(v) Reliance and causation
463 In Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304 at [24] (Campbell), French CJ emphasised the relationship between the question whether conduct is misleading or deceptive within the meaning of s 42 of the FT Act and whether a person has suffered loss or damage which thereby entitles them to damages under s 68 of that Act:
The distinction between characterisation of the conduct and determination of the causation of the claimed loss said to result from it must be maintained. In so saying, it is necessary to acknowledge that there may be practical overlaps in the resolution of these logically distinct questions. The characterisation of conduct may involve assessment of its notional effects, judged by reference to its context. The same contextual factors may play a role in determining causation.
464 For the following reasons, I do not accept the respondents' contentions that, if the conduct complained of was misleading or deceptive, there was no reliance on the conduct so as to give rise to an award of damages to BlueFreeway and/or there was no causal link between that conduct and any loss suffered by BlueFreeway.
465 First, as noted above, a majority of the directors of BlueFreeway (i.e. Messrs Daniel, Greiner and McDonnell) said that if they had known of the nature and extent of the respondents' involvement in financing the transaction, they would not have voted in favour of BlueFreeway executing the Exit Agreement and I accept that evidence.
466 Mr Greiner and Mr Daniel also said that if they had known of the involvement they would have taken legal advice on the implications of the source of the funding. When tested in cross examination as to what he would have done in the counterfactual, Mr Greiner said that he regarded the financial arrangements as "a device" and that while he would have wanted to hear the views of other directors he considered that the position was "pretty clear" and that he would not have supported it. I accept that evidence unreservedly. Mr Greiner was an impressive witness and his credibility was not directly challenged.
467 Mr Daniel also explained in cross examination that, in the counterfactual, he would have considered the legal advice but then still formed his own view on the matter. He described the funding support provided by the respondents as being "an inside job" and not market driven. I accept that evidence and his explanation that he would have opposed entry into the Exit Agreement because of the longer term adverse implications for BlueFreeway's reputation if the transaction was implemented and endorsed by the board with those financial arrangements. I found Mr Daniel's explanation of the reasons why he would have opposed the Exit Agreement to be compelling and, as noted above, I accept his evidence.
468 Mr McDonnell gave evidence that if he had known of the financing role played by the respondents he would have immediately reported that to both Mr Daniel and Mr Webb and that a board meeting would have been called. He also said that legal advice would have been taken, but that he would have approved execution of the Licence Agreement only if the respondents agreed that the licence fee was not to be included in the 2007 EBIT. He also said that if he had been aware of their involvement he would not have recommended that BlueFreeway execute the Exit Agreement. As noted above, Mr McDonnell gave reasons why he would take these positions in the counterfactual. I accept his evidence on these matters and refer again to the reasons in [133]-[188] above as to why I reject the respondents' attack upon his credibility. I found Mr McDonnell to be a truthful witness.
469 In circumstances where I accept the evidence of the three BlueFreeway directors who were called as witnesses as to how they would have acted in the counterfactual, I reject the respondents' claim that there is no evidence of reliance or causation to attract an award of damages under s 42 of the FT Act in favour of BlueFreeway. In my opinion, the fact that neither Mr Webb nor Mr Smith (two other directors of the company) was called to give evidence has no material relevance on this issue. In the case of Mr Webb, I do not accept the respondents' submission that it is clear that Mr Webb would have vigorously advocated execution of the Exit Agreement because it was vital to the pursuit of his business plans. And even if he did, having heard and accepted the views expressed by Messrs Daniel, Greiner and McDonnell, I do not believe that Mr Webb's advocacy would have overcome their fundamental concerns regarding the propriety of the transaction and they would have opposed execution of the Exit Agreement.
470 The respondents sought to avoid such a finding by saying that the decision to enter the Exit Agreement was a decision made by Mr Webb. They say that Mr Webb alone conducted the negotiations concerning the Exit Agreement and that none of the other directors had any involvement in it. They say that in those circumstances the hypothetical evidence of the three directors is irrelevant because neither they nor the BlueFreeway board were the decision-makers.
