Lake Cumbeline Pty Ltd & Ors v EFFEM Foods Pty Ltd (t/as Uncle Ben's of Australia) [1997] FCA 292

Lake Cumbeline Pty Ltd & Ors v EFFEM Foods Pty Ltd (t/as Uncle Ben's of Australia) [1997] FCA 292 - FCA 1997 case summary — Zoe

TABLE OF CONTENTS THE PARTIES......................................................................................................................... ‑2‑ THE W CONTRACT.............................................................................................................. ‑3‑ THE HEADS OF AGREEMENT............................................................................................. ‑7‑ THE SHAREHOLDERS' AGREEMENT DATED 30 MARCH 1987....................................... ‑9‑ THE INITIAL PERFORMANCE OF THE W CONTRACT AND THE HEADS.................. ‑11‑ Table of TIA Sales.................................................................................................................. ‑12‑ THE APPELLANTS' PRE-INVESTMENT INVESTIGATIONS.......................................... ‑13‑ THE FAILURE OF TIA IN APRIL 1989................................................................................ ‑15‑ THE RELEVANT CLAIMS PLEADED BY THE APPELLANTS.......................................... ‑16‑ (a) The representations alleged to have been made on 16 March 1987................................ ‑16‑ (b) The representations alleged to have been made on 26 March 1987................................ ‑18‑ THE CONCLUSIONS AT FIRST INSTANCE..................................................................... ‑18‑ (a) Final conclusion............................................................................................................ ‑19‑ (b) Findings on credit......................................................................................................... ‑20‑ (c) Findings on alleged representations (ii)-(iv).................................................................... ‑20‑ (d) Findings on alleged representation (xii).......................................................................... ‑25‑ (e) Finding on alleged representation (xiii)........................................................................... ‑25‑ (f) Alleged representation (xiv)........................................................................................... ‑26‑ (g) Findings on the issue of reliance in respect of the representations alleged to have been made before 30 March 1987.................................................................................................................................... ‑27‑ THE APPELLANTS' GROUNDS OF APPEAL.................................................................... ‑30‑ THE APPELLANTS' WRITTEN SUBMISSIONS ON ALLEGED REPRESENTATIONS (ii), (iii) AND (iv)‑31‑ THE APPELLANTS' ORAL ARGUMENT ON ALLEGED REPRESENTATIONS (ii), (iii) AND (iv)‑38‑ THE APPELLANTS' WRITTEN SUBMISSIONS ON ALLEGED REPRESENTATIONS (xii) and (xiii) ‑71‑ THE APPELLANTS' ORAL ARGUMENTS ON ALLEGED REPRESENTATIONS (xii) AND (xiii) ‑82‑ THE APPELLANTS' ORAL ARGUMENTS IN REPLY........................................................ ‑90‑ CONCLUSIONS ON THE APPEAL.................................................................................. ‑108‑ (a) The claims said to arise out of alleged representations (ii), (iii) and (iv).......................... ‑108‑ (b) The claims said to arise out of alleged representations (xii)-(xiv)................................... ‑115‑ ORDERS.............................................................................................................................. ‑117‑

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IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. NG 522 of 1995 ) GENERAL DIVISION ) ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: LAKE CUMBELINE PTY LIMITED First Appellant IDOBOOK PTY LIMITED Second Appellant PETER HORROBIN Third Appellant RICHARD SANDS Fourth Appellant RAYMOND PRIDMORE Fifth Appellant AND: EFFEM FOODS PTY LIMITED trading as UNCLE BEN'S OF AUSTRALIA Respondent CORAM: BEAUMONT, EINFELD AND FOSTER JJ DATE: 24 APRIL 1997 PLACE: SYDNEY REASONS FOR JUDGMENT THE COURT: This is an appeal from an order of a Judge of the Court dismissing claims made by the appellants, Lake Cumbeline Pty Limited ("Lake Cumbeline"), Idobook Pty Limited ("Idobook"), Peter Horrobin, Richard Sands and Raymond Pridmore, against the respondent, Effem Foods Pty Limited, trading as Uncle Ben's of Australia ("UBA"), for substantial damages and other relief. THE PARTIES Messrs Horrobin and Pridmore controlled Lake Cumbeline. Mr Horrobin, who had previously practiced as a solicitor, and had held senior positions in several large firms, and in merchant banking and finance operations, practised as a corporate consultant in Sydney. Mr Pridmore had had substantial experience in locating suitable business investments. Through Cerberus Investments Pty Limited, a company controlled by him, Mr Pridmore was engaged by Messrs Horrobin and Sands to find investment opportunities. Mr Sands, who controlled Idobrook, was an accountant and investor who was associated with Mr Horrobin's consultancy practice and had a wide range of business interests. Mr Lees, the main witness for UBA, had joined UBA in 1970. He had held various positions at UBA including Senior Buyer and Senior Wet Raw Materials Buyer. In the latter position, Mr Lees reported directly to Mr Ian Armstrong, the Commercial Director of UBA. UBA, a subsidiary of a substantial American corporation, and the largest pet food manufacturer in the southern hemisphere, was a customer of Trawl Industries of Australia Pty Limited ("TIA"), which was engaged in acquiring, processing and selling fish. TIA conducted its operations from leased facilities in Geelong. It purchased fish from different fishermen, processed the fish, froze them using a blast freezer, and stored them in a cold store. During the time of the investment in TIA by Lake Cumbeline in 1987, out of which these proceedings arose, TIA attempted to establish its own fishing fleet and was, with the ultimate aim of establishing itself as a fully integrated fish supplier, negotiating to purchase the Geelong premises. In early 1987, which is the material time for present purposes, UBA was TIA's main customer. The relationship between UBA and TIA at the time was reflected in two particular transactions which were central to the litigation, to which reference should now be made. THE W CONTRACT By contract No. W17299 ("the W Contract") dated 11 February 1987, UBA agreed to buy from TIA, at the prices there specified - all prices being "FOT" Geelong and in accordance with a nominated Standard Quality Specification ("SQS") - a total of 6,250 tonnes of fish as follows: H & G SalmonApprox. 500 tonnes Blue Mackerel Approx. 200 tonnes Jack Mackerel Approx. 2,000 tonnes Australian Pilchards Approx. 3,000 tonnes Sheba Mackerel Approx. 200 tonnes Sheba Pilchards Approx. 350 tonnes.

