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[2000] FCA 1048
Federal Court of Australia
2000-08-03
Weinberg J
Original judgment source is linked above.
THE COURT ORDERS THAT: 1. There be judgment in favour of the applicants against the first respondent in the sum of $216,050.02. 2. The sum of $20,000 interest be paid by the first respondent, pursuant to s 52A(1)(b) of the Federal Court of Australia Act 1976 (Cth), as a lump sum to be included in the sum for which judgment is given, making a total sum awarded of $236,050.02. 3. The application against the second respondent be dismissed. 4. The application against the third respondent be dismissed. 5. The application against the fourth respondent be dismissed, with costs. 6. The first respondent pay 80% of the applicants' costs of and incidental to the application, including reserved costs, save for any costs incurred by the applicants in proceeding against the fourth respondent. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
REASONS FOR JUDGMENT 1 This case arises under s 52 of the Trade Practices Act 1974 (Cth) ("the Act"). It concerns a luxury cruiser, the "Circa II", which was purchased on 2 April 1996 by Ruben Fried and his brother Morry Fraid. The vendor was Dixie Holdings Pty Ltd ("Dixie Holdings"). Graham McDonald was, at all relevant times, an employee of Dixie Holdings. Ian McDonald, is the father of Graham McDonald. He was a director of Dixie Holdings, and its effective controller. Anthony Gripske is a mechanic who provided a report concerning the engines of the Circa II at the time of its purchase. 2 The applicants seek, pursuant to ss 82 and 87 of the Act, declaratory relief and damages. They claim that Graham McDonald was involved, within the meaning of s 75B of the Act, in the contravention of s 52 of the Act by Dixie Holdings. 3 The applicants commenced this proceeding by seeking damages against Ian McDonald claiming that he too was involved in the contravention of s 52 of the Act by Dixie Holdings. However, they abandoned that claim during the course of the trial. 4 The applicants claim, in the alternative, damages for breach of contract against Dixie Holdings. In respect of that claim they rely upon s 17 of the Sale of Goods Act 1896 (Qld). As is typical in such legislation, that section provides for a series of terms to be implied in contracts for the sale of goods. 5 Finally, the applicants claim damages for negligent misstatement as against Anthony Gripske. This claim was not actively defended by Mr Gripske, and he ultimately elected not to take any part in this proceeding.
Background 6 In February 1996 Isaac Fried (known generally, and hereafter, as "Zac Fried") saw an advertisement in a boating magazine known as "Trade-A-Boat". The advertisement was for a fifty-four foot sport cruiser. It displayed a photograph of the Circa II. Beneath the photograph was the following description: "54' SPORT CRUISER - IN SURVEY (TC93 - 026 - 1) 'Circa' is a truly remarkable vessel. Designed by Alan Warwick in New Zealand, 'Circa' has been lavishly appointed to provide sumptuous accommodation with three double staterooms, a saloon and dining area with leather lounges and a superbly equipped galley. 'Circa' is fully air conditioned. With its twin jet drives and a draft of only 0.6 metres, 'Circa' allows you to visit secluded waterways which are normally inaccessible to conventionally propelled craft. With a top speed of 35 knots and comfortable cruising around 30 knots, 'Circa' will take you where you want to go. 'Circa' has been fastidiously maintained by her original owner and is in current survey for charter purposes." 7 In 1996 Zac Fried was twenty-four years of age. When he saw the advertisement for the Circa II he was immediately impressed. For a number of years his father Ruben had owned a much smaller boat, a thirty foot Bayliner Avanti 2900. However, that boat no longer met the family's needs. 8 The applicants had decided that they wanted a boat to use for day cruises out of Hamilton Island. Morry Fraid said that he was anxious that the boat be able to travel at high speed because he was a scuba diver who enjoyed going out to some of the far reaches of the Barrier Reef. He said that it was important to him that he not spend an inordinate amount of time getting from place to place. Both Ruben Fried and Zac Fried also stressed the importance to them of being able to achieve high speed. 9 The Circa II was precisely what Zac Fried and his father had been looking for. Zac Fried drew the advertisement to the attention of his father. He was told to have the boat checked out and, if it seemed satisfactory, to negotiate for its purchase. 10 The Circa II had been purchased by Dixie Holdings from Coopers & Lybrand in October 1995. Coopers & Lybrand were the receivers and managers of Welrose Pty Ltd. That company had owned the boat since 1990 and had used it to operate luxury charters out of Hamilton Island. The boat was purchased by Dixie Holdings with the intention of being resold at a profit. Graham McDonald was given the task of selling the boat. He arranged for the advertisement to be placed in "Trade-A-Boat". In doing so, he drafted the description of the boat which accompanied the photograph. The information concerning its "top speed of 35 knots" and its capacity to cruise comfortably at "around 30 knots" had been provided to him by Ian McDonald. 11 Shortly after seeing the advertisement Zac Fried telephoned Graham McDonald. On 21 February 1996, in response to that call, Graham McDonald faxed to Zac Fried an "information sheet" concerning the Circa II which had earlier been prepared by Coopers & Lybrand. Relevantly, it contained a full inventory of the boat including the following statements: "ENGINES MAKE: 2 DETROIT DIESEL 8V92TA TURBO AFTER COOLED SUPER CHARGED; POWER TAKE OFF: TWIN DISC MODEL (SP-314 P1); COUPLINGS: CENTAMAX; HP: 2 X 750 @ 2300 RPM; CYLINDERS: V8; PROPULSION: 2 X 362 HAMILTON JET UNITS; ENGINE HOURS: PORT 898.1, STARBOARD 892.6. … CONDITION THIS VESSEL IS IN EXTREMELY GOOD CONDITION WITH LOW ENGINE HOURS AND HAS BEEN REGULARLY MAINTAINED BOTH STRUCTURALLY & MECHANICALLY" 12 After Zac Fried received the information sheet he showed it to his father, and to Morry Fraid, his uncle. Subsequently, he arranged to inspect the Circa II at the Gold Coast where it was moored at Sanctuary Cove. Although the evidence is somewhat contentious on this point, it is likely that he inspected the boat some time late in February, or early in March 1996. There was no sea trial of the Circa II on that occasion. 13 During the course of that visit Graham McDonald provided Zac Fried with a promotional video of the boat. The video showed the Circa II travelling close to shore at what appeared to be a very high speed. The original of that video had been prepared some years earlier, by the former owners of the Circa II. Graham McDonald had arranged for the video to be copied in order to distribute it to prospective purchasers.
