Integral Energy Australia v EDS

Supreme Court of NSW|2006-06-20|Before: Einstein J, Mr J, Allsop J, Heydon JA

For the reasons given in our outline, we say either by not specifying persons, that of itself falls foul [of the pleading requirements], and the non-specificity arises either by alluding to SCT per se or to classes of people who either represented or have knowledge.

When [the plaintiff does] descend to any level of specificity as to the named individuals, [it] either does so in a way that is by no means clear as to how the aggregation process works or, alternatively, it is clear [that it has] no idea ..about the mechanism, because ultimately when you get to J, it either asserts that … it was known that there were persons who had responsibility within the organisation, J(b), they had an opportunity and a duty when responding to make certain inquiries and they couldn't have a genuine belief and if they did consult they would have known the representations were false.

MR SACKAR: Well, [they] want to say that the persons who made the representations presumably should have checked or didn't check, but they don't give any specificity as to that.

They simply reverse engineer from the representations.

In other words, instead of building the case in a way that we understand it, they say "the representations were deceitful, therefore you did not obviously make an inquiry", but when one looks at the cases on aggregation, one has got to be a little more specific than that.

The state of the authorities 16 Corporations are responsible for their actions through those who act on their behalf, whether an act is performed by one person or by a number (Dunlop v Woollahra Municipal Council [1975] 2 NSWLR 446 at 485, referred to in Bray v F Hoffman-La Roche Ltd (2002) 118 FCR 1). 17 When considering the knowledge of a company it is necessary to specify some person or persons so closely and relevantly connected with the company that the state of mind of that person or those persons can be treated as being identified with the company so that their state of mind can be treated as being the state of mind of the company (Brambles Holdings Ltd v Carey (1976) 15 SASR 270 (Brambles), approved by the High Court in Krawkowski. See also The Bell Group Ltd (In Liquidation) v Westpac Banking Corporation (5) [2004] WASC 273). 18 In Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 the majority of the High Court made it clear that where fraud is pleaded against a company it is necessary to ascertain whether the relevant representation had been made "consciously" by the company. In this respect the majority said (at 580):

A representation that the instrument of lease covered the whole of the agreement between Eurolynx and Swaeder bears only one meaning. If that representation was made consciously by Eurolynx or its solicitor, it must have been made fraudulently. There is no sense in which a representation in those terms could have been honestly made by Eurolynx or by its solicitor. But was Eurolynx or its solicitor conscious of the making of a representation in those terms? 19 For the purposes of ascertaining whether Eurolynx' mind was conscious of making the representation the High Court found that it was relevant to consider the state of mind of all persons who had a connection with the relevant transaction. In this respect, the majority said as follows (at 582-583): The mind of Eurolynx does not depend upon the acceptance of the evidence of Gilbert alone [the officer of Eurolynx responsible for giving instructions to the solicitors in respect of the lease and side agreement] as to his appreciation of the significance of the separate agreement. Account must be taken of the evidence that Eurolynx' agent (Cini) and Eurolynx' officer (Ryan) who had first procured the agreement of Mermelstein (as agent for the purchasers) to buy unit 12 knew that the purchasers were willing to buy on the footing that the rent reserved by the lease was what the tenant had been and was willing to pay for a lease of the property offered to them. In other words, they were willing to buy at a price 10 times the amount of the rent which the property itself would yield. Their knowledge was the knowledge of Eurolynx, for they were the persons who were responsible for the initial negotiations and who had set the scene in which the representation had been made by the s 32 statement and the proffered contract of sale. As Bright J said in Brambles Holdings Ltd v Carey (1976) 15 SASR 270 at 279 (and see at 275-276, per Bray CJ; at 281-282 per Mitchell J) (emphasis added): " Always , when beliefs or opinions or states of mind are attributed to a company it is necessary to specify some person or persons so closely and relevantly connected with the company that the state of mind of that person or those persons can be treated as being identified with the company so that their state of mind can be treated as being the state of mind of the company. A division of function among officers of a corporation responsible for different aspects of the one transaction does not relieve the corporation from responsibility determined by reference to the knowledge possessed by each of them (See Dunlop v Woollahra Municipal Council [1975] 2 NSWLR 446 at 485 Tesco Supermarkets Ltd v Nattrass [1972] AC 153 at 170). Neither Cini nor Ryan was called to give evidence. It is erroneous to make a finding as to the company's intention or willingness to misrepresent the contractual arrangements with Swaeder without reference to the knowledge of Cini and Ryan. 20 Another reason for requiring the plaintiff to identify the persons behind the alleged representations is that the subjective sense in which the representation was intended by the representee to be understood is an essential enquiry for a claim in fraud. In this respect, the majority in Krakowski said that (at 578, see also at 576-577):

In order to succeed in fraud, a representee must prove, inter alia, that the representor had no honest belief in the truth of the representation in the sense in which the representor intended it to be understood. 21 It is not permissible to create a "notional person with a dishonest intent" for the purposes of proving fraud against a company. In Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 the question of whether it was appropriate to aggregate the knowledge of different officers of a corporation for the purposes of ascertaining fraud was raised directly, and rejected by Tadgell JA (with whom Winneke P agreed). In that case the Court considered the circumstances in which something less than knowledge of dishonesty will amount to fraud for the purposes of challenging indefeasible title conferred under statute. In this context, Tadgell JA cited the first sentence of the passage from Krakowski [commencing: "A division of function"] and said (at 145):