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____________________________________________________________________________________________________________________________________" THE APPELLANTS' PRE-INVESTMENT INVESTIGATIONS The learned primary Judge described the history of the appellants' "pre-investment investigations". This is a critical aspect of the matter and a full reference should be made to it as follows (at 21-6): "The main investigations in relation to the investment on 30 March 1987 were made by Pridmore. In February 1987 he met with Fasham and J Wilson who discussed the Trawl operation with him. He subsequently had several conversations with J Wilson and Fasham during that month. During one of those conversations he was shown an unsigned copy of a contract for the purchase of the Geelong Cold Stores situated at Corio Quay North, Geelong. He was not given a copy of this contract. He also obtained a draft of the 26 March 1987 Heads of Agreement with UBA. In March 1987 he discussed the results of his investigation of Trawl with Horrobin and Sands, and decided to make further investigations. In March 1987, he got a copy of purchase order W17299 and a costing document. Prior to 18 March 1987 he visited ANZ and saw a Mr Goldsworthy ("Goldsworthy"). He took steps to seek verification from Goldsworthy in relation to Trawl and the good standing of the Atasco directors. These inquiries were made under time constraints because of the need to obtain the relevant Minister's consent to purchase the Corio Quay facility; that is, the cold store at Geelong. He said there was less time than usual to chase up contingent liabilities and "things of that nature". Accordingly, the applicants took indemnities from the vendors to cover those contingencies. He said that the visit to ANZ was to assure the applicants that the vendors were in fact able to meet the indemnities. He discovered that Trawl had two overdrafts which totalled $1 million. His understanding at that time was that Trawl was in some financial difficulty. He relayed the results of his inquiries as to the financial position of Trawl with ANZ and the State Bank of Victoria to Horrobin and Sands. He regarded it as essential that the vendors should give indemnities and he relied on those indemnities. He agreed that there was no consideration given to the possibility of Trawl raising its own funds since it was always assumed that it would not need its own funds and that the input from Cumbeline would have been sufficient to carry the venture through. His understanding before the investment was that if Trawl had its own vessels, factory, blast freezer and storage, it provided a unique asset in Australia. He could not recall whether he saw a set of accounts for year ended 30 June 1986 before the investment. The probability is that he did not. He said that this situation would be unusual but it would also be "inconsequential in terms of this investment". He said that he sat down with Trawl's accountant to examine the general ledger, the costing sheets and working papers. He sought information as to the business ability, character and financial capacity of the Atasco directors. Prior to the investment he obtained a letter from the Port of Geelong Authority ("PGA") confirming that the Minister had approved a new lease of the cold store premises to Trawl. On 26 March 1987 he obtained a letter from Fasham confirming conversations about work necessary to be done to meet the requirements of UBA. He was assured by Fasham that there were no outstanding works or further plant to be installed to meet any requirements of UBA. He wanted confirmation about the existence of a replacement agreement with UBA and got confirmation in the letter. The shareholders' agreement required as a condition precedent that fishing licence endorsement should be provided for the south-east trawl region in respect of the "Allied Star". He said that this condition was waived before completion. He agreed that the applicants obtained a comprehensive set of warranties prior to investment as these were essential for this transaction in the applicants' view. He undertook his own financial investigation of the financial position of Trawl and was satisfied with that investigation. He obtained a copy of the executed Heads of Agreement of 26 March 1987 on or about that date. The applicants were content with these Heads of Agreement. His understanding was that the agreement imposed no obligation on either party to supply or accept fish in the absence of an agreement as to price, but said this was in the context of a cost plus method of negotiating price. [emphasis added] The main input of Sands prior to the investment was to obtain information to prepare computer models and to make a projection as to the future operations of Trawl. The Heads of Agreement of 26 March 1987 and Contract W17299 were the only documentary evidence he saw prior to 30 March 1987, which supported his understanding of the "exclusive" arrangement with UBA. He was party to discussions with Atasco representatives on 9 March 1987. He was not party to the discussions with Lees on 18 March 1987 (which are referred to in more detail below), but was informed of them. He made some investigation of the accounting records. Sands prepared the budget which was attached to the shareholders' agreement. He agreed that the profit gross margins were attractive. He believed that the assumptions in the budget were realistic and capable of achievement. He prepared the budget in consultation with Horrobin and Pridmore and it reflected his own independent investigation of the business prospects of Trawl. [emphasis added] Sands analysed Pridmore's material and discussed matters with Pridmore and prepared draft computer models. He also had discussions with Horrobin, but as far as the investigation was concerned, he didn't do anything else. He said that Pridmore had been employed to do the investigation. He said he had received a balance sheet from Pridmore, but he made no investigation of the accounting records prior to 30 March 1987. He understood that Pridmore had looked at those records. J Wilson had produced some accounts for 28 February 1987. Horrobin was aware that Trawl was in a very unhealthy situation for a trading company, without an injection of capital. His interest was principally in respect of one item, namely the gross profit made for the month of February 1987 on increased sales of fish. He formed the view that the profitability of the company was strongly increasing from what was previously, in his understanding, a start-up phase. He left the investigations basically to Sands and Pridmore and did not himself engage in that exercise. He did not examine any of the accounting records, but left this to Pridmore. He said that the applicants decided to invest after Sands had prepared a computer model which showed what the adjusted figures on performance of the contract looked like. He referred to various computer models having been prepared by Sands up to 30 March 1987. He considered that the timing of the investment became important after 9 March 1987 because he was told that the Victorian Minister for Transport was threatening to cancel the sale of the cold stores at Geelong to Trawl. As best he could recollect, this was about 12 March 1987. [emphasis added] He agreed that the applicants were of the opinion that for $2 million they had bought into a company which had a "fantastic" future so far as profitability was concerned and that it had strong early cash flows and the potential for growth. The only investigations that Horrobin personally made before 30 March 1987 was at the brief meeting with J Wilson and Fasham on 9 March 1987 and a visit to Geelong on 18 March 1987, when he looked at the plant and talked to some people, and also had discussions with the Atasco shareholders. The only direct inquiries made by Horrobin of UBA were those discussions which he had with Lees on 18 March 1987, which lasted in the order of 15-30 minutes. He was interested in the model projections prepared by Sands."

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The conduct thus alleged was also said to constitute fraud and negligence at common law. Lake Cumbeline further alleged (para.6) that, acting on the faith of the representations pleaded, Lake Cumbeline invested substantial amounts of money in TIA and lent money to TIA; that Idobook lent monies to Lake Cumbeline to enable it to make the said investment and loans; that Messrs Horrobin, Sands and Pridmore guaranteed certain obligations of TIA with the ANZ Bank; and that TIA expended the funds which had been invested in and lent to it. It was then said and, as has been noted, this was not disputed, that TIA had lost the value of the funds lent to it and that, having had receivers appointed in April 1989 and liquidators appointed in August 1990, TIA was unable to repay those funds. The appellants further alleged (para.7) that, by reason of UBA's conduct, Lake Cumbeline lost the value of its investment and expenditure or, alternatively, the value of the investment was much less than at the time when it was made; Idobook was unable or likely to be unable to recover in whole or in part the monies advanced to Lake Cumbeline; Lake Cumbeline was unable or likely to be unable to recover in whole or in part the monies advanced to TIA; Messrs Horrobin, Sands and Pridmore were likely to be required to pay out monies to the ANZ Bank pursuant to their guarantees; and Lake Cumbeline and Idobook lost the opportunity of investing these monies in activities that would have generated profit for them and lost the value of subsequent investments and expenditures. (b) The representations alleged to have been made on 26 March 1987(b) The representations alleged to have been made on 26 March 1987 It was further alleged by the appellants (para.20) that, on or about 26 March 1987, UBA represented to them in writing in the form of a contract between TIA and UBA dated 26 March 1987 (that, is the Heads) that it would: "(a) establish with [TIA] an evergreen, continuing long-term relationship for the supply of fish by [TIA] to UBA [alleged representation (xii)]; (b) source in the first instance its requirements for fish from [TIA] except for Western Australia [alleged representation (xiii)]; (c) assist and co-operate with [TIA] in its effort to source raw material fish from various fishermen and enterprises within Australia [alleged representation (xiv)]."

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These representations were said by Lake Cumbeline (para.21) to be false and misleading. Reliance and loss and damage, were also pleaded in similar terms. Common law counts were added as before. THE CONCLUSIONS AT FIRST INSTANCE As has been said, the appellants advanced many claims at first instance, and some are no longer pursued. In all, some 24 representations were pleaded in the further amended statement of claim; four said to have been made on 16 March 1987, seven on 18 March, three on 26 March, one each in April, June and August [or September] 1987, two in September 1987, one in the period October 1987 - January 1988, and two each in February and March 1988. His Honour found that, with one exception, none of the misrepresentations pleaded were proved. The trial judge did find that the representations alleged to have been made in August (or September) 1987 that UBA had never offered to buy fish from Mr Harry Mitchelson and had no intention of doing so, was made, but that the appellants did not rely on it. Neither finding is now challenged. Several of the representations alleged were said to have been made orally. Their making was disputed and the credit of the witnesses in this aspect of the proceedings was, of course, very important. (a) Final conclusion(a) Final conclusion The primary Judge said (at 122-3): "... my final conclusion is that having regard to the seven to eight year period that has elapsed between the events and conversations raised in evidence and the hearing of the evidence before me, the only safe course is to place primary emphasis on the objective factual surrounding material and the inherent commercial probabilities, together with the documentation tendered in evidence. In circumstances where the events took place so long ago, it must be an exceptional witness whose undocumented testimony can be unreservedly relied on. The witnesses in this case unfortunately did not come within that exceptional class. The discussions referred to in evidence were capable of bearing quite opposed meanings depending on subtle differences of nuance and emphasis, and a proper appreciation of the significance of those matters must necessarily be considerably diminished over such a long period of time. [emphasis added] Due to the detailed cross-examination of each of the major witnesses over many days, I had the opportunity to observe and appraise the reliability of their evidence."

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The Judge also (at 249) saw significance in the representations, undertakings, warranties and conditions precedent which were set out in the Shareholders' Agreement signed on 30 March 1987. Letters confirming the assurances made by Mr Fasham were sought and obtained by Mr Horrobin on 26 March 1987. So too were letters confirming the consent of the ANZ Bank to the proposed allotment of shares to Lake Cumbeline and assurances were obtained from the Bank that TIA was not included in cross guarantees of other companies in the Atasco Group. Yet, the primary Judge said (at 253), no attempt was made to include any reference to the oral assurances allegedly given by UBA in the Shareholders' Agreement, or to make the Agreement conditional on such assurances, or to otherwise confirm in writing any such assurances. The appellants were, his Honour found (at 250), persuaded to acquire the TIA interest because it was seen as an "extremely attractive, if not irresistible investment". In this connection, his Honour referred to evidence that Mr Sands had instructed Lake Cumbeline's solicitors to prepare a comprehensive agreement in relation to the proposed purchase on 16 March 1987, that is, prior to the meeting with Mr Lees on 18 March. Preparation of that kind indicated, the Judge said, "a substantial attraction to the venture" at that time. Reference was also made by his Honour (at 251) to a spreadsheet prepared by Mr Sands, and forwarded to First National Limited on 2 April 1987, three days after the Shareholders Agreement had been signed. His Honour noted (at 253) that this spreadsheet indicated a profit of about $3.24 million in the period to December 1987 alone, based on a supply capacity of almost 15,000 tonnes of fish by January 1988. The Judge also found (at 253) that the appellants' belief in the Tasmanian government's intention to close the existing jack mackerel grounds to all but existing licence holders was another operative and persuasive inducement to the investment. The purchase of vessels entitled to fish in the enclosed mackerel grounds would increase the capital value of the boats, whose licences were transferable. The primary Judge made a specific finding (at 254) that, prior to April 1987, the appellants regarded the investment in TIA as a "venture capital" proposal, a short term, high profit investment. His Honour referred to a facsimile memorandum written by Mr Horrobin in January 1988 in which Lake Cumbeline's role was described as a "venture capital financier". While acknowledging that this memorandum was written 8 months after the initial investment, his Honour found (at 255) that, nonetheless it was an accurate reflection of the approach taken by the appellants to their investment. The primary Judge, finding (at 255-6) that a major factor in inducing the appellants' investment in TIA was their assessment of the location and size of the TIA processing plant at Geelong, said: "The importance of the perceived unique position of the location of [TIA's] processing plant and the consequent strategic marketing advantages which this conferred were a most important feature in attracting the investment. In a situation where the [appellants] considered that [TIA] had a strong competitive advantage over other suppliers, it was not nearly as essential for them to rely on assurances from UBA, because the fact was, to their thinking, that they were able to rely on the great economic and commercial strategic advantage which the location and size of the plant provided. This in my view was a major inducing factor."

