Digi-Tech (Australia) Ltd v Brand & 5 Ors; Digi-Tech [2004] NSWCA 58 | Case summary

Digi-Tech (Australia) Ltd v Brand & 5 Ors; Digi-Tech [2004] NSWCA 58 | Case summary | Zoe

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CATCHWORDS : PRACTICE AND PROCEDURE - Pleading referring to s 51A of the Trade Practices Act 1974 (Cth) - Particulars giving specificity to the alleged representation - Utility of trial judge's finding where proceeded on an incorrect assumption - Question of fact involving credibility findings - Where credibility findings made, reliance not to be determined on a Gould v Vaggelas (1983) 157 CLR 215 presumptive basis - Lack of authority must be pleaded to prevent surprise - TRADE PRACTICES - Whether representation with respect to a future matter - Approach in Miba Pty Ltd v Nescor Industries Group Pty Ltd (1966) 141 ALR 525 not adopted - Relevance of expression of belief - Proper approach to s 51A of the Trade Practices Act 1974 (Cth) - Whether representation was misleading and deceptive - Where no evidence of reasonable grounds for the representation - Whether parties had relied on the representation - Indirect causation under s 82(1) of the Trade Practices Act 1974 (Cth) - Relief under s 82 of the Trade Practices Act 1974 (Cth) - TAXATION AND REVENUE - Whether liable for withholding tax - Definition of royalty - COURTS AND JUDICIAL SYSTEM - Lengthy judgments - Importance of confining judgment to essential submissions and reasoning. D Fair Trading Act 1992 (ACT) LEGISLATION CITED : Income Tax Assessment Act 1936 (Cth), ss 6(1), 128(1)(AA), 128B(5)(A), 128B(2)(B), Div 10B Pt 3 Trade Practices Act 1974 (Cth), ss 51A, 82, 87 Trade Practices Revision Act 1986 (Cth) Bond Corporation Pty Limited v Thiess Contractors Pty Limited (1987) 14 FCR 215 City of Botany Bay Council v Jazabas Pty Limited [2001] NSWCA 94 Customs and Excise Commissioners v A [2003] 2 All ER 736 Esso Petroleum v Marden [1976] QB 801 Federal Commissioner of Taxation v Franklin Mint Pty Limited (1993) 44 FCR 109 Federal Commissioner of Taxation v Sherritt Gordon Mines Limited (1977) 137 CLR 612 Gould v Vaggelas (1983) 157 CLR 215 Hampic Pty Ltd v Adams [1999] NSWCA 455 Janssen-Cilag Pty Limited v Pfizer Pty Limited (1992) 37 FCR 526 Kenny & Good Pty Limited v MGICA (1992) Ltd (1999) 199 CLR 413 March v Stramare (E & MH) Pty Limited (1991) 171 CLR 506 Marks v GIO Australia Holdings Limited (1998) 196 CLR 494 Miba Pty Ltd v Nescor Industries Group Limited (1966) 141 ALR 525 CASES CITED : Nowegijick v R (1983) 144 CLR (3d) 193 PanContinental Mining Limited v Commissioner of Stamp Duties [1999] 1 Qd R 310 Ronpibon Tin NL v Federal Comissioner of Taxation (1949) 78 CLR 47 Shaddock & Associates Pty Ltd v Parramatta City Council [No 1] (1981) 150 CLR 225 Smith v FCT (1987) 164 CLR 513 Stanton v Federal Commissioner of Taxation (1955) 92 CLR 630 Stockland (Constructors) Pty Ltd v Retail Design Group (International) Pty Ltd [2003] NSWCA 84 Sydney Harbour Casino Properties Pty Limited v Coluzzi & Anor [2002] NSWCA 74 Sykes v Reserve Bank of Australia (1988) 88 FCR 511 Thompson v Mastertouch TV Services Pty Limited (No 2) (1977) 15 ALR 487 Ting v Blanche (1993) 118 ALR 543 Trident General Insurance Company Limited v McNeice Bros Pty Limited (1988) 165 CLR 107 Wardley Australia Limited v Western Australia (1992) 175 CLR 514 Wright v TNT Management Pty Limited (1989) 15 NSWLR 679 (CA 40832/02) Digi-Tech (Australia) Ltd (Appellant) Graham Leonard Brand (First Respondent) Robert Edward Chambers (Second Respondent) Christopher Gerard Kelliher (Third Respondent) Roeturn Pty Limited (Fourth Respondent) Morrow No 1 Pty Ltd (Fifth Respondent) Nesyear Pty Limited (Sixth Respondent) (CA 40833/02) Digi-Tech (Australia) Ltd (Appellant) Christopher Gerard Kelliher (First Respondent) Ian Michael Smith (Second Respondent) Hametron Pty Limited (Third Respondent) Dellfan Pty Limited (Fourth Respondent) PARTIES : (CA 40838/02) Kalifair Pty Ltd (First Appellant) Kalinick Pty Limited (Second Appellant) Divome Properties Pty Limited (Third Appellant) Toltex Human Resources Pty Limited (Fourth Appellant) Digi-Tech (Australia) Ltd (First Respondent) Digi-Tech Equities Limited (Second Respondent) Digi-Tech Communications Limited (Third Respondent) John Anthony Reid (Fourth Respondent) (CA 40840/02) McLean Tecnic Pty Ltd (First Appellant) A I McLean Pty Limited (Second Appellant) Digi-Tech (Australia) Ltd (First Respondent) Digi-Tech Equities Limited (Second Respondent) Digi-Tech Communications Limited (Third Respondent) John Anthony Reid (Fourth Respondent) FILE NUMBER(S) : CA 40832/02; 40833/02; 40838/02; 40840/02 (CA 40832/02 & CA 40833/02) John C Sheahan SC/M Christie (Appellant) A J Meagher SC/I M Jackman SC (Respondents) (CA 40838/02) COUNSEL : A J Meagher SC/I M Jackman SC (Appellants) John C Sheahan SC/M Christie (Respondents) (CA 40840/02) A J Sullivan QC/H Stowe (Appellants) John C Sheahan SC/M Christie (Respondents) (CA 40832/02 & CA 40833/02) Blake Dawson Waldron (Appellant) Atanaskovic Hartnell (Respondents) (CA 40838/02) SOLICITORS : Atanaskovic Hartnell (Appellants) Blake Dawson Waldron (Respondents) (CA 40840/02) Gillis Delaney Brown (Appellants) Blake Dawson Waldron (Respondents)

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Tuesday 23 March 2004 DIGI-TECH (AUSTRALIA) LIMITED v Graham Leonard BRAND & 5 ORS DIGI-TECH (AUSTRALIA) LIMITED v Christopher Gerard KELLIHER & 3 ORS KALIFAIR PTY LIMITED & 3 ORS v DIGI-TECH (AUSTRALIA) LIMITED & 3 ORS McLEAN TECNIC PTY LIMITED & 1 OR v DIGI-TECH (AUSTRALIA) LIMITED & 3 ORS FACTS On 30 June 1997, a complicated transaction, involving two telecommunications products (the "Products") was entered into by a number of corporate and individual parties. The Products were known as the 'Terminal Adapter' and the 'Freerider'. The parties were a group of investors (described in the judgment as the "Kalifair appellants" and the "McLean appellants") and companies in the Digi-Tech group of companies (described collectively in the judgment as Digi-Tech). Digi-Tech owned the Products. The essence of the transaction was that Digi-Tech would, in return for certain payments, assign the intellectual property relating to the Products to a partnership. This partnership would exploit those rights and, thereby, promote the Products. As a further part of the scheme, the Investors were entitled to exercise an option between 15 April 1999 and 31 July 2000 that would require Digi-Tech to take up the Investors' rights and duties under the relevant scheme. An attraction of the scheme for the Investors was that they could obtain tax deductions for the capital expenditure involved in the purchase of the intellectual property rights. The valuation of the intellectual property rights was crucial to the expected tax benefits. Digi-Tech carried out its own valuation and retained Deloitte Touche Tomatsu to provide a valuation based on certain Digi-Tech projections. On the basis of these valuations Digi-Tech decided that the appropriate price for the purchase of the rights to the Products was $72.5m. On 30 June 1997, the Investors divided the partnerships so that there was one partnership for each product. The purchase price was divided appropriately. Under the Sale Agreements, the Investors, as partners in the relevant partnership were obliged to make payments to Digi-Tech over three and a quarter years. These payments were by way of relatively small instalments each quarter, and a larger 'balloon' payment on 30 September 2000. In return for such payments, the intellectual property rights to the respective Products were granted to the partnerships. The expectation was that, unless the partnerships were highly successful, the options would be exercised so that the liability for the balloon payment would fall on Digi-Tech, rather than the Investors. At June 1997, neither of the Products was in a state such that it could be marketed. Digi-Tech purported to terminate the Sale Agreements relating to the Terminal Adapter partnership and Freerider partnership on 25 March 1999 and 7 September 1999, respectively. This was on the grounds of what were said to be breaches of those agreements and repudiation. Digi-Tech then demanded payment from each Investor of the balloon payment and other outstanding payments. Between 20 and 28 September 1999 the Investors exercised or purported to exercise their options by notices addressed to Digi-Tech. Digi-Tech disputed that the options were validly exercised. HELD by the Court Issue 1: Did the Investors plead (or were they otherwise entitled to press and have determined) a case that Digi-Tech had represented that the products had the high revenue and profit potential in the "Digi-Tech projections"?

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The parties to the appeal 4 Not all issues arising in the trial were pressed on appeal and not all parties to the trial are appellants. We shall identify the parties to the appeals. 5 In CA 40838/02, Kalifair Pty Limited, Kalinick Pty Limited, Divome Properties Pty Limited and Toltex Human Resources Pty Limited are the appellants and Digi-Tech (Australia) Limited ("DTAL"), Digi-Tech Equities Limited ("DTEL"), Digi-Tech Communications Limited ("DTCL") and Mr John Reid are the respondents. Mr Reid was a director of a number of companies in the Digi-Tech group. 6 The Digi-Tech group was a New Zealand group of companies, of which DTCL was the ultimate holding company. Digi-Tech designed and sold data communications products and was in the business of producing data communications hardware and software. 7 Kalifair and Kalinick were investors in the Terminal Adapter Partnership (to which we refer below) as from 30 June 1997. Divome and Toltex were the holding companies of Kalifair and Kalinick respectively and said to be the assignees, respectively, of the interests of Kalifair and Kalinick in the partnership. 8 In CA 40840/02, McLean Tecnic Pty Ltd and A I McLean Pty Limited are the appellants and DTAL, DTEL, DTCL and Mr Reid are the respondents. McLean Tecnic was a partner in the Terminal Adapter Partnership and the Freerider Partnership (to which we refer more fully below). A I McLean was the holding company of McLean Tecnic and said to be the assignee of its interests in both partnerships. 9 In CA 40833/02, DTAL is the appellant and Mr Kelliher, Mr Smith, Hametron Pty Limited and Dellfan Pty Limited are the respondents. On 7 October 2003 the appellants in CA 40833/02 filed a notice of discontinuance discontinuing the proceedings in respect of the whole of their claim against the third, fourth, seventh and eighth respondents, i.e. Mr O'Loughlin, Mr Whiting, Onefish Pty Limited and Twofish Pty Limited; according to the notice the respondents concerned consented to the discontinuance. 10 Mr Kelliher was a partner in the Freerider Partnership and Hametron was said to be the assignee of his interests in that partnership. Mr Smith was a partner in the Freerider Partnership. Dellfan was alleged by Mr Smith to be the assignee of his interests in that partnership. Mr O'Loughlin was a partner in the Freerider Partnership as was Mr Whiting. Onefish was said to be the assignee of Mr O'Loughlin's interests in the partnership and Twofish was said to be the assignee of Mr Whiting's interests therein. 11 In CA 40832/02 DTAL is the appellant (and cross-respondent) and Messrs Brand, Chambers, Kelliher and Roeturn Pty Ltd, Morrow No 1 Pty Ltd and Nesyear Pty Limited are the respondents (and cross-appellants). 12 Mr Brand, was a partner in the Terminal Adapter Partnership and Roeturn was said to be the assignee of his interest in the partnership. Mr Chambers was a partner in the Terminal Adapter Partnership and Morrow No 1 was said to be the assignee of his interest in the partnership. Mr Kelliher was a partner in the Terminal Adapter Partnership and Nesyear was said to be his assignee. 13 In these reasons we shall use "Digi-Tech" as a description (depending on the context) of any one or more (collectively) of DTAL, DTEL, DTCL, any other Digi-Tech companies mentioned, and Mr Reid. We shall refer to McLean Tecnic and A I McLean, collectively, as the McLean appellants. We shall refer to the parties other than Digi-Tech and the McLean appellants, collectively, as the Kalifair appellants. When referring to the McLean appellants and the Kalifair appellants, collectively, we shall refer to them as the appellants (or, depending on the context, as the Investors).