471 In my view, however, that submission confuses what in fact occurred with the relevant elements of the counterfactual and the assumptions which underpin it. Even if the respondents' description of what in fact occurred is accepted as accurate (and it might be noted that the description overlooks some important evidence, including evidence that Mr McDonnell was involved to some extent in the sense that he arranged for and was involved in the legal documentation of the arrangement and, together with Mr Webb, he signed the Exit Agreement on behalf of BlueFreeway; and also Mr Daniel's evidence that he was confident that the Exit Agreement had been discussed at the board level even though it was not minuted), I do not consider that it is determinative in the counterfactual. The counterfactual is predicated on the assumption that the board was aware of the nature and extent of the respondents' involvement in the financing, an assumption which, on the findings I have made above, is at odds with what actually occurred.
472 Nor do I accept the twelve other contentions advanced by the respondents in seeking to avoid adverse findings of reliance and causation. For convenience and with a view to not unnecessarily lengthening these reasons for judgment, some of those contentions may be dealt with together.
473 First, the respondents say that the decision whether to enter into the Licence Agreement was a decision for the FTI board and a majority of that board was not called to give evidence. But this submission ignores the fact that BlueFreeway was the sole shareholder of FTI and appointed a majority of the directors to that board. Any decision taken by the FTI board would have to be a decision which was taken in the best interests of its sole shareholder. Furthermore, that submission fails to engage with a central issue in the counterfactual, which is whether or not the BlueFreeway board would have approved the Exit Agreement and the payment of the Additional Payment.
474 Secondly, the fact that Mr Greiner said that he had not seen or read the Exit Agreement is not determinative in the counterfactual. Again, the respondents confuse what actually happened with what would have happened in the counterfactual.
475 Thirdly, the respondents say that Mr Greiner conceded in cross examination that if he had received advice from a reputable source which sanctioned the transaction, it may have led him to support the transaction. I do not consider that this accurately describes Mr Greiner's evidence. Mr Greiner said that a legitimate vendor financing arrangement was an option. He was then asked to assume in the counterfactual that:
(a) the financing was not a related party transaction;
(b) there was no prohibition against the financing in the SPA; and
(c) BlueFreeway's executives were not opposed to the respondents providing the finance.
476 On the basis of those assumptions, it was put to him that he would have approved the respondents' involvement, to which he answered:
Well, if we had had advice from Mallesons - I don't think we could have afforded them at the time - but if we had had advice from Mallesons that said, you know, "Our judgment is this is completely okay, you run no risk," and we would have had the normal sort of discussion you and I are having, and we would have said, "Is there a legal risk, is there a reputational risk, is there a - you know, what are the risks, commercial risks?" And if Mallesons hypothetically had said, "No, no, there is absolutely no risk, and here's a letter saying it's, you beaut, go do it," a bit hard for me to say that I would not take notice of that.
I think it is a stretch, but that is for others, no doubt.
477 Mr Greiner's careful answer does not support the respondents' contention, but it does indicate that, in certain circumstances, he may have been persuaded to approve exit arrangements based on full disclosure.
478 For completeness, it might also be noted that the respondents adduced no evidence to support another important assumption underpinning this line of questioning, namely that a reputable law firm would have provided a written opinion to the board stating that there was nothing untoward about the respondents' role in the financing, let alone an unqualified statement that there was no reputational risk for BlueFreeway.
