Elconnex Pty Limited v Gerard Industries Pty Limited

Having regard to the lapse of time since then, it is hardly surprising that neither Miss Vale nor Mr Johnson was able to give the Court anything like a verbatim account of this conversation. But it is common ground that a Wendy's shop is the type of shop which requires, for its success, a substantial passing crowd of persons frequenting a shopping centre for more pressing reasons, such as the need to purchase the week's groceries. A sufficient number of these persons will then enter the Wendy's shop upon impulse to taste the delights of ice-cream or doughnuts. I think it is very probable, if not inevitable, that Mr Johnson would indeed have been interested to know whether the centre had attracted lettings which might in turn attract customers. His conversation with Miss Vale was followed by the signing of a letter of intent, indicative of his interest in taking a lease. It therefore seems likely that what Miss Vale had told him had encouraged him to think the shopping centre would be a success. She, for her part, would hardly have disguised her generous assessment of the prospects. Sales people do not usually hide their lights under bushels. She thought, as she said in cross-examination, that it had been "a very successful campaign in the first stage". Speaking of this very conversation with Mr Johnson which preceded the issue of the letter of intent, she said that, apart from a particular fruit and vegetable shop, she was "feeling confident about the letting". Indeed, she also said that in early July, with the same proviso, she was "still very confident about the rest of the letting programme". With regard to the fruit and vegetable shop, in fact an apparently suitable tenant was found in July and a draft lease issued on or about 5 August, but unfortunately, in about late August or some time in September, this proposed letting fell through. It is necessary now to say something about the credit of the witnesses. Mr Johnson and Miss Vale were each cross-examined. Both had difficulty in recalling events at this distance, but in many respects their evidence was not in serious conflict. Mr Johnson left no doubt of his acceptance that Miss Vale would have had reasonable grounds for the statements she made to him, at the time they were made. The gravamen of his case was that subsequent events falsified them at a stage when he was still in negotiation, and that he was not then told the truth, either by her or when he made a direct request for information of the executive director of the respondent responsible for the transaction, a Mr Keast. I was generally impressed by Mr Johnson, and where he was in conflict with Miss Vale, I preferred his version. However, as I have said, the points of conflict were actually not many. Returning to the important conversation between Mr Johnson and Miss Vale which preceded the letter of intent, neither of them having attempted a verbatim account, and each having agreed that she went through the proposed tenancies with him, the question remains what was the effect of what she said about them. According to Mr Johnson, she told him on several occasions, one of which I understand to have been this occasion, "things are going to plan". I accept that she said this, as indeed I think she believed at the time. I think she elaborated by giving him an optimistic rendition of the position with respect to each of the individual tenancies proposed. On a subsequent occasion, which Mr Johnson thought "would have been very late September", but which I think may have been earlier, Miss Vale told him that "but for the fruit and vegetable store and two other external tenancies, the premises would be full on opening". This was in a telephone conversation. On some occasion also, Miss Vale again took Mr Johnson through the position of the proposed tenancies as she perceived it at that time. The evidence does not allow me to fix the date of this conversation, nor its details, but I am satisfied that nothing was said to suggest that the centre would be far from fully occupied