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The transaction that gave rise to the litigation 14 The litigation arose out of a transaction entered into on 30 June 1997, immediately prior to the expiry of the 1997 tax year. 15 The transaction involved two telecommunications products, known as Terminal Adapter and Freerider (the "Products"), which were owned by Digi-Tech. The Terminal Adapter enabled the logging on of a number of functions contemporaneously on a single digital network telephone line, for example a facsimile, telephone, e-mail and EFTPOS. The Freerider was the name of a software system that allowed a particular type of data network to be used simultaneously for multiple functions such as sending facsimiles and other secondary data between locations connected to the same network. 16 At trial, there was a dispute between Digi-Tech and the Investors as to whether the Investors seriously intended to derive profits from the development of the Products. It was, however, common ground that at least a primary purpose of the Investors was to acquire significant tax benefits in consequence of entering into the transaction. Accordingly, the Investors had a pressing need to conclude the transaction before the 1997 tax year ended. 17 The transaction was based on an investment scheme devised by Mr Garry Urwin of Horwath and Horwath. The scheme, broadly speaking, initially involved Digi-Tech assigning the intellectual property relating to the Products to a single partnership with the view that the partnership would exploit those rights and, thereby, the Products. 18 The attraction of the scheme was that the partners (the Investors) would obtain tax deductions for the full amount of the capital expenditure involved in the purchase, spread over a period of three to four years. An opinion had been obtained from senior counsel which confirmed (on the basis of certain assumptions) the tax deductibility, pursuant to Div 10B of Pt 3 of the Income Tax Assessment Act 1936 (Cth), of the capital expenditure on the intellectual property. The key to the materialisation of the expected taxation benefits was the need, as expressed by senior counsel, for the Investors to have "a reasonable expectation that the revenue generated from these products by the exploitation of the intellectual property would be sufficient to meet the instalments of the price which they had to pay …". Were such an expectation to be held, according to senior counsel, "the dominant purpose will be the obtaining of the commercial return on investment and not the obtaining of an increased tax deduction". 19 The potential tax benefits to the Investors were believed to be extremely high; the structure devised for the scheme was thought to permit each of the Investors to claim a $1 deduction for every 15 cents of actual expenditure. 20 The receipt of the money so invested would not be taxable in the hands of the Digi-Tech group in New Zealand. Thus, the scheme held attraction to all parties. 21 Digi-Tech appreciated that an appropriate valuation of the intellectual property rights was crucial to support the price to be paid by the Investors. Without such a valuation the perceived tax benefits would be unlikely to materialise. For this reason, Digi-Tech carried out its own valuation and, in addition, retained Deloitte Touche Tomatsu to provide an analysis of the gross profit margins that might be obtained from the exploitation of the intellectual property rights, and a valuation of those rights. 22 On 4 April 1997 Deloitte produced a gross margin review for the Terminal Adapter and Freerider (the "Gross Margin Review") and on 22 April 1997 produced an indicative valuation of these products (the "Indicative Valuation"). 23 The Gross Margin Review contained gross margin projections based on projections prepared by Digi-Tech (principally by Mr Dennis Rowe, the chief executive officer of one of the Digi-Tech companies). On the basis of the Digi-Tech projections of revenue and gross margin, Deloitte valued the Products (subject to certain assumptions) at between $67m and $74m. 24 On 2 May 1997, Messrs Urwin and Reid agreed that an appropriate purchase price for the rights to the Products would be $72.5m. 25 On 30 June 1997 the Investors were divided into two partnerships because of advice received by Digi-Tech that the numbers involved in the acquiring partnership should not exceed 20. At that time, 76.65% of the total purchase price of $72.5m was attributed to the Terminal Adapter Partnership (i.e. $55.57m) and 23.343% was attributed to the Freerider Partnership (i.e. $16.93m). That division of the purchase price was based upon the proportion of the (Deloitte) Indicative Valuation attributable to each of the Products. 26 The basic structure of the schemes, as they were transformed into a series of agreements on 30 June 1997, was as follows:

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The Sale Agreements 29 DTAL, as the owner of the intellectual property rights to the Products, assigned to each relevant Partnership for five years all its right, title and interest in those rights in respect of Australia, including an exclusive right to use and exploit those rights in Australia in accordance with each Sale Agreement (cl 2.1). 30 "Intellectual Property Rights" were defined to mean all intangible property rights of DTAL relating to the Products including (among others) know-how and trade secrets, whether or not capable of protection by a patent, and the copyright to the relevant software. 31 DTAL was entitled to terminate each Sale Agreement without prejudice to its other rights if the Partnership concerned either committed a material breach which was incapable of being rectified or committed a material breach which was not rectified within a reasonable time after written notice of the breach had been given (cl 4.1). 32 On termination or expiry of each Sale Agreement, each Investor (partner) was required to pay the balloon payment - if it was outstanding (cl 5.3(b)). 33 Each Investor (partner) was required each quarter to make payment of an instalment in respect of the purchase price and a contribution to the capital of DTSPL. The total amount payable by the Investors each quarter was approximately $347,000. 34 The steps required for an Investor (partner) to exercise an option varied depending upon whether the Investor was a corporate body or a natural person. If the Investor was a corporation, generally speaking the option was granted to its holding company. When the option was exercised, the holding company would sell or put the shares in the corporate investor to DTAL. If the Investor was a natural person, it was first necessary for the natural person to transfer his or her interests in the Partnership and shares in DTSPL to a corporate nominee so that the option operated with respect to the shares in that corporate nominee. 35 For an Investor to transfer their interests and obligations under the Sale Agreements, the Investor was required to deliver to DTAL a deed pursuant to which the transferee was bound by the Sale Agreement to perform the obligations of the Investor, i.e. a deed of accession (cl 20.4).

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Litigation is commenced: the pleadings 44 The Investors commenced separate sets of proceedings against various Digi-Tech entities. The relief that they claimed, relevant to this appeal, was based on s 82 and s 87 of the Trade Practices Act 1974 (Cth) and the equivalent sections of the Fair Trading Act 1992 (ACT). In these reasons, we shall refer only to the Trade Practices Act 1974 and not to the equivalent provisions of the Fair Trading Act 1992: It was not suggested that those equivalent provisions give rise to any different consequences. 45 The Investors asserted in these proceedings that the notices of termination issued by DTAL were void and of no force and effect, that the relevant agreements were in full force and effect, and that the Investor options had been validly exercised. 46 The summonses asserted, first, a cause of action based on misleading and deceptive conduct on the part of Digi-Tech in relation to existing facts, and then, in the alternative, reliance was placed on s 51A of the Trade Practices Act 1974 and misleading and deceptive conduct involving future facts was alleged. 47 The misleading and deceptive conduct based on existing facts was said to involve two categories of representations. One category was referred to as the "Suitability Representation," the other as the "Profit Potential Representation". The misleading and deceptive conduct based on future facts was said to involve only the Profit Potential Representation. 48 The Suitability Representation was to the effect that Digi-Tech had represented that the Products were suitable for and capable of ready exploitation in Australia. The Profit Potential Representation was to the effect that Digi-Tech had represented that the Products had a high revenue and profit potential. 49 The summonses asserted that the representations were false and that the misleading and deceptive conduct had caused the Investors loss or damage. The loss or damage was pleaded to be, in effect, the purchase price, option fee and share capital contribution paid by each of the Investors and "any liability arising from these proceedings in respect of any further payments to any of the defendants". No allegation was made that the loss or damage was constituted by loss of taxation benefits. The summonses also alleged that the Investor options had been duly exercised. 50 The summonses claimed orders under s 87 of the Trade Practices Act 1974 in effect declaring that cl 5.3(b) of the Sale Agreements was not enforceable (that being the clause that required the making of the balloon payments). In the alternative, the plaintiff Investors sought damages under s 82 of the Trade Practices Act 1974. There was no claim for the agreements to be set aside. 51 Digi-Tech denied that it had breached the Trade Practices Act 1974 and asserted that the Investors' exercise of the options was invalid on a number of different bases. In cross-claims, Digi-Tech asserted that the relevant agreements had been validly terminated and claimed amounts said to be outstanding in terms thereof.

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His Honour said that the expression "high" in the Profit Potential Representation was "clearly vague". Although he said, "it has to be given content by its context," he did not proceed to give it any content and repeated that the Investors did not assert that "the business would have a certain value". 56 His Honour made it plain that he understood the Investors' primary case on this issue to be that the Profit Potential Representation meant merely that the Products had "a high revenue and profit potential" and was not to be construed as being qualified by more specific and detailed statements that were alleged in particulars to the Profit Potential Representation in the summonses. 57 On this basis, the judge commented: "The essential emphasis through all of the plaintiffs' evidence goes to their having been misled and deceived by the suitability misrepresentations, it being those misrepresentations which are put as underpinning the suggested problems with the profit potential representations and it being put that the suggested misleading and deceptive conduct arises by reason of the suggested falsity of those representations . Whether this be because, as may well be the case, the plaintiffs very carefully indeed sought to confine their affirmative case with respect to the profit potential representations to that which had been pleaded, the fact is that the states of mind of the plaintiffs as at material times were carefully and painstakingly tested in cross-examination. Nowhere in any of that cross-examination did the evidence to my mind, even come close to either dealing with, or certainly to proving on the balance of probabilities, any or any special significance, which the plaintiffs sought to attribute to the market size and penetration etc. flaws. Had any such special significance (or indeed significance of a material nature) been present to the minds of the plaintiffs in the course of the giving evidence in terms of being a matter in respect of which, but for the suggested mistakes, they would not have entered into the transaction, it would seem surprising indeed that such evidence did not come forward at some stage or in some discernable way. Presumably this is because, as Mr Sheahan pointed out [Transcript 12 June 2002 at 85] the plaintiffs' positive case had given particulars relied upon to establish the falsity of the representations, which simply did not extend to cover or suggest any market size and penetration etc flaws. In any event the fact that some continued development or adaptation of the Terminal Adapter to meet some particular requirement or requirements of a particular Australian market or purchaser may have been necessary, by no means establishes that the product did not have a high revenue and profit ' potential '. The so-called ' product ' had such potential by reason of the functionality which it exhibited and the concepts and features which had led to its inception and development."(emphasis in the original judgment) 58 We repeat that the judge made these remarks in the context of making findings concerning the Profit Potential Representation in accordance with his primary understanding of what it meant, namely, that it meant merely that the Products had "a high revenue and profit potential" (without the word "high" being qualified or coloured in any way). On that basis, as is apparent from the remarks in question, his Honour found that the Investors had failed to prove that they had relied on the Profit Potential Representation. This finding was consistent with the judge's finding as to reliance in connection with Suitability Representation. 59 The judge then made a number of observations on a different and alternative assumption as to the meaning of the Profit Potential Representation. This alternative assumption was that the Profit Potential Representation was to be construed as comprising the specific and detailed statements provided as particulars to the Profit Potential Representation in the summons. That is, in effect, that several representations were made. On this alternative assumption, which the judge described as "somewhat artificial", he concluded that reliance had been established. 60 This finding on the alternative assumption was made despite the fact that, as the judge mentioned, the Investors did not testify that they relied on the Profit Potential Representation so construed and, understandably, were not cross-examined on that basis. It is difficult to reconcile this finding with those made by his Honour in regard to the Suitability Representation and when dealing with the Profit Potential Representation in accordance with his primary understanding thereof. We deal with this more fully below in connection with Issue 1.

