McLean Tecnic & Anor v Digi-Tech & Ors [2005] NSWSC 386 | Case summary | Zoe

NSWNSWSC

McLean Tecnic & Anor v Digi-Tech & Ors

[2005] NSWSC 386

Supreme Court of NSW|2005-04-11|Before: McDougall J, Dougall J

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At a glance

Source facts

Court

Supreme Court of NSW

Decision date

2005-04-11

Before

McDougall J, Dougall J

Source

Original judgment source is linked above.

Judgment (59 paragraphs)

[1]

CITATION : McLean Tecnic & Anor v Digi-Tech & Ors [2005] NSWSC 386

[2]

DECISION : See paras [147]-[150] of judgment

[3]

CATCHWORDS : TRADE AND COMMERCE - Trade practices - misleading or deceptive conduct - where "Profit Potential Representation" held in appeal proceedings to constitute misleading or deceptive conduct - causation - whether plaintiffs suffered loss by that representation - whether plaintiffs suffered loss by directly relying on representation - whether plaintiffs suffered loss by indirectly relying on representation - whether open to plaintiffs on pleadings to submit that loss suffered by indirectly relying on the representation - whether inference that plaintiffs relied on representation available on evidence - DAMAGES - Trade practices - Trade Practices Act - where conduct taken to be misleading or deceptive by operation of s51A - whether deeming provision inoperative when considering whether conduct caused loss or damage for purposes of ss 82 and 87 - DAMAGES - Trade practices - whether correct method for assessment of damage involves consideration of value of benefits to plaintiffs at trial - whether benefits acquired by plaintiffs had value at trial - TRADE AND COMMERCE - Trade practices - causation - where plaintiffs liable for certain balloon payments - whether that liability caused by misleading or deceptive conduct or by plaintiffs' failure to exercise options to avoid liability - whether misleading or deceptive conduct materially contributed to loss or damage - whether plaintiffs' conduct constituted fresh and independent cause of loss or damage

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C The original investment scheme 10 Digi-Tech owned the intellectual property rights associated with the Products. 11 The investment scheme was put together by Gary Urwin of Horwath & Horwath. 12 The essence of the transaction which Mr Urwin proposed to the Digi-Tech parties was for Digi-Tech to assign the intellectual property rights relating to the products to a partnership of Australian investors for agreed consideration. 13 The final structure of the transaction was established on 30 June 1997, at which time: (a) A partnership was formed in relation to each Product: the Terminal Adapter Investor Partnership, and the Freerider Investor Partnership. The original investors agreed to contribute differing amounts to the capital of each partnership. With some exceptions, those amounts were in multiples of $500,000; (b) Digi-Tech Australia Ltd (DTAL), a New Zealand company and a subsidiary of Digi-Tech Communications Ltd (DTCL), entered into an agreement with the Terminal Adapter Investor Partnership for the sale and purchase of the Terminal Adapter intellectual property rights in Australia for a five year period (c) DTAL also entered into an agreement with the Freerider Investor Partnership for the sale and purchase of the Freerider intellectual property rights in Australia for a five year period; (d) each of the Terminal Adapter Investor Partnership and the Freerider Investor Partnership granted an exclusive licence to use those intellectual property rights in Australia to an Australian company, Digi-Tech Software Pty Ltd (DTSPL). The partners in those partnerships were the shareholders in DTSPL in the same proportions that they held interests in the partnerships; (e) DTSPL entered into a supply agreement with Digi-Tech Manufacturing Ltd (DTML), a New Zealand company (and subsidiary of DTCL), for the supply of products using the Terminal Adapter and Freerider intellectual property rights; (f) investors in the Terminal Adapter Investor and Freerider Partnerships entered into option agreements with DTCL and another of its subsidiaries, Digi-Tech Equities Limited (DTEL). The options were exercisable between 15 April 1999 and 31 July 2000. By exercise of an option, the investors could effectively relieve themselves of any liability for the outstanding purchase price by compelling DTEL (in the case of a corporate investor), to subscribe for sufficient capital in the investor to make the outstanding payments;; (g) under the terms of the sale and purchase agreements the partners in the relevant partnerships were required to make payments to DTAL over a period of three and a quarter years by way of relatively small instalments each quarter and a large "balloon payment" on 30 September, 2000 (if an option was excercised at any time between 15 April 1999 and 31 July 2000 then the balloon paynment became payable at that time). In addition, they were required to make payments to DTEL by way of an option (or underwriting) fee and payments to DTSPL by way of subscription for the shares in DTSPL. The payments due in each year from an investor subscribing for a $500,000 share in the partnership are set out in Appendix F to the judgment of Justice Einstein (except that it shows the balloon payment as due 31 July 2000): Red 4/1214; 14 The terms of the transaction documents giving rise to this structure are not in issue in this case. The key terms of the more significant transaction documents are set out below. Partnership Agreements 15 The partners (ie, the investors) in each Partnership agreed to enter into and carry on the business of manufacturing, importing, marketing, distributing and selling the product concerned in Australia (cl 2.1). The Partnership had the right to use the intellectual property rights under the Sale Agreement (cl 2.2). Each partner agreed to maintain their shareholding interest in DTSPL, which was the licensee company, for as long as the partner retained its capital interest (cl 2.4(a)(i)). Each partner agreed to pay all future calls made on the shareholding interest in DTSPL for as long as the partnership interest was retained (cl 2.4(a)). The Sale Agreements 16 DTAL, as the owner of the intellectual property rights to the Products, assigned to each relevant Partnership for five years all its right, title and interest in those rights in respect of Australia, including an exclusive right to use and exploit those rights in Australia in accordance with each Sale Agreement (cl 2.1). 17 "Intellectual Property Rights" were defined to mean all intangible property rights of DTAL relating to the Products including (among others) know-how and trade secrets, whether or not capable of protection by a patent, and the copyright to the relevant software. 18 DTAL was entitled to terminate each Sale Agreement without prejudice to its other rights if the Partnership concerned either committed a material breach which was incapable of being rectified or committed a material breach which was not rectified within a reasonable time after written notice of the breach had been given (cl 4.1). 19 On termination or expiry of each Sale Agreement, each Investor (partner) was required to pay the balloon payment - if it was outstanding (cl 5.3(b)). 20 Each investor (partner) was required each quarter to make payment of an instalment in respect of the purchase price and a contribution to the capital of DTSPL. The total amount payable by the Investors each quarter was approximately $347,000. The Licence Agreement 21 The Licence Agreement ran in tandem with the term of the Sale Agreement. Pursuant to the Licence Agreement, the parties to the Investor Partnerships licensed to DTSPL the exclusive right to use and exploit the Intellectual Property Rights in Australia. Option Agreements 22 The steps required for an Investor (partner) to exercise an option varied depending upon whether the Investor was a corporate body or a natural person. 23 If the Investor was a corporation, generally speaking the option was granted to its holding company. When the option was exercised, the holding company would remain as a shareholder with its existing shares and DTEL would subscribe for new share capital sufficient to pay the outstanding balloon payment due. 24 By clause cl 4(b), the investor warranted that, on the date on which the option was exercised, the "Company" would have no indebtedness other than the "Investor Debt" to any person. 25 "Investor Debt" was defined to mean "the proportion of the purchase price payable to DTAL pursuant to the Sale Agreement for which the Investor is severally liable less all amounts paid by or on behalf of the Investor to DTAL by way of instalment and the Instalment Debt". "Instalment Debt" was defined by reference to the outstanding proportions of the purchase price instalments payable to DTAL.