at its opening. I am satisfied of that both because I accept Mr Johnson's honesty, and also because I accept his competence as a businessman - had he been told the true position, as it developed, he must have made searching enquiries of which there is no trace in the evidence. The reason why I think the telephone conversation, in which it was suggested that the centre was almost fully let already, may have been earlier than late September, is that Miss Vale would almost necessarily have been acting dishonestly if she had made the statement then. Earlier, her optimism may have misled her, without deliberate falsehood, into painting a rosier picture than was really justified. But "[b]y late September we were very worried", as she said herself. Mr Keast had by then made clear his own concern. And thereafter the position did not improve. It is unnecessary to elaborate the point, for Miss Vale freely conceded the stark reality when she was asked in cross-examination: "In fact by November the position with the leasing was so bad that in your view had Mr Johnson been told the correct position, he would not have executed a lease, would he?" and answered: "No, he wouldn't have. I don't believe he would have." The reference to November might appear to be jumping forward somewhat, but Miss Vale said that "after late September/October [she] had no further conversation with [Mr Johnson] about tenancies", according to her recollection. She was asked: "Even though you knew how badly the position was then going?" and answered: "That's right." She was, however, keeping Mr Keast fully informed, holding fortnightly meetings with him. What all this evidence converged upon was a meeting, at which both Mr Johnson and Mr Keast were present, held in a boardroom at the offices of Mr Johnson's solicitors on 1 November 1993. Present were Mr Johnson's solicitor Mr Lamb, a Mr Bruce Sedgwick of Jones Lang Wootton, Mr Johnson, Mr Keast, an assistant to Mr Keast Mr Ell, and Mr Keast's solicitor Mr D'Agostino. The meeting was called to finalize the proposed lease. Although Mr Keast denied it, I think his presence was an indication of how desperate the letting situation was for Leda, since it was certainly not his practice to attend meetings of that kind - nor, of course, was it normal that the lessor's solicitor should attend upon the lessee's solicitor to resolve difficulties with the documents. A number of questions concerning the terms of the proposed lease were debated, but at the end of the meeting, and as it was breaking up, Mr Johnson turned to Mr Keast to ask, according to Mr Johnson's account: "How is the leasing programme at Rosemeadow going?" -

"We are finding tenants slowly but they will all be there on the day. There is nothing to worry about." In cross-examination, this wording underwent minor changes, but Mr Johnson was firm as to the substance, and that the effect was:

"You've got nothing to worry about". He said that the solicitors had left the room, but Mr Ell was sitting next to Mr Keast and Mr Sedgwick was still in the room, although he had moved. Mr Johnson's evidence received some support from Mr Sedgwick, the Jones Lang Wootton employee who was in attendance at the meeting. He later became State Leasing Manager, and is now employed as a leasing executive by Lend Lease. Mr Sedgwick recalled that "as the parties were preparing to leave the meeting, Mr Johnson asked Mr Keast a question which was to the effect of 'How are you going with the leasing programme?' Mr Keast responded with words to the effect of 'There is nothing for you to worry about'". In cross-examination, Mr Sedgwick said he was not "one hundred per cent sure" as to the "exact wording", but he made it clear he was sure as to "the meaning" of Mr Keast's statement to Mr Johnson. He reaffirmed that he did hear Mr Johnson speak to Mr Keast about "the leasing programme". However, he also gave the following evidence: "Could it be that you heard him say words to the effect that 'things are going okay'?" Answer: "Yes". "That is perfectly consistent with your recollection?" Answer: "Yes".

