"The duty of an investment adviser who is approached by a
client for advice and undertakes to give it, and who proposes to
offer the client an investment in which the adviser has a
financial interest, is a heavy one. His duty is to furnish the
client with all the relevant knowledge which the adviser
possesses, concealing nothing that might reasonably be regarded
as relevant to the making of the investment decision including
the identity of the buyer or seller of the investment when
that
identity is relevant, to give the best advice which the adviser
could give if he did not have but a third party did
have a
financial interest in the investment to be offered, to reveal
fully the adviser's financial interest, and to obtain
for the
client the best terms which the client would obtain from a third
party if the adviser were to exercise due diligence
on behalf of
his client in such a transaction."
21. The disclosure of Kephala's interest was not made in terms or in a
context
which would suggest that he would no longer be looking after the
appellants' interests. The character of the disclosure was rather
that of a
fiduciary who was purporting to discharge his duty to disclose an interest.
Kephala did not purport to be negotiating in
his own interests as opposed to
those of the appellants or to be acting at arm's length from the appellants.
On the contrary, his
proposal purported to be a sale at valuation, that is to
say a sale on a basis which would be fair to the appellants as well as to
the
vendors.
22. The learned judge considered that the absence of provision for
remuneration for acting in the appellant's interests
persuasive. I do not
think that is of much significance in the circumstances. The question might
have arisen if the matter had developed
differently. Kephala's immediate
response to the appellants' approach, however, was to put the proposition for
the sale at valuation
of the property in which he had an interest. That was
calculated to convey to the appellants that it was Kephala's wish to dispose
of the property. Moreover it was assumed on all sides that Kephala's company,
Edcom, would manage the property for remuneration.
The question of
remuneration for Kephala's efforts on the appellants' behalf did not arise.
23. The learned trial judge made the
following finding: "I find that the
significance of Kephala's disclosure was apparent to Franks and Reddin in the
sense that they
realised they were dealing with a man who had his own
interests to serve in the transaction."
24. An appellate court must be cautious
about overturning a finding of that
kind which may be based in part on the learned judge's assessment of the
parties as witnesses.
I have reached the conclusion, however, that if it
means that the appellants realised that Kephala was no longer looking after
their
interests, it is inconsistent with the objective facts established by
the evidence, and cannot stand. The basis of the proposed sale, namely at
valuation, did not suggest
a man who was looking to his own interests to the
exclusion of those of the appellants, and Kephala's subsequent conduct could
only
have encouraged the belief that he was still looking after the interests
of the appellants. The inference from the objective facts
that the appellants
continued to rely on Kephala, is, to my mind, overwhelming. Their actions are
eloquent testimony of their reliance
on Kephala. They acted on his
calculations and financial plan, and on his advice as to the property and its
value, without seeking
further advice. They signed, through David Franks, the
contract which Kephala produced. Although the financial viability of the
scheme which Kephala devised, depended upon being able to borrow at interest
of not more than 15 per centum per annum, they accepted
his assumption that
finance would be available at that rate and did not propose that the contract
be conditional upon such availability.
They acquiesced in his choosing and
instructing the solicitors and they acted on his advice and arrangements in
approaching the
financial institutions. Clearly they placed complete reliance
upon and trust in Kephala. If Kephala had thought about it, he ought
to have
realised that the appellants were relying upon him to protect their interests.
25. I have reached the conclusion, for the
above reasons, that Kephala owed
the duties of a fiduciary to the appellants in relation to the transaction.
As Kephala was acting
as servant of the respondent companies in relation to
the transaction they also owed the duties of a fiduciary to the appellants.
26. I think that Kephala was in breach of his fiduciary obligations. By
engaging in a sale of property in which he had an interest
through his
companies, he had undertaken a duty described by Brennan J in Daly v Sydney
Stock Exchange (supra) as "a heavy one".
It was certainly not discharged by
mere disclosure of his interest in the property. His obligation as to
disclosure, as Brennan
J described it, was "to furnish the client with all the
relevant knowledge which the adviser processes, concealing nothing that might
reasonably be regarded as relevant to the making of the investment decision
..." That obligation required, in my opinion, disclosure
that the price asked
was greatly in excess of the price paid by the vendors a year before. It was
not sufficient to expect Franks
to appreciate that fact and its significance
from reading the statutory statements at the time of the signing of the
contract. It
required, in my opinion, specific disclosure that the valuation
put forward as the basis of the sale, was not borne out by the vendors'
experience in attempting to sell. There should have been specific disclosure
that persistent attempts to sell at the price of $355,000
had been
unsuccessful and that, moreover, all attempts to secure a lessee had proved
unsuccessful.
27. Kephala's obligations as
fiduciary went further than disclosure. They
extended to obtaining "for the client the best terms which the client would
obtain
from a third party if the adviser were to exercise due diligence on
behalf of his client in such a transaction." On the facts of
the present
case, that required that Kephala refrain from selling the property to the
appellants at a price which was plainly over-value
and which he had been
unable to obtain on the market. At the very least he should have declined to
proceed unless and until the
appellants had independent advice. Kephala's
fiduciary position also required that he insert a "subject to finance" clause
in the
contract. He knew that the appellants were proceeding with the
transaction on the faith of the financial plan which he had prepared
and that
the financial viability of the plan depended upon their ability to borrow
$317,000 at a rate of interest of about 15 per
centum per annum. It was
plainly prudent, indeed necessary, to insert a clause protecting the
appellants against the possibility of the failure of the plan due to inability
to secure finance at a rate of interest which would ensure the plan's
viability.