The first sea trial 14 On 18 March 1996 Zac Fried went on a sea trial of the Circa II. That sea trial lasted for about two hours. Present were Graham McDonald, and his brother Geoff, who drove the boat. 15 There is conflicting evidence as to precisely what occurred during the course of that sea trial. Zac Fried said that he was invited, at one point, to take over the running of the boat. He said that he caused the boat to accelerate quickly because he wanted to see how it performed at high speed. He said that about a minute later an alarm sounded. He said that Geoff McDonald had immediately grabbed the controls and slowed the boat down. After a few minutes the alarm ceased. Zac Fried said he was told by Geoff McDonald that the reason the alarm had sounded was because he had accelerated too quickly. He said that he subsequently learned that the true reason the alarm had sounded was because the engines were overheating. 16 Geoff McDonald said that the alarm had sounded the moment that Zac Fried had caused the boat to accelerate to full speed. He said that when the alarm sounded he had grabbed the controls, and throttled back. The alarm had then stopped, instantly. He said that he subsequently inspected the engines to see what had caused the alarm to go off. He said that he had discovered that the water level in the heat exchanger of one of the engines was low, and that the alarm had sounded when the boat accelerated because the sensors had suddenly detected that fact. He said that the alarm sounding had nothing to do with the engines overheating. 17 Graham McDonald said that he was in the galley for much of the sea trial. He had not heard the alarm sound, and was unaware of the incident to which both Zac Fried and Geoff McDonald had referred. The negotiations for the purchase of the Circa II 18 On 19 March 1996, the day after the sea trial, Zac Fried contacted Steve Gow, a Melbourne-based boat broker who was known to him. He was engaged on behalf of the applicants to arrange for the boat to be inspected, and to arrange for its purchase, if it passed inspection. On the same day Mr Gow wrote to Roger Enriquez, the company secretary and financial controller of the applicants' many retail outlets. Mr Gow's letter was in the following terms: "Dear Roger, Further to our discussions, I have compiled the following brief as to the pre-purchase checks, purchase/settlement and work to be carried out on the 54' Warwick Cruiser. Total purchase price 875,000 Trade in allowance 80,000 Deposits payable 55,000 Estimate for - supply of Jet ski 7,000
The second sea trial 28 On 31 March 1996 Ruben Fried, Morry Fraid, and their respective families all boarded the Circa II for a sea trial. Also on board were Graham McDonald and his brother Geoff. Once again it was Geoff McDonald who drove the boat. The sea trial appears to have been satisfactory, although there is some conflict between the parties as to the speed at which the boat travelled on that occasion. Morry Fraid said the boat went no faster than 20 knots, and even then, only for very short distances at that speed. Geoff McDonald said that he took the Circa II up to 30 knots, with no apparent difficulty. 29 Both Ruben Fried and Morry Fraid said that they made known during the course of the sea trial that they required the boat to be able to achieve high speeds, in the order of those represented in the initial advertisement. Graham and Geoff McDonald denied that there was any discussion of speed during the course of the sea trial. At one stage Ruben Fried asked Graham McDonald about the kind of warranty which would come with the boat if he and his brother were to purchase it. Graham McDonald replied that there would be no warranty given. He told Ruben Fried that secondhand boats did not come with warranties. Either Zac Fried or Ruben Fried apparently then telephoned Mr Gow in Melbourne, and Mr Gow confirmed that what Graham McDonald had said regarding warranties was in fact true.