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D Tax advantages and the Deloittes Valuations 26 An attraction of the scheme was the anticipation that the partners (the Investors) would obtain tax deductions for the full amount of the capital expenditure involved in the purchase by equal instalments spread over the period of the transaction (5 years), while the payments of the pauchase [sic] price were not spread equally, but were heavily weighted towards the end (the balloon payment). In the years until the balloon payment became due the structure permitted each of the investors to claim a $1 deduction for every 15 cents of actual expenditure. Payment of the balloon was effectively avoided by the exercise of the option. 27 An opinion had been obtained from senior counsel which confirmed (on the basis of certain assumptions) the tax deductibility, pursuant to Div 10B of Pt 3 of the Income Tax Assessment Act 1936 (Cth), of the capital expenditure on the intellectual property. 28 The key to the realisation of the expected taxation benefits, as expressed by senior counsel, was the need for the Investors to have "a reasonable expectation that the revenue generated from these products by the exploitation of the intellectual property would be sufficient to meet the installments of the price which they had to pay ...". The total installments of the purchase price payable by investors (including the balloon payment) was approximately $70 million. Were such an expectation to be held, according to senior counsel, "the dominant purpose will be the obtaining of the commercial return on investment and not the obtaining of an increased tax deduction". 29 Digi-tech carried out its own valuation of the Products, and additionally retained Deloitte Touche Tomatsu to provide an analysis of the gross profit margins that might be obtained from the exploitation of the intellectual property rights, and a valuation of those rights. 30 On 4 April 1997 Deloitte produced a gross margin review for the Terminal Adapter and Freerider (" Gross Margin Review ") and on 22 April 1997 produced an indicative valuation of these products (" Indicative Valuation "). 31 The Gross Margin Review contained gross margin projections based on the projections prepared by Digi-Tech (" Digi-Tech Projections "). The Digi-Tech Projections calculated projected "gross margins" in the Australian marketplace, by reference to a number of assumptions, including market size, market penetration, revenue per site. 32 On the basis of the projections of revenue and gross margin, Deloittes projected net revenues (before tax) of about $282 million, and valued the Products at between $67m and $74m.

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E Involvement of the McLean Parties in the investment scheme 33 The McLean Parties were not involved in DTSPL, from its inception on 30 June 1997. 34 Ian McLean first became aware of the opportunity of investing in DTSPL and the partnerships in around March 1998, when the possibility was raised by his accountant, Mr Werner Bali of the firm Rost & Kitchener. 35 Mr Bali first became aware of the transaction in late 1997. At that time, one of his partners was advising his own client in relation to possible investment in the business. In around February 1998, that partner informed Mr Bali that his client was not proceeding with the investment, shortly after which Mr Bali raised the possibility of investment with Mr McLean. 36 After Mr McLean expressed possible interest, a meeting was arranged at the offices of Horwarths on 18 March 1998, attended by Gary Urwin, Andrew Sneddon, Werner Bali and Ian McLean. 37 The opportunity to invest in DTSPL and the partnerships had arisen because a number of the original investors had defaulted, and Horwarths [sic] were at that time looking for replacement investors. 38 Mr McLean ultimately decided to invest. He caused the incorporation of McLean Tecnic Pty Ltd as a special purpose vehicle to become the partner in the Digi-Tech Business, and caused AI McLean Ltd to guarantee the obligations of McLean Tecnic Pty Ltd in relation to the transaction. 39 The McLean Parties executed transaction documentation in Canberra on 4 May 1998, by which the interests of the defaulting original partners were assigned to the McLean Parties, and they assumed certain liabilities to DTAL under a deed of novation. 40 By reason of the transaction documents executed by the McLean Parties on 4 May 1998 (which are exhibited in IM3), McLean Tecnic Pty Ltd became a partner of the Terminal Adaptor and Freerider partnerships, on terms effectively identical to the original investors in relation to ongoing rights and obligations. 41 The payments which were due by the McLean Parties arising from participation in the transaction (excluding additional funds for further research and development) are set out in a document which is at page X of the Tender Bundle. By way of summary, the payment obligations included: (a) 8 payments of $154,454.99 between May 1998 and June 1999, totalling $1,235,640; (b) a final balloon payment of $22,214,234.83, due on or before 30 September 2000. 42 The total amount actually paid by the McLean Parties in connection with their participation in the transaction is as set out in paragraphs 67 and 68 of the Affidavit of Ian McLean sworn in these proceedings.