28. I consider that Kephala having failed to discharge
his fiduciary duties,
the respondents were in breach of their duties to the appellants. They
therefore cannot recover from the appellants
damages for breach of the
contract entered into in consequence of the breaches of fiduciary duty.
29. That conclusion is sufficient
to dispose of this appeal. I think,
however, that I should deal with the other ground that was argued. It was
contended that the
placing of an unfounded valuation before the appellants
amounted to deceptive conduct under s.52 of the Trade Practices Act 1974 (Cth)
and entitled the appellants to resist this action quite apart from the
existence of a fiduciary relationship.
30. The relevant
law may be sufficiently stated as follows. Conduct may be
deceptive or misleading although there is no intention to deceive or mislead.
If the consequence is deception, that suffices to make the conduct deceptive;
Hornsby Building Information Centre Pty Ltd v Sydney
Building Information
Centre Ltd [1978] HCA 11; (1977-78) 140 CLR 216 per Stephen J at p.228, per Jacobs J at p.232
and per Murphy J at p.234. A statement of opinion, such as a valuation, is
not misleading
or deceptive simply because it is erroneous; Elders Trustee and
Executor Co v E G Reeves Pty Ltd [1987] FCA 332; (1988) 78 ALR 193 per Gummow J at p.242;
Global Sportsman Pty Ltd v Mirror Newspapers Ltd [1984] FCA 180; (1984) 55 ALR 25. It does
convey, however, that the opinion is held and that there is a basis for the
opinion; Global Sportsman Pty Ltd v Mirror Newspapers
Ltd (supra) at p.31;
James v ANZ Banking Group Ltd [1986] FCA 41; (1985-86) 64 ALR 347 at p.372. A statement of
opinion may be misleading or deceptive, however, if the opinion was not held
or if it lacked any, or any
adequate, foundation; Elders Trustee and Executor
Co v E G Reeves Pty Ltd (supra) at p.242. Where the opinion is expressed as
that
of an expert, it conveys not only that it is honestly held but that it is
held on rational grounds involving an application of the
relevant expertise;
Bateman v Slatyr (1987) 71 ALR 553 at p.559.
31. The conduct in question is that of Kephala in forwarding to the
appellants a valuation of an employee of Edcom, Mr
Milne, as the basis of a
sale at valuation. The valuation of Mr Milne stated a value of $355,000.
This has to be considered against
the fact that the present vendors, having
purchased the property in December 1987 for $225,000 had been endeavouring at
least since
May 1988 to sell it for $355,000 without success and had been
unable to let it. It was subsequently sold in May 1989 for $247,500.
Those
facts alone must raise a serious question as to what basis Mr Milne could have
had for his valuation.
32. The appellants
called as a witness an experienced valuer, Mr Brooke. His
evidence was devastating. He was closely cross-examined but was unshaken
in
his opinions. He valued the property as at 7th January 1989 at $252,000,
somewhat above the Valuer-General's valuation for rating
purposes of $215,000
as at May 1988 and $236,000 as at May 1989. Mr Brooke allowed a 10 per cent
margin either way as a maximum
tolerance to accommodate differences of opinion
as to value, but could find no justification at all for a value of the order
of Mr
Milne's valuation. He examined various factors which could be said to
possibly account for Mr Milne's figure but refuted all of
them. I think that
the clear conclusion from the evidence of Mr Brooke is that there was no
adequate or rational foundation for the
valuation of Mr Milne. No evidence
was called to contradict the evidence of Mr Brooke. The respondents called no
evidence as to
values. Mr Milne was not called as a witness and there was no
suggestion that he was not available.
33. The learned trial judge
in dealing with the allegation of deceptive and
misleading conduct, correctly held that "There is no evidence to suggest, nor
was
it pleaded, that the opinion as to the value was not honestly held by the
valuer." He also said: "I accept Kephala's evidence that
he acted in good
faith in sending it to the defendants and, once again, the pleadings do not
suggest otherwise."
34. His Honour
was correct about the state of the pleadings and there could
be no challenge to his finding as to Kephala's bona fides. That, however,
does not dispose of the point. Bona fides on the part of Kephala in
forwarding the valuation would not be an answer if the valuation
which he
forwarded lacked any, or any adequate, foundation. As to that His Honour
said:
"There was no evidence which showed
'that the opinion was
not held or that it lacked any, or any adequate, foundation';
(Elders Trustee and Executor Co Ltd v
E.G. Reeves Pty Ltd [1987] FCA 332; 78 ALR
193 at p.242). The mere discrepancy between the valuation
proffered by Mr Brooke and that of Mr Milne does not establish
any
of these matters; nor does that aspect, taken along with the
rest of the evidence, establish false or misleading conduct