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Issue 1 in the appeal 64 For the sake of convenience, we repeat that this issue is: "Did the investors plead (or were they otherwise entitled to press and have determined) a case that Digi-Tech had represented that the products had the high revenue and profit potential in the 'Digi-Tech projections'?" 65 Senior counsel who argued this issue on the appellants' behalf (Mr Meagher SC and Mr Sullivan QC) both submitted that the case of the appellants as to the Profit Potential Representation, as presented at trial, was that Digi-Tech had represented that the Products had "a high revenue and profit potential" on the basis that "high" was to be understood in the light and in the context of the way in which the appellants had pleaded this representation. They submitted that the particulars to the material allegation gave content to the meaning of "high". In other words, they submitted that the Profit Potential Representation was not put as being at a high level of generality (without any qualification), as was understood by the judge, nor in the detailed way that his Honour postulated the alternative (namely, that the Profit Potential Representation involved the making of the specific and detailed representations particularised in the summonses). 66 Mr Sheahan SC, who together with Mr Christie appeared for Digi-Tech, resisted this submission and sought to support the judge's approach. He submitted that the appellants were seeking to make out a case on appeal that had not been made at trial. He submitted (as his Honour found) that the appellants' case was based on a representation of high revenue and profit potential, without "high" being qualified in any respect. He said that the appellants did not at trial contend that Digi-Tech did not have reasonable grounds for each of the particular forecasts and assessments contained in the relevant documents. He submitted that, if the appellants had pleaded a case that the particular forecasts or the assessments were misleading, then Digi-Tech would have approached its defence in a different manner by cross-examining the witnesses differently. 67 In the summonses, the appellants pleaded their case based on the Profit Potential Representation as follows; "95 … (b) The Products had a high revenue and profit potential;

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Source: Digi-Tech projections (Paragraph 6.6). 68 The particulars described the above material as the "written representations" relating to the Profit Potential Representation. Oral representations were pleaded, as well, but they were said to be merely that the Products had a high revenue and profit potential and therefore take the matter no further. 69 The pleading in the summons of the Profit Potential Representation is far more than a bald assertion that "the products had a high revenue and profit potential". Some definite purpose has to be ascribed to the lengthy and detailed particulars given in support of this allegation. On the face of the pleading, that purpose is self-evident, namely, the particulars give colour, content and a degree of specificity to the generality of the representation alleged. The particular matters alleged in the particulars are not pleaded as individual representations separate from the allegation of the material representation (namely, that the Products had a high revenue and profit potential). This is manifest from the clear distinction made in the pleading between the material allegation made and the particulars to that allegation. The particulars particularised the high revenue and profit potential alleged in the material allegation that comprised the Profit Potential Representation. They did not constitute separate representations on which the appellants were relying for their cause of action, nor can they be divorced from the material allegation made. 70 In para 99 of the summonses, the appellants pleaded that, to the extent that the Profit Potential Representation was "with respect to future matters", they relied upon s 51A of the Trade Practices Act 1974. 71 In para 44 of its defence, Digi-Tech dealt with para 95 of the summons by asserting in effect that the Profit Potential Representation was made on reasonable grounds, and those grounds were identified. Digi-Tech denied that its conduct was misleading or deceptive, but appeared to accept the onus placed on it by s 51A to prove reasonable grounds for any representations as to future matters that it had made. 72 It was common ground that the parties had not joined issue in an oral debate before his Honour on the question whether the manner in which the appellants sought to put their case on the Profit Potential Representation was open to them on the pleadings, or by reason of the manner in which the case was conducted. Indeed, Mr Meagher, who appeared for all the appellants below, said that the first time he had become aware of what his Honour referred to as "pleading issues" in this respect was when he read the judgment. 73 In his opening at trial, Mr Meagher relied expressly on the effect of s 51A in relation to the Profit Potential Representation. He drew attention to the representations as to revenue and profit in the Gross Margin Review and the Indicative Valuation as well as other documents. When he commenced his address at trial, Mr Sheahan handed up a "List of Issues" and an "Overview Submission". These documents demonstrate that Digi-Tech recognised then that it bore the onus of proving that it had a reasonable basis for the statements (made by or on behalf of Digi-Tech in the documents relied on by the appellants) that the Products had high revenue and profit potential. 74 When it came to leading evidence, the appellants sought to establish their case on the Profit Potential Representation by proving the matters alleged in the particulars. 75 In closing addresses (by way of written and oral submissions), the appellants spelt out in no uncertain terms that their case was based, among other things, on the fact that as at 30 June 1997 neither the Terminal Adapter or Freerider had the high revenue and profit potential described in the Gross Margin Review and the Indicative Valuation, and that Digi-Tech did not have reasonable grounds for the projections in those documents. The appellants' submissions went on to deal in great detail with why, according to them, Digi-Tech had not demonstrated it had reasonable grounds for the projections. 76 In its closing written submissions at trial, Digi-Tech submitted that the issue was not whether DTAL had reasonable grounds for the particular forecasts and assessments in the Deloitte report, but only whether DTAL had reasonable grounds for representing that the Products had a high revenue and profit potential. In those submissions, Digi-Tech dealt in detail with the appellants' attack on the revenue and profit projections. In oral submissions in closing, senior counsel for Digi-Tech properly accepted that it had not been incumbent upon the appellants to give any particulars about the respects in which, for the purposes of s 51A case, the respondents' conduct was said to have been misleading or deceptive. 77 We conclude that the appellants conducted their case at trial on the basis that the Profit Potential Representation was constituted by the collective effect of the revenue and gross profit forecasts contained in the Indicative Valuation, based as it was upon the gross margin projections contained in the Gross Margin Review, which figures, in turn, were referred to in a document described as the Information Memorandum (see the particulars to para 95 of the summons). The appellants did not conduct the case upon the basis that the Profit Potential Representation was constituted solely by the material allegation in para 95, unaffected by the particulars thereto; nor did they conduct the case upon the basis that each particular projection particularised in para 95 constituted an independent and separate representation on which they separately relied. 78 Accordingly, we do not accept Mr Sheahan's submissions as to the meaning to be attributed to para 95 of the summons and as to the way in which the trial was run. We accept the appellants' submissions in regard to these matters. Contrary, to Digi-Tech's submissions, this is not a case where the appellants are seeking to depart from the case that was presented at first instance. 79 In our view, the judge erred in the way he approached the matter and in failing to deal with the appellants' case that the Profit Potential Representation amounted to a representation that the products had a high revenue and profit potential, with "high" being understood by reference to the particulars to para 95 of the summons. The first issue is to be decided in favour of the appellants.

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Issue 2 80 The second issue is: "Did Digi-Tech represent that the products had the revenue and profit potential in the 'Digi-Tech projections' (i.e., that those forecasts of future revenues and profits could be achieved)?" 81 Although the list of agreed issues records that Einstein J answered this question in the negative, this answer must be understood in the light of [1104] of his Honour's reasons. There the judge states: "In my view the evidence establishes that the profit potential representations were made, that is to say the defendants represented that the products had a high revenue and profit potential . I am however of the view that no representation was made to the effect that the business would have a certain value or revenue and no less." 82 In other words, as we have mentioned when dealing with Issue 1, his Honour did not deal with the Profit Potential Representation in the way it was pleaded (namely, that the Products had a high revenue and profit potential, with "high" being construed by reference to the particulars to para 95 of the summons). It is in this sense that his Honour did not find that the Profit Potential Representation was made. 83 The consequence is that his Honour did not answer the right question, that is, whether the Profit Potential Representation, understood in the sense we have explained, was made. 84 Digi-Tech does not in reality dispute that it made representations that the Products had a high revenue and profit potential. It does, however, dispute the allegations made in the particulars to para 95. 85 The meaning of the Profit Potential Representation depends, therefore, on which of the particulars to para 95 have been proved. Unless this is known, the precise context against which the term "high" is to be measured cannot be determined. 86 The judge made no findings in this regard, but appeared to assume that the particulars were proved. In our view that assumption must be correct, at least as far as the written representations are concerned, as they are based on documents that are not disputed (and we have pointed out that the oral representations take the matter no further). 87 In our view, therefore, the answer to Issue 2 must be in the affirmative and the appellants succeed on this issue. 88 Before leaving this issue, two matters should be noted. Firstly, in the judge's reasons on this aspect there is an extensive discussion as to the "belief" of Digi-Tech in making the Profit Potential Representation. This aspect of the matter goes to whether the Profit Potential Representation related to future facts and will be dealt with when that topic is discussed. Secondly, the documents containing the Profit Potential Representation also contained several disclaimers. This is a matter that Digi-Tech (rightly, in our view) dealt with under the heading of "reliance" and we shall deal with it when discussing the reliance issue.

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In taking these factors into account, Einstein J followed, with precision, the approach of Merkel J. 97 We disagree with the approach adopted in Miba and we do not accept that any of the factors referred to in the preceding paragraph has significant bearing on the particular question whether the Profit Potential Representation is to be characterised as "a representation with respect to any future matter". 98 We turn firstly to the relevance of Digi-Tech expressing a belief as to the high revenue and profit potential of the products. 99 The expression of a belief involves the expression of a state of mind. There is no reason why a person's state of mind should not relate to future matters. Thus, in determining whether an expressed belief relates to future matters, regard must be had to the words used and the context: Sydney Harbour Casino Properties Pty Limited v Coluzzi & Anor [2002] NSWCA 74 at [24] per Mason P. 100 The point was emphasised by Hill J in Ting v Blanche (1993) 118 ALR 543 (at 553) when he observed: "Whatever may be the case where there is an express representation as to the maker's state of mind concerning a future matter, it is not, in my opinion, correct to treat a representation as to an event or conduct in the future, be that in the form of a prediction or otherwise, as not being a representation with respect to a future matter merely because it implies a representation as to the maker's present state of mind. The language of s 51A is very wide and the words ''with respect to" are, like the words ''in respect of" discussed by Dickson J, delivering the judgment of the Supreme Court of Canada in Nowegijick v R (1983) 144 DLR (3d) 193 at 200, (a discussion cited with approval by Toohey J in Smith v FCT (1987) 164 CLR 513 at 533; 74 ALR 411 at 424): "… words of the widest possible scope. They import such meanings as ''in relation to", ''with reference to" or ''in connection with". The phrase ''in respect of" is probably the widest of any expression intended to convey some connection between two related subject-matters."