479 Fourthly, the respondents rely on Mr Daniel's evidence that the board essentially accepted what they were told which was that they had no option but to exercise the Exit Agreement and that he also suggested that he may have sought to mediate some kind of alternative arrangement between the parties. Again, this does not accurately describe Mr Daniel's evidence. Mr Daniel made abundantly clear in cross examination that, in the counterfactual, he "would have personally been very opposed to the exit agreement being -being executed". Moreover, his evidence as to what in fact occurred in terms of executing the Exit Agreement is not determinative of what would have happened in the counterfactual. And his evidence concerning the possibility of a mediation was given in the context of him responding to an hypothetical scenario of the board refusing to approve the Exit Agreement and how the group would then deal with the breakdown in relationships between Mr Webb and BlueFreeway management on the one hand and the respondents on the other hand. I understood his reference to the possibility of a mediation as meaning that he would seek to arrange a renegotiation, which does not preclude the possibility of the parties arriving at a different agreement under which the respondents would exit the group, as long as there was full disclosure.
480 Fifthly, the respondents place heavy emphasis upon the fundamental importance of the licence transaction to BlueFreeway's success and the need to cut ties with the respondents if Mr Webb's vision was to proceed. They contend that these considerations would have prevailed and caused the board to approve the Exit Agreement in the counterfactual. The difficulty with this submission is that it flies in the face of the evidence of each of Mr Daniel, Mr Greiner and Mr McDonnell who, when presented with those propositions, resoundingly and rationally rejected them. I accept their evidence as to why they would still have opposed execution of the Exit Agreement and, if necessary, pursued other options for dealing with the strained relations with the respondents.
481 Sixthly, the respondents sought to attach some significance to the fact that, although the respondents had a contractual entitlement to receive the Additional Payment of approximately $16 million by way of shares, in the course of the Exit Agreement negotiations this entitlement was converted to an immediate cash payment. The significance of this matter was never adequately explained.
482 Seventhly, the respondents sought to discredit the evidence of both Mr Daniel and Mr Greiner on the counterfactual by suggesting that it did not reflect the same "detachment" which characterised other parts of their evidence. I disagree. Their evidence on this subject was given rationally and convincingly and I accept it unreservedly, as I do their other evidence.
483 Eighthly, they say that if in the counterfactual the issue of execution of the Exit Agreement arose in late October, at that time there was an additional director of the BlueFreeway board, namely Mr David Smithers (who was appointed on 22 October 2007), and he was not called as a witness the consequence was that there was no evidence of how a majority of the board would have acted at that time. The difficulty with this submission is that it assumes that, in the counterfactual, consideration of the Exit Agreement would have arisen after 22 October 2007 and not at an earlier time when, on the hypothetical, the board was first informed of the nature and extent of the respondents' role in financing the transaction. Yet again, the respondents seem to confuse what actually occurred with the hypothetical elements of the counterfactual.
484 For the reasons given in [463]-[483] above, I reject the respondents' contention that there is no evidence of reliance on the first representation. They also contend that there is no evidence of reliance in respect of the second representation and they say that the position here is even worse because Mr McDonnell gave express evidence that at the relevant time he had formed no view and had no information as to the origin of the funds. In support of that contention, the respondents draw attention to [20] of Mr McDonnell's third affidavit, which is in the following terms:
Throughout the period up to the execution of the CMUK Licence Agreement on 22 May 2007, I was of the belief that there was a third party investor involved who was providing funds which would allow CMUK to pay the licence fee ultimately negotiated.
485 Far from supporting the respondents' contention, this evidence is diametrically opposed to it. I reject the respondents' contention.
486 The respondents also say that the entire agreement clause in the Exit Agreement stands in the way of BlueFreeway being awarded damages for misleading or deceptive conduct under s 42 of the FT Act. The significance of such a clause in this context was explained by Gummow, Hayne, Heydon and Kiefel JJ in Campbell at [130] as follows:
It is as well to add, however, that, of itself, neither the inclusion of an entire agreement clause in an agreement nor the inclusion of a provision expressly denying reliance upon pre-contractual representations will necessarily prevent the provision of misleading information before a contract was made constituting a contravention of the prohibition against misleading or deceptive conduct by which loss or damage was sustained. As pointed out earlier, by reference to the reasons of McHugh J in Butcher, whether conduct is misleading or deceptive is a question of fact to be decided by reference to all of the relevant considerations, of which the terms of the contract are but one. (Footnotes omitted).