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F Operation of DTSPL 43 As at June 1997, further adaptation, research and development were required before Terminal Adaptor could operate in Australia; and further development and field testing was required before Freerider could be marketed. 44 Expected buyers of the Products did not materialize, and sales fell below projected levels. 45 On 25 March 1999, DTAL purported to terminate the Sale Agreements relating to the Terminal Adapter Partnership and, on 7 September 1999, the Sale Agreements in relation to the Freerider Partnership. In both instances it did so on the grounds of what were said to be breaches identified by earlier notices and repudiation. 46 After terminating the Sale Agreements, DTAL demanded payment from each Investor of the balloon payment and other outstanding amounts. 47 Between 20 and 28 September 1999, the Investors in the two Partnerships (including the McLean Parties) purported to exercise options by notices addressed to DTAL. Digi-Tech disputed that the options were validly exercised. " The issues 7 The parties also prepared an agreed outline of issues. I set them out: "1 The case in the remittal hearing is limited in scope to certain aspects of the McLean Parties' claim under the Trade Practices Act . 2 The relevant findings which bind the Court on this rehearing include: (a) The findings by Justice Einstein (not challenged on appeal) dismissing the Plaintiffs' claims in relation to the Suitability Representation (in paragraph 95(a) of the Second Further Amended Summons in proceedings no. 50169 of 1999 (the TA Summons ) and paragraph 91(a) (the first) of the Second Further Amended Summons in proceedings no. 50087 of 2000 (the FR Summons )) and the Profit Potential Representation (in paragraph 95(b) of the TA Summons and paragraphs 91(a) (the second) and 91(c) in the FR Summons), in so far as it related to existing facts (paragraph [62] of the Court of Appeal's Judgment). (b) The Court of Appeal found that Justice Einstein erred in failing to deal with the Plaintiffs' case that the Profit Potential Representation amounted to a representation that the products had a high revenue and profit potential, with "high" being understood by reference to the particulars in paragraph 95 of the TA Summons (paragraph [79] of the Court of Appeal's Judgment). (c) The Court of Appeal found that, so understood, the Profit Potential Representation was a representation as to a future matter and was misleading and deceptive as Digi-Tech did not adduce evidence that it had reasonable grounds for making the representation (paragraph [127]). 3 In this hearing, the first question is causation: ie, whether the McLean Parties suffered loss and damage by reason of DTAL making the Profit Potential Representation, as understood in accordance with paragraph 2(b) above. 4 There are 2 limbs to the McLean Parties' case on causation: (a) firstly, "direct causation", based on the contention that Ian McLean personally read the Deloittes Reports, and invested in the Digi-Tech Business in reliance upon the Deloittes' Indicative Valuation; and (b) secondly, "indirect causation" based on the contention that if Werner Bali had been aware that there was no reasonable basis for the Digi-Tech Projections, he would have advised Mr McLean against the investment in the Digi-Tech Business; and if Mr McLean had received such advice, he would not have made the investment. 5 Digi-Tech disputes: (a) that causation can be established on either of those limbs; (b) that reliance on either limb is to be addressed by reference to the Deloittes' Indicative Valuation other than to the extent that that valuation was included in the particulars (ii) and (iii) to Paragraph 95(b) of the TA Summons, and in the particulars (ii) and (iii) of each of paragraphs 91(a) (the second) and 91(c) in the FR Summons; (c) that the second limb is available on the pleadings. 6 If the McLean Parties fail to establish the element of causation in relation to the claim for misleading and deceptive conduct, the parties are in agreement that the substantive orders made by Justice Einstein in the original proceedings be affirmed. 7 If the McLean Parties establish the element of causation in relation to the claim for misleading and deceptive conduct, there will be further issues as to: (a) the nature of the relief (if any) to which the McLean Partis are entitled; (b) costs in respect of the proceedings before Justice Einstein." The Profit Potential Representation 8 It is sufficient to set out para 95(b) of the statement of the plaintiffs' contentions in the Terminal Adapter proceedings to understand how the McLean parties put their case both in relation to the Terminal Adapter partnership and in relation to the Freerider partnership. So far as is relevant to the McLean parties, para 95 alleged that before McLean Tecnic entered into the relevant documentation, the defendants represented to it (and others) that: "(b) The Products had a high revenue and profit potential; Particulars The representation was express and contained in the following documents: (i) DTAL Information Memorandum dated May 1997: · "The Licensee will attain an investment in the data communications field which can provide exciting returns" (section 2).