[86]

A representation as to future rental, for example, will be a representation with respect to a future matter, even if also, impliedly, a representation as to the existing state of mind of the maker." 101 Hill J's approach in Ting v Blanche was accepted, in effect, as being correct by Heerey J (at 514) and Sundberg J (at 520-521) in Sykes v Reserve Bank of Australia (1988) 88 FCR 511. A similar approach was adopted by Mason P in City of Botany Bay Council v Jazabas Pty Limited [2001] NSWCA 94. 102 Accordingly, the mere fact that revenue and profit potential was dealt with explicitly as a matter of DTAL's belief casts a very dim light indeed on the question whether, in expressing that belief, Digi-Tech was making a representation as to a future matter. It certainly does not resolve that question: as we have said, it all depends on the words used and the general context. 103 The other factors on which Einstein J relied were that the Information Memorandum set out the grounds on which the revenue and profitability assessments had been made, that it was clear that some of the grounds included assumptions that the representees should make their own assessment, that the DTAL material did not guarantee the achievability of any forecasts (the disclaimer provisions), that the materials disclosed the business to be an emerging one, and that its value was difficult to assess and its future cash flows were uncertain. 104 Many of these factors go to reliance rather than characterisation of the representation. Others have very little bearing on the question whether the Profit Potential Representation relates to future matters. 105 His Honour (and Digi-Tech) placed particular emphasis on the various disclaimers contained in the transaction documents. Typical of these disclaimers was the following: "Digi-Tech has used its best endeavours to ensure the accuracy of the information contained in this Memorandum but neither Digi-Tech nor any other party on its behalf makes any representation or warranty as to the accuracy or completeness of the information contained in this Memorandum and shall have no liability for any statements, opinions, information or matters (express or implied) arising out of, contained in or derived from or for any omissions from this Memorandum. …" 106 The words in the disclaimer, "the accuracy of the information contained in this Memorandum," apply to the accuracy of the statement that there was the potential for high revenue and profit. The fact that Digi-Tech used its "best endeavours" in estimating that potential says nothing about whether the estimate relates to future matters. The assertion that Digi-Tech made no representation cannot nullify a representation that is in fact made. We do not regard the disclaimer as being relevant to Issue 3. 107 The wording of s 51A is not complex, nor is it difficult to understand. It is undesirable to apply past judicial pronouncements as to factors relevant in other cases as some sort of code of conditions that has to be satisfied for the section to apply in every case. The ordinary meaning of the language used in s 51A is plain enough to provide the key to whether it applies in a particular case. 108 In any event, none of the factors taken into account in Miba and by the judge in this case precluded the need for an examination of the precise terms of the Profit Potential Representation and the context in which it was made. These were the vital matters. Such an examination requires, firstly, due weight to be given to the meaning of the word "potential" as it is used in the Profit Potential Representation. 109 The Oxford English Dictionary relevantly defines "potential" as: "A. adj .

[91]

Issue 4 115 This issue is: "Was the Profit Potential Representation misleading and deceptive because Digi-Tech had not adduced evidence that they had reasonable grounds for making it?" 116 It is common ground that it is not clear whether Einstein J addressed this issue insofar as it relates to the projections referred to in the particulars in para 95 of the summons. We are, nevertheless, able to determine the specific question that is raised by this issue. 117 The particulars to para 95 assert that, in assessing the gross profit margin, Digi-Tech assumed a market penetration of 50% and, taking this factor into account, the relevant documents referred to in the particulars reflected a forecast gross profit of $92.1m. It is not in dispute that, in the documents concerned, statements to this effect were made. 118 Mr Reid was asked in cross-examination to identify the matters that he took into account prior to the Gross Margin Review in arriving at the view that a 50% market penetration could be achievable. His evidence was: "Digi-Tech itself had been approached by New Zealand Telecom. I understood that New Zealand Telecom had been interested or had been looking for a Terminal Adapter to work on the D-channel environment with EFTPOS. They had approached us. Very soon thereafter, months, Telstra surfaced, then an unsolicited approach via Advantage, also looking for similar technology. I understood that this was a new, emerging market and that there was serious interest from Telstra in that respect and my view at the time was if we were successful with Telstra, who I understood to be the largest telecoms company in Australia, then we would be very well placed to capture a lot of other business with that Terminal Adapter." 119 No other evidence was adduced that could justify the 50% market penetration figure. In the course of argument in the appeal, Ipp JA put to Mr Sheahan: "80% or 20% would be equally credible apparently. There is no explanation as to how the 50% could be achievable for the reasons expressed by Mr Reid. Why 50%?" Mr Sheahan replied: "It is impressionistic". He suggested that the surrounding circumstances must have played a part in the assessment. He said: "It was made clear the product had not been sold, [there was] no market research, there was little independent support for the penetration rates. They believed they had very good prospects of selling it to Telstra in Australia because of an approach from them. They had an understanding of the market and so on, but it is compressed into [the passage quoted from Mr Reid's evidence]". 120 Mr Sheahan's submission is understandable, but the fact is that no evidence was given to the effect that Digi-Tech took into account the matters to which he referred in arriving at the 50% market penetration estimate. There was also no evidence that explained what impact the factors to which Mr Sheahan referred would have on the market penetration estimate, and what weight should reasonably be attributed to each. 121 The $72.5m. purchase price depended substantially on the 50% market penetration being correct. In our opinion, Digi-Tech did not discharge the burden upon it to establish that there were reasonable grounds for showing that the "50% market penetration could be achievable". 122 There are other matters that support a finding in favour of the appellants on Issue 4. 123 There was a dispute between the parties as to whether Digi-Tech had represented the market size for EFTPOS users as 350,000 or 240,000. The appellants contended that, irrespective of the precise representation, Digi-Tech had overstated the market size figures for EFTPOS users. The judge said in this regard: "The submission was that insofar as the 350,000 figure for market size was concerned and the 240,000 figure for market size was concerned one simply did not know what the correct figure was from the evidence and that whilst there was no justification for either of those figures, the Court could certainly be confident on the evidence that whatever the figures were, they were likely to be significantly lower than and less than those figures." 124 His Honour then said: "It does seem to me that there is real substance in the plaintiffs' complaint in this regard. 125 Then, Einstein J addressed an error in the Digi-Tech estimate of the Freerider market. Digi-Tech submitted that the impact of this error was "minimal". Einstein J accepted that Digi-Tech's submission was "one of substance". He said: "The Freerider represented only $85 million of the ultimate total projected gross revenue of $352 million (according to the Gross Margin Report). A loss of 17% of the FR revenue ($14.5M) would have reduced total revenue by only 4%". 126 His Honour then found that there were reasonable grounds for Digi-Tech to make "a high level of generality representation that Freerider had high revenue and profit potential". The problem with this finding is that it is based on the wrong premise, namely, that the Profit Potential Representation was made at "a high level of generality" and not as we have found it to have been made. For this reason his Honour's finding on this aspect cannot be sustained. It is significant in this context, however, that Digi-Tech admitted an error involving an overstatement of $14.5m. in regard to the Freerider market and no explanation was given for this error. 127 For the reasons we have expressed, we conclude that the Profit Potential Representation was misleading and deceptive in material respects (namely, those to which we have referred above). In coming to this view we take into account the omission of Digi-Tech to adduce evidence that they had reasonable grounds for making the representation. 128 We have given careful consideration to whether we should attempt to make findings concerning those projections referred to in the particulars in para 95 of the summons that are not covered by the three aspects of the Profit Potential Representation that we have dealt with above. We have come to the conclusion that we should not. 129 Such findings would depend to a significant degree on questions of credibility, relating principally to differences between Mr Reid and Mr Rowe. It is true that the judge expressed views as to the credibility of these witnesses and made certain findings but the appellants challenge these findings and contend, further, that, on the evidence properly understood, the judge erred. 130 We were not asked by the parties to make findings as to the individual projections, we were asked merely to resolve Issue 4. For the reasons we have stated we would resolve Issue 4 in favour of the appellants. 131 As will appear below, we have come to the conclusion that certain of the issues should be remitted for re-trial. Included amongst those issues are Issues 5 and 6, which involve reliance on the part of the appellants and the relief to which the appellants are entitled. It is not apparent to us whether any of the parties regard findings on the individual projections as being relevant to their respective cases, as a whole and, in particular, in regard to Issues 5 and 6. For the sake of clarity we should say, in ordering a re-trial in respect of Issues 5 and 6, that we intend that the appellants should be entitled to raise factual issues involving the particulars to para 95 insofar as such matters may be relevant to the determination of those issues.

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Issue 5 132 This issue is: "Would the investors have entered into the relevant transactions if they had been told that Digi-Tech did not have reasonable grounds for the revenue and profit projections upon which the Deloitte Indicative Valuation was based?" 133 We have noted previously that Einstein J held that reliance (or inducement) was not established - on the basis that the Profit Potential Representation involved a "high degree of generality" (which, as we have held, was an erroneous basis). We have also noted that Einstein J held, on the basis that the Profit Potential Representation involved separate representations of the projections and the other statements set out in the particulars to para 95 of the summons, that reliance (or inducement) was established. We have held that that, too, was an erroneous basis. 134 As we have concluded that both bases on which his Honour relied for his conclusions were erroneous, the findings he made as to reliance cannot stand and must be set aside. 135 Moreover, his Honour's findings on this issue do not assist this Court in attempting to resolve the reliance question itself (that is, on the basis that the correct question is whether there was reliance - or inducement - on the Profit Potential Representation as we consider it should be construed). 136 His Honour's views as to the credibility of the individual appellants who testified as to reliance, generally, are nevertheless of real significance to the resolution of Issue 5. It will be recalled that with regard to the Suitability Representation he did not accept the appellants' evidence and they failed on the issue of reliance (and there is no appeal from his Honour's findings in that respect). The individual appellants who testified as to reliance were cross-examined, generally, and, in finding that the appellants had not relied on the Profit Potential Representation (construed so as to involve a high degree of generality), the judge had regard to his view of their credibility. 137 The question raised by Issue 5 is essentially a finding of fact and involves credibility findings. There are many factors to bear in mind in considering this issue. Apart from the general question of whether witnesses are to be believed, there are other important factors. 138 The first is that there are a number of disclaimers of responsibility on the part of Digi-Tech in the documents containing the Profit Potential Representation. The disclaimers are of considerable significance in determining whether the appellants would have entered into the relevant transactions if they had been told that Digi-Tech did not have reasonable grounds for the Profit Potential Representation. The significance of these disclaimers points up, sharply, the need to have seen and heard the witnesses before deciding Issue 5. 139 The second is that it is necessary in answering Issue 5 to determine the purpose for which the appellants entered into the transaction. The difficulty is that the judge determined this issue by reference to his incorrect view of what was comprised by the Profit Potential Representation. Therefore, the findings made by his Honour in this respect cannot be relied upon. 140 Thirdly, the difficulties are compounded by the fact that at the trial the focus in regard to the reliance issue was on how the absence of reasonable grounds affected the intrinsic value of the business and its profitability. The appellants' pleadings do not allege that, had they known that there was a serious risk that groundless assumptions had been made by senior counsel when advising that taxation deductions were likely to be allowed (because there was an absence of reasonable grounds for the revenue and profit projections and the represented value of the Intellectual Property Rights), they would not have entered into the transaction. This issue was not mentioned in the judge's reasons. It seems that the case was not presented or investigated in this way before him. 141 In the course of oral argument in the appeal, the case for the appellants on reliance was put substantially on the basis that the Profit Potential Representation caused them to believe that substantial tax benefits would be received. As inadequate attention was given to this issue at the trial, it is not possible on appeal to make a reliable determination of the reliance issue on this basis. 142 In requesting this Court to make a determination on the reliance issue, the appellants placed emphasis on what they described as an "inference of reliance". They submitted that a presumption of reliance arose by reason of the principles expressed in Gould v Vaggelas (1983) 157 CLR 215 at 238-239, 249-251. 143 We do not accept this submission. Firstly, many of the appellants gave oral evidence as to reliance and the judge did not believe them. He made factual findings as to reliance (albeit on an erroneous assumption), not based on inferences or presumptions but on the credibility of the witnesses he had seen and heard. Factual findings so made must override any inference or rebuttable presumption. 144 For the reasons we have expressed, the factual findings as to reliance cannot stand, but that does not automatically result in the matter being determined on a Gould v Vaggelas presumptive basis. Where the credibility of the witnesses who testified on the issue is seriously called into question - and on reasonable grounds (as in this case, by reason of the judge's credibility findings) - it would not be just to decide the matter by resort to a presumption. 145 For the above reasons we have concluded that this Court should not decide Issue 5 on the papers. This issue should be remitted to the Commercial List Judge for allocation for re-trial according to law in the light of these reasons. 146 In coming to this conclusion we have borne in mind that the McLean appellants stand in a different position to the other appellants as they entered into the transaction at a relatively late stage (after June 1997) and different considerations apply to them. In particular, a question raised by the McLean appellants under Issue 6 is whether Einstein J gave proper weight to a written statement made by Mr Ian McLean (who was not able to give oral evidence because of poor health). We have concluded, however, that the question of reliance as it affects the McLean appellants would also be best resolved after a re-trial, once all the evidence on this issue, as it affects all parties, has been heard. In other words, we consider that the question raised by the McLean appellants' appeal in respect of Issue 5 should not be determined in isolation but after a full consideration of all the contextual circumstances once they have been ventilated fully in evidence.