"Could it be that you heard Mr Johnson say to Mr Keast something to the effect of just 'how are things going'?" Answer: "Yes". If these answers stood alone, they would, of course, greatly weaken the effect of Mr Sedgwick's evidence in chief. But he said as well, during the course of his cross-examination, that, when he heard Mr Keast speaking, what that gentleman said did not accord "with what [he] understood to be the truth at the time". At the time, his other evidence made clear, there was a real concern "at the lack of progress in securing tenants for the Rosemeadow Marketplace". Mr Sedgwick acknowledged that he had not corrected what Mr Keast had said. He gave a picture of being extremely uncomfortable about this aspect of his own conduct, and in my opinion that picture had the appearance of truth. The account given by Mr Johnson and Mr Sedgwick was denied by Mr Keast and by Mr Robert Ell, his assistant at the time, who still works for Leda. Mr Keast said: "I do not remember holding any conversation with Mr Johnson in relation to the retail leasing of Rosemeadow Marketplace." But I was not impressed by the evidence of these two gentlemen, and I preferred that of Messrs Johnson and Sedgwick, particularly Mr Johnson. A subtle, yet powerful, indication of the probability of Mr Johnson's having asked, when the moment of decision impended, "How is the leasing programme at Rosemeadow going?", is the telling coincidence between that question and his reaction, as the respondent's witness Miss Vale recalled it, when first approached on behalf of Leda: "How is the leasing at Rosemeadow going?" The answer was vital and, on the respondent's case, he had had no updated information since September. He must, of course, have known that the opening of the centre was now being delayed by almost a month, in itself a change in the situation that might well have provoked some inquiry. Neither of the solicitors recalled the conversation of which Messrs Johnson and Sedgwick gave evidence, but in the circumstances of such a meeting, and particularly at the very end of it, I do not regard that as of much significance. It does not, in the context of all of the evidence, change my view as to the version that is to be preferred. Nor does the fact that a cross-claim dated 26 August 1994 filed by the present applicants in a local court does not refer to the conversation with Mr Keast. The allegations then made are broadly consistent with the case put at the hearing in this court, and the specific allegation concerning Mr Keast was made by letter dated 24 November 1994, when particulars of the cross-claim were sought. In the upshot, Oraka Pty Limited executed an agreement for lease of the proposed shop at Rosemeadow, and Mr Johnson executed the agreement as guarantor, on 3 November 1993. In my opinion, the execution of these documents not only followed hard upon the holding of the meeting of 1 November, but was induced by the specific representation made by Mr Keast at that meeting. But if Mr Keast had remained silent, as the respondent asserts he did, and the documents had been executed in those circumstances, the respondent's case would have been no better. For it is clear that there had been no correction, during the whole of the month preceding the meeting, or at the meeting, of what I am satisfied were the earlier optimistic forecasts put to Mr Johnson, although Mr Keast knew that the prospects for the letting of the shops at the shopping centre had turned out to be extremely poor. The respondent relies upon the two reviews by Miss Vale of the letting prospects as conveying the truth, but these reviews relate to a much earlier date when the truth was seen by Miss Vale through rosy spectacles of optimism. I am satisfied that at no time was Mr Johnson told enough to correct the wrong impression which I think Miss Vale conveyed in or about July. In the circumstances, Leda was guilty of engaging in misleading and deceptive conduct. The rule is, as I said in Elconnex Pty Limited v Gerard Industries Pty Limited (1991) 32 FCR 491 at 499, that "silence, in circumstances calling for some clarification, may amount to misleading conduct". See also Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 32, 38, 40-1; Winterton Constructions Pty Ltd v Hambros Australia Limited (1992) 39 FCR 97 at 112-114. Indeed, the respondent's case balances improbably on the horns of a dilemma. It denies that anything was said as to the letting prospects on 1 November, but at the same time it claims Mr Johnson was told the truth during the earlier months. But if he had been told the truth at any time from the latter part of September through October and up to 1 November, he must have been concerned, just as Mr Keast and Miss Vale were. It would then be impossible that he would have refrained from seeking some assurance concerning the lettings before the execution of the documents. Miss Vale herself thought he would never have executed them had he known the truth. In fact, by October, the position had become so bad that Leda had to apply to Woolworths for the waiver of a term of their contract