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THE APPELLANTS' GROUNDS OF APPEALAPPELLANTS' GROUNDS OF APPEAL The appellants challenge the conclusion of the primary Judge that they had failed to establish, by reference to alleged representations (ii), (iii), (iv), (xii) and (xiii), that UBA had engaged in misleading or deceptive conduct. The appellants then challenge his Honour's conclusions that if, contrary to his finding, they could demonstrate misleading conduct by UBA, the appellants did not rely on any of those representations in deciding to make their investment. Senior Counsel for the appellants contended that the primary Judge's usual advantage in seeing and hearing the witnesses (see Abalos v Australian Postal Commission (1990) 171 CLR 167 per McHugh J at 179; Devries v Australian National Railways Commission (1992) 117 CLR 472) was immaterial here because of the primary Judge's technique of relying on the objective surrounding circumstances and the contemporary documents. Counsel submitted that it was open to the appellants to adopt the same method and to refer to the oral evidence only where a fact was common ground, or where the oral evidence contained an admission by a witness called by UBA. Counsel submitted that his Honour's process of reasoning was "invalidated" by virtue of "inconsistent" factual findings, findings "unsupported" by or "inconsistent" with the evidence, by taking, in effect, judicial notice of "supposed" commercial "practice" without the evidence needed to establish such matters, and logical errors. The appellants claimed that they "base[d]" their submissions "substantially on identifiable discrepancies" between the contemporaneous documents stated to be relied upon by the primary Judge and the findings of his Honour. Counsel invited the Court, in effect, to make its own factual findings which, they said, justified a finding in Lake Cumbeline's favour on the issue of liability, or, at the least, warranted the grant of a new trial. These submissions were fully developed in written and oral submissions and it will be convenient to go first to the appellants' written submissions on the question whether the primary Judge erred in not making a finding that alleged representations (ii), (iii) and (iv) were made out. THE APPELLANTS' WRITTEN SUBMISSIONS ON ALLEGED REPRESENTATIONS (ii), (iii) AND (iv)APPELLANTS' WRITTEN SUBMISSIONS ON ALLEGED REPRESENTATIONS (ii), (iii) AND (iv)

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The appellants submit that the primary Judge should not have found that UBA intended to be bound by the W contract. They further submit that his Honour erred in concluding (at 171) that the W contract was a "binding enforceable contract which imposed clearly defined rights and obligations on the parties" and that it was treated as such by the parties to it. The appellants rely upon the following evidence: • When Mr Lees issued the W contract he and Gordon McBurnie (also a Senior Wet Raw Materials Buyer for UBA) were, according to their own evidence, aware of the limitations on the capacity of TIA to process and store the amount and quality of fish described in the W contract. • When Mr Lees issued the W contract he was aware of TIA's "consistent and significant under-performance of [its] existing contractual obligations [to UBA]". • Prices and quantities in the W contract were "significantly above" those in W17264, dated 14 January 1987, and were contrary to UBA's general policy of achieving "significant savings" in raw materials. • When Lees issued the W contract UBA had entered, or was about to enter, into supply arrangements which, if performed, would have exceeded UBA's projected requirements. • Mr Lees, contrary to his usual practice, did not satisfy himself as to the capacity of TIA to perform the W contract. • If the fulfilment of the W contract with TIA was not to produce significant oversupply to UBA, the company's practice of over-commitment depended upon substantial under-performance by their other suppliers. At the relevant time, there was no evidence of such under-performance. • The appellants rely on the evidence of Mr McBurnie that neither he nor Mr Lees ever believed that TIA would be able to fulfil the requirements of the UBA contracts: at a discussion between Mr McBurnie and Mr Horrobin, in the presence of Mr Sands, on 21 September 1988 Mr McBurnie said: "The reason why [TIA's] factory clogged up in 1987 was because neither Bob Lees nor I believed that [TIA] would be able to supply us with the tonnages of fish we had contracted with you for and we had not made any alternative arrangements for cold storage."

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Mr Lees' evidence was that, in his view, the W contract was regarded by the parties as issued pursuant to the Heads. The Judge found that Mr Lees' intention to contract for quantities in excess of UBA's requirements at the time did not advance the appellants' case, because planning such requirements involved a "difficult commercial judgment". This, the appellants argue, does not distinguish what may have been a motivation for UBA acting in a particular way, with on the one hand, the effect UBA's conduct had on the beliefs of the appellants and their reliance based on those beliefs, and, on the other the question whether UBA intended the W contract to be binding. In any event, they argue that his Honour's finding is irrelevant to a determination of any misleading conduct by UBA. The appellants submit that his Honour was not justified in finding that, as at March 1987, Messrs Lees and McBurnie were not concerned with the basic capacity of TIA to comply with the W contract, although it was found that they had concerns about the rate of supply and processing. In fact, their argument runs, the concerns expressed by Mr McBurnie go to the essence of the UBA specifications. The evidence was that UBA contracts incorporated specifications which required fish to be processed to a standard at least as high as for human consumption; and essential to this was the rate at which fish was frozen, which in turn was dependent upon the capacity of the blast freezer . His Honour acknowledged (at 32) that UBA had been aware since 29 August 1985 that the "performance of both the blast freezer and the main cold store were unacceptable to UBA". The capacity to freeze fish in accordance with UBA specifications thus is, the appellants say, a matter going to the capacity of TIA to perform the W contract. It follows, the argument goes, that the finding was not open that it had not been demonstrated that it is likely that UBA was convinced that TIA did not have the ability and capacity to perform the W contract. His Honour, as has been noted, said that "the weight of the evidence is to the contrary". However, the appellants submit that evidence demonstrates conclusively that the plant did not have the capacity to fulfil the W contract. His Honour referred to the Wildridge and Sinclair Refrigeration Engineers' Report, which stated that a survey of existing facilities based on a freezing time of 15 hours would enable TIA to freeze 50 tonnes per day. But, the appellants say, the Report clearly demonstrates that, as at June 1987, the facility was not capable of blast freezing 50 tonnes of fish per day to UBA's quality specifications. It would only become so capable upon installing additional equipment and carrying out works on the blast freezer, at an estimated cost of $475,000. The appellants submit that a failure to appreciate this lack of capacity in relation to performing the W contract is "fundamental" in the reasoning rejecting their claims. "The capacity [they say] of [TIA] to perform to UBA specifications goes to the heart of each of the alleged misrepresentations on 16 March 1987, 18 March 1987 and 26 March 1987 and such an error invalidates his Honour's findings in respect of each representation which involves the capacity of [TIA]".

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If the matters contained in this telex are accepted, then various infringements of the specifications have taken place. This incident is, the applicants say, significant, as in the year 1986, 40 tonnes out of 70 or 71 tonnes is more than half the salmon supply, and a little less than 10% of all the fish supply (435 tonnes), for the year. On 16 February 1987, Mr McBurnie visited the TIA facilities. He found that the fish was still at -0.5oC to +0.7oC six hours after being placed in the freezer. He felt concern that the freezer was not causing any significant reduction in temperature after 4 hours nor after a further 2 hours. This, he felt, could be a problem and was "a concern possibly about slow freezing". The primary Judge noted that "[t]his seems to be a similar problem to that noted earlier in September 1985". This means that, despite the months of operation from April 1986 to February 1987, the problems detected in the tests made in late 1985 still persisted. Around May 1987, UBA became concerned about the possibility of their mackerel supplies being generally defective. It was not clear why they were defective, but there was a concern regarding "variable fish quality". Later there was a concern about "soft packs" - that is, those which are soft and partly thawed. Addressing the finding by the primary Judge that the blast room capacity was 50 tonnes per day, apparently based on the report by Wildridge & Sinclair Engineering Reports, refrigeration specialists. The Report said that the "existing low temperature plant has only half the required capacity to match the above heat load". However, according to the report, in order to utilise the available compressor capacity, it would be necessary to obtain a new accumulator vessel, two new ammonia pumps, an inter-cooler vessel and to remove all bare pipe coils and so on. The budget cost for all of this was $475,000. Accordingly, it is said, his Honour's finding of a capacity of 50 tonnes per day should have been qualified since the evidence was that the plant does not have that capacity without the upgrading advised by Wildridge and Sinclair.