[97]

Their Honours also referred to Janssen-Cilag . 155 Stockland (Constructors) Pty Ltd v Retail Design Group (International) Pty Ltd followed the approach of Janssen-Cilag. Stockland, like Janssen-Cilag, was not a case where the plaintiff claimed damage caused by entering into a transaction induced by misleading conduct. In both cases the misleading conduct had caused others to act to the direct prejudice of the plaintiff. That is to say, the chain of causation was as follows: firstly, misleading conduct by the defendant; secondly, an innocent party is induced by the misleading conduct to act in some way; thirdly, the innocent party's act, by its very nature, causes the plaintiff loss. On this basis, no act of the plaintiff contributes to the loss. The chain of causation is complete without there needing to be any act or omission on the part of the plaintiff. 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. 157 This analysis demonstrates the fallacy of applying the so-called indirect theory of causation to this case. 158 On the assumption that Digi-Tech's forecasts as to the revenue and gross margin of the products were misleading and deceptive, that misleading and deceptive conduct resulted in Deloitte producing, in essence, a misleading and deceptive valuation to support the price of $72.5m. That valuation enabled the investment scheme to be put together and proposed by Urwin to the appellants. But to complete the chain of causation, there must be something linking the appellants' loss to their entry into the investment scheme. That link is the inducement of the appellants and their consequential act of entering into the transaction to their prejudice. Without that link, there is no proof that the misleading conduct caused the loss. 159 We accept Mr Sheahan's submission 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 Mr Sheahan pointed out, were it otherwise, representees could succeed even though they knew the truth, or were indifferent to the subject matter of the representation. 160 On this ground alone we would not uphold this argument. 161 We would add, in any event, that we consider to be well-founded Digi-Tech's submission that, by reason of the appellants' omission to plead the indirect theory of causation, they should not be able to raise it at this stage. 162 The appellants first raised the indirect causation theory in their closing addresses (in writing and orally). Senior counsel for Digi-Tech made very brief submissions dealing with the indirect theory of causation. He did not object to the appellants pressing this argument but that may have been by oversight, having regard to the vast amount of issues involved and the general complexity of the case. 163 The indirect theory of causation appears to have been regarded as of trivial importance at the trial and could have had no affect on the evidence led. That is because it was not pleaded. 164 The overriding factor in regard to this argument is that a case based on the indirect theory of causation should have been pleaded to prevent Digi-Tech from being taken by surprise: see Bond Corporation Pty Limited v Thiess Contractors Pty Limited (1987) 14 FCR 215 at 222-223. The pleaded case of the appellants was based on direct reliance by them. They did not plead reliance by Urwin. Had the indirect theory been pleaded, the cross-examination of the witnesses might well have proceeded in a different way. In any event, without the matter having been appropriately pleaded and investigated at the trial, it would be dangerous to make a factual finding that, but for the misleading conduct, Urwin would not have promoted the transactions. 165 Accordingly, on this question we uphold the submissions of Digi-Tech.

[99]

Issue 7 172 This issue is in the following terms: "Did Kalifair and Kalinick have the benefit of options although not signed by Divome and Toltex?" 173 Einstein J answered this question in the negative. 174 We have previously set out the basic structure of the Terminal Adapter and Freerider Partnerships. It is sufficient to repeat that Investors, as partners in the Terminal Adapter Partnership and the Freerider Partnership, were obliged to make payments to DTAL over a period of three and a quarter years by way of relatively small instalments each quarter and a large balloon payment on 30 September 2000. Each Investor in each of the Partnerships could exercise an option between 15 April 1999 and 31 July 2000 requiring DTEL to take up the rights and duties of the Investor concerned under the relevant Partnership. The mechanism whereby the options would be exercised involved (as a first step) ensuring that, at the time the options were exercised, the Investors (the partners, in effect) would be companies established for that special purpose. Each individual and company that had previously been an Investor in the schemes was to hold all the shares in the special purpose company concerned (that being the special purpose company that had acquired that individual or company's rights and duties under the relevant Partnership). By the exercise of the option, DTEL would be obliged to take up shares held by the individual or company concerned in his or its special purpose company. 175 We have mentioned that, unless the Partnership was highly successful, the likelihood was that the Investors would exercise their options between 15 April 1999 and 31 July 2000 so that the liability to make the balloon payments would not fall on them, but on DTEL. 176 There were three major prongs to the desirability of the scheme to Investors. Firstly, it was hoped that income from revenue earned by the Products would offset the instalments to be paid while the Investors retained their interests in the Partnerships. Secondly, substantial tax benefits were to be derived from the scheme. Thirdly, if the Products proved to be insufficiently successful to warrant the making of the balloon payment, the Investors could exercise their options and thereby avoid the obligation to make such a payment. That obligation, by the exercise of the option, in practical terms, would be transferred to DTEL (DTEL having acquired the shares in the special purpose company that held the rights and owed the obligations under the agreements comprising the scheme). 177 It was common ground that the agreements comprising the scheme were inter-dependent. Each agreement could not be read independently, that is, separately from the other agreements. Together, they formed one complete transaction. 178 Issue 7 arises because the Kalifair and Kalinick Option Agreements were not executed by their respective holding companies, Divome and Toltex. 179 The Kalifair and Kalinick Sale Agreements (like all the Sale Agreements) provided for the identification of "Covenantors". The Covenantors under the Kalifair and Kalinick Sale Agreements were, respectively, to guarantee the payment by Kalifair and Kalinick of the quarterly instalments payable to DTAL under the terms of the Sale Agreements. The Sale Agreements contemplated that the Covenantors would be listed in Schedule 8 to those agreements. 180 The Covenantors under the Sale Agreements were described as Investors under the Option Agreements. Thus, for example, the Option Agreement for corporate investors (including Kalifair and Kalinick) provided that the "Investor" might exercise the option provided thereby by following a procedure set out in cl 2.4 thereof. The Investor under the corporate Option Agreement was to be the sole shareholder in the Investor company under the Sale Agreement. That is to say, Divome - as the sole shareholder of the Investor company, Kalifair (that is, the Investor under the Kalifair Sale Agreement) - was to be the Investor under the Option Agreement applicable to Kalifair. In the same way, Toltex - as the sole shareholder in the Investor company, Kalinick - was to be the Investor under the Kalinick Option Agreement. 181 By the Kalifair and Kalinick Option Agreements only the Investor in terms thereof (that is, in each case, Divome and Toltex) had the right to exercise the options provided thereby. 182 In January 1998 (more than six months after 30 June 1997) a completed Schedule 8 was provided to DTAL by the solicitors for Kalifair and Kalinick. This showed that Divome was to be the Covenantor under the Sale Agreement of Kalifair's obligations and Toltex the Covenantor of Kalinick's obligations. 183 It was contemplated that Divome and Toltex would each execute an Option Agreement, but, seemingly, initially by oversight, neither did so. 184 On 28 September 1999, Divome and Toltex (with the agreement of Kalifair and Kalinick) purported to exercise the options. They did so by notices delivered under cover of a letter dated 28 September 1999 from their solicitors. The solicitors' letter pointed out that neither Toltex nor Divome had signed any Option Agreement or Sale Agreement and stated: "Neither Toltex nor Divome is liable as covenantor in respect of any obligations owed under the sale agreement. Toltex and Divome expressly deny any such liability, past, present or future, actual or contingent".

[100]

The solicitors went on to assert that, nevertheless, the options in the Option Agreements were for the benefit of Divome and Toltex and not Kalifair and Kalinick. They then stated: "The enclosed notices are signed accordingly and respectively on behalf of: s Toltex and Kalinick. s Divome and Kalifair in each case reserving expressly and for the reasons outlined above, that Toltex and Divome in no way adopt and are not liable in any way under the Sale Agreement …" 185 Digi-Tech argued before Einstein J that Toltex and Divome had, by their conduct, become bound as Covenantors under the Sale Agreements and were thereby obliged to DTAL in terms thereof (in particular for the payment of the instalments owing by Kalifair and Kalinick respectively). His Honour found against Digi-Tech in this respect and there is no appeal in that regard. 186 The next issue with which his Honour was required to deal was whether Divome and Toltex (as each contended) had validly exercised the options when the notices purporting to do so were sent under the cover of the solicitors' letter of 28 September 1999. The judge determined that the option had not been exercised validly. The basis for his Honour's reasons appears from the following observations he made: · "In the absence of an execution of the Investor Option Agreements by all parties intended to be bound by the Agreements including the party intended to execute the Agreement as "Investor", the Option Agreements could not be regarded as binding in any sense. The documents were intended to operate if and only if the parties comprehended by the typed form of document, all executed and agreed to be bound by the terms of the document. · It was simply not possible for the options to be exercised by a third party being the sole shareholder in the Company but which disclaimed any relevant obligations plainly comprehended by the wording of the Option Agreements …" 187 Mr Jackman SC, who argued this issue on behalf of Divome and Toltex, submitted that Divome and Toltex were identified in the Sale Agreements as third parties who were to have the benefit of being entitled to exercise the option provided by the Option Agreement applicable. He submitted that they were entitled to exercise such options without assuming any obligations under the Sale Agreements. He relied on Trident General Insurance Company Limited v McNeice Bros Pty Limited (1988) 165 CLR 107. Mr Jackman also submitted that his Honour's finding that the Option Agreements "could not be regarded as binding in any sense" was not open on the pleadings. He submitted that all parties had conducted the case on the basis that the Option Agreements were binding. 188 It is not necessary to deal with the pleading issue referred to in the preceding paragraph as the matter can be resolved by reference to the construction issue that arises, namely, whether, under the Option Agreements, it was open to a party to exercise the option while at the same time disclaim any obligation under cl 4 thereof. 189 Clause 2.1 of the Option Agreements provides: "In consideration of the payment of instalments of the Option Fee by the Investor as set out in the Schedule, DTEL grants to the Investor the right to require DTEL to subscribe for Company shares on the terms and conditions set out in this agreement." 190 Clause 2.2 provides: "2.2 Subject to the payment of instalments of the Option Fee from time to time as set out in the Schedule … and provided that there is no outstanding breach of the warranties and undertakings in clause 4 of this agreement, the Investor Option may be exercised by the Investor at any time during the Investor Option Period. During the Investor Option Period, the Investor agrees that it must not deal with or encumber any of the Company Shares except as contemplated by this agreement and any purported exercise of the Investor Option other than by complying with this clause is invalid. … 191 Clause 4 provides: 4. Warranties The Investor warrants and undertakes to each of DTAL and DTCL that: (a) the company has been incorporated for the sole purpose of making an investment in the Investor Partnership and DTSPL and the Company will not prior to the expiry of the Investor Option Period undertake any activity not expressly provided for or contemplated by the Investor Partnership Agreement … ; (b) on the date on which the Investor Option is exercised, the Company will have no indebtedness to any person other than the Company Debt; (c) the Investor will procure that either the Company or a guarantor of the Instalment Debt pursuant to the Sale Agreement will meet all payments of the Instalment debt or any other indebtedness arising under this Agreement prior to the exercise of the Investor Option; (d) the Investor will procure that the Company does not alter its constituent documents or agree to any variation of the terms of the Investor Partnership Agreement without the prior written consent of DTCL; and (e) the Company will comply with all applicable laws relating to the administration of the Company including the Corporations Law." 192 We repeat that the "Investor" in the Kalifair Option Agreement is Divome and the "Company" is Kalifair, while in the Kalinick Option Agreement the "Investor" is Toltex and the "Company" is Kalifair. Each Option Agreement provides that the option granted to the Investor (Divome or Toltex, as the case may be) is "on the terms and conditions set out in this Agreement" and is conditional on there being "no outstanding breach of the warranties and undertakings in cl 4 of this Agreement". Clause 4 expressly provides for a warranty and undertaking by the Investor. 193 Mr Jackman recognised that his contention meant that Divome and Toltex did not exercise the Option Agreements as "Investors". He submitted that the reference in cl 2.2 to the words "provided that there is no outstanding breach of the warranties and undertakings in cl 4 of this Agreement" should be read as meaning "provided that the company has complied with the matters set out in sub-paragraphs 4(a)-(e)". Such a construction would reflect the fact that "the Investor" (in the case of Divome and Toltex) was not bound by any warranties or undertakings. He accepted that the "Company" (namely Kalifair and Kalinick - under the respective Option Agreements) was bound as a party to the Option Agreement. He submitted that, on that basis: "Clause 4 thereby takes effect as a set of conditions for the valid exercise of the option by the sole shareholder of Kalifair and Kalinick respectively rather than a set of warranties and undertakings given by that sole shareholder". 194 In our opinion, however, there is no justification for altering the plain meaning of the words used. 195 The Option Agreements contemplate that the Investor will become a party thereto. Each Option Agreement, after all, is described as the "Digi-Tech Investor Agreement". The option provided by cl 2.1 is described as the "Investor Option". Clause 2.1 provides for an option to "the Investor" and not to anyone else. The "Investor" in this sense means the entity that is the Investor in terms of the Option Agreement. The inference is that the party exercising the option will assume the obligations of the Investor in terms of the Option Agreement. 196 Clause 4 unambiguously requires the Investor to give the warranty and undertaking set out therein. Once it is accepted (as it must be in the light of his Honour's findings from which there is no appeal) that Divome and Toltex were not parties to the Option Agreements, the only way that each could give the warranties and undertakings provided by cl 4 was by doing so upon and by the exercise of the option. 197 Their solicitors' letter of 28 September 1999, however, disavowed any intention on their part to do so. The option Divome and Toltex sought to acquire, therefore, was not an option in the terms set out in the Option Agreements (as required by cl 2.1). They sought to exercise the options on the basis that they would not be bound by cl 4. In our view, however, the Option Agreements required the Investor exercising the option to be so bound. Divome and Toltex could not exercise the options while disavowing any intent to be bound by the Option Agreements. 198 We consider that Einstein J correctly upheld Digi-Tech's contentions in this regard and we would not uphold the contentions of Divome and Toltex on Issue 7.