which permitted Woolworths to decline to go into occupation if less than 70% occupancy of the shopping centre should be achieved. The condition was waived. Another target that was missed was a 75% level of committed rentals required for a funding draw-down, but the draw-down was simply foregone. Indeed, I think it was probably for the same reason that the shopping centre did not open on 5 November, as planned, but only on 30 November. Plainly, the extra time gave opportunity for attempts to be made to push up the number of lettings. When the shopping centre did open, there were many vacancies. It is expressly admitted on the pleadings that "only eight of the seventeen shops available for lease in Rosemeadow were occupied by tenants". After the close of the evidence, counsel for the respondent sought leave to withdraw this admission, but I refused that leave, considering the application to be far too late; the whole case had been conducted without regard for precision on this issue, a course the admission was plainly calculated to induce Oraka and Mr Johnson to follow. In any event, the respondent had not disputed that there was a serious shortfall in the lettings. Referring to a larger number of tenancies, covering the entire centre, than those, close to the Wendy's shop and the Woolworths store, to which I infer the admission related, the respondent's solicitor answered the question: "Would in fact the figure of thirteen out of twenty-four be the exact number [of lettings arranged], with seven leases issued and not returned and six issued and executed - that could be right?" He replied: "That could be right." This answer related specifically to the time of the meeting of 1 November, but there is no evidence of a great influx of tenants in the next four weeks. I am satisfied that, as a result of Leda's substantial failure to let shops in the centre, the Wendy's shop at all times operated at a loss, even without taking account of the outgoings of rent. There was some attempt to suggest the applicants had failed to mitigate their damages. However, the onus as to this is on the respondent, and it is sufficient to say that I do not think the onus has been discharged. It should be borne in mind that there are Wendy's stores nationwide; that Mr Johnson, on the evidence, had been responsible for the opening of some seventy shops in shopping centres; and that there was no suggestion of any lack of general competence on the part of Mr Johnson or of Oraka. There was a plain and obvious cause to account for the losses, being the state of the shopping centre, in which numbers of other tenants were also complaining, and in my opinion the damages proved by Oraka are attributable to the contraventions of section 52 that I have found. The letter of intent to which reference has been made was drawn up by Jones Lang Wootton (in a form similar to that utilized earlier when Woolworths was proposing to build the centre) and sent out to Mr Johnson under cover of a letter dated 14 July 1993, with a request that he sign and return it. It was pointed out that "there will be no binding agreement to lease until formal documents have been exchanged". After making some handwritten alterations and additions, Mr Johnson signed this letter of intent on 28 July 1993, and returned it to Jones Lang Wootton. The document contained some clauses, forming part of its original drafting, which should be noted. Clause 16 stipulated: "Acceptance of this offer by the Landlord will not in any circumstances create a legally enforceable Agreement for Lease between the parties and is subject to the execution by the parties of an Agreement for Lease to be prepared by the Landlord's Solicitors, incorporating the above terms and otherwise and on terms and conditions acceptable to both parties."

On the last page, there was a heading "ACKNOWLEDGMENT", beneath which appeared the following: "I/We acknowledge that: A. This offer is subject to the formal written approval of and acceptance by the Lessor and that no legal rights or obligations will arise unless and until execution and exchange of leases between the lessor and the lessee. ... F. No representation, promise, warranty or undertaking (including, without limitation, representations as to the suitability of the Premises for any particular purpose or the profitability of any business conducted or to be conducted from the Premises) has been made to me/us by any person or entity in connection with the Premises or the Lease except those set out above or those confirmed below: ..." Following paragraph F, there was a space in which Mr Johnson filled in in handwriting his exclusivity requirements and certain matters related to the construction of the shop. Immediately below the space, the form continued as follows: "(Important Note: The Lessor and its agents and representatives shall not be responsible in any way for any loss, cost or damage resulting or arising from any alleged breach of promise or any suggested misrepresentation by the Lessor or its agent or representative unless the promise or representation upon which you wish to rely is