The purchase of the Circa II 30 After the sea trial the applicants decided that they would purchase the Circa II. On 2 April 1996 Mr Enriquez, on their behalf, signed the contract for the sale of the boat which Mr O'Brien had earlier prepared, and which he had signed on behalf of the vendor on 25 March 1996. The contract price agreed upon was $835,000, and not the $875,000 originally contained in the two earlier offers to purchase. The trade-in allowance for Ruben Fried's existing boat was reduced from $80,000 to $40,000. It was accepted by the respondents that the sale price was altered in order to reduce the amount which Dixie Holdings would have to pay as capital gains tax. 31 Some time late in March or early April 1996, a document headed "Invoice" was prepared on behalf of Dixie Holdings. That document bears the date 19 February 1996. However, it is common ground between the parties that this date must be incorrect. The invoice stipulates the purchase price as $835,000. It is clear, therefore, that it must have come into existence some time after 25 March 1996, the date on which Mr O'Brien prepared the contract of sale for the first time nominating $835,000 as the purchase price. It is likely that the invoice was created around 2 April 1996, when settlement took place. 32 The invoice concludes with the following statement: "Sold as is where is. No warranty is given or implied." 33 Counsel for the respondents accepted that the primary significance of that clause related to the applicants' alternative claim, pursuant to s 17 of the Sale of Goods Act, for breach of contract. It is clear that exemption clauses of that type cannot oust the operation of s 52 of the Act - IOOF Australia Trustees (NSW) Ltd v Tantipech (1998) 156 ALR 470 at 478-80. The period after the purchase 34 For six weeks after the sale of the Circa II Geoff McDonald was retained by the applicants to look after the boat. He said in evidence that he continued, as he had always done, to maintain the Circa II properly. On one occasion he took it to Brisbane where it was used, with the applicants' approval, and for a fee, by an overseas film company. Geoff McDonald said that he never at any stage experienced any difficulties in operating the boat. 35 Sometime after this six week period the applicants engaged the services of John Gordon, a relative by marriage of Morry Fraid, to take the boat from the Gold Coast to Hamilton Island, in about late June 1996. Mr Gordon was a very experienced skipper and had operated various boats much larger than the Circa II for many years. 36 Mr Gordon said that the trip from the Gold Coast to Hamilton Island had been something of a nightmare. It had been interrupted by equipment failures on a number of occasions. By the time the Circa II reached Hamilton Island there were problems with the anchor, the generators, and the toilets. Mr Gordon had also experienced a number of problems with the engines including constant overheating. He said that he was unable to operate the boat at more than 1800 to 2000 RPM, or about 20 knots. Every time he did so the alarm would sound, and he would have to throttle back. He said that he had arranged for repairs to the engines to be carried out at Hamilton Island. He produced a receipt for over $8,000, dated 24 August 1996, for work which had been done to overcome the overheating problems. That work was undertaken by Transmissions & Diesels Ltd, the New Zealand company which, it transpired, had originally modified the engines on the Circa II for marine use. 37 Mr Gordon said that in the months which followed the trip to Hamilton Island the overheating problems constantly recurred. He said that he was never able to operate the boat at a speed of more than about 20 knots. Every time he did so the alarm would sound. He said that the boat's engines frequently broke down, even when it was travelling at lower speeds than this. 38 Zac Fried said that he had been in contact with Mr Gordon during his journey to Hamilton Island on the boat. He said that he became aware of the various problems with the boat, including the fact that the engines were continually overheating even when the boat was driven at around 20-22 knots. These problems persisted during the time Zac Fried was at Hamilton Island. He said that the gauges were always up at around 90 degrees whereas he understood that the normal operating temperature for diesel engines was around 80 degrees. He said that the more the Circa II was used, the more necessary it became to reduce the revs. He said that the alarm, which was calibrated to go off at 100 degrees, had sounded on many occasions. He said that the only way to bring the boat down to a normal operating temperature was to bring the engines back to around 1500 revs. This meant that the boat's speed would come down to around 12 or 13 knots. He said that he became so frustrated with the Circa II whilst at Hamilton Island that he considered chartering another boat. 39 Zac Fried said that the main problem with the engines was the overheating, leading to leaks in the manifolds. He described how the boat had eventually been returned to the Gold Coast, and then driven by truck to Melbourne as it was too dangerous to risk in the ocean. He said that while the boat was in Melbourne he had tried to use it on a number of occasions. However, the engines continually broke down. 40 Zac Fried said that in about May 1997 the boat had been driven by truck to Sydney. He said that the same engine problems were still being experienced. He said that he had authorised more repairs to be conducted. Late in 1997 he met and spoke to Darren Hood, the National Sales Manager of Detroit Diesel. He also spoke to Jason Grose, an expert mechanic who conducted a business known as Mobile Marine Repairs. By that stage the applicants were so frustrated with the Circa II that they had decided to sell it. Mr Grose advised him that there was no point trying to repair the engines because they had an inherent design fault. Mr Grose told him, for the first time, that the engines of the Circa II were not genuine Detroit Diesel marine engines, but rather Detroit Diesel automotive engines which had been adapted for marine use. Mr Grose told him that there were many reasons why the engines could not operate properly to power the boat at high speed, and why they would always overheat. He advised Zac Fried that the only solution was to replace the engines with genuine Detroit Diesel marine engines. 41 Zac Fried said that throughout 1998 the Circa II was moored at Rose Bay in Sydney. It could not be used at all during that period. Finally, between November 1998 and May 1999, the original engines were replaced. The new engines were genuine Detroit Diesel marine engines, purchased through Mr Hood, and installed by Mr Grose. Zac Fried said that the new engines had performed well. The boat could now cruise comfortably at acceptable speeds. He said he had driven it at up to 37 knots without the alarm having sounded. The new engines had been totally reliable. 42 Ruben Fried confirmed what his son said about the condition of the boat's engines during 1996 and 1997. He said that he had flown to Hamilton Island in about July 1996 intending to use the boat whilst there. However, neither he nor his family had been able to do so until the problems with the toilets, the water, and the engines had been fixed. He also said that he had been told by his son, and by Mr Gordon, that if he wished to use the boat it would have to be kept to a slow speed. He said that during its time at Hamilton Island the Circa II was never permitted to exceed 18 knots because if it did it would immediately overheat and break down. He said that he soon lost interest in the boat, considering it "boring". He ended up leaving it to the children to use. 43 Ruben Fried confirmed that he was never able to use the Circa II after it was brought to Melbourne. Every time he planned to take the boat out, he was told that there was something wrong with it. He had actually boarded the boat only once in Melbourne, and even then had to disembark immediately because the engines broke down. He said that since the genuine Detroit Diesel marine engines had been installed they had been totally reliable and the boat had cruised comfortably at around 30 knots. 44 Morry Fraid said that he too had been at Hamilton Island when Mr Gordon brought the Circa II from the Gold Coast. He spoke of the many problems which he had encountered with the boat. He said that when the boat was run at about 20 knots for any length of time the engines would overheat and the alarm would sound. He said he had tried repeatedly, with Mr Gordon, to get the boat to operate properly. He said that the boat would get up on the plane at about 18 or 20 knots: "… and then we'd sort of creep it forward a bit to 22 knots and the red light would go on and we'd have to throttle it back to about 18 knots again. So we could cruise up to about 20 knots without getting this warning signal. Mr Moshinsky: What was the top speed you could reach on the boat? - About 22 knots. His Honour: Does that mean that top speed was 22 knots because the red light or the warning light would go on at that stage? - No, fully throttled. It could not go faster than 22? - It could not go faster than 22 knots and after a few minutes at 22 knots the red warning light would go on and then we would throttle back." 45 John Gordon said that throughout the second half of 1996, and throughout the whole of 1997, numerous attempts were made to repair the boat's engines. He produced a large number of invoices to prove these repairs. He said that he was satisfied that the repairs were necessary, and he confirmed that they all had been carried out. Zac Fried said that he had authorised each of the invoices to be paid.