487 The respondents correctly acknowledge that an entire agreement clause is not legally determinative. In my view the clause here does not operate to defeat the claim for damages for misleading or deceptive conduct. Such a clause is unlikely to have any meaningful effect or operation in circumstances where the gravamen of the complaint is that the respondents engaged in misleading or deceptive conduct by their silence and failed to reveal the true state of affairs which was inconsistent with previous representations they had made.
488 Finally, the respondents resist any claim for relief relying upon the release given in cl 10 of the Exit Agreement, which is in the following terms:
10. Releases
10.1 Release
Except as set out in clause 10.2, in consideration of the Sellers agreeing to the earn out cancellation set out in clause 7 and Blue Freeway making the Additional Payment in accordance with clause 6 the parties agree that upon the Termination Date they irrevocably, fully and finally discharge and release each other from any claims, actions, proceedings or demands of any nature that party has or may have had against the other party under the Share Purchase Agreement, the Management Agreement, the Barnes ESA and the Hawksley ESA or howsoever arising from the purchase by Blue Freeway of the shares in the Companies, including, but not limited to, under or in relation to the early termination of the Hawksley ESA or the Barnes ESA.
10.2 Exceptions
The release under clause 10.1 does not apply in relation to any claims, actions, proceedings or demands arising under:
(a) this agreement;
(b) the Non-Compete Agreement;
(c) any agreement entered into by the parties in the future; or
(d) clauses 6.2, 7 or 12, or warranties 8 or 20 in schedule 8, of the Share Purchase Agreement, in the period up to the date which is 6 months after the Termination Date.
489 For the following reasons, I reject the respondents' reliance on the release clause. First, I do not consider that the clause applies to defeat a claim such as that made here which arises out of matters which were not in the knowledge of the applicants at the time the Exit Agreement was executed. In his decision at first instance in United States Surgical Corporation v Hospital Products International Pty Ltd [1982] 2 NSWLR 766 at 818, and in his Honour's customary fashion, McClelland J carefully analysed the effect of a release clause in circumstances similar to here and made the following pertinent observations (omitting case citations):
It is a principle of equity "that a releasee must not use the general words of a release as a means of escaping the fulfilment of obligations falling outside the true purpose of the transaction as ascertained from the nature of the instrument and the surrounding circumstances including the state of knowledge of the respective parties concerning the existence, character and extent of the liability in question and the actual intention of the releasor": Grant v John Grant & Sons Pty Ltd. Indeed the examination of the authorities undertaken by the High Court in that case indicates that a substantially similar rule operates at common law. In Grant v John Grant & Sons Pty Ltd, the High Court quotes with approval the following words of Lord Westbury in London and South Western Railway Co v Blackmore:
"The general words in a release are limited always to that thing or those things which were specially in the contemplation of the parties at the time when the release was given."
and the following words of Tunton J in Upton v Upton:
"…the general words of a release may be limited by the particular matter out of which the release springs, and the particular intent of the parties by whom the release is executed…"
It is abundantly clear that it was not contemplated by the parties that the release in question would extend to liability arising from Mr Blackman's and HPI's activities in Australia, or a fortiori, to activities of the kind the subject of these proceedings, which were concealed from USSC.
(Footnotes omitted).
490 This analysis of the relevant principles was not challenged in the appeal to the High Court in that litigation and I respectfully adopt it.
491 Secondly, for the reasons I have given above, I have accepted the applicants' contention that BlueFreeway did not have knowledge of the true circumstances under which CMUK had financed the licence transaction. Its lack of knowledge was due in no small part to the steps taken by the respondents to hide those circumstances from BlueFreeway. I accept the applicants' contention that it would be unconscionable for the respondents to rely upon a general reading of the terms of cl 10.1 which would have the effect of defeating their claim for damages based on the respondents' misleading or deceptive conduct.