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(Paragraph 6.6)." 9 The Court of Appeal characterised this case as follows: "69 The pleading in the summons of the Profit Potential Representation is far more than a bald assertion that "the products had a high revenue and profit potential". Some definite purpose has to be ascribed to the lengthy and detailed particulars given in support of this allegation. On the face of the pleading, that purpose is self-evident, namely, the particulars give colour, content and a degree of specificity to the generality of the representation alleged. The particular matters alleged in the particulars are not pleaded as individual representations separate from the allegation of the material representation (namely, that the Products had a high revenue and profit potential). This is manifest from the clear distinction made in the pleading between the material allegation made and the particulars to that allegation. The particulars particularised the high revenue and profit potential alleged in the material allegation that comprised the Profit Potential Representation. They did not constitute separate representations on which the appellants were relying for their cause of action, nor can they be divorced from the material allegation made." 10 Thus, their Honours concluded: "77 We conclude that the appellants conducted their case at trial on the basis that the Profit Potential Representation was constituted by the collective effect of the revenue and gross profit forecasts contained in the Indicative Valuation, based as it was upon the gross margin projections contained in the Gross Margin Review, which figures, in turn, were referred to in a document described as the Information Memorandum (see the particulars to para 95 of the summons). The appellants did not conduct the case upon the basis that the Profit Potential Representation was constituted solely by the material allegation in para 95, unaffected by the particulars thereto; nor did they conduct the case upon the basis that each particular projection particularised in para 95 constituted an independent and separate representation on which they separately relied." How the McLean parties put their case 11 The McLean parties relied on the affidavit and oral evidence of Mr (Alan) Ian McLean and of their former accountant, Mr Werner Bali, and on a substantial body of documentary evidence. However, none of their evidence suggested that they had relied directly on the Profit Potential Representation (ie upon the representation pleaded and particularised in para 95(b) of the summons in the Terminal Adapter proceedings). Mr McLean's evidence was that he tried to read through the whole of the written material furnished by Digi-Tech, which included both the Indicative Valuation and the Gross Margin Review on which (among other things) the Indicative Valuation was based. However, Mr McLean gave no evidence that he had actually read or paid attention to, let alone relied upon, the material referred to in the particulars to para 95(b). Nor, except in the most general way, did Mr Bali. 12 Instead, Mr McLean's evidence was that he noticed and relied upon the valuation of $70 million that, he said, was expressed in various places in the Indicative Valuation. The Indicative Valuation did indeed refer, in a number of places, to a valuation of the products falling within a range of $67 million to $74 million. Mr McLean's evidence was that, consistent with his usual approach to figures, he selected a figure in the middle of the range: in this case, $70 million. 13 The McLean parties submitted that it was open to them to prove reliance on, or inducement by, the Profit Potential Representation in this way. The Indicative Valuation was on its face prepared by the discounted cash flow method. Thus, it was necessary for Deloittes to take into account the projected cash flows to be derived from the exploitation of the products over the 5 years' life of the partnerships. This they purported to do, by referring to their Gross Margin Review. The Indicative Valuation made it clear that, on the assumption that the cash flows would be as summarised in the Gross Margin Review, then a valuation based on the discounted cash flow method over the relevant period of years would produce a figure within the range to which I have referred. 14 The McLean parties submitted that this approach to what may be called for convenience the question of reliance was supported by passages from the decision of the Court of Appeal. Digi-Tech submitted that it was not open to the McLean parties to put their case in this way, and that nothing in the Court of Appeal's decision permitted them to do so. 15 If I were approaching the matter afresh, and uninstructed either, in general, by the previous history or, specifically, by what was said in the Court of Appeal, I would incline to the view that it was not open to the McLean parties to put their case in this way. However, I cannot approach the matter in that way. I must have regard to the history of the matter as it was summarised by the Court of Appeal and, specifically, to the way in which the Court of Appeal said the relevant issues were argued. I therefore turn to the decision of the Court of Appeal. The Court of Appeal's reasons 16 The parties, in their agreed narrative, set out in tabular form those of the 10 issues argued in the Court of Appeal that were relevant to the McLean parties; the way those issues were dealt with by Einstein J; and the way those issues were dealt with by the Court of Appeal. For convenience, I reproduce that table below: Issue Trial Appeal 1. Did the Investors plead (or were they otherwise entitled to press and have determined) a case that Digi-Tech had represented that the products had the high revenue and profit potential in the "Digi-Tech projections Not considered to have been the pleaded case. Whether otherwise entitled to make that case not addressed. This issue is decided in the affirmative, that is, in favour of the appellants [962], [964], [986]-[988], [1065], [1070], [1086], [1104], [1133], [1134], [1136], [1138], [1144], [1155], [1160] [64]-[79] 2. Did Digi-Tech represent that the products had the revenue and profit potential in the "Digi-Tech projections" (i.e., that those forecasts of future revenues and profits could be achieved)? No. Digi-Tech made express representations that the Products had high revenue and profit potential. "High" is to be understood by reference to the particulars in paragraph 95 of the summons. Those particulars are based on documents that were not disputed. Accordingly, the answer to Issue 2 is in the affirmative. [1086], [1104], [1133], [1134], [1136], [1138], [1144], [1155], [1160] [80] - [88] No. It is undesirable to apply past judicial pronouncements as to factors relevant in other cases as a code of conditions that must be satisfied for s 51A to apply. The ordinary meaning of the language of the section is plain enough to provide the key to whether it applies in a particular case. 3. Was the representation in relation to revenue and profit potential with respect to a future matter and therefore subject to the deeming provision in s 51A(2) of the Trade Practices Act 1974? [1119]-[1128], [1158], esp. at [1128], [1158] On that basis, the relevant representation was a representation with respect to a future matter. The trial judge erred in finding to the contrary [89] - [114] 4. Was the Profit Potential Representation misleading and deceptive because Digi-Tech had not adduced evidence that it had reasonable grounds for making it? Not clear whether addressed in relation to projections. The $72.5m purchase price depended substantially on the 50% market penetration estimate being correct. The evidence revealed at least three respects in which this estimate was defective. Moreover, Digi-Tech did not adduce evidence that it had reasonable grounds for making the representation. Digi-Tech therefore did not discharge the burden upon it to establish such reasonable grounds. The Profit Potential Representation was misleading and deceptive in material respects and the answer to this issue is in the affirmative. [1101]-[1102], [1134], [1143], [1160] [115] - [131] No (although slightly narrower question addressed). The finding of the trial judge that reliance was not established cannot stand, since both bases on which his Honour relied for his conclusions were erroneous. 5. Would the investors have entered into the relevant transactions if they had been told that Digi-Tech did not have reasonable grounds for the revenue and profit projections upon which the Deloitte Indicative Valuation was based? The Court is not in a position to determine the answer to Issue 5. Accordingly, Issue 5 should be remitted to the Commercial List Judge for allocation for re-trial according to law in the light of these reasons. For TA: [1136]-[1137] [132] - [165] For FR: [1162]-[1173] 6. Were the investors entitled to relief by way of orders under s 87(2)(ba) and damages under s 82 of the Trade Practices Act 1974? Not dealt with. The resolution of this issue depends to a substantial degree on the answer to Issue 5. Issue 6 is remitted for re-trial on the same basis as Issue 5. [166] - [171] 7. [Irrelevant to McLean Parties] Was the exercise of options for McLean Tecnic P/L invalid because: (a)Yes. [1379]-[1380] McLean Tecnic could have assigned its rights and duties to two separate but related companies, each wholly owned by A I Mclean. If this had have been done, there would have been no breach of warranty. The trial judge was justified in preferring the submissions advanced on behalf of Digi-Tech on this issue. 8. (a) at the time of exercise in relation to one partnership, it had an existing liability in relation to the other; and The failure to plead the existence of the two debts to DTSPL must have resulted in surprise and unfairness to the McLean appellants. The trial judge's findings regarding the debt are set aside. A re-trial is ordered on whether the indebtedness as now alleged existed at the relevant time. (b) it was indebted to DTSPL? (b)Yes. [1379]-[1380] [199] - [230] No. Digi-Tech failed to establish that any part of the payments said to attract withholding tax was a royalty, in accordance with Stanton v Federal Commissioner of Taxation (1955) 92 CLR 630 and Federal Commissioner of Taxation v Sherritt Gordon Mines Limited (1977) 137 CLR 612. This was an essential element of both Digi-Tech's arguments on this issue. 9. Was the exercise of options for Kalifair P/L, Kalinick P/L, McLean Tecnic P/L, Brand, Chambers, Kelliher, Smith, O'Loughlin and Whiting invalid because on the day of exercise each was (or in the case of natural person investors, their nominee company became) liable for withholding tax? [1343]-[1359], esp. at [1355], [1357] The trial judge was therefore correct in answering the question posed by Issue 9 in the negative. [231] - [258] 10. [Irrelevant to McLean Parties]

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17 As the parties noted, references to "the appellants" in the Court of Appeal's reasons, and in the parties' summary of those reasons, is a reference to, relevantly, the McLean parties. 18 In para [63], the Court of Appeal noted that, "Issues 1 to 6 concern only the appellants' case in regard to the Profit Potential Representation to the extent that that representation was said to be as to future facts. The appellants' contention in this regard was that Digi-Tech's conduct was misleading because it had represented that each of the Terminal Adapter and Freerider had a high revenue and profit potential (with the term "high" being qualified or coloured as we explain below)." 19 I have already set out para [69] of their Honour's reasons, in which they explain how the word "high" in the Profit Potential Representation was to be "qualified or coloured"; and para [77], in which their Honours summarised how the McLean parties conducted their case at trial in relation to that representation. Their Honours dealt with issue 5 at paras [132]-[165]. At para [139], in answering issue 5, they said that it is necessary to determine the purpose for which the appellants entered into the transaction. They then noted in para [140] that the focus at trial was on the intrinsic value of the business and its profitability. They said: "140 Thirdly, the difficulties are compounded by the fact that at the trial the focus in regard to the reliance issue was on how the absence of reasonable grounds affected the intrinsic value of the business and its profitability. The appellants' pleadings do not allege that, had they known that there was a serious risk that groundless assumptions had been made by senior counsel when advising that taxation deductions were likely to be allowed (because there was an absence of reasonable grounds for the revenue and profit projections and the represented value of the Intellectual Property Rights), they would not have entered into the transaction. This issue was not mentioned in the judge's reasons. It seems that the case was not presented or investigated in this way before him." 20 It appears from para [141] that, in oral argument in the appeal, the appellants put their case on the basis that the Profit Potential Representation caused them to believe that substantial tax benefits would be received. The McLean parties did not put their case this way before me. 21 In the course of considering issue 5, the Court of Appeal dealt with what was called "the indirect causation theory". It appears that the appellants sought to argue that the misleading or deceptive conduct alleged against Digi-Tech had caused Deloittes to produce their Indicative Valuation supporting the price asked for the investment, and had caused the promoter of the scheme, Mr Gary Urwin, to propose it to the investors. The Court said at para [158], as to this formulation of the case: "To complete the chain of causation, there must be something linking the appellants' loss to their entry into the investment scheme. That link is the inducement of the appellants and their consequential act of entering into the transaction to their prejudice. Without that link there is no proof that the misleading conduct caused the loss." 22 The McLean parties did not press this theory of causation before me. However, their case might be called one of "second hand" reliance; in that (so they submitted) they relied upon a representation that was itself founded upon the representation alleged and particularised in para 95(b) of their statement of contentions, as explained by the Court of Appeal. 23 In relation to issue 6, whether the McLean parties would have entered into the transaction had they not been misled, the Court of Appeal said at para [168] that it might also be necessary to see what other expectations motivated them to enter into the transaction. Their Honours said: 168 Issue 6 may also turn, at least to a degree, on whether the appellants were induced to enter into the transaction solely or partly by their expectation that they would receive the expected tax benefits, and whether the intrinsic value of the business had some part to play in inducing them. If the intrinsic value of the business was an inducing factor, the degree and extent of the overstatement may be relevant to the relief that is ordered. The latter aspect does not appear to have been an issue at the trial. It was not suggested that this Court would be in a position to make any findings on this question.