The expert evidence 46 The applicants called both Mr Hood and Mr Grose to give evidence. Mr Hood confirmed that the engines of the Circa II were not genuine Detroit Diesel marine engines, but had been built up by Transmissions & Diesels Ltd in New Zealand. They had been built with non-genuine componentry in order to gain a light-weight, high horsepower package. The only parts of the engines which were genuine Detroit Diesel engines were the cylinder block, the crankshaft and possibly the cylinder heads. The external parts of the engines were not genuine Detroit Diesel parts at all. Mr Hood said that in his opinion the reason for the overheating problems experienced with the engines was that they were automotive engines with major modifications to the cooling system. He said that marine engines had a higher horsepower than automotive engines. The main problem with the modification was that the cooling system was inadequate to cope with the horsepower that a marine engine needed to achieve. 47 Mr Hood said that when he spoke to Zac Fried about the engines in September 1997 he told him not to bother having them repaired as they would soon break down again. He said that he had advised that new engines be fitted which were "the genuine product". Shortly after his initial meeting with Zac Fried, Mr Hood inspected the engines at Rose Bay. At that time he observed that the manifolds showed indications of rust and that there were water leaks around the header tanks and around the expansion tanks. He noted that the heat exchanger was too small. He said that there should have been two turbo chargers rather than one. He said that genuine Detroit Diesel marine engines had always been made with cast-iron manifolds in order to withstand the extreme heat to which they were subjected, and that the aluminium manifolds fitted on the Circa II's engines were unsuitable for marine engines of this size. 48 Mr Grose agreed with Mr Hood that the basic problem with the engines was the manifold system. The gaskets continually leaked causing water to enter the engines. This, in turn, caused problems with the cylinder heads. He said that these engines had a high exhaust temperature which was a design fault brought about by the modifications. The cooling system was inadequate for the amount of horsepower which the engines produced. He agreed with Mr Hood that the Circa II's engines were inherently defective, and would constantly overheat and break down. He agreed that the engines needed to be replaced by genuine Detroit Diesel marine engines. 49 The applicants both said that they were surprised to learn in 1997, for the first time, that the Circa II's engines had been designed as automotive engines, and modified for marine use, and that they were not genuine Detroit Diesel marine engines. Zac Fried said that he knew of Detroit Diesel prior to purchasing the boat. It was a highly reputable manufacturer of diesel engines, whose engines were used by, among others, the Australian Navy. He said that the fact that the engines were said to be Detroit Diesel had been a selling point of particular importance when he recommended the purchase of the boat. 50 It was on the basis of these facts that the applicants instituted the present proceeding in 1998.
The applicants' claim that the representations made were false 51 The applicants identified a series of representations which, they contended, constituted misleading or deceptive conduct on the part of the first respondent. There were six such representations in all, but only the first two are of any consequence. The additional representations pleaded are either variations on a theme, or of such little importance as to be incapable of having induced the applicants to purchase the Circa II. 52 The first representation is said to be contained in the advertisement published in "Trade-A-Boat" magazine in February 1996. It is in two parts: (a) that the Circa II's top speed was 35 knots; and (b) that the Circa II could cruise comfortably around 30 knots. 53 The second representation is said to be contained in the information sheet faxed by Graham McDonald to Zac Fried on 21 February 1996. It is also in two parts: (a) that the Circa II's engines were Detroit Diesel 8V92TA turbo after cooled supercharged engines; and (b) that the Circa II was in extremely good condition with low engine hours and had been regularly maintained both structurally and mechanically. 54 The first respondent has admitted in its defence to making both the first and second representations. There is, therefore, no issue about the fact that these representations were made. 55 The applicants' case was that the first and second representations were false at the time they were made. In relation to the applicants' claim against the first respondent, it is of course not necessary, pursuant to s 52 of the Act, to demonstrate that they were known or suspected to be false. Section 52 is not confined to conduct which is intended to mislead or deceive - Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Pty Ltd (1978) 140 CLR 216 at 225; Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191 at 197. A corporation which acts honestly and reasonably may, nonetheless, engage in conduct that is likely to mislead or deceive.