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Issue 8 199 We repeat that this issue is: "Was the exercise of options for McLean Tecnic P/L invalid because: (a) at the time of exercise in relation to one partnership, it had an existing liability in relation to the other; and (b) it was indebted to DTSPL?" 200 Einstein J answered both questions in the affirmative. 201 The facts that give rise to this issue are the following. McLean Tecnic was an Investor in both the Terminal Adapter and Freerider Partnerships. A I McLean was the sole shareholder of McLean Tecnic. A I McLean had entered into an Option Agreement in regard to the Terminal Adapter Partnership and had entered into another, and separate, Option Agreement in regard to the Freerider Partnership. 202 Clause 2.2 of the McLean Option Agreements provided that the options thereunder might be exercised by A I McLean at any time during the option periods "provided that there is no outstanding breach of the warranties and undertakings in cl 4 of this Agreement". 203 Clause 4.1 of the two McLean Option Agreements provided: "The Investor warrants and undertakes to each of DTAL and DTCL that: (a) the Company has been incorporated for the sole purpose of making an investment in the Investor Partnership and DTSPL and the Company will not prior to the expiry of the Investor Option Period undertake any activity not expressly provided for or contemplated by the Investor Partnership Agreement; (b) on the date on which the Investor Option is exercised, the Company will have no indebtedness to any person other than the Company Debt; … 204 On 20 September 1999, A I McLean sought to exercise its Freerider Option Agreement. It required DTEL to subscribe for NZ$3,776,415 worth of shares in McLean Tecnic. At that date, however, McLean Tecnic was indebted to DTAL for NZ$19,993,367 and A$197,352.27 in relation to the Terminal Adapter Sale Agreement. 205 Einstein J accepted Digi-Tech's submission that because, as at 20 September 1999, McLean Tecnic was so indebted to DTAL, the exercise by A I McLean of the Freerider Option Agreement was invalid. The basis of this submission was that, by reason of McLean Tecnic's indebtedness to DTAL in relation to the Terminal Adapter Sale Agreement, the warranty that McLean Tecnic would have no indebtedness other than the Company Debt (cl 4.1(b)) was breached. 206 On 28 September 1999, A I McLean sought to exercise the Terminal Adapter Option Agreement. But, at that time, because of the failure of the exercise of the Freerider Option Agreement, McLean Tecnic was still indebted to DTAL for NZ$3,776,415.30. Accordingly, Einstein J held that A I McLean's exercise of the Terminal Adapter Option Agreement was also invalid as being in breach of cl 4.1(b). 207 Mr Sullivan QC, who together with Mr Stowe, appeared for the McLean appellants, submitted that the judge's construction of the warranty in cl 4.1(b) as to the Company (McLean Tecnic) having no indebtedness to any person other than the "Company Debt", produced an absurdity, and cl 4.1 should be construed so as to avoid that result. 208 Mr Sullivan drew attention to the following definitions. "Company Debt" was defined by the Option Agreements to mean "the proportion of the purchase price payable to DTAL pursuant to the Sale Agreement for which the Company is severally liable less all amounts paid by or on behalf of the Company to DTAL by way of instalment and the instalment debt". "Investor Partnership" was defined in each case as being the Terminal Adapter Partnership and the Freerider Partnership respectively, as was "Investor Partnership Agreement". 209 These definitions indicate that "Investor Partnership" and "Investor Partnership Agreement" are separate concepts for the purposes of the Terminal Adapter and the Freerider Option Agreements. In other words, under the Terminal Adapter Option Agreement, the Investor Partnership was the Terminal Adapter Partnership and Investor Partnership Agreement meant the Terminal Adapter Partnership Agreement. Likewise, under the Freerider Option Agreement, these terms had a similar meaning with "Freerider" being substituted for "Terminal Adapter". 210 A I McLean entered into the two Option Agreements on 4 May 1998. On that date (and thereafter) McLean Tecnic was not incorporated for the sole purpose of making an investment in either the Freerider or the Terminal Adapter Investor Partnership (as required by cl 4.1(a) of the Options Agreements); that is because it had made an investments in both. Thus, on a literal view of cl 4.1(a), there had been a breach of that clause from the very moment the Option Agreements were entered into. 211 Mr Sullivan pointed out further that McLean Tecnic, with the knowledge and concurrence of Digi-Tech, undertook an activity not expressly provided for or contemplated by the Freerider Investor Partnership Agreement, as it undertook the role of a partner in the Terminal Adapter Investor Partnership (and vice versa). 212 He submitted, therefore, that on the construction upheld by the judge, there would have automatically been a breach of the warranty and undertaking in cl 4.1(a) - thus invalidating the exercise of the options under cl 2.2. This invalidation would have been inevitable. On that basis A I McLean never had the benefit of an option that was capable of being exercised. Therein, it was submitted, lay the absurdity. 213 Both Digi-Tech and the McLean appellants accepted that in construing the Option Agreements, due regard had to be paid to the circumstances in which the documents came into being. According to Einstein J: "[T]he events on the evening of 30 June and in the early hours up to about 4.00 am of 1 July were in fact what can only be described as a madhouse of frantic efforts by all who participated to consummate the split transactions being documented literally on the spot under the most considerable time pressure imaginable". (emphasis in the original judgment) 214 Mr Sheahan submitted that regard also had to be had to the fact that the Agreements were structured so that each partnership shared in the income generated by the products of both partnerships. Accordingly, he submitted, each Investor Partnership Agreement should be construed as expressly contemplating that partners might also be partners in the other Partnership that was associated with the scheme. 215 Mr Sheahan submitted that on that basis there would not be a breach of cl 4.1(a) and no absurdity would result. He pointed out that cl 2.2 contemplated that there might be a breach of the warranties and undertakings in cl 4 but, provided the breach was remedied before the option was exercised, the option could be exercised validly. 216 Mr Sheahan submitted that McLean Tecnic could have assigned its rights and duties to two separate but related companies, each wholly owned by A I McLean. Each would then have acquired an interest in only one of the Partnerships, thus satisfying cl 4.1(a). He pointed out that Mr Kelliher was also a partner of both Partnerships and he had exercised his two Option Agreements validly by, prior to the exercise thereof, assigning his two sets of interests to two different companies. Had McLean Tecnic done the same, there would have been no breach of warranty by it. 217 On this basis, Mr Sheahan submitted, A I McLean could have had the benefit of the Option Agreements without words being supplied, omitted or corrected in cl 4.1(a). 218 Mr Sullivan submitted, in reply, that the expression "indebtedness" in cl 4.1(b) of the Terminal Adapter Option Agreement should be construed as "indebtedness other than indebtedness that would satisfy the definition of Company Debt in respect of the Freerider Option Agreement" and, in relation to the McLean Freerider Option Agreement, as "indebtedness other than indebtedness that would satisfy the definition of Company Debt in respect of the Terminal Adapter Agreement." 219 Mr Sullivan accepted that the fairness of the construction for which he contended would be contingent upon construing the Option Agreements so as to make it a condition precedent to the exercise of the option in respect of one Partnership, that McLean Tecnic had paid the option fees (and was not in default in relation to the Instalment Debt) due in respect of the other. As he candidly pointed out, were that not so, it might be open to McLean Tecnic to exercise the option in respect of one Partnership, when there existed default in respect of the payment of the Instalment Debt and non-payment of option fees in respect of the other Partnership. This would have the consequence of requiring DTEL to subscribe in a company which was liable for the balloon payment in respect of the Partnership for which the option was not exercised (where, also, the option fees might be owing and where there might be outstanding amounts in relation to the Instalment Debt). 220 Mr Sullivan submitted that such a result (that is, the construction of such a a condition precedent to the exercise of the option) could be obtained by adding words to two parts of the Option Agreement. Firstly, cl 2.2, he submitted, should read: "Subject to the payment of instalments of the Option Fee ( and other partnership debts ) from time to time as set out in the Schedule …"