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169 If the expected tax benefits were a relevant motivating factor (as seems to have been the case), it would probably be necessary to determine whether the misleading conduct caused the tax deductions to be disallowed. This is a matter that was not investigated before Einstein J, although the importance of the expected tax deductions to the appellants seems to have been significant. We think it preferable that this question - if it is relevant (and, as noted, it seems to be) - be decided after an appropriate joinder of issue at trial. 24 In the hearing before me, the McLean parties did not suggest that the expected tax benefits played no part in their decision to enter into the transaction. However, they said, the representation of value, based on the representation of cash flow (ie on the Profit Potential Representation) was material, because the expectation of tax benefits of itself would not have motivated them to enter into the transaction. 25 When one has regard to what was said by the Court of Appeal, it must follow, I think, that it is open to the McLean parties to put their case on causation as, before me, they did. In particular, what the Court said at para [140], where their Honours referred to the way that the case was put before Einstein J, suggests that this proceeded on the basis that reliance on the statement of value must necessarily involve reliance on its foundational element, namely the cash flows which were valued (and which were the subject of the Profit Potential Representation as particularised in para 95(b) of the statement of contentions). 26 Mr JC Sheahan SC, who appeared with Mr BF Katekar of counsel for Digi-Tech, submitted that a case based on a representation as to value was different, in one significant respect, to a case based on a representation as to future profits. He submitted that a representation of the former kind was as to a present matter, whereas a valuation of the latter kind was as to a future matter. Thus, he submitted, whilst the latter could invoke the operation of s 51A of the Trade Practices Act, the former could not. 27 Mr AJ Sullivan QC, who appeared with Mr HWD Stowe of counsel for the McLean parties, submitted that a representation of value conveyed two representations. First, it conveyed a representation that the opinion expressed in the valuation was held. Second, it conveyed a representation that the opinion of value was based on reasonable grounds. He relied on the decision of Lindgren J in MGICA (1992) Ltd v Kenny & Good Pty Ltd (1996) 70 FCR 236. Thus, he submitted, there was a sufficient relationship between the misleading or deceptive conduct that the Court of Appeal had found against the Digi-Tech parties and the material on which the McLean parties said they relied. 28 For the reasons that I have given, I think that I am required, by the decision of the Court of Appeal, to accept that it is open to the McLean parties to put their case in the way that they do. Thus, I do not think that I need to express a concluded view on this argument. Reliance or inducement 29 I therefore consider the question of reliance or inducement on the basis that it is open to the McLean parties to put their case in the "second hand" way that I have described. I should, however, make it clear that if the McLean parties were to be confined strictly to the pleaded case - ie if they were required, to succeed, to show that they had relied directly (and not at second hand) on the Profit Potential Representation - then I would conclude that it failed. It would fail, on this basis, simply because there was no evidence that Mr McLean, or Mr Bali, had taken into account in any direct way the Profit Potential Representation. 30 Further, and regardless of the way in which the McLean parties put their case, I note that there was no evidence, either from Mr McLean or from Mr Bali, of reliance on the matters referred to in subparas (i) and (ii) of para 95(b) of the statement of contentions. That is to say, there was no evidence that either Mr McLean or Mr Bali had considered the DTAL Information Memorandum of May 1997 or the Gross Margins Review of April 1997. The case on reliance was based exclusively on subpara (iii) - the Indicative Valuation.