The first representation 56 The applicants contended that the first representation relating to the speed of the Circa II was false. They argued that there was ample evidence to suggest that the top speed of the Circa II was never, at any relevant time, even on the respondents' own case, more than 30 knots. Moreover, its "comfortable" cruising speed, even on those rare occasions when it was able to be used, was only about 20-25 knots. 57 The applicants pointed to the evidence of the respondents' own witness, Errol Pottinger, to support these claims. Mr Pottinger said that during the five years or so that he had been the skipper of the boat, it had been used mainly for short trips between Hamilton Island and Hayman Island. He said that during the course of those trips the boat had generally cruised at around 23-24 knots. He said that the Circa II was capable of doing around 30 knots. However, he added that this was possible only with a light load of fuel and with a following sea. 58 The applicants also relied upon the evidence given on behalf of the respondents by Geoff McDonald. He said that when he drove the boat its comfortable cruising speed was about 20-25 knots. He also said that he had taken it over 30 knots on two or three occasions "for a minute or so, just to give it a run". The applicants submitted, however, that this evidence did not provide any support for truth of the representations as to the speeds which the Circa II had been said to be able to achieve. 59 Ruben Fried, Morry Fraid, Zac Fried and John Gordon all gave evidence that the Circa II could not be driven at any speed over 20 knots without the engines overheating and breaking down. 60 The first respondent denied that the speed of the Circa II had ever been an issue during the negotiation for its sale. Both Graham McDonald and his brother Geoff said that nothing had ever been said to them by the applicants, or by Zac Fried, about the importance to them of the speed of the boat, or of being able to achieve a top speed of 35 knots, or a comfortable cruising speed of 30 knots. The first respondent submitted that the evidence given by the applicants concerning those matters had been little more than window dressing. 61 The first respondent submitted, in the alternative, that any differences between the speeds as represented in the advertisement, and the speeds which could be achieved, were, at best, marginal. It could not be said, for example, that the applicants would not have purchased the boat had they known that it could cruise at a mere 25 knots, rather than the 30 knots represented. 62 Further, in the alternative, it was submitted by the first respondent that the log books demonstrated that the Circa II had, on at least one occasion, achieved the types of speeds represented in the advertisement. It could not therefore be said that the first representation was false.
The second representation 63 The applicants contended that the particular part of the second representation which suggested that the Circa II's engines were "Detroit Diesel 8V92TA turbo after cooled supercharged" was false. A "half truth" may, of course, be misleading and deceptive, and it was submitted that this part of the representation contained, at best, a "half truth". The applicants argued that the respondents' failure to have included in the description of the engines the fact that these were Detroit Diesel automotive engines which had been converted by a different company into marine engines rendered this representation, at best, misleading. They contended that Detroit Diesel engines had a name and reputation for excellence and reliability. They argued that they should have been told that the Circa II's engines were not genuine marine engines. They claimed that had they known the truth, they would not have purchased the boat. 64 The applicants contended that the particular part of the second representation in which it was claimed that the Circa II was in "extremely good condition", was also plainly false. They submitted that this description could not conceivably be applied to the engines of this boat. They pointed to what they said was an overwhelming body of evidence of problems with the engines from the time the boat was taken to Hamilton Island in late June 1996, and throughout the whole of 1997 and 1998. They submitted that an examination of the Circa II's log books for the years 1994 and 1995 demonstrated that the engines had been in constant need of attention. Mr Pottinger had clearly spent an enormous amount of time working on the engines in an effort to keep the boat going. He had, on many occasions, removed the manifolds and replaced the gaskets. He had also, twice, removed the cylinder heads which had cracked. These were serious problems, it was submitted, and most unusual for engines which were as new as those of the Circa II. 65 The applicants invited me to reject the evidence of the respondents to the effect that throughout the six months or so that Dixie Holdings owned the Circa II it ran satisfactorily, without any apparent difficulty. The applicants submitted that this was inherently improbable. It did not square with the log books, nor did it square with the subsequent history of the boat. 66 The first respondent submitted that there was nothing misleading about describing the engines on the Circa II as Detroit Diesel, or in failing to mention that they were automotive engines which had been converted for marine use. The evidence was that the practice of converting such engines for marine use had been common at one time. 67 The first respondent also invited me to conclude that the part of the second representation to the effect that the Circa II was in "extremely good condition" was true, broadly speaking. It was submitted that any problems which affected the boat from about the end of June 1996 must have been brought about by Mr Gordon's mishandling of the boat, or by his failure to maintain it properly. It was submitted that notwithstanding Mr Pottinger's difficulties with the manifolds and the gaskets, and the repeated references in the log books to his having had to attend to exhaust leaks, the boat was still in "extremely good condition".