incorporated in this Application to Lease. If you wish to rely upon a particular promise or any representation which is not already recorded in the Application to Lease it is essential that it be recorded in (F) above)." The agreement for lease, although executed by Oraka, and by Mr Johnson as guarantor, on 3 November 1993, was apparently not executed by Leda until some time later, and it is dated 11 February 1994. Apart from a formal guarantee by Mr Johnson, notable among its provisions is clause 9.1, as follows: "9.1 The Tenant represents and warrants [emphasis added] that: (a) the Tenant was not induced to enter into this deed by and has not relied on any statements, representations or warranties whether orally [sic] or in writing or contained in any brochure including, without limitation, statements, representations or warranties about the fitness or suitability for any purpose of the Premises or about any financial return or income to be derived from the Premises; and (b) in entering into this deed the Tenant has relied entirely on enquiries relating to and inspection of the Premises made by or on behalf of the Tenant; and (c) the Tenant has obtained independent legal advice on and is satisfied about the Tenant's obligations and rights under this deed; and (d) the Tenant has obtained independent expert advice on and is satisfied about the nature of the Premises and the purposes for which the Premises may be lawfully used. 9.2 The Tenant acknowledges that the Landlord has entered into this deed on the basis that the representations and warranties contained in clause 9.1 are true and not misleading. 9.3 The Tenant indemnifies the Landlord against any liability or loss arising from, and any costs, charges and expenses incurred in connection with any breach of the representations and warranties contained in clause 9.1 including, without limitation, legal expenses on a full indemnity basis or solicitor and own client basis whichever is the higher. 9.4 References to this deed set out in this clause include the Lease." The lease, also executed by Oraka on 3 November 1993, and apparently by Leda at some later date, provided for a term of five years from 30 November 1993. The lessor was Leda and the lessee Oraka. Rent in the sum of $21,450.00 per annum was covenanted to be paid by monthly instalments, in addition to which it was stipulated that there should be annual reviews of the amount of the rent and payment of contributions to outgoings and also of what was described as a "marketing levy" equal to five per cent of the rent. Counsel for Leda sought to place reliance on clause 9 of the agreement for lease, and on the corresponding provision in the letter of intent. Clause 9 has been drawn in formidable language, as a representation and warranty by Oraka, reinforced by what is expressed as an indemnity in clause 9.3, that Oraka was not induced by and did not rely on any representations made to it. But there is a difficulty in depending on such a provision according to its literal terms. It cannot be thought that the very agreement that was obtained by a misrepresentation can be made good by incorporating in it a further misrepresentation falsely asserting that it was not procured by the means which were in fact employed. The agreement that so seeks to sustain itself was obtained by a misrepresentation, and no verbal magic of an added clause can change that. Many authorities have made this clear. It is sufficient to refer to the judgment of Sheppard J (with whom in this respect Jackson J agreed) in Clark Equipment Australia Ltd v Covcat Pty Ltd (1987) 71 ALR 367 at 371; my own judgment in Lezam Pty Ltd v Seabridge Australia Pty Ltd (1992) 35 FCR 535 at 556-557; and the judgment of Foster J (with whom in this respect Wilcox and Tamberlin JJ agreed) in GIO Australia Holdings Limited v Marks (1997) ATPR 43,541 at 43,555. Clause 9.1, in the present case, goes further than most such clauses, in so far as it is expressed as a representation and warranty by the very party that was misled. However, the same was true of the exclusion clause considered by Tamberlin J in Brookteck Pty Limited v Lumocol Australia Pty Limited (unreported, 23 October 1996), where his Honour nevertheless thought the clause could not be given effect contrary to the statute. Indeed, it is noteworthy, but unsurprising, that Leda was not prepared, by an appropriate cross-claim, to assert that its own execution of the documents was actually induced by the representation expressed to be made by Oraka, and to claim damages accordingly! Nor was it prepared to sue for damages for breach of the warranty it had procured from Oraka. But if claims so divorced from the true circumstances of the transaction, and so directly contrary to the statute, were unthinkable, of what value is clause 9? In my opinion, a clause of this kind could only assist the respondent if, in reality, its terms formed part of a complex of circumstances leading to the conclusion that the respondent's conduct was not truly misleading, or did not truly induce the action it was alleged to induce. If, on the other hand, the