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It appears that UBA was not very fast in taking the fish out of the cold store, because it did not have any alternative storage. Messrs Lees and McBurnie never thought that TIA would process at the rates it did in April and May. This bears on the question of whether representations (ii) to (iii) were, if made, correct. It is, the appellants contend, a question of "the sincerity" with which UBA approached the contract. The evidence was that, regardless of whether the W contract was for six months or for a year or close to a year, in reality the 6,250 tonnes, if they were to be delivered, would have to be largely delivered and processed by about June or July of 1987. His Honour said that the ability of the processor to procure fish for supply is a matter over which the processor can have no control, because it will vary according to the ability of the fishermen to "catch the fish in appropriate amounts at proper times". From the table headed "Trawl Industries of Australia - Fish Sales" set out earlier in these reasons, it can be seen that in April 1987 there were over 1,000 tonnes of fish delivered, and in the next month, there were 1,299 thousand tonnes delivered. Thus, as at 30 March 1987, with approximately 850 tonnes supplied, there were still over 5,000 tonnes to be supplied according to the contract. Even if it be accepted that TIA could process 50 tonnes per day through the blast freezer, and if the blast freezer could be utilised every single day for the three months to the end of June, TIA could, the appellants say, still only be able to process 4,500 tonnes, which is 1,750 tonnes short of the amount stipulated in the contract. If TIA is unable to process 50 tonnes per day and in fact can only process less than 40 tonnes, which, the appellants contend, is probably closer to reality, then the problem becomes more acute. Even if one can assume that the season extends beyond the end of June, one would still not find the capacity to achieve the more than 5,000 tonnes required. In dealing with UBA's intention to honour its obligations under the W contract and their intention to create a genuine contract, Counsel referred to the "consistent under-performance" of TIA prior to the W contract coming into being. To the end of 1986, it had supplied only about 435 tonnes. The following cross-examination of Mr Lees revealed that he was aware of this: "Q: After 31 December 1986? A: They would have under-performed significantly, yes. Q: They have under-performed from a promise, to deliver something like 9,500 tonnes in that period, by something in the order of 95%, have they not? A: Yes. Q: That is such a gross under-performance that you would hardly regard it as a significant performance at all, would you? A: It was a very poor performance."

[92]

The appellants accept that Mr Lees, and perhaps Mr McBurnie, thought that TIA could be expected to generate some fish, whether under the old owners or under the new partnership, because they had produced some fish in the past. However, the evidence is that they did not expect performance on anything like the scale called for by the W contract. This is demonstrated by the fact that they made no alternative cold store arrangements, and therefore were "unpleasantly surprised" when large quantities of fish initially came in. As to UBA's duty in these circumstances, where it knew that a contract it had issued for 6,250 tonnes was being used by the other contracting party, in the course of negotiations with investors, Counsel submits that if UBA knew that there were particular investors in view (and UBA had actually met those investors); and if it knew that TIA had never in its life produced anything like 6,250 tonnes (and it had only actually produced just over 435 tonnes for the early part of 1987); there was a duty to qualify the otherwise potentially misleading impression which the W contract, by itself, would create. It is said to be a type of duty to amplify, the type of duty to cease to be silent, or to at least avoid anything misleading that might arise out of the presence of the contract. Counsel refers to a letter from Mr Lees to Mr G Lever, the Financial Manager of TIA, dated 19 March 1987. At that time, a debt of some $49,000 was owing by TIA to UBA. The letter, which bears on the relationship between UBA and TIA, states: "I refer to your letter of March 17, 1987 enclosing copy invoices for $5,806.40 for services apparently supplied by Tasair Pty Ltd to [TIA]. I am disappointed to the stage of being extremely annoyed as at no time during any of my discussions with yourself, John and Gavin Wilson or Bruce Fasham have I agreed or implied that [UBA] would be responsible for any debts incurred by [TIA] to Tasair Pty Ltd or any other aircraft charter operator. My disappointment is deepened by the fact that having been in your office for approximately four hours yesterday discussing all issues, including payment of accounts, that this particular matter was not raised or even referred to, particularly as one of my major points was the fact that the long standing relationship between [UBA] and [TIA] was being jeopardised by [TIA's] apparent inability to conform to their own telex advices regarding account settlements with UBA. As you are aware, [UBA] have made a large number of concessions and allowances to [TIA] in an endeavour to establish the operation on a sound and viable footing through financial and technical assistance. Thus, if we cannot begin to conduct our business on an open and honest basis, then I am left with little alternative but to withdraw this support for the continuation of the business."

[111]

A note in Mr Lees' diary, dated 24 February 1987, contains the words "contract - Trawl". This suggests, it is submitted, that Mr Lees sent the W contract to TIA on that day. The W contract has a date received stamp "26 FEB 1987" on it and bears Mr Lees signature. It does not seem to have been signed by TIA or returned by it when goods began to be supplied under this contract. In view of this, it is suggested that the contract came into force very soon after 26 February 1987. On 9 March 1987, a lengthy meeting took place between Messrs Fasham and Wilson from Atasco, and Messrs Horrobin and Sands from Lake Cumbeline. At the meeting, Mr Wilson said that Atasco wanted $2.5m from an investor for half of TIA, and Mr Sands requested costings, contracts and orders. This seems to have generated the provision of the draft Heads to Lake Cumbeline at a date prior to 18 March 1987. His Honour accepted that the evidence establishes that the W contract was received by TIA on 26 February 1987, and that Mr Pridmore received a copy after 11 February 1987 which, Counsel says, must mean after 26 February. A copy was sent to Mr Sands on about 16 March 1987, and Mr Horrobin was given a copy shortly before, or on, 18 March 1987 when the discussion with Mr Lees took place. There is evidence that, in fact, the W contract was faxed on 16 March to P.R. Horrobin and Company and addressed to Messrs Sands and Horrobin. On 26 March 1987, the Heads was signed by TIA and UBA, and faxed to Lake Cumbeline on that day. Mr Pridmore was handed a faxed copy of the Heads and of the current order (W contract) furnished in the terms of the "ongoing frame agreement" - that is, it is submitted, the Heads. Four days later the Shareholders' Agreement was signed, and shares were issued to Lake Cumbeline. Against this background, in asking the question - was any representation made of the type set out in representations (ii) to (iv) by the W contract, or the Heads, or by conduct surrounding them; the key aspect of the conduct, the appellants contend, is that Mr Lees knew that the documents were going to be shown to investors with a view to attracting their support.

[115]

The appellants submit that, so far as the first two representations are concerned, that is, that UBA was bona fide intending to perform, whether it was injurious to UBA or not, amounts to a representation by UBA to Lake Cumbeline. This was because UBA knew that Lake Cumbeline was going to be shown the document, and it also knew that Lake Cumbeline was interested in the document, or at least that TIA was interested in using the document to try and capture Lake Cumbeline's interest. The same submissions are made in relation to the Heads which was going to be shown to Lake Cumbeline in order to attract its interest and make it more likely to invest. In those circumstances, it is contended, UBA made a representation to the Lake Cumbeline people through TIA, its commercial partner, with the desire that TIA would get greater financial assistance from this new investor. The appellants say that there is a contrast between his Honour's conclusion that, in respect to the representations (ii), (iii) and (iv), there were no representations made at all by the use of these documents, on the one hand, and, on the other his conclusion that three representations (xii), (xiii) and (xiv) were made in the Heads by the use of the same documents. After analysing representations (xii) to (xiv), his Honour noted that they are alleged to have been made in the Heads. He concluded by finding that there was a limited representation to be found in the clause "(b)oth parties agree to establish an evergreen, continuing long term relationship for the supply of fish by TIA to UBA". But his Honour did not find it to be false. This was not just a representation passing between the parties through the Heads, but a representation which UBA was making to the Lake Cumbeline interests. His Honour came to a similar conclusion in relation to representation (xiii). The appellants contend that their case for representations (ii), (iii) and (iv) is stronger than in relation to representations (xii) - (xiv), because Mr Lees, who had carriage of things at UBA, thought, on the one hand, that the Heads were a sham or a nullity and not binding, but, on the other, he was of the firm opinion that the W contract was binding. That being the case, the W contract was more likely than the Heads to be regarded by Mr Lees as representational conduct. The crucial matter to consider, the appellants say, is how, in all likelihood, the representee would objectively have perceived the actual documents, namely the W contract and the Heads. His Honour thought the Heads were going to create or operate as representational conduct. The appellants submit that the W contract should have been seen as also operating as representational conduct because, whether or not the Heads was in any sense binding, the W contract bears all the hallmarks of precision and seriousness that one associates with the highest form of contract. In his reasons for judgment, his Honour dealt, at some length, with the first three representations under the heading "Representations (i) - (iii) - 16 March 1987 - W17299 was a Genuine and Binding Contract". His Honour accepted Mr Lees' evidence that he regarded the W contract as binding, although Mr Lees did not consider the Heads to impose binding obligations. His Honour said (at 156): "The commitment on the part of UBA to take up to 6,250 tonnes of fish was honoured by UBA. In the three months after February 1987, UBA accepted and paid for all the fish which [TIA] was able to supply."