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Secondly, he submitted that the Schedule should be read as if it contained the following words: " Other Partnership Debts" means such of the amounts set out below which have fallen due at the time of the exercise of the Option : [ Table setting out Option Fees and Instalment Debt due in respect of the other partnership ]" 221 In our opinion, however, Mr Sullivan's solution involves a substantial rewriting of the Option Agreement, does too much violence to the words used, and is unnecessary. The solution proffered by Digi-Tech is reasonable in the context, requires far less change to the ordinary meaning of the words used, and does not result in absurdity (as shown by the example of Mr Kelliher). In our view, Einstein J was justified in preferring the submissions advanced on behalf of Digi-Tech on this issue. 222 Accordingly, we uphold the views expressed by the judge in regard to this aspect of Issue 8 and the arguments of the McLean appellants in this respect fail. 223 Einstein J also found that at 30 September 1997 McLean Tecnic owed DTSPL $58,719.95. This was in respect of $15,892.95 being purchase and option fees due in September 1999 and $42,827 for an unpaid call on capital. It was said that this indebtedness prevented the exercise of the options by A I McLean. 224 The McLean appellants' principal argument on this issue was that this alleged indebtedness was a matter outside the pleadings and was not available for adjudication. 225 Digi-Tech accepted that it did not make specific reference to these two debts in its pleadings. It sought to make its case on accounts put in as exhibits. The existence of the two debts in question was not addressed in oral evidence. The exhibits in question were tendered when dealing with other issues. 226 In the context of this case, with many issues in dispute and thousands of pages of exhibits tendered in evidence, it was important to ensure that the respective cases of the parties were pleaded in such a way that no party could be taken by surprise. We have stressed this in regard to Issue 6. It seems to us that the failure to plead the existence of the two debts must have resulted in surprise and unfairness to the McLean appellants. 227 The judge accepted that the indebtedness existed merely by relying on the documents tendered. It is true that the McLean appellants tendered the documents in question themselves and asserted that they were correct. But the documents were very bulky, and the two items were an infinitesimal part of the information contained therein. Whether or not the documents became evidence for all purposes is not to the point. The significance of the omission to make any reference to the two debts in the Digi-Tech pleadings is that the McLean appellants did not apply their minds to the question whether these particular debts were correctly shown in those documents when they tendered them. 228 The documents were tendered at a time when the McLean appellants did not know that Digi-Tech would try to use the alleged debts to contend that A I McLean had not exercised the Option Agreements validly. The question was simply not canvassed in the course of oral evidence. It received very little attention in closing oral addresses (the McLean appellants apparently did not challenge the $42,827 debt at all). But this was not the only issue in this case which did not receive the attention of counsel in closing. We repeat that, having regard to the complexity and vastness of the issues, that is quite understandable. 229 In these circumstances, it seems to us that it would be unfair and dangerous for factual findings to be made as to the indebtedness of the Mclean Tecnic on the strength of those documents alone. 230 In our opinion, the judge's findings on this issue should be set aside. In our view, however, given the way the issue was dealt with by the parties (with some degree of technical fault on both sides), it would be just to order a re-trial in respect of this issue (that is, whether the indebtedness as now alleged existed at the relevant time).

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Issue 9 231 Issue 9 is as follows: "Was the exercise of options for Kalifair P/L, Kalinick P/L, McLean Tecnic P/L, Brand, Chambers, Kelliher, Smith, O'Loughlin and Whiting invalid because on the day of exercise each was (or in the case of natural person investors, their nominee company became) liable for withholding tax?" 232 Einstein J answered this question in the negative. 233 Digi-Tech contended that, by reason of the receipt by and entitlements of DTAL to payments of the purchase price under the Sale Agreements, DTAL became liable in Australia for withholding tax. Digi-Tech submitted that withholding tax was payable by DTAL on some part of the purchase price paid (and payable) to it for the Intellectual Property Rights. 234 This contention rested, firstly, on the proposition that, because part of the Intellectual Property Rights included know-how, trade secrets and confidential information (to which we shall collectively refer as "Know-how"), that particular part was not capable of being assigned. Secondly, it was said that, despite the wording to the contrary of the Sale Agreements (which provided for assignment of the Intellectual Property Rights), the Know-how was in fact licensed by DTAL to the investors. 235 On this basis, Digi-Tech submitted that part of the payments in respect of the purchase price related to the Know-how, that particular part constituted royalties, and DTAL was liable for withholding tax in respect of those royalties. 236 Digi-Tech also put its argument on this issue in another way, as follows. · Clause 10.3(b) of the Sale Agreements provided for a warranty by the Investors (that is, the partners of the two Partnerships) to the effect that "as at the date of this Agreement the payments to be made to DTAL pursuant to this Agreement may be made free of any tax, deduction or other withholding of any nature". · By reason of the receipt by and entitlements of DTAL to payments of the purchase price under the Sale Agreements (which included royalties for the reasons set out above), DTAL became liable in Australia for withholding tax. · By cl 10.3(b), the Investors were obliged to ensure that the payments to be made to DTAL were free of withholding tax. · None of the instalments paid to DTAL by the Investors took account of any liability that DTAL might have for withholding tax. · Thus, there had been a breach of the warranty contained in cl 4 of the Option Agreements and, hence, the options were not exercised validly. 237 An essential element of both Digi-Tech's arguments was that at least part of the instalments payable under the Sale Agreements (that in respect of Know-how) amounted to royalties. Digi-Tech submitted that the Know-how was not capable of assignment and the Sale Agreement must be construed as meaning that, thereby, a licence was conferred upon the partnerships to use the Know-how. 238 Digi-Tech conceded that, if the payments were simply in satisfaction of the purchase price of "property" - as this term is understood in law - and were not royalties, the payments so received by DTAL would be in the nature of capital and no withholding tax would be payable in respect thereof. If, on the other hand, the instalments or any part thereof constituted royalties, they would be covered by s 128A(1)(AA) of the Income Tax Assessment Act 1936 which provided, in effect, that for the purposes of the relevant withholding tax provisions (ss 128B(5)(A) and 128B(2)(B)), "income" included a "royalty". 239 Digi-Tech pointed out that the definition of "royalty" in s 6(1) of the Income Tax Assessment Act 1936 included amounts "to the extent to which" they satisfy various descriptions and submitted: "These words contemplate apportionment of expenditure which relates, in part, to one of the matters referred to in the statutory definition and in part to something else [ Federal Commissioner of Taxation v Franklin Mint Pty Limited (1993) 44 FCR 109 at 120 (Full Court); Ronpibon Tin NL v Federal Commissioner of Taxation (1949) 78 CLR 47 at 59]". 240 The next leg of Digi-Tech's argument on this aspect was that: "To the extent that cl 2.1 of the Sale Agreements purports to assign know-how and trade secrets to the partnerships, it constitutes an agreement to perform a service by DTAL for the benefit of the partnerships, being the disclosure of confidential information [ PanContinental Mining Limited v Commissioner of Stamp Duties [1989] 1 Qd R 310]. This is so irrespective of whether cl 2.1 operates as an assignment or an exclusive licence". 241 Digi-Tech next contended that the supply by DTAL of Know-how to the Partnerships pursuant to cl 2.1 of the Sale Agreements constituted the supply of technical or commercial knowledge or information and accordingly fell under the statutory definition of "royalty". Therefore, it was said, to the extent that the payments in respect of the purchase price of the Products were referable to the supply of the Know-how, those payments constituted royalties on which withholding tax was payable. 242 In dealing with the method whereby such royalties could be calculated, Digi-Tech submitted that, as the purchase price was not expressly apportioned between the various items for which it was paid, an allocation would need to be made based on a fair and reasonable assessment of the extent to which the price related to each category of Intellectual Property Rights acquired by the Partnerships pursuant to cl 2.1 (see Ronpibon Tin NL v Federal Commissioner of Taxation at 59). 243 Einstein J rejected Digi-Tech's argument on three grounds. 244 Firstly, he held that the Sale Agreements involved "an assignment, rather than a licence of intellectual property rights". Secondly, his Honour held that Digi-Tech had "failed to establish, on the evidence, anything of proven value by way of the suggested Know-how, trade secrets and confidential information". Thirdly, his Honour held that Digi-Tech's argument could not apply to any of the individual Investors who assigned their interest in the Partnerships to a different entity at the time of exercise of the options. His Honour said in this regard: "Had withholding tax been payable in those cases, the assignor would have remained liable to pay the withholding tax and the assignee company whose shares are acquired by DTEL would not have that liability." 245 It is only necessary to deal with the challenge to the second of these findings. 246 In Federal Commissioner of Taxation v Sherritt Gordon Mines Limited (1977) 137 CLR 612 the Commissioner submitted that the payments made in that case were royalties because they were measured by reference to the value of goods produced by means of a technical or industrial process, being payments made in consideration of the right to use technical information supplied in relation to the process. Mason J (with whom Gibbs J agreed) observed (at 626): "It is said that a fee for the provision of technical assistance and information may constitute a royalty and that the fee will have this character when the owner of a right or asset grants or sells the right or permits the asset to be used for a consideration calculated by reference to the quantity or value of the thing taken or the occasion on which the right is exercised or the asset used."

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Mason J then said (at 626): "There the Court was considering an agreement between the owners of land and a sawmiller whereby there was a sale of standing timber to the sawmiller for a lump sum payable in quarterly instalments which became due independently of the amount of timber removed. The Court held that the payments were not royalties and in the passage already quoted made it clear that it is of the essence of a royalty that the payments should be made in consideration of the grant of a right, that they should be made in respect of particular exercises of the right and therefore should be calculated in the manner stated. The tenor of the passage is in my opinion quite opposed to the Commissioner's contention. Here the substantial, if not the sole, consideration for the payments was not the grant of a right but for the provision of technical assistance and information which Western Mining was entitled to use once it was supplied, without the grant of any additional right so to do. The express grant of the right to use and sell … was no more than a recognition of the consequence which automatically flowed from the provision of the technical assistance and information." 247 Jacobs J, in the same case, said (at 631): "The essential feature of royalties in its ordinary acceptation is that the payments are calculated proportionately to the use or the production extraction or treatment consequent upon the use of that which is provided, not the legal quality of that for which the payment is made." 248 The Sale Agreements did not provide that the payments to DTAL were to be made in respect of, or as consideration for, any particular exercise of the right to use the Know-how. The Sale Agreements did not reveal that any part of the payments to DTAL represented the degree or extent to which the Know-how was used. The Sale Agreements did not provide that part of the payments made to DTAL were to be calculated by reference to the occasions upon which rights to use the Know-how were exercised. 249 Accordingly, the Sale Agreements do not give any indication that any part of the payments to DTAL, said to be in respect of rights to use the Know-how, was calculated in the manner stated in the joint judgment in Stanton v Federal Commissioner of Taxation at 642 and adopted and approved by Mason J (with the concurrence of Gibbs J) in Federal Commissioner of Taxation v Sherritt Gordon Mines Limited at 626. 250 Moreover, apart from the terms of the Sale Agreements, no evidence was led at the trial in an attempt to establish, outside the Sale Agreements, that any part of the payments made to DTAL were in respect of the Know-how and were calculated in accordance with Stanton v Federal Commissioner of Taxation. Furthermore, the evidence did not reveal how the payments made to DTAL under the Sale Agreements, in respect of the purchase price of the products, were to be calculated proportionately to the use of the Know-how. No submissions appear to have been made at the trial explaining how the calculation was to be effected and no suggestions were made as to what proportion of the payments made to DTAL were in respect of royalties. 251 Rather, Digi-Tech relied on the following finding by Einstein J: "But more particularly his evidence clearly established that DTAL, as part and parcel of its ordinary and very well established niche business, was able to take in its stride such requirements as the real world might in time (and even in what may be regarded as relatively a very short time) throw up in terms of exploitation in Australia for the needs of particular customers or for the needs of particular perceived demands. DTAL had the contacts in the industry and the relationships with the software companies which had worked on Terminal Adapter, to be able to accommodate the need for software adaptation and modification. Importantly, it had the know-how to work out how to handle any such needs. That know-how was part and parcel of DTAL's attraction to the plaintiffs and investors and it was never seriously challenged in any way during this litigation". (emphasis in original judgment) 252 Digi-Tech submitted that this finding was inconsistent with the judge's determination that Digi-Tech "failed to establish, on the evidence, anything of proven value by way of the suggested Know-how, trade secrets and confidential information". 253 In addition, Digi-Tech pointed out that there was unchallenged evidence that DTAL supplied the partnerships with Know-how, trade secrets and confidential information of value that was used by DTSPL (and hence the partnerships) in various ways. Digi-Tech submitted, generally, that there was proven value in the Know-how and his Honour erred in the finding he made. 254 The appellants, on the other hand, drew attention to the fact (as we have already noted) that Digi-Tech did not prove what monetary value (if any) the Know-how had independently of the other Intellectual Property Rights. They pointed out, also, that DTAL charged DTSPL separately for the Technical assistance that DTAL provided. In this context, the Sale Agreements required DTAL to provide "reasonable managerial support and assistance to DTSPL"; and cl 7.5(a) of the Licence Agreements provided that DTSPL had to pay for management support provided by DTAL under the Sale Agreements. Thus, the liability for the provision of management support was separate from the purchase price under the Sale Agreements. Similar provisions applied to the provision by DTAL of "technical and sale support to DTSPL in respect of any large or technically complex orders for products". 255 In the circumstances, it is simply not possible to determine whether any value was attributed by the parties to the Know-how in the purchase price payable under the Sale Agreements. Additionally, if such value was so attributed, there is no way of determining what that value was. In the circumstances, Digi-Tech failed to establish that any part of the payments made to DTAL said to attract withholding tax was calculated in accordance with Stanton v Federal Commissioner of Taxation and Federal Commissioner of Taxation v Sherritt Gordon Mines Limited. On that basis, in our view, no part of that payment has been shown to be a royalty. 256 We agree, moreover, with Einstein J that Digi-Tech failed to establish that the Know-how had any value. 257 This conclusion disposes of other arguments raised by Digi-Tech in respect of withholding tax. 258 Accordingly, we consider that Einstein J was correct in answering the question posed by Issue 9 in the negative. . Issue 10 259 Issue 10 is: "Did Smith's nominee company (Dellfan Pty Limited) deliver an executed deed of accession with the consequence that Smith's option was validly exercised?" 260 Einstein J answered this question in the affirmative.