The issue of reliance 68 Turning to the issue of reliance, the applicants' case was that they had been induced to purchase the Circa II by either or both of the representations. They submitted that the inference of inducement and reliance could readily be drawn in this case. 69 In Gould v Vaggelas (1985) 157 CLR 215, a decision of the High Court concerning the tort of deceit, Wilson J observed at 236: "1. Notwithstanding that a representation is both false and fraudulent, if the representee does not rely upon it he has no case. 2. If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation. 3. The inference may be rebutted, for example, by showing that the representee, before he entered into the contract, either was possessed of actual knowledge of the true facts and knew them to be true or alternatively made it plain that whether he knew the true facts or not he did not rely on the representation. 4. The representation need not be the sole inducement. It is sufficient so long as it plays some part even if only a minor part in contributing to the formation of the contract." 70 In Dominelli Ford Pty Ltd v Karmot Auto Spares Pty Ltd (1992) 38 FCR 471 at 482-3 a Full Court of this Court held that these observations were applicable to claims based upon alleged breaches of s 52 of the Act. See also Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 525 per Mason CJ. 71 The applicants gave evidence that they had relied upon both the first and second representations in deciding to purchase the Circa II. They said that the advertised speed of the boat had been an important selling point. Ruben Fried said that he had previously owned a boat which had a top speed of about 40 knots and that it was important to him that any new boat which he acquired should have a top speed which closely approximated that of his existing boat. Morry Fraid emphasised the importance to him of the speed of the boat, stressing his desire to use it for his diving activities around the Whitsundays, and the Barrier Reef. Zac Fried also emphasised how important the speed of the boat had been as a factor in his decision to recommend that it be purchased. 72 The applicants indeed went further, and claimed that they had expressly communicated to the McDonalds the importance of the speed of the boat during the sea trial on 31 March 1996. They said they had made it plain during the sea trial that they expected the Circa II to live up to the performance standards promised in the advertisement. 73 It is not necessary for the purposes of the claim under s 52 of the Act to make any finding as to whether any such communications were, in fact, made. The question to be determined is whether the applicants relied upon the first representation as to the speeds of the boat, and not whether they communicated any such reliance to the respondents. Whether the applicants did communicate their desire for speed might, of course, be relevant to their alternative claim for breach of contract. However, that question need not be addressed at this stage. 74 The applicants contended that the fact that they undoubtedly relied, to some degree, upon the report prepared by Mr Gripske did not mean that they had not also relied on the first and second representations. They submitted that it was clear, on the authorities, that a claim for breach of s 52 of the Act could succeed notwithstanding that independent advice had also been provided. A representation need not be the sole inducement; it is sufficient if it plays some part, even if only a minor part, in contributing to the decision to enter into the contract - see Gould v Vaggelas; Dominelli Ford (Hurstville) Pty Ltd v Karmot Auto Spares Pty Ltd; and Wardley Australia Ltd v Western Australia. 75 The applicants submitted that even if it could be shown that they had failed to exercise reasonable care in acting upon the various representations made by the first respondent, that did not absolve Dixie Holdings from liability for having engaged in misleading or deceptive conduct - see Neilsen v Hempston Holdings Pty Ltd (1986) 65 ALR 302; Collins Marrickville Pty Ltd v Henjo Investments Pty Ltd (1987) 72 ALR 601 at 611 per Wilcox J; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546 at 588; and Sutton v AJ Thompson Pty Ltd (in Liq) (1987) 73 ALR 233 at 239. 76 It was submitted on behalf of the first respondent that if, contrary to its primary submissions, I were to find that either or both of the first and second representations were false, I should nonetheless find that the applicants had not relied upon those representations in deciding to purchase the boat. The applicants had engaged their own experts to advise them and the reason that they purchased the Circa II was because their experts had told them that it was safe to do so. It was submitted that neither Ruben Fried nor Morry Fraid had taken any real part in the decision to purchase the boat. Each had delegated that decision to Zac Fried. He, in turn, had delegated it to Mr Gow. It could not be said that Mr Gow had relied, in any way, upon those representations.
Loss and damage 77 With respect to their claim for loss and damage the applicants sought to recover both the costs which they had incurred in repairing the engines, and the costs of ultimately replacing those engines with new Detroit Diesel marine engines. 78 The applicants submitted that both the costs of repair and the costs of replacing the engines flowed directly from the first respondent having engaged in misleading or deceptive conduct. They submitted that they should recover the whole of the repair costs which had been incurred, save for several items which they accepted were not compensable because their own experts said that the persons whom they had engaged to perform those repairs were manifestly incompetent to perform that work. The applicants submitted that there should be no reduction in the total sum compensable for repairs by reason of their having failed to mitigate their loss by having failed to appreciate, at an earlier stage, that the engines were inherently defective and would inevitably have to be replaced. 79 The first respondent submitted that were I to find that there had been a contravention of s 52 of the Act I should nonetheless disallow the claims for any of the repairs to the engines. It was contended that once it had become clear that there were serious problems with the engines, the applicants ought at once to have called in qualified experts to examine them. Any such experts would have told them that the engines had a major design fault and that they could not be repaired. It was submitted that it would be unjust, in the circumstances, to impose upon the first respondent liability for expenses unnecessarily and unreasonably incurred. The case against the second respondent 80 The applicants' case against the second respondent, Graham McDonald, is of course based upon s 75B of the Act. In order to be liable under that section as a person involved in a contravention of s 52, it must be shown that the person had knowledge of all the essential elements of the contravention. In other words, it must be shown that the person had knowledge of the falsity of the representation - see Yorke v Lucas (1985) 158 CLR 661. It is clearly established that "knowledge" means actual, and not constructive, knowledge. Wilful blindness is not as such synonymous with actual knowledge. However, an inference of actual knowledge may be drawn from facts proved by direct evidence, and the shutting of one's eyes to the obvious may give rise to that inference - see Compaq Computer Australia Pty Ltd v Merry (1998) 157 ALR 1 at 5 per Finkelstein J; and Bowler v Hilda Pty Ltd [2000] FCA 899 at par 78 per Finn J. 81 The applicants contended that notwithstanding Graham McDonald's denials, I should infer that he must have been aware of the falsity of both the first and second representations. They identified a series of primary facts from which they submitted that this inference should be drawn. 82 Graham McDonald said in evidence that he only became involved with the Circa II in late December 1995. He had nothing whatever to do with the operation of the boat. He said that he had been told by his father, who knew the boat better than he, that the top speed was 35 knots and that it could comfortably cruise at about 30 knots. He said that he had never looked at the log books, and that he had never spoken to Mr Pottinger about any problems which he might have experienced with the engines. He said that he knew nothing of the problems with the manifolds, or of any difficulty with the engines overheating. He said he was unaware that there was a problem in getting the boat to cruise at more than 20 knots. 83 The applicants submitted that I should reject this evidence. They submitted that I should instead infer that when Mr Pottinger had instructed Geoff McDonald as to how to operate the boat he told him of the problems which he had experienced with the engines. The high point of the applicants' case in this regard was that Mr Pottinger conceded, in cross-examination, that such a conversation "could have occurred". The applicants submitted that I should further infer that if Geoff McDonald had been told by Mr Pottinger of these problems, he would have communicated what he was told to his brother, Graham. 84 It was submitted on behalf of the second respondent that, even assuming that the first respondent had contravened s 52 of the Act, there was insufficient evidence to prove knowledge on his part that any of the representations relied upon by the applicants were false. It was submitted that I should not infer, contrary to the evidence given by Graham McDonald, that he was aware of the history of the Circa II, or any of the problems associated with its engines. It was further submitted that I should not infer that he was aware that the engines were not genuine Detroit Diesel engines, but rather automotive engines which had been modified for marine use.