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Mr McLean's evidence 33 Mr Sheahan submitted that, regardless of any considerations of honesty, Mr McLean's evidence was too unreliable to support any finding. 34 It is clear that Mr McLean suffered from difficulties in reading, comprehension and memory. He said so himself, in paras 29 to 35 of his affidavit sworn 16 March 2005. He thinks that those problems are getting worse with age (he is now aged 76 years), but said that they have, to an extent, afflicted him all his life. However, he says, he had "an extremely good memory in relation to all matters concerning the operation of electrical motors" (see para 34(a) of his affidavit; his business, which had been very successful, involved the repair of electrical motors and included electrical sales and mechanical repairs); and that, more generally, he had better recall of "visual images, physical activities, and numbers", much more readily than written text (affidavit, para 34(b)). 35 Mr McLean was assessed by a clinical psychologist, Professor Richard Mattick. Professor Mattick's reports, which were tendered without objection, concluded, among other things, that Mr McLean had impaired verbal memory, and that the verbal memory problems that he reported appeared to be genuine, significant and impairing his function (see, for example, Professor Mattick's report of 2 March 2005, exhibit PX1, at para 12.9.2). I should note that Professor Mattick's reports were tendered by the McLean parties and that Digi-Tech did not object to their admission; thus, no question arose for my consideration of their admissibility - see, for example, s102 of the Evidence Act 1995. 36 Mr McLean's assessment of the reliability of his memory, as recorded by Professor Mattick, was more succinct and, I think, more informative on this point than his affidavit. In para 5.10.2 of the report of 2 March 2005, Professor Mattick records that Mr McLean said that: "my memory is bloody rotten"; he forgets names and has to use notes to remind himself to whom he is talking; and forgets what he has read even though he understood what he was reading at the time he read it. 37 On reviewing Mr McLean's testimony (written and oral), and my impressions of him in the witness box, I have no confidence whatsoever that his evidence reflects actual recollection rather than reconstruction. I have no sense of persuasion, based on his evidence, that the events he described did in fact occur. Human memory is notoriously both fallible and suggestible. Mr McLean is dealing with events that occurred in the second half of 1997 and the first half of 1998 - seven to eight years ago. His testimony is not based on any contemporaneous note or recollection. In an ordinary case, it may be accepted that, whilst a witness has forgotten the precise detail of events that occurred so long ago, he or she might, nonetheless, have an actual recall of events of particular significance. Thus - particularly where regarded objectively those events might be expected to have occurred - the witness' recollection of them may be persuasive, to the point that it is accepted as providing a basis for a finding in fact that the events occurred. 38 In Watson v Foxman (2000) 49 NSWLR 315, McLelland CJ in Eq had occasion to discuss the fallibility of human memory, in the context of a representation case. Although his Honour was talking of recollection of words in a conversation (where the conversation, or the words in question, were said to be misleading or deceptive), I think that what he said may be applied with equal force to memory of events and matters other than conversations. His Honour pointed out at 319 that the degree of fallibility increases with the passage of time; and that, consciously or otherwise, the processes of memory may be affected by self interest. He said: "Furthermore, human memory of what was said in a conversation is fallible for a variety of reasons, and ordinarily the fallibility increases with the passage of time, particularly where disputes or litigation intervene, and the processes of memory are overlaid, often subconsciously, by perceptions or self interest as well as conscious considerations of what should have been said or could have been said. All too often, what is actually remembered is little more than an impression from which plausible details are then, again often subconsciously, constructed. This is a matter of ordinary human experience." 39 In my view, what his Honour said may be transposed exactly to Mr McLean's testimony concerning: his reading of the documents presented to him; that which he now recalls having focused on; and that which, he now says, was of significance to him. I think that the process of reconstruction is particularly acute in his case, because I think that the starting "impression" is one based on a perception of his position rather than on some - even dim - actual spark of remembrance. I do not, however, find that this is because he is seeking to be dishonest, or seeking deliberately to colour his evidence. 40 Nonetheless, I think that the problem is acute for two reasons. The first is the fact that Mr McLean's recollection is extremely poor, so that his capacity for recollection, as opposed to reconstruction, is at best very slight. The second is that the context in which he now gives evidence is one focusing entirely on the question of reliance, as a result of the decision of the Court of Appeal. These considerations reinforce my view that the persuasive character, or probative weight, of McLean's evidence is at best negligible, and that, absent corroboration (either by other evidence or by concordance with the probabilities objectively ascertained), it is insufficient to discharge the probative burden resting upon the McLean parties to prove reliance, or inducement. 41 In a representation case, where it is clear that material is given to a person for the purpose of persuading him or her to enter into a transaction, where the material in context is capable of having that effect, and where the person considers that material, human experience suggests that a decision made thereafter to enter into the transaction will have been influenced, to a greater or lesser degree, by reliance upon the material provided. In other words, human experience suggests that, to some extent, the material will have induced the decision, or that the decision will have been made in reliance upon it. Thus, where the person testifies that he or she was induced by, or relied upon, the material, a tribunal of fact may feel justified in accepting this evidence because it accords with the objective probabilities. 42 There is no doubt that, in representation (or s 52) cases, the Court may proceed on the basis of a presumption or inference of reliance in the circumstances to which I have referred. See, for example, Gould v Vaggelas (1983) 157 CLR 215. However, as the Court of Appeal pointed out in this case at para [143], factual findings made on the basis of credibility rather than inferences or presumptions "must override any inference or rebuttable presumption". Thus, their Honours concluded at para [144], the matter could not automatically be "determined on a Gould v Vaggelas presumptive basis. Where the credibility of the witnesses who testified on the issue is seriously called into question - and on reasonable grounds … - it would not be just to decide the matter by resort to a presumption". 43 It was for that reason that their Honours remitted issue 5 for further hearing; and they did so acknowledging (at para [146]) that the McLean parties "stand in a different position to the other appellants as they entered into the transaction at a relatively late stage … and different considerations apply to them". Even so, their Honours concluded, "the question of reliance as it affects the McLean appellants would also be best resolved after a re-trial … the question raised by the McLean appellants' appeal in respect of Issue 5 should not be determined in isolation but after a full consideration of all the contextual circumstances once they have been ventilated fully in evidence". 44 There were a number of other aspects of Mr McLean's evidence, apart from his acknowledgements to the Court and Professor Mattick of the fallibility of his memory, that have affected my assessment of his credibility. He had almost no recall of any of the salient, and important, aspects of the transaction, and in some respects, the recollection that he had was either inconsistent with the transaction as presented to him or, more plainly, wrong. Thus, he thought, he was buying a 40% interest in the two partnerships, for a figure of $1.2 million. The interest (as he ultimately accepted) was 31.6% (or perhaps 31.7%). The purchase price included not just the first two years' instalments totalling approximately $1.2 million (the figure on which Mr McLean seized), but also the balloon payment of (in round figures) $22 million. It is clear, both from the documents and Mr Bali's evidence, that Mr Bali explained to Mr McLean in May 1998 that the total purchase price was the sum of those amounts. Further, Mr McLean said that he had no understanding that he was acquiring interests in partnerships, for a limited period of time. He said that he had understood that he was buying an interest in an ongoing business (presumably, one that would continue for as long as the proprietors wished). (I have not overlooked that the investment was made not by Mr McLean personally, but by his special purpose company McLean Tecnic; in this context, nothing turns on the lifting of the corporate veil.) 45 Nor, in this respect, did Mr McLean's evidence receive any corroboration from Mr Bali. The only evidence of any explanation given by Mr Bali to Mr McLean was that, as mentioned, Mr Bali explained that the purchase price included not only the first two years' payments, totalling about $1.2 million, but also the balloon payment of $22 million. (Mr Bali gave some further advice on this topic, to which I shall return.) That evidence, which I accept, does not assist in accepting Mr McLean's evidence; indeed, I think, it tells against it. Nor is there anything in the documents to corroborate Mr McLean's testimony. 46 I have no doubt that Mr Bali understood that the investment was of a limited nature: in partnerships having a duration of five years. I have little doubt that Mr Bali would have explained this to Mr McLean; any other view was inconsistent with the cash flow schedules that Mr Bali sent to Mr McLean. Thus, I think, it is more likely than not that Mr McLean understood at the time that he was acquiring interests of limited duration. If this were not so, however, then another problem would arise. The Indicative Valuation on which, Mr McLean says, he relied, and through which, the McLean parties say, they relied on the Profit Potential Representation, related to five years of cash flows. If Mr McLean did not, at the time, understand that this was what was being acquired, then there is a stark division between the substance of the Profit Potential Representation on the one hand, and the transaction that, Mr McLean on this hypothesis, understood was the subject of the Indicative Valuation. In those circumstances, it would be difficult to understand how the Profit Potential Representation could have induced a decision to enter into the transaction if Mr McLean had then understood it as he now (on his evidence) understands it. 47 There are at least two explanations for Mr McLean's lack of recollection of the nature and important elements of the transaction. One is that his memory is so poor that he has simply forgotten them. The other is that his focus (indeed, Mr Sheahan submitted, his sole focus) was on the tax benefits available under the investment, so that he did not focus on the other elements. In reality, I think, the explanation is a combination of these. I think, for reasons that I shall explain shortly, that Mr McLean's real interest was in the apparent tax benefits; and that, at the time, he focused on these; and that, as a result and because of his defective memory, his recollection of so many important elements is so poor. 48 Even on the central question of what Mr McLean said he saw and relied upon, his testimony was confused and inconsistent. In his affidavit, Mr McLean identified the $70 million valuation as one of the factors that persuaded him to cause the McLean parties to enter into the transaction. This must be taken to be a reference to his "mid point" summary of the range of $67 million to $74 million referred to in the Indicative Valuation. However, in cross examination, Mr McLean identified the $70 million figure as being one for profitability or sales. When asked what he recalled about the material provided to him, he said: "A. The thing that I do recall was that, and it's very, very strong in my mind, the only thing I really have any total recall on is that I read an area that indicated the profitability of the company and I think I even marked, I marked one of the books, I was thinking okay there's a 70 million.