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261 Clause 20.4 of the Sale Agreements provided that an Investor, wishing to transfer its interest and obligations under the Agreement, was required to deliver to DTAL "a deed pursuant to which the transferee is bound by this Agreement to perform the obligations of the Investor; …". 262 Before Einstein J, Digi-Tech contended that Mr Smith failed to deliver a deed to DTAL as required by cl 20.4(a). Mr Smith's case was that he had signed and delivered to DTAL a deed in requisite form whereby he assigned his partnership interest in the Freerider partnership to his assignee company, Dellfan. 263 Einstein J found that Mr Smith did execute such a deed. His Honour, however, did not expressly find that Mr Smith delivered the executed deed to DTAL. Nevertheless, Digi-Tech failed on this issue before his Honour so that it must be assumed that his Honour held, tacitly, that there had been delivery. 264 Digi-Tech submitted that there was no evidence that a signed deed in the form required by cl 20.4(a) was delivered to DTAL. It was said that DTAL only ever received (by facsimile) an unexecuted copy of the deed to which Mr Smith had referred in evidence. 265 In addition, Digi-Tech submitted that Mr Smith could not have executed the deed on behalf of Dellfan as he was not an authorised agent of the company, whose sole director was Mr Urwin. There was no evidence that Mr Urwin executed the deed; as mentioned, the judge found that Mr Smith had executed the deed. 266 For either or both of these reasons, Digi-Tech submitted that Mr Smith did not validly exercise the option. 267 In an affidavit by Mr Smith, tendered in chief, he said: "On 14 September 1999, I sent a facsimile to DTAL advising that I had assigned my interest in the FIP and DTSPL to Dellfan. Pages 31 to 38 of Exhibit "IMS 1" are a true copy of the facsimile, the deed of assignment and deed poll." 268 The facsimile letter of 14 September 1999, written by Mr Smith to DTAL reads: "I advise that I have assigned my interest in the Freerider Investor Partnership and my shares in Digi-Tech Software Pty Limited in accordance with clause 14 of the Freerider Partnership Agreement to Dellfan Pty Limited. I enclose for your information a copy of the document by which this transfer occurred. I enclose a deed pursuant to which Dellfan Pty Limited is bound by the Sale Agreement dated 30 June 1997. …" 269 The copy of the deed that was in evidence was not executed. Nevertheless, Einstein J found that Mr Smith did execute a deed. In our view, that finding was reasonably open on the evidence. 270 The question remains whether an executed deed was delivered to DTAL. 271 In cross-examination, it was put to Mr Smith that an Investor might transfer its interest and obligations under a Sale Agreement to a transferee by delivering to DTAL a deed as required by the Agreement. Mr Smith acknowledged this. This was the only reference in cross-examination to the delivery of a deed. 272 It was then put to Mr Smith that he had never executed such a deed. He replied that he thought he had. 273 In re-examination, Mr Smith was referred to the facsimile of 14 September 1999 and to a copy of the unexecuted deed that was in evidence; he was then asked whether that was a copy of the deed to which he referred in his facsimile of 14 September 1999. He replied in the affirmative, although he acknowledged that the copy did not bear a signature. He confirmed that his testimony was that the deed "would have been executed" and it "should have been executed". He was told to refresh his memory by reference to the facsimile of 14 September 1999 and was then asked: "[A]re you able to state with any greater clarity one way or the other whether the copy of the Deed which you sent pursuant to which Dellfan was bound by the Sale Agreement was executed or not?"

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He replied: "I would have thought it would have been executed, because I was taking, I thought, care to do this properly. I haven't got an executed copy in front of me, so I can't positively swear to that." 274 The following exchange then occurred: "Q. Refreshing your recollection from [the facsimile of 14 September 1999], are you able to state with any greater clarity than you have done so far in your evidence whether the copy of the Deed which you sent was in fact executed or not? A. I believe it would have been. Q. What is the basis for that belief? A. That I was taking care when preparing these documents, because I was aware of the importance of them. It would be my normal practice to check documents that I was preparing." 275 Mr Sheahan submitted that the evidence as a whole was insufficient to discharge the onus of proving that an executed Deed had been delivered. 276 Einstein J believed the testimony of Mr Smith. He believed him when he said that he would have executed the deed and found that that was sufficient to discharge the onus in relation to execution. It seems to us that, in the same way, accepting the veracity of Mr Smith's evidence, his statement that he would have delivered a signed deed to DTAL is sufficient to discharge the onus upon him in regard to delivery. Two matters reinforce this conclusion. Firstly, Mr Smith's evidence as to what he would have done in regard to the delivery of the deed is reinforced by his explanation for that testimony, namely, that he was taking care to ensure that the formalities were carried out properly, having regard to the importance of them. Secondly, Digi-Tech led no evidence in contradiction to that given by Mr Smith. 277 Digi-Tech also argued that there was no evidence that Mr Smith was authorised to sign the Deed, that being of particular significance (it was said) as the sole director of Dellfan was Mr Urwin (and not Mr Smith). 278 In our opinion, the answer to this submission (which was not pressed in oral argument) is that Digi-Tech did not plead lack of authority on the part of Mr Smith (and, indeed, did not cross-examine him on this issue). It is a generally accepted rule of practice that absence of authority must be pleaded to prevent the opposing party from being taken by surprise. We would not allow this argument to be raised at this stage. 279 Accordingly, we would answer the question posed by Issue 10 in the affirmative and uphold Einstein J's decision in this respect.

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A final comment: overly lengthy judgments 282 There is a noticeable increase in extremely complex and sophisticated litigation. This is one such case. The increased complexity of litigation and the great number of issues that in some cases require determination have led to some very lengthy judgments. There are other cases where the issues are less complex but the judgments are nevertheless very long, and unnecessarily so. This should be discouraged. Prolixity is an enemy of comprehensibility and, indeed, cogency, 283 This case was a labyrinth of facts and issues, and the task of writing a judgment was an extremely difficult one. Many of the issues resolved by his Honour are not the subject of appeal. Nevertheless, while genuine tribute must be paid to the judge for the industry and dedication manifest from his extensive reasons, it has to be said that their length and form have not facilitated the discernment and understanding of the significant issues in the appeal. 284 The judgment sets out in great detail the submissions advanced by the parties and the evidence of many of the witnesses. Some of this material relates to peripheral matters. The mass of these references tends to obscure the essential issues that have to be decided and makes the reasoning process difficult to follow. The reasoning process itself is overly discursive, and clear and precise findings are at times difficult to detect. In addition, findings on some important matters have not been made at all, but in fairness to his Honour, in many instances that is likely to have been because of the particular focus attributed to the issues by the parties in presenting their respective cases. All these matters loomed large in the argument on appeal. 285 In Customs and Excise Commissioners v A [2003] 2 All ER 736 Schiemann LJ said (at 753-754, [82]-[83]: "A judge's task is not easy. One does often have to spend time absorbing arguments advanced by the parties which in the event turn out not to be central to the decision making process. Moreover the experienced judge commonly has thoughts about avenues which it might be crucial to explore but which the parties have not themselves examined. It may be his duty to explore these privately in order to satisfy himself whether they are relevant. Having done the intellectual work there is an understandable temptation to which many of us occasionally succumb to record our thoughts for posterity in the judgment or to refrain from shortening a long first draft. However, judges should bear in mind that the primary function of a first instance judgment is to find facts and identify the crucial legal points and to advance reasons for deciding them in a particular way. The longer a judgment is and the more issues with which it deals the greater the likelihood that: (i) the losing party, the Court of Appeal and any future readers of the judgment will not be able to identify the crucial matters which swayed the judge; (ii) the judgment will contain something with which the unsuccessful party can legitimately take issue and attempt to launch an appeal; (iii) citation of the judgment in future cases will lengthen the hearing of those future cases because time will be taken sorting out the precise status of the judicial observation in question; and (iv) reading the judgment will occupy a considerable amount of the time of legal advisers to other parties in future cases who again will have to sort out the status of the judicial observation in question. All this adds to the cost of obtaining legal advice." 286 We endorse these remarks and would add some general comments. 287 One of the major reasons for the inordinate length of some judgments is the mechanical recounting of large tracts of submissions and evidence. Ordinarily, the repetition of counsel's submissions has a twofold purpose. First, to assist in defining the issue. Secondly, to indicate that the arguments raised have been taken into account. There is good reason, however, not to repeat these arguments verbatim, but to summarise them succinctly. Similarly, the recording of large extracts of evidence has little utility unless the point the judge seeks to make from the evidence is clearly stated at an appropriate stage. Moreover, the quoted extract should be reduced to a minimum; the minimum being that particular portion on which the point is based - and no more. 288 Where a judgment contains excessively long recitations of the parties' submissions and the evidence of witnesses it often becomes difficult on appeal to detect precisely which of the submissions the trial judge has upheld, and on what specific grounds, why long extracts of particular testimony are repeated, and what inferences are to be drawn from it and from what particular passages. This method of writing judgments makes it difficult to detect specific findings in the mass of material. The problem is exacerbated when the findings are scattered amidst discursive discussions. 289 It is generally unnecessary and undesirable to express every line of thought, including those that have proved to be unhelpful, in the judge's chain of reasoning. This again can cause debate and confusion. It is preferable for trial judges to confine themselves to the reasoning that leads to their final conclusions. 290 The practice of appending cross-referenced documents to a judgment is to be discouraged. A succinct analysis of the issues and their sequential determination, involving a clear and ordered statement of the facts found is the preferred aim. 291 Finally, the difficulty in finding one's way around a judgment of 778 pages, with some 100 pages of cross-referenced appendices, is self-evident. It is simply not possible to absorb the material contained in such a lengthy document in the way needed for the efficient hearing of an appeal. It also detracts from the utility of the document as a source on which the judgment of an appellate court can be based. **********

Digi-Tech (Australia) Ltd v Brand & 5 Ors; Digi-Tech

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