The claim for breach of contract 85 As noted earlier, the applicants' claim for breach of contract was pleaded as an alternative to their primary claim under s 52 of the Act. This alternative claim need not be considered in the event that liability under the Act is established.
The claim against the fourth respondent 86 The applicants' claim against Mr Gripske was based entirely upon an alleged failure on his part to articulate, in clear terms, that the engines which he had inspected were Detroit Diesel automotive engines which had been converted for marine use, and not genuine Detroit Diesel marine engines. 87 Mr Grose expressed his opinion that any competent diesel mechanic who specialised in Detroit Diesel engines, as Mr Gripske claimed he did, and who was engaged to prepare a report concerning the engines on the Circa II, would have drawn attention to the provenance of those engines.
Findings 88 In my opinion the applicants are entitled to succeed against the first respondent. I am satisfied that Dixie Holdings contravened s 52 of the Act by representing to the applicants that the top speed of the Circa II was 35 knots, and that it could cruise comfortably at around 30 knots. I am also satisfied that Dixie Holdings contravened the same section of the Act by representing to the applicants that the engines of the Circa II were Detroit Diesel and that the boat was in "extremely good condition". The making of a representation constitutes engaging in conduct. Each of these representations was, in my opinion, a misrepresentation. The conduct of the first respondent in causing them to be made was misleading or deceptive, or likely to mislead or deceive - Global Sportsman Pty Ltd v Mirror Newspapers Ltd (1984) 2 FCR 82 at 87. 89 The true position was that there was a major design fault associated with the engines of the Circa II. Those engines were always likely to overheat when brought up to a speed of around 20 knots. In this case I need do no more than refer to contemporaneous documents. The log books speak for themselves; they paint a clear picture of the frustration which Mr Pottinger experienced in trying to keep the boat operating. They show that the engines frequently overheated, and occasionally broke down. I have no hesitation in accepting Mr Pottinger's evidence regarding this matter. I also accept the evidence of Messrs Hood and Grose, uncontradicted as they were, that the Circa II's engines were poorly designed and in need of constant repair and attention. These engines could not sensibly be described as being in "extremely good condition". The Circa II was, on the evidence, what colloquially would be described as "a lemon". 90 I accept the evidence of Ruben Fried, Morry Fraid and Zac Fried that their decision to purchase the Circa II was influenced to a considerable degree by representations made as to the speed at which the boat could travel. I accept the evidence of Ruben Fried that once it became clear that the boat could not exceed 20 knots he completely lost interest in it. 91 I am satisfied that the part of the second representation concerning the engines being Detroit Diesel was relevantly false. It was, in my opinion, a "half truth". I am satisfied that the applicants relied, in part, upon that representation in deciding to purchase the boat. Detroit Diesel was a name of repute in the context of diesel engines. Converted truck engines are hardly what the applicants expected to be getting when they purchased this very expensive, high speed luxury cruiser. 92 I am satisfied that in deciding to purchase the Circa II the applicants relied upon that part of the respondents' second representation as to its "extremely good condition". The fact that they engaged their own consultants who, it would seem, let them down by not alerting them to the problems with the boat's engines, is no answer to their claim. It does not constitute a break in the chain of causation - see Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 171. Moreover, taken in context, this representation was not mere "puffery" but a representation made seriously, and with the intent that it be acted upon. Even "puffery" may, of course, amount to misleading conduct - General Newspapers Pty Ltd v Telstra Corporation (1993) 45 FCR 164. 93 In relation to the applicants' claim against Graham McDonald, I am not persuaded that he knew, at the time the first and second representations were made, that they, or any part of them, were false. The Circa II was little used in the six months or so that it was owned by Dixie Holdings. It was rarely, if ever, driven at any real speed. The problems with the engines would not be likely to have shown up. In any event, Graham McDonald did not operate the boat during that period. 94 I am not prepared to infer that Mr Pottinger told Geoff McDonald about the problems which he had experienced with the engines. Even if I were prepared to draw that inference, I would not infer that Geoff McDonald conveyed that information to his brother, Graham. In that regard I accept the evidence of Graham McDonald to the effect that he was unaware of the problems with the engines. I accept too the evidence of Geoff McDonald, and of Ian McDonald, that they did not know that the engines on the Circa II were inherently defective. I do so in part because I doubt that Ian McDonald would have purchased the Circa II for the price which he did ($575,000) had he had any inkling that the engines would have to be replaced in order for the boat to operate properly. 