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Mr McLean then said: "That's one, that $70 million that I am talking to you about was very significant because it indicated to me that was coming from Deloittes, it indicated to me, well, we were looking at a very profitable business." (T18.35) 52 He did not recall that there was any other part of the Indicative Valuation which he had read (T18.41). 53 Mr McLean's evidence at T18 struck me as being reconstruction, based on his observing that the valuation range of $67 million to $74 million at p628 of exhibit PX4. It is inconsistent with the answer given by him at T13-14 referred to above. It is also inconsistent with a subsequent answer given by him on the same topic at T44.50: Q. I take it from what you said you understood that you were buying a right to participate as to 40 percent in a business with projected sales revenues of $70 million, am I right so far? A. Yes, that sounds right. 54 There were other occasions where Mr McLean accepted the proposition that he was investing, or contemplating investing, in a business that had sales revenues of $70 million: see T42.25 and T43.35-.50. This indicates further the difficulty of placing any reliance upon Mr McLean's testimony as to his thought processes in the first half of 1998. 55 Mr Sullivan submitted, relying on Professor Mattick's third report, that the general weakness of Mr McLean's memory was not inconsistent with his retaining "the capacity to recall limited and general matters". However, Mr McLean's evidence was, in substance, that the $70 million valuation, which in the witness box he said he recalled seeing in the Indicative Valuation, was fundamental to his decision to proceed with the transaction. Mr McLean's previous statements and affidavits were proved. Although in each of them he said, in substance, that he had relied on the Indicative Valuation, he did not in any of them identify the $70 million figure that he now attributes as the central point of that valuation. I would have thought it likely that, if Mr McLean had any actual memory, it would have been of the figure: particularly given his evidence that, when he saw a range of figures, he tended to select a figure at the mid point of the range. His failure to recall the $70 million figure in his previous statements and affidavits casts doubt upon his purported recollection of that figure now. 56 Mr Sullivan further relied on statements in paras 57(b) and (c) of Mr McLean's affidavit sworn on 16 March 2005. Those statements, Mr Sullivan submitted, show that Mr McLean "would not have acquired his interest in Digi-Tech unless he was comfortably satisfied that the $70 million valuation was reasonable". However, neither of those statements purports to be a recollection of the relevant events, or of Mr McLean's thought processes, in April/May 1998. Each of them is prefaced with the words "It is my present belief that". Those words deny recollection, and on the contrary suggest reconstruction: a process in which the danger of suggestability is particularly significant. 57 Further, if Mr McLean's evidence were to be accepted, it would suggest that his recall is of agreeing to purchase, for the sum of $1.2 million, a 40% interest in a business worth $70 million. The inherent improbability of such an opportunity being offered is yet another, and I think significant, indicator of the unreliability of Mr McLean's memory. That he could purport to remember such a transaction is an indication of the difficulty in attributing any persuasive weight to Mr McLean's testimony. 58 Another matter of concern in Mr McLean's evidence is his portrayal of himself as someone to whom figures, and financial information were a mystery - he said that his knowledge of them "is almost zilch" (T53.30). Mr Bali did not confirm this. On the contrary, his evidence was that, on his observations, Mr McLean could absorb and understand financial information, and would ask intelligent questions when it was provided to him (T93.20-94.20). I prefer Mr Bali's evidence on this point. It may very well be that Mr McLean's understanding of financial information has deteriorated since 1998. Nonetheless, his evidence sought to suggest that it was the same (and very poor) then as now. Indeed, he suggested, when during cross examination he was shown AI McLean's income tax return for the 1998 financial year, he thought that the loss shown was "reference numbers"; he "didn't realise they are dollar signs" (T53.25). I regard that evidence as implausible and unworthy of belief. 59 For these reasons, if the question of reliance were to be decided only by reference to Mr McLean's testimony, without reference to what I perceive to be the objective circumstances, or context, I would conclude that the McLean parties have not made out their case. I add, in case I have not already made it clear, that Mr McLean's testimony is not corroborated in this respect by other evidence, so that reliance case stands or falls on my acceptance of what Mr McLean says.