[130]

However, his Honour did not give any weight to this statement. Counsel submits that his Honour's finding that the letter "does not evidence ... any significant deterioration of the relationship ... such that Mr Lees ought to have raised it with Cumbeline as prospective investors", should not be accepted, when viewed in the context of the conversation which took place on 18 March, when Mr Lees knew that investors were going to rely upon the contract and the Heads. Further, Counsel submits, weight should be given to the amounts owed by TIA to UBA and the existence of, and the conclusions contained in, the credit report previously mentioned. The appellants submit that account should be taken of the following evidence of Mr Lees given to the Supreme Court: "Q: And you knew that Mr. Horrobin and Mr. Pridmore were contemplating investing in [TIA's] business? A: Not at the time of the drafts when these agreements were drawn up, no. Q: Well, when the final version of exclusivity clause was drawn up you knew that, didn't you? A: Yes. Q: And you didn't tell anybody at [TIA], much less Mr. Horrobin or Mr. Pridmore, that there was already an agreement in force between [UBA] and Ocean Fresh for the supply of the very sort of fish that was contemplated to be supplied by [TIA]? A: That's true. Q: Was that a deliberate decision on your part? A: No. Q: You say it was an oversight, do you? A: Yes. Q: And it would in fact have been misleading, wouldn't it, to say to [TIA] what you said in clause 3, knowing that there was already a contract which ensured that you couldn't comply with the clause on page 3? A: It would have been. Q: And that's the reason why, when Mr. Pridmore tackled you about Ocean Fresh at the end of 1987, you wouldn't give him a straight answer, isn't it? A: No, I don't believe so, because I believed it was our business basically. Q: It was your business, what you did, and it didn't matter that somebody else might, in reliance upon what you held yourself out as doing, might have done? A: Yes, I think so. HIS HONOUR [SUPREME COURT]: Q: I don't understand how you can give that answer if this exclusivity clause was intended to have any meaning? A: Your Honour, we didn't place a lot of weight or credence on the agreements. I mean all in all the agreements, our basic contracts which are the official contracts of the company, were the documents that we used in terms of price, tonnage and delivery. I mean, these documents were, I guess - and I use the word myself - `letter of intent', basically, to demonstrate that we would like to remain in business and we would appreciate people continuing our supply. [emphasis added] Q: But reserving the right to discontinue it at any time? A: But reserving the right -- Q: Did you regard that as a honourable practice? A: I didn't regard it as dishonourable."

[132]

The present primary Judge concluded that the evidence did not establish that Mr Lees had any knowledge or appreciation of the reputation or experience of Messrs Horrobin, Pridmore and Sands. This, the appellants say, is contrary to Mr Lees' evidence. When he was asked whether it was clear to him that none of them had any experience in the fishing industry, Mr Lees said "It would've been, yes". Counsel also submits that his Honour gave insufficient weight to the following: • Mr Lees' evidence, which shows the basis for the relationship as one of mutual trust. Mr Lees, in his statement, agreed that Mr Pridmore said to him words to the effect: "we cannot check up on everything you do, we must be able to trust each other"; • The clause in the Heads that: "And the parties agree to consult regularly to maintain and further their mutual aims as set out in this agreement"; and • The policy to expand the number of suppliers to UBA by December 1987. Referring to Counsel's submission that the encouragement of TIA to begin supplying fish to UBA was "part of an attempt to expand the number of suppliers to UBA", his Honour accepted that "this seems to be correct". It is submitted, in relation to representation (xii), that his Honour failed to give sufficient weight to the wording in the Heads and, in particular, to the words: "and in consideration of TIA installing a processing plant to specifically meet UBA requirements" [emphasis added]. It is said that, when this is read in conjunction with the rigorous UBA specifications, and the need for a "highly specialised and flexible facility" to respond to changes in UBA requirements, as supported by the evidence, its significance becomes even greater. It is contended that his Honour gave inappropriate weight to the words "subject to satisfactory performance" under the heading "Framework of Agreement" in the Heads, when such terms have no greater effect than would be implied by law in any event: they ought to be construed, in context, with the balance of the document. In relation to representation (xii), Counsel submits that there is evidence: • that neither Mr Lees nor Mr McBurnie believed that TIA would be able to perform under the contract; • that Mr Lees was aware that the Heads was intended to be shown to potential investors;

[137]

It is contended that account should be taken of the following evidence of Mr Armstrong, in respect of the advantages to UBA of building exclusive supply arrangements: "Q: ... [d]o you agree ... with that proposition ... [that the Heads is an extraordinary document to be entered into on behalf of UBA]? A: [UBA] entered into agreements with other companies specifically relating to the meat, poultry and packaging industries to develop sources of supply exclusively for [UBA] with the vendors supplying capital... to produce a product to the specification to supply to [UBA]. ... in the context of that kind of arrangement this is not all that extraordinary (emphasis added). Q: Part of it being a... business relations exercise and the other just to familiarise yourself in a general way with the nature of the suppliers business premises? A: Yes. You've got to understand that [UBA] at that time was really trying to build a proper well managed product pipeline and we were building relationships or trying to build relationships with vendors very much the same way that sales forces try to build relationships with customers. Q: Yes, well usual for a commercial director to take an interest in the establishment of a supplier's business? A: Sure. Q: And why was that according to your understanding, Mr Armstrong? A: Obviously if a buyer was developing a business with a supplier then again that is obviously one supplier I have not seen and would like to see and, secondly, it was part of my role to make sure that vendors saw that the senior management of the business were interested in their business. Q: [Persons occupying the role as commercial director] would... satisfy themselves... that the particular business was being developed in a way which was going to suit [UBA]? A: You would ensure that the business was being developed to supply against the standard quality specification. Q: And that even if that price was higher than the price at which [UBA] could acquire product from other suppliers, nonetheless it was still obligated as you understood it to obtain fish from [TIA]? A: [UBA] has a history of... working with suppliers who are developing their business, particularly if they are developing their business to meet a [UBA] requirement, to pay an agreed amount over and above a base market price or whatever the basis for the original calculation was, to cover whatever was worked through to build that price structure, so if you are asking me would they have paid over the market the answer is yes but by an agreed amount for an agreed period of time to cover what the payments were being made for ... . Q: And your understanding was that if fish were available from [TIA], [UBA] had to sit down with [TIA], work out the cost, agree on an appropriate percentage profit margin for [TIA] and then purchase the specified quantities of fish from [TIA] at that price? A: The cost of the fish in the industry were one of the things - the cost of any industry that [UBA] buyers are working in are one of their key areas of research. I would suggest to you that the intent here is that given the scale of fishing that was to be undertaken that the costs [TIA] would be way below any of the ad hoc fisheries, if that's the right word. It was also the practice of [UBA] to ensure that suppliers were profitable otherwise they won't be there next year. So I think you need to look at the intent. (emphasis added)."

[154]

His Honour thus decided that while Mr Lees held the view that the agreement was not enforceable, he was not, however, obliged to spell out his view; and so the Judge held, in effect, there was no breach of the representation. Counsel for the appellants submit that once a representation of the type his Honour found was found - that is, that UBA made a contract giving some sort of preferential right to TIA and because of the nature of contractual obligations it thus represented that it intended to be bound by the contract - the fact that Mr Lees signed the contract, when he did not intend to be bound nor believe he was bound, amounts to a misrepresentation. The misrepresentation may have been innocent, but it was nonetheless a misrepresentation and for that reason, it is submitted, his Honour's conclusion in this respect should not stand. One matter which significantly influenced the decision of the primary Judge was his finding that the appellants did not complain to UBA when they became aware that UBA appeared not to be honouring representations which the appellants regarded as having been made. However, Counsel for the appellants submits that TIA was in the invidious position of being dependent upon the customer [UBA], in respect of whom, and to whom, they were supposed to complain; so that failure to complain could not be probative of whether or not the representations were made. THE APPELLANTS' ORAL ARGUMENTS IN REPLYAPPELLANTS' ORAL ARGUMENTS IN REPLY It will be convenient to refer next to some matters mentioned by the appellants' Counsel in his reply. Counsel submit that it was incorrect to describe TIA as a "middle man" or a "broker", who bought whatever frozen fish was on the market. Rather, the appellants say, it is clear that TIA was regarded as a "processor" at Geelong. For instance, Messrs McBurnie and Lees visited the fishing plant at Geelong on a number of occasions where they could see that TIA was not buying whatever frozen fish was on the market, but was in fact engaged in the processing of fish. Counsel challenges his Honour's finding that the W contract was merely a contract which represented nothing more than its existence, creating no representation regarding capacity, merely formalising the arrangements between the parties regarding tonnages, prices and delivery etc. The appellants' Counsel refer to Bradford Third Equitable Benefit Building Society v Borders [1941] 2 All ER 205 where Viscount Maugham said (at 211) that to establish a common law action of deceit: "... there must be a representation of fact made by words, or it may be, by conduct. The phrase will include a case where the defendant has manifestly approved and adopted a representation made by some third person."