That passage, so it was said on behalf of the respondent, authorises the aggregation of all the knowledge of officers of a corporation in order to determine a fraudulent state of mind of the corporation. The answering submission by counsel for the appellant is in my opinion correct. Neither that passage in Krakowski nor any other principle justifies the simple aggregation of the knowledge of a number of persons individually unaware of fraud, or facts which ought to disclose it, to create a notional person with a dishonest intent. The High Court in Krakowski was not purporting in the passage relied on to lay down any such principle but to authorise a consideration of the knowledge and circumstances of all relevant persons - including what may properly be inferred - in order to ascertain the mind of the corporation. 22 The plaintiff seeks to rely on AG-Exports (Australia) Pty Ltd v Export Finance and Insurance Group [2006] NSWSC 467 per Simpson J at [24] as authority for the proposition that the dictum of Bright J in Brambles referred to above did not require the pleading of an individual or individuals within a company in a claim in deceit. 23 This is not correct. The gravamen of Simpson J's judgment is that prior to pre-trial procedures it may be permissible for a plaintiff alleging deceit not to include particulars of the individuals alleged to have had the requisite knowledge and intent, but that such particulars must ultimately be provided (see paras [26] & [31]). In that case the proceedings had been on foot, 'in one form or another', for four and a half years and the plaintiff had had access to documents produced by virtue of pre-trial procedures (para [26]). 24 In these circumstances, Simpson J ultimately refused leave to amend the pleading to include a deceit claim for the following reasons (at paras [30] and [31]): 25 It is well recognised that an allegation of fraud is a most serious allegation, whether the fraud is attributed to an identified individual (or individuals) within an organisation, or (impermissibly) to the organisation as a corporate entity. 26 The first two variants of the pleading of deceit identified above are not sustainable because they do not identify with specificity the person or persons so closely and relevantly connected with the company that the state of mind of those persons can be treated as being the state of mind of the company. 27 All three variants of the deceit claim identified above are not sustainable because the plaintiff has failed to allege any connection between the persons or classes of persons alleged to have made or authorised the representation, and those alleged to have knowledge of the facts giving rise to its falsity. Inferences 28 Whilst ever the plaintiff continues to eschew the making of an allegation that individuals who made the representation had the requisite knowledge of falsity thereof, it will have failed to comply with the requisite pleading requirements. The making of such a serious allegation is itself subject to well-known ethical constraints. However in appropriate cases where it is reasonably open to draw inferences from circumstantial evidence, it can be proper to plead knowledge of falsity. These are matters for the party and not for the Court. Dealing with particular J 29 Particular (J) of paragraph C 59 (A) which begins "further or in the alternative, the persons who made or authorised or approved the deceitful SCT representation to Integral in the abovementioned ways" is deficient as follows :

i. it then alleges knowledge in particular persons of the lack of functionality

ii. it then alleges opportunities which such persons are said to have had and the duty owed by them to the Corporation to obtain information about whether or not the particular tender requirements were absent

iii. it then alleges that those persons could not have had a genuine belief in the truth of the suggested deceitful representation unless they had consulted with those within the Corporation having that actual knowledge [this allegation eschews the charge that those persons did not have that genuine belief, a charge which may or may not be available to be made as supported by inference, depending upon the materials held by the plaintiff's legal advisers and their instructions].

iv. it then alleges that if these persons did so consult, they would have known that the representation was false [ this allegation eschews the charge that such persons knew that the representation was false, a charge which may or may not be available to be made by the plaintiff as supported by inference, depending upon the materials held by the plaintiff's legal advisers and the instructions given to by the plaintiff]

v. it then alleges that if these persons did not so consult, they recklessly refrained from doing so [without positively making the charge that these persons did not so consult, again a charge which may or may not be available to be made by the plaintiff by inference and depending upon the materials held by the plaintiff's legal advisers and the instructions given to by the plaintiff] 30 Presently the application for leave to amend is disallowed for the above reasons. Costs may be argued.

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CITATION : Integral Energy Australia v EDS (Australia) Pty Limited & Ors [2006] NSWSC 600

AG-Exports (Australia) Pty Ltd v Export Finance and Insurance Group [2006] NSWSC 467 Brambles Holdings Ltd v Carey (1976) 15 SASR 270 Bray v F Hoffman-La Roche Ltd (2002) 118 FCR 1 Bruce v Odhams Press Ltd [1936] 1 All ER 287 Derry v Peek [1886-90] All ER Rep 1 Dunlop v Woollahra Municipal Council [1975] 2 NSWLR 446 Gould v Vaggelas (1985) 157 CLR 215 CASES CITED : Krakowski v Eurolynx Properties Ltd (1995) 183 CLR 563 Macquarie Bank Ltd v Sixty-Fourth Throne Pty Ltd [1998] 3 VR 133 Multigroup Distribution Services Pty Ltd v TNT Australia Pty Ltd & Anor (1996) ATPR 41-522 Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116 Tesco Supermarkets Ltd v Nattrass [1972] AC 153 The Bell Group Ltd (In Liquidation) v Westpac Banking Corporation (5) [2004] WASC 273 Tresize v National Australia Bank Ltd [2005] FCA 1095 Wallingford v Mutual Society (1880) 5 App. Cas. 685 White v Overland [2001] FCA 1333

ii. The statement of claim must include facts which, if not specifically pleaded, might take the other party by surprise ( Multigroup Distribution Services Pty Ltd v TNT Australia Pty Ltd (1996) ATPR 41-522. See further the judgement of Allsop J in White v Overland [2001] FCA 1333 at [4], which was approved by Heydon JA in Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116).

vii. In Tresize v National Australia Bank Ltd [2005] FCA 1095, Sundberg J summarised the elements of deceit at [38] as follows: (a) a representation of fact (which can be as to the representor's opinion or intention or the law) that is conveyed to the claimant by the representor's words or conduct;

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