95 In my opinion there should be judgment for the applicants against the first respondent for most, but not all, of the repair costs incurred. I would disallow the last item claimed, being $10,990 paid on 22 September 1997 to Mobile Marine Repairs (Jason Grose's business). By the date that last repair was effected, the applicants should have known, well and truly, that it was pointless trying to repair the engines. Mr Grose certainly knew that they had to be replaced. Given that the applicants must have known by then that it was pointless spending any more money on the existing engines, but still made one last attempt at repairing them in order to be able to sell the boat, the first respondent should not be liable for what might be viewed as almost an act of folly on their part. Relief under s 82 of the Act is not, of course, to be confined by analogy either with actions in contract or tort - Marks v GIO Holdings Ltd (1998) 196 CLR 494. However, a causal connection must be established between the loss or damage suffered and the conduct done in contravention of the Act. That causal connection does not exist, in my view, between the misrepresentations made by the first respondent and the last repair item. 96 All other repair costs which were incurred prior to that last payment are, in my view, compensable. I accept the evidence that those repairs were carried out in a competent manner by qualified tradesmen, and that it was reasonable in the circumstances for the applicants to try to rectify the problems with the engines. That leaves a total of $56,232.03 for the costs of repairs incurred in 1996 and 1997. The first respondent should be required to compensate the applicants for the cost of these repairs. 97 I also find that the first respondent is liable to the applicants for the cost of replacement of the engines. The applicants actually spent $182,000 on new Detroit Diesel marine engines. However, the evidence before me was that these were a more expensive type than those which they had replaced. Engines comparable to those which were replaced, but which were manufactured by Detroit Diesel as marine engines, would have cost $142,000. I would allow that sum, together with the costs of installation (being $27,817.99) as damages for the replacement cost of the engines. From the total replacement costs of $169,817.99 I would deduct an amount of $10,000. That was said by Mr Grose to be the value of the old engines which are still owned by the applicants. Those engines may be sold at some stage. The total replacement cost of the engines would therefore be $159,817.99. 98 When the sum of $159,817.99 is added to the repair costs of $56,232.03 the total amount to be paid by the first respondent by way of damages is $216,050.02. 99 The applicants have also claimed interest. Order 35 r 8 of the Federal Court Rules provides that interest on a judgment debt is calculated at the rate of 10.5% per annum unless the Court determines that a lower rate should be applicable. The present application was filed in July 1998 and through no fault of any party has been in the list of cases awaiting hearing for a very considerable time. It would be unfair to the first respondent to fail to give consideration to that fact in determining the amount of interest which it should be required to pay in regard to the sum awarded as damages. 100 In the present case I propose to order that a lump sum of $20,000 interest be paid, pursuant to s 51A(1)(b) of that Act, to be included in the sum for which judgment is given. My reasons for arriving at the figure of $20,000 were debated fully during the course of the hearing and need not be set out here. 101 It is clear that the first respondent must pay the applicants' costs of and incidental to this proceeding. However, the applicants have failed in their claims against the second and third respondents. The quantum of costs separately incurred in relation to the second and third respondents would, in all likelihood, have been small. Rather than requiring the applicants to pay the costs of the second and third respondents, thereby introducing further complexity into this case, it was agreed by counsel that the most sensible course would be for me to adjust the amount of costs to be awarded against the first respondent. In doing so I have regard, of course, to the relationship which exists between Dixie Holdings and Graham and Ian McDonald. Accordingly, I order that the first respondent pay 80% of the applicants' costs of and incidental to this proceeding, such costs to be taxed in default of agreement. It follows that there will be no order that the applicants pay the costs of either the second or third respondent. 102 As regards the applicants' claim against Anthony Gripske, I consider that this claim must fail. I am not persuaded by the evidence adduced by the applicants that his report was prepared negligently merely because it failed to state clearly that the engines which he had examined were Detroit Diesel automotive engines which had been converted for marine use. I do not consider that, in the context of a brief report of the type which he was engaged to prepare, there was any obligation on his part to describe the engines in that way. 103 It was not suggested by the applicants, in the course of their closing submissions, that I should find that Mr Gripske was negligent in having failed to detect that they would constantly overheat, or that they were subject to the fundamental defects later identified by Messrs Hood and Grose. 104 Mr Gripske did not appear in this proceeding. He seems to have incurred some costs in the earlier steps of defending the claim brought against him, to which he is entitled. I would therefore order that the applicants pay the fourth respondent's costs, those costs to be taxed in default of agreement. I certify that the preceding one hundred and four (104) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Weinberg.
Dates of Hearing: 5, 6 and 7 July - Melbourne 10, 11 and 12 July - Brisbane
Fried
Dixie Holdings Pty Ltd
(1998) 156 ALR 470
(1978) 140 CLR 216
(1982) 149 CLR 191
(1985) 157 CLR 215
(1992) 38 FCR 471
(1992) 175 CLR 514
(1986) 65 ALR 302
(1987) 72 ALR 601
(1988) 39 FCR 546
(1987) 73 ALR 233
(1985) 158 CLR 661
(1998) 157 ALR 1
(1984) 2 FCR 82
(1982) 42 ALR 171
(1993) 45 FCR 164
(1998) 196 CLR 494