[162]

When he says "[UBA] had contracted to purchase", that means, it was suggested, that on 4 February, at the meeting recorded in Mr Lees' diary, the parties reached agreement on quantities. They had not yet reached agreement on prices but they were "to be renegotiated", and the evidence shows that they were renegotiated on 11 February. The result of the meeting of 11 February is apparent, it is contested, in the W contract. Mr Wilson's record indicates that the prices were agreed on that day. Mr Lees' handwritten notes, dated 11 February, contain references to the prices for various types of fish. Mr Fasham informed the Bank of Victoria that the meeting, at which the prices were to be renegotiated, had now taken place, then he set out increased price levels and six types of fish with prices all of which correspond to the W contract. On 21 February, Mr Wilson wrote a letter to UBA enclosing the so-called revised' Heads: the first embodiment of what eventually became the Heads. This letter stated that all other terms and conditions were embodied in the attached master Heads of Agreement. This, it is said, is evidence that Mr Lees had notice of the draft Heads and possibly had notice that what he had said would be prepared, so that it could be shown to potential investors. The respondent had submitted that "The prices and negotiations which led to the issuing of contract W17299 took place long before that matter arose and took place against a background which the evidence shows involved representations by [TIA] to Lees, to [UBA], as to what was happening within that company and that company's capacity to supply fish." Counsel for the appellants challenge this chronology of the events. It is submitted that the issue of creating a stronger relationship or stronger agreement, as evidenced in the Heads, arose on 29 January 1987. This is before the negotiations to decide the quantities and prices to be included in the W contract. These negotiations took place on 4 February and 11 February respectively. It is, the appellants' argument runs, therefore incorrect to say that the negotiations which led to the issuing of the W contract took place before any discussion of the stronger relationship'. As has been said, there was no finding by his Honour as to whether Mr Lees thought that the W contract was going to be shown to investors. The appellants submit that this is a matter of some significance, and the issue was squarely raised in the pleadings. Mr Lees, in his several statements in-chief, does not deal with the allegation. Counsel's submission is that the following principle, explained by Handley JA in Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Limited (1991) 22 NSWLR 389 (at 418), is applicable: "There appears to be no Australian authority which extends the principles of Jones v Dunkel to a case where a party fails to ask questions of a witness in chief. However I can see no reason why those principles should not apply when a party by failing to examine a witness in chief on some topic, indicates as the most natural inference that the party fears to do so'. This fear is then some evidence' that such examination in chief `would have exposed facts unfavourable to the party'."

[165]

• Mr Lees' evidence was that he did not view the Heads as a contract at all. There was evidence that he did not intend the document to be binding on UBA. Mr Lees did not perceive the Heads to be of any value. It is hard to see, the appellants' argument runs, that if that was his perception, how that could be in any sense a stronger agreement. • On the basis of its perceived worthlessness, its reference to another contract and of the general looseness of its language, one would expect investors who saw it to pursue further inquiries. • Mr Lees' evidence was that he regarded the W contract as one which was issued under, and pursuant to, the Heads. He agreed, in cross-examination, that the W contract was regarded by the parties as being issued pursuant to the Heads. In other words, he saw them as being, in that sense at least, interlinked. • Mr Lees admitted many times in his evidence that he knew that the investors would rely on what was in the Heads. He obviously would have expected them to read it with some attention. In those circumstances, it is submitted, a tribunal of fact would be able to infer confidently that Mr Lees knew that the W contract would be passed on. However, the primary Judge has not made a finding on that subject. It was not a trivial or incidental fact but one which was squarely exposed for consideration in para. 3 of the statement of claim. This omission evidences, it is said, a breakdown in the chain of reasoning which ought to justify a new trial. That is particularly the case where there is no explicit evidence that Mr Lees did not know the fact. He gave no evidence about it and there is no direct evidence emerging from the cross-examination about it. In those circumstances, as a matter of circumstantial inference as to what Mr Lees' state of knowledge was, one would have to look at all the circumstances and draw an inference. A related matter is that Counsel for the respondent raised the issue whether Mr Lees had behaved reasonably in increasing the prices and tonnages in the W contract, and of the basis he might have had for believing that TIA would be able to supply more than 6000 tonnes of fish for the lifetime of the W contract. One suggestion made by the respondents was that Mr Lees arrived at the view that TIA could supply that tonnage because a delegation of eighteen fishermen had undertaken to supply 2500 tonnes of pilchards, which was a very large part of the pilchard requirements in the W contract. But, the appellants submit that the problem with this reasoning is the chronology of the events. The evidence was that the information about the eighteen fishermen and the news as to what they were to supply, was only given to Mr Lees after the negotiation about volumes on 4 February 1987; the information was given to him in the letter of 21 February 1987. The suggestion that Mr Lees was being reasonable or genuine in thinking that 6,250 tonnes could be delivered under the W contract, would have to be tested or determined as at the time he made the commercial agreement, which was some days, or possibly weeks, before he actually got the news about the 2,500 tonnes of pilchards. His Honour said (at 169-170): "Historically, [TIA] had supplied only in the order of 10% of the quantities contracted for up to February 1987. Therefore, it is said for the applicants that UBA (Lees) could have no genuine belief in [TIA's] ability to meet W17299. It is said that W17299 involved substantial increases in tonnages and prices inserted to make [TIA] a more attractive proposition to a potential investor. However, by the time W17299 had been given to [TIA] on 26 February 1987, it is clear that Lees knew that [TIA] was negotiating to obtain the Corio Quay complex with the result that [TIA] would have greater control."

[168]

The appellants accept that, technically, it is correct to say that they first saw the actual Heads in final form on 26 March. No one else had ever seen it in its final form before that day because it was only on that day that Mr Lees made the appropriate changes and sent it to TIA. But, the appellants' argument runs, the respondent's point, first, ignores cl 4.1(m) of the Shareholders' Agreement in which the new investors stipulated for the sighting of that document; secondly, it ignores the fact that the draft Heads that led to the ultimate Heads had been around since 21 February, were given to the investors no later than 18 March, and these drafts differed very little from the final version. (2) The second topic raised in reply by Counsel for the appellants relates to the capacity of the plant. In his statement Mr Horrobin gave this evidence, by way of background, which the appellants contend is not controversial: "6. On or about 13 April 1987 [TIA] purchased from PGA a 56 year lease of the whole Geelong factory and cold store complex and also purchased the plant and equipment located in the PGA complex. Prior to this purchase, whole Jack Mackerel caught for [TIA] by the fishermen arrived at the Geelong processing works on trucks, held in large yellow one tonne fibreglass bins, packed with ice. These bins were unloaded by the PGA utilising the PGA's forklift and held in the yard of the factory complex. As required by [TIA] for processing, each bin was picked up by the PGA forklift and deposited onto a bin unloader located in [TIA's] fish processing room. [TIA's] workers then tipped the fish onto a conveyor, where they washed, sorted and packed the wet fish into smaller bins (sometimes called tubs'), each of approximately 15 to 25 kilos capacity. 7. At this point [TIA] and [TIA's] workers were required by PGA to surrender control of the process to PGA, whose employees conveyed the tubs of wet fish into an adjoining PGA room (called the breakout room') where they stacked the tubs of wet fish onto wooden pallets, with each layer of tubs being separated from other layers by the insertion of freezer slats'. PGA then placed each loaded pallet of raw, wet fish into the blast freezer; blast froze the raw fish over a period of hours (which varied depending upon the size and type of fish and the specifications of [UBA]; removed the pallets of frozen fish back into the breakout room; manually separated each frozen block from the wall of the tub to which the wet fish had become adhered whilst being blast frozen (a process described as break out')); stacked the blocks of frozen fish onto pallets (roughly one tonne per pallet); covered each pallet of frozen fish with a plastic film which was then `shrunk wrapped'; and loaded each completed pallet of frozen fish into the PGA coldstores awaiting collection by [UBA]. Pallets of frozen fish held in the coldstores would then be loaded by PGA into refrigerated trucks sent by [UBA] for that purpose. A similar procedure was also utilised to process Pilchards for supply by [TIA] to [UBA]. 8. The blast freezers were refrigerated rooms located on the ground floor of the PGA factory and coldstore complex, in which fish were frozen by being blasted with refrigerated air directed by large fans. In order to meet [UBA's] contract specifications it was essential that the temperature of fish being processed by [TIA] for [UBA] be reduced to the temperature level specified by [UBA] within the time specified by [UBA]. [TIA's] daily capacity to process tonnages of fish for [UBA] was controlled by the time taken by the blast freezers to freeze fish down to the temperature required by [UBA]. If the blast freezer could not keep pace with the arrival of raw fish at [TIA's] factory, then the fish would spoil and [TIA] would be unable to supply fish to the specifications required by [UBA] and the tonnages required by [UBA]. 9. Prior to 13 April 1987, only part of the approximately 1500 tonne cold storage capacity at the PGA complex was available to be utilised by [TIA] for cold storage of frozen fish for [UBA]. This limitation was caused by any one or more of three varying constraints. These were, firstly, the competing demands for cold storage space of other frozen food customers of Port of Geelong Authority (such as frozen potato chips stored by McCains); secondly, the problem that fish smell can contaminate some other foodstuffs even when frozen, making it sometimes necessary to set aside separate storage space for fish in one or other of the separate cold storage rooms situated on each of the three floors of the Geelong cold store building; and thirdly, the PGA would only allow its blast freezers and coldstores to open during normal working hours, on a nine day fortnight basis, and would not allow any overtime to be worked by PGA employees. This rendered impossible a continuous 24 hours per day, 7 days per week processing and blast freezing operation of the sort required for large volume industrial fish processing by [TIA] for [UBA]."