conduct really was misleading, and did induce the applicants to execute the document headed "AGREEMENT FOR LEASE", the fact that this document happened to include clause 9 cannot enable the respondent to evade the consequences of its conduct. Counsel recognized the difficulty, and attempted to pitch his argument to overcome it. The proposition was that clause 9, and the preceding provision in the letter of intent, could be accumulated with other circumstances as the foundation for a finding that the applicants were not induced to take the lease by the conduct alleged. It was pointed out that Mr Johnson made enquiries of his own, and it was suggested that the language of clause 9 was probably taken by him to require him to rely on those enquiries. On all the evidence, and particularly having regard to my impression of Mr Johnson, I do not accept this argument. In my opinion he distinguished between formal drafting, as to which he relied on his lawyers, and the representations actually made to him with a view to persuading him to enter into the transaction, which he accepted. That is not to say he was not influenced by other factors as well, but the causation that seals the operation of section 52 in a particular case does not have to be sole and exclusive of other factors. Despite some inconsistencies in the evidence, I also accept the view put to me on behalf of the applicants, supported as it was by the respondent's witness Miss Vale, that the agreement for lease and the lease would never have been entered into without the misleading conduct of the respondent. In many cases, such a conclusion would lead to the court granting the remedy of setting aside the lease. However, the lease has been assigned to someone not a party to this action, and the question arises whether in those circumstances the court can grant effective relief under section 87 of the Trade Practices Act, or is confined to a remedy in damages. There is authority that the court could not set aside an instrument such as a lease so as to affect the rights of an assignee who was not a party to the contravention of section 52: Krambousanos v Jedda Investments Pty Ltd (1996) 64 FCR 348 at 355-356. (The subsequent appeal, which was dismissed, did not involve this point: Jedda Investments Pty Ltd v Krambousanos (unreported, Burchett, Carr and Kiefel JJ, 4 February 1997).) In my opinion, it is open to the court to make orders under section 87 in order to remedy the situation. Although sub-section (2) of section 87 lists specific forms of order "referred to in subsection (1) and (1A)", which it says "are" the orders referred to therein, sub-section (1A) itself is unconfined as to the form of remedy. It refers to "such order or orders as the Court thinks appropriate against the person who engaged in the conduct or a person who was involved in the contravention", and then adds in parenthesis "including [emphasis added] all or any of the orders mentioned in sub-section (2)". I propose to make orders under section 87(1A) which will have the effect of setting aside any obligation of Oraka to pay rent or make any other payment whatever under the lease to the respondent during the period prior to the assignment and of requiring the respondent to indemnify Oraka and Mr Johnson against any liability to make any payment whatever to any person under the lease thereafter. I shall also order that the guarantee given by Mr Johnson to Leda be set aside ab initio. The wide view I have taken of the powers conferred on the Court by section 87 is, I think, supported by the decision of the Full Court in Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274; and see also the wide orders made in Deane v Brian Hickey Invention Research Pty Ltd (1988) 10 ATPR 49,608. Apart from its liabilities under the lease, Oraka suffered further damages, but it is accepted that it did not suffer the business losses which were originally alleged. This is because of the interposition of another company as operating company in respect of the Wendy's shop, not because the losses were not suffered. The further damages actually sustained by Oraka are limited to a sum of $4,245-86 paid in respect of rent and a net amount lost in respect of the fitting out of the premises, being $81,394-70. Additionally, Oraka is entitled to interest under section 51A of the Federal Court of Australia Act 1976 in respect of both sums. The only order I make at this stage is to direct the applicants to bring in short minutes of orders appropriate to be made pursuant to these reasons. Those short minutes should, of course, provide for the payment of the costs of the action by Leda, and for the dismissal of the cross-claim for rent with costs. I certify that this and the preceding twenty-two (22) pages are a true copy of the Reasons for Judgment herein of his Honour Justice Burchett.

Associate: Date: 4 April 1997 Counsel for the Applicants: Mr M.R. Aldridge Solicitors for the Applicants: Gordon and Johnstone Counsel for the Respondent: Mr P.H. Greenwood and Mr I.D. Roberts Solicitors for the Respondent: Turtons Dates of hearing: 2 - 5 December 1996