[169]

The appellants submit that it is necessary to distinguish between what happens in the blast freezer and the transmission to the cold stores; and that it would be wrong to give the impression, as the respondent's argument might suggest, that there was "just a sort of cold store in operation like a large refrigerator". In truth, the appellants say, there were a number of stages. As his Honour found, it was the blast freezer which controlled the capacity of the plant. Paragraph 8 of Mr Horrobin's statement was corroborated by Mr Lees' evidence that the operational capacity of the cold storage sections was 1500 tonnes. With that background, it is not true to say that Atasco or TIA owned and operated a "cold store" at any time before 13 April; the appellants contend, it is true to say that the blast freezer controlled the rate of through-put. Counsel for the respondent had contended that the evidence as to the freezing trials at the end of 1985 was inconclusive. The appellants submit that this evidence indicated that the trials were wholly conclusive of an incapacity to meet specifications. There is nothing, the appellants contend, to suggest that that incapacity ever changed. In relation to the visit of Mr McBurnie to TIA premises at Geelong on 16 February, the primary Judge said: "This seems to be a similar problem to that noted earlier in September 1985". Mr McBurnie gave evidence that it was a different problem. His Honour does not seem to accept Mr McBurnie's explanation, perhaps for several reasons. One was that Mr McBurnie was rather uncertain as to what problem he was talking about eight years earlier when he noted: "Still minus .5 to plus .7 six hours after placing in freezer, this could be a problem". The second was that Mr McBurnie said he was not an expert on these topics. A third explanation may simply have been that, since eight years had passed, Mr McBurnie's recollection in late 1994 of what he meant, by a note in February 1987, is obviously not a secure foundation on which to base any particular conclusion. The evidence that the second Wildridge and Sinclair report said that the capacity of the freezer was 50 tonnes but only if $475,000 was spent on it has been mentioned. Counsel for the appellants stressed the following note contained in that document: "Note: It is not possible to fully freeze fish in tubs in a blast freezer in five hours."

[175]

To charge that there were no reasonable grounds for beliefs is not, the appellants say, to charge fraud; to charge knowledge that TIA did not have the capacity is getting perhaps close to fraud, but that is the structure of the pleadings. Counsel for the respondent had suggested that the case below was for "full-blooded" sham and fraud but that the appellants had now retreated from this on appeal. Counsel for the appellants submit that where two people purport to enter into a transaction and propound a form which does not correspond to the substance or reality, or essence of what has been done, then there is a shared element of deception. Paragraph 4 of the statement of claim sets out the four representations. Paragraph 4(a) says that "UBA did not regard the contract as a legally binding one". It does not allege that TIA did not regard the contract as legally binding. Paragraph 4(d) says that "UBA knew"; it does not state that TIA knew. It may be that TIA did in fact share that knowledge, but that may not necessarily be the case. The appellants accept that, obviously, there are considerable difficulties in persuading an appellate court to find fraud where a primary Judge has declined to do so. However, the appellants say, there are two factors which distinguish this case. The first is the special features of his Honour's approach; and, secondly there is the question of an important fact not being found. His Honour's stated approach was to rely essentially only upon the objective circumstances, the documents and general probabilities of the case. However, it is submitted that his Honour did not actually apply that approach because, on occasions, he seems to have weighed in the balance all the evidence, including Mr Lees' evidence, and apparently concluded that Mr Lees was to be positively believed. In contrast, his Honour did say very hard things about Mr Lees and he did find him guilty of deceit. There is, it is submitted, a kind of internal contradiction between his Honour's two approaches, and that conflict, or difference in method, must cast substantial doubt on the validity of some of his Honour's conclusions. The key fact which para. 3 of the statement of claim propounds for consideration is the mental state of Mr Lees in relation to the use to which the W contract would, or might, be put. As has been said, no finding was made on this issue. It was an allegation laid out for examination at the trial but the primary Judge did not make a finding, either that Mr Lees knew those things, or that he did not know those things. The appellants say that, therefore, the most important finding that had to be made one way or the other in the case, so far as the first four representations were concerned, was not made. CONCLUSIONS ON THE APPEAL It will be convenient to consider first the claims said to arise out of alleged representations (ii), (iii) and (iv). (a) The claims said to arise out of alleged representations (ii), (iii) (iv) As has been seen, although the case sought to be made by the appellants in this area was literally framed in terms of a representation, so far as s.52 is concerned, the inquiry is necessarily a wider one; that is, whether in all the circumstances the respondent's conduct was misleading or deceptive, or likely to be so (see, e.g. Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191). By their particulars of para.3 of the statement of claim, the appellants pleaded a case which was wide enough, in our view, to include a claim that by virtue of writing and conduct, circumstances were created by the respondent, or were allowed to be created by it, which amounted to conduct that could be characterised as misleading conduct. It will be borne in mind that under the modern system of pleading, "the question is whether it would be open to the [appellants] upon the pleadings to prove facts at the trial which would constitute a cause of action" (see The Mutual Life & Citizens' Assurance Company Limited v Evatt (1968) 122 CLR 556, at 631). Although it will be convenient for us to continue to refer to the appellants' case in terms of alleged representations, we intend that such references be understood in the wider sense that we have mentioned, that is, as a reference to conduct of the kind particularised which, when viewed in the totality of the circumstances, may be seen to mislead, or be likely to do so. As has been noted, the learned primary Judge had to deal with several alleged misrepresentations, or instances of misleading conduct. Of the 24 misrepresentations pleaded and pressed at the trial, 15 relied solely on conversations alleged to have taken place between Messrs Lees, Horrobin and Pridmore. Mr Lees denied each of the conversations. In this connection, that is, the alleged oral misrepresentations, none of which were pressed on the appeal, it was one thing for the Court to reject this aspect of the appellants' claim once the Court was unable to be satisfied of the credibility of some of the oral testimony of the appellants' witnesses. But, with all respect to the primary Judge, it was another thing to reject a claim which was said to be based, not on any conversation, but upon written material, the existence of which was not disputed. That is to say, there was no dispute that the W contract, the Heads and the Shareholders' Agreement existed, whatever oral discussions may, or may not, have occurred at the time. In particular, it was not, and could not be, disputed that by cl.4.1(m) of the Shareholders' Agreement, it was provided: "4.1 Prior to the Completion Date, [TIA] shall make available, and the Proprietors shall procure that the Company shall make available for inspection by [the appellants]... (m) A copy of a contract acceptable to the [appellants] between [TIA] and [UBA] for the supply of fish by [TIA] to [UBA]."

[176]

It was not, and could not be, disputed that such a provision was of a kind that investors in the position of the appellants would ordinarily require in making a commercial judgment to invest. Given TIA's difficult financial position at the time, it was only reasonable to expect that the investors, and, equally important the financiers funding the investors, would require, as a condition of their investment, that they be provided with some tangible, concrete evidence that UBA was committed to providing TIA with a cash flow which was sufficient to justify the substantial investment the appellants proposed to make. This would accord with common sense and ordinary business practice. His Honour saw nothing unusual or extraordinary about a provision such as cl.4.1(m). In dealing with the issue of reliance, the Judge said (at 249): "Another significant consideration is that in the shareholders' agreement with itself which Atasco signed on 30 March 1987, there is express reference made in clause 10.6 to the representations, warranties and undertakings made to Cumbeline being set out in the agreement, and that Cumbeline had entered into the agreement on the basis of, and in reliance on, those representations, warranties and undertakings. That clause makes it quite clear that Cumbeline entered into the shareholders' agreement on the basis of the representations, warranties, and undertakings which had been carefully drawn and spelt out in the document. Furthermore, clause 2.1 of that agreement sets out a series of conditions precedent, including provision of evidence that Trawl has certain rights, licences, consents, waivers and other assurances. Clause 4, as is usual in such agreement, provides that prior to the completion date a large number of documents, records and papers shall be supplied and that certain actions will be taken by the parties. There was no attempt to include a reference to any assurances by UBA or to make the agreement conditional on such assurances." [emphasis added]. We agree, as has been said, that a provision such as cl.4 is usually to be found in circumstances of the present kind. As we followed his Honour's process of reasoning, the key, central or decisive section is the passage at 122-3 which we have already set out. Having said (at 122) that "[c]redit in this matter assumes a significant role because almost all of the representations alleged are specifically and categorically denied", as has been noted, his Honour then proceeded to comment adversely on the credibility of aspects of the evidence of the appellants and of Mr Lees. The central passage, found at 122-3, was, it will be remembered, as follows: "I should add that my final conclusion is that having regard to the seven to eight year period that has elapsed between the events and conversations raised in evidence and the hearing of the evidence before me, the only safe course is to place primary emphasis on the objective factual surrounding material and the inherent commercial probabilities, together with the documentation tendered in evidence. In circumstances where the events took place so long ago, it must be an exceptional witness whose undocumented testimony can be unreservedly relied on. The witnesses in this case unfortunately did not come within that exceptional class. The discussions referred to in evidence were capable of bearing quite opposed meanings depending on subtle differences of nuance and emphasis, and a proper appreciation of the significance of those matters must necessarily be considerably diminished over such a long period of time." [emphasis added].

[177]

There are, in our view, difficulties with this reasoning, when it is sought to be applied to the written material in question, namely, the W contract, the Heads and the Shareholder's Agreement, the existence of which is not disputed and the tenor of which accords with usual commercial practice. We acknowledge that such reasoning may have been appropriate in rejecting the appellants' case so far as it was based on the alleged oral misrepresentations; but, with all respect, we cannot see how this process of reasoning could justify rejection of the claims made in para.3 of the statement of claim when it is recalled that those claims were grounded on written material the existence of which is not disputed. To this extent, in our view, his Honour misdirected himself. What then are the consequences of this misdirection? It is well established that from the point of view of an appellate court, the distinction between written, undisputed, material on the one hand, and oral testimony on the other, is critical (see, e.g., Zuvela v Cosmarnan Concrete Pty Ltd (1996) 71 ALJR 29 at 31). It is true that, in other respects also, his Honour was not satisfied that the appellants had made good a cause of action on the claims made in para.3 of the statement of claim. It is also true that a misdirection in one respect on an issue does not necessarily mean that there should be a new trial on that issue. As Lord Steyn said in Smith New Court Securities Ltd v Citibank NA [1996] 3 WLR 1051 at 1070: "It follows that the Court of Appeal was entitled to conclude that in respect of the first representation the trial judge misdirected himself. That meant that the Court of Appeal was at large to disregard the judge's findings of fact, even though based on credibility. I understood counsel for Citibank at one stage to suggest that this vitiates all the judge's findings of fact and the whole case on fraud collapses. That is quite unrealistic. The impact of a misdirection is not governed by fixed rules. The appropriate course is dictated by considerations of common sense and fairness as well as close attention to the nature of the misdirection and the circumstances of the particular case. Here the Court of Appeal was fully entitled to take the view that the misdirection only vitiated the judge's findings on the first representation. In all other respects the Court of Appeal was entitled to act on the judge's findings so far as they were unaffected by the misdirection." [emphasis added].

[178]

But, so far as concerns the claims made in para.3(b), (c) and (d) of the statement of claim it is, in our view, difficult to see how it can be said that "the final conclusion" of his Honour at 122-3 can, as it were, be severed from the residue of his Honour's reasoning, especially on the issue of reliance, and then that other reasoning applied. Not only was the "final conclusion" central, as has been said, to his Honour's approach in this area, but the other reasoning largely proceeded on the basis, that even if the oral representations alleged had been made, the appellants did not rely on them and instead relied on first, the statements made in the Shareholder's Agreement, and then their own judgments that in the future, TIA would become profitable. This raises the difficulty already mentioned, that is, that once it is accepted, as his Honour did, that the statements made in the Shareholder's Agreement were relied upon it must follow, on this approach, that his Honour was accepting that the appellants relied upon the performance by TIA of the obligations imposed by the provisions of cl.4.1(m); that is to say, that TIA would produce for inspection "a copy of a contract acceptable to the [appellants] between [TIA] and [UBA] for the supply of fish by [TIA] to [UBA]". In these circumstances, it is not open to the Court to sever, as it were, the "final conclusion" of his Honour from the other parts of his Honour's reasoning which led him to dismiss the claims made in para.3(b), (c) and (d) of the statement of claim. This means that we cannot accept his Honour's central reasoning. It then follows, in our view, that, to this extent the appeal should be allowed and there should be a new trial of those claims so far as they allege causes of action said to arise under s.52 of the Trade Practices Act. It is true that other causes of action were pleaded in this connection, in particular, fraud and negligence. However, as has been seen, the case presented on appeal on behalf of the appellants has concentrated on the causes of action said to arise under s.52. In terms of the ingredients necessary to establish the other causes of action, and in terms of the measure of damages for those causes of action, there are obvious practical circumstances which would support the approach taken by the appellants in this regard. That is to say, it may reasonably be expected that the other causes of action would be more difficult to establish and, if established, it would seem that no greater measure of damages could be claimed than under any cause of action which might be made good under s.52. As has been seen in the appellants' written submissions, an attempt was made, initially at least, to present an argument that if the appeal were to be allowed and the orders at first instance set aside, this Court should itself form a view favourable to the appellants, at least on the issue of liability. In the written submissions, and orally, the appellants also made an alternative submission, as we have noted, that a new trial be ordered on these issues.

[180]

In our view, the appellants have failed to make out any case for interfering with his Honour's conclusions on this point. The finding of the making of the representation made by the learned primary Judge was clearly open. Further, in our opinion, his Honour was justified in concluding that there have been no misrepresentations here. Cases such as Prints for Pleasure Ltd v Oswald-Sealy (Overseas) Ltd (1968) 88 WN(NSW) 375 illustrate the distinction made by his Honour (at 208) in the passage which we have set out above. That is to say, a clear distinction exists, in commerce, and in point of legal analysis, between a contract which establishes a term relationship between a seller and a purchaser on the one hand, and specific contracts for the sale of goods between those parties on the other. The former kind of contract operates so as to establish a relationship between the parties (often but not necessarily, to deal exclusively with one of them) by which it is contemplated that specific transactions will be negotiated between them in the future. While the former type of contract may impose relevant obligations (for instance to deal with one of them exclusively or to use best endeavours to negotiate on certain matters), ordinarily this kind of agreement will not, in its own terms, constitute an enforceable agreement for the sale of particular goods. That kind of transaction will ordinarily be dealt with by the second kind of contract. In other words, whilst the former type of agreement operates so as to establish a framework, or an umbrella, pursuant to which it is contemplated that sales of individual goods will be negotiated, no such sale then occurs. The sale transaction arises under a subsequently negotiated contract in which all relevant terms and detail are agreed. The distinction we make is, in truth, reflected here in the Heads of Agreement on the one hand, and the W contract on the other. It is clear, we think, that the Heads had no more operation than to establish the relationship between TIA and UBA, whereas the W contract constituted the sale of goods. It follows that we agree with his Honour's conclusions in this respect. ORDERS We make the following orders: 1. Appeal allowed in part. 2. Order a new trial of the claims made in paras. 3(b), (c) and (d) of the further amended statement of claim that, in the respects there alleged, the respondent engaged in conduct in trade or commerce that was misleading or deceptive, or likely to be so, contrary to the provisions of s.52 of the Trade Practices Act 1974. 3. Appeal otherwise dismissed. 4. Costs of the proceedings at first instance, and on appeal, reserved. Direct that the parties file and serve written submissions on the question of costs within 60 days. We would only add that we hope that, given the scope and dimensions of the litigation to this point, there may now be some prospect of a mediated outcome that is mutually satisfactory to both sides. It has always been the policy of the common law to encourage and promote the compromise of claims about which there is room for reasonable argument, without litigating to the finish. The present case is surely of this kind, and it calls for an appropriate solution, perhaps by mediation, rather than by litigation to the very end. The history of the matter shows that after months of trial time in this Court, and in the Supreme Court of New South Wales, and after 5 days of oral argument before us (against the background of lengthy written submissions), the parties and their advisers must by now be fully aware of the strengths and weaknesses of their respective cases. We take the liberty of suggesting that, in their own interests, given especially the professional costs likely to be incurred, the parties now consider turning their minds to a resolution of the residue of dispute without the need for a further court hearing. I certify that this and the preceding one hundred and seventeen (117) pages are a true copy of the reasons for judgment herein of the Court. Associate: Date: 24 APRIL 1997 A P P E A R A N C E S COUNSEL FOR THE APPELLANTS: MR J.D. HEYDON QC with MS P. WINES INSTRUCTED BY: BLAKE DAWSON WALDRON COUNSEL FOR THE RESPONDENT: MR J.N. WEST QC with MR R.M. SMITH INSTRUCTED BY: DEACONS GRAHAM & JAMES DATES OF HEARING: 19, 20, 21, 22, 23 FEBRUARY 1996 DATE OF JUDGMENT: 24 APRIL 1997

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Court

Decision date

Before

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Judgment (180 paragraphs)

Cases Cited (7)

Cited By (1)