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Events leading up to the transaction 60 Mr McLean's business, relating to electrical motors and other matters, had prospered. He sold it in 1998, and realised a capital sum of about $10 million. That sum he, through his company, invested. Some of the investments were solid (for example, investments in rental properties). Others were of a more speculative nature. One somewhat speculative investment was in options trading. 61 The details of Mr McLean's options trading (as he believed it to be) are irrelevant. It was conducted through two men, Mr James Hutchings and Mr Terry Tindall. In about 1996, Mr McLean invested about $100,000 with Mr Hutchings. He received monthly statements purporting to show the trading that had been conducted with his money, and the results of that trading. In 2000, it became apparent that the whole operation was fraudulent; but, in 1997 and 1998, there was no basis for Mr McLean to think that this was so. On the contrary, the records provided to him purported to show that the trading had been extremely profitable. He was able to withdraw large amounts of "profit"; and at the same time, the amount of his investment increased. 62 Mr Bali said that, "in around late 1997", Mr McLean contacted him concerning his projected income. According to Mr Bali, Mr McLean said that the projected figures "looked pretty good, but there will be a lot of tax involved. Mate, what are we going to do about my tax?" Mr Bali said that Mr McLean repeated that question on two subsequent occasions. (Mr McLean would not accept that he repeated the question on two subsequent occasions, but I do not find his evidence on this point persuasive. I think that Mr Bali is likely to have remembered both the substance of the initial approach and the repetition of the question. I accept Mr Bali's evidence on this point.) 63 It is not surprising that, in the second half of the calendar year 1997, Mr McLean thus regarded his financial prospects. A summary of options trading prepared by Mr Bali, or his firm Rost & Kitchener, shows that during the month of July 1997, AI McLean appeared to have derived profits of almost $2.5 million from option trading; and $2.9 million for the six months from July to December 1997. 64 Mr Bali said that he became aware of the Digi-Tech investment in late 1997, through one of his partners. In about February 1998, Mr Bali became aware that the investment opportunity was still available and formed a view that it might interest Mr McLean. He introduced it to Mr McLean as "an interesting high tech business proposal with tax benefits". Mr Bali obtained the documents, and discussed them with Mr McLean. Although Mr Bali was somewhat coy on the point, I have no doubt that he explained the tax benefits to Mr McLean. To the extent that Mr McLean sought to suggest otherwise, I do not accept his evidence. 65 The documents obtained by Mr Bali, and subsequently by Mr McLean, included a "white folder". That folder comprised a number of documents including draft agreements, the Gross Margins Review, the Indicative Valuation and a copy of the tax opinion supporting (on certain assumptions) the deductibility of the amount agreed to be invested. 66 I have no doubt that Mr Bali understood the outline of the proposal. In essence, as applicable to the McLean parties, it required AI McLean to pay a very substantial amount to acquire interests in the partnerships formed to exploit the products. According to the tax advice, if the McLean parties entered into the transaction with the reasonable expectation that the licence fees earned from exploitation of the products over the five year duration of the investment would be sufficient to meet the instalments of purchase price, then the dominant purpose would be the obtaining of the commercial return on investment, so that the full amount of the instalments of purchase price would be deductible over the five year life of the partnerships. 67 The purchase price, overall, was $72.5 million. The interest available to the McLean parties was a 31.6% interest. I have no doubt that Mr Bali understood, and explained to Mr McLean, that the available deductions would offset, wholly or very substantially, the very large profits that AI McLean appeared to be deriving from its options trading activities. 68 The other significant feature of the proposal was the option. That related to the "balloon" instalment of the purchase price. In substance, it enabled an investor, in the third year, to relieve itself of liability to make the balloon payment by putting it back to Digi-Tech. (It may be noted that this was considered in the tax advice; the opinion expressed was that, assuming the expectations of gain were held, the option was not "a mechanism for rebate of the purchase price thereby decreasing the annual deductions", but "a hedge against the risk of failure of the project".) 69 The effect was that (having regard to the interest available to the McLean parties) tax deductions in excess of $3 million might be available for the 1998 and 1999 financial years. Clearly, that would absorb a very substantial amount of options trading profit; and at a tax rate of 36% (Mr Bali's evidence as to the applicable rate at the time) would generate cash savings very much in excess of the total $1.2 million instalments payable during those years. Further, if the put options were exercised according to their terms, there would be no liability to pay the balloon amounts. I do not regard those circumstances, regarded objectively, as providing any support for the proposition that Mr McLean is likely to have focused on the value attributed to the business in the indicative valuation. In my view, Mr McLean was looking for a tax deduction to soak up his option trading profits (I note, in passing, that the profits purportedly attributed to him for the 1999 financial years were even higher than those for 1998).

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Other relevant circumstances 70 Both Mr McLean and Mr Bali sought to suggest that the prospects of success of the Digi-Tech venture were of importance. However, their behaviour simply fails to bear this out. No investigation whatsoever - no "due diligence" - was carried out. Mr McLean, inconsistent with his practice on other occasions, did not inspect Digi-Tech's premises either in Australia or New Zealand. Neither Mr McLean nor Mr Bali made any attempt to obtain and review up to date management accounts, budgets, projections or the like. They made no check whatsoever on the business; indeed they did not even check whether the products had been launched. 71 These matters are of particular significance given that the Indicative Valuation was dated April 1997 - twelve months before Mr McLean decided to proceed. No attempt was made to see whether the performance of the business in the intervening time had matched, exceeded or fallen short of the projected trading levels on which the indicative valuation was based. 72 Mr Bali acknowledged that, had he been approaching the transaction as one in which in substance Mr McLean was acquiring a 31% interest in a $70 million business, he would have suggested that Mr McLean make enquiries about business plans, forecasts, strategies and trading results; and that, in the present case, he made no such suggestion (T119.7). To my mind, this evidence - reluctantly given though it was - confirms that, in Mr Bali's mind, the transaction was not one of business investment, but one undertaken for its apparent tax effect. 73 In Gentry Brothers Pty Ltd v Wilson Brown & Associates Pty Ltd (1996) ATPR ¶41-460, Kiefel J dealt with the question of want of reasonable care on the part of an applicant at ¶41-611. Her Honour noted that an applicant does not have to establish that reasonable care was taken, before showing a right to relief under the Act. (As Gleeson CJ put it in Henville at 468 [13], "[t]he purpose of the legislation is not restricted to the protection of the careful or the astute".) However, her Honour noted, there may be cases where the lack of enquiry may show that the plaintiff was not interested in the truth or otherwise of the representation, so that it can be said that, as a matter of fact, the plaintiff did not rely upon it. The circumstances of this case - the total absence of anything resembling an investigation, let alone an appropriate level of due diligence, for an investment in excess of $23 million - strongly support the drawing of such an inference. 74 There are other matters that in my view support the drawing of this inference. Even if Mr McLean does not now understand that the total purchase price payable was not just $1.2 million, but the further balloon payment of $22 million, he understood it in April 1997. Mr Bali sent to Mr McLean on two occasions the schedule of payments. That schedule referred not only to the first two years' instalments, but also to the balloon. 75 When Mr Bali first sent the schedule of payments to Mr McLean, on 3 April 1998, he sent also the management accounts of Digi-Tech Software Pty Ltd (the operating company in New South Wales, owned by the investors; it was not a member of the Digi-Tech Group) for the six months to 31 December 1997. It was plain from those management accounts that the company had not traded during that time - its only income was $484 for interest. But this was a company that was expected to make sales for the calendar year 1998 of $64.625 million and to earn thereon a net profit after tax slightly in excess of $15 million. If the McLean parties were contemplating investing in the two partnerships as a genuine commercial venture, on the basis of the revenues projected as disclosed in the indicative valuation, this document should have set the alarm bells ringing. It did not. 76 When Mr Bali resent the schedule of payments to Mr McLean on 4 May 1998, it was not encumbered by the management accounts. Mr Bali's copy bears his handwritten notes against the totals of the payments to be made. They describe the payments as "payable by McLean". They divide them up into the payments for the 1998 financial year, the payments for the 1999 financial year, and the balloon payment due on 31 July 1999. As to that last payment, Mr Bali's handwritten note says, "walk away or renegotiate future terms". Mr Bali's evidence was that he explained those matters to Mr McLean. Mr McLean says he has no recollection of any explanation of the balloon. I accept Mr Bali's evidence on this point. 77 Further, Mr Bali confirmed that, as part of his explanation, he would have explained to Mr McLean that the payment of $600,000 by 30 June 1998 would produce a tax deduction in that financial year "of about $3 million" (T100.5). Mr McLean's evidence, in a general fashion, was that he had no contemporaneous understanding (ie in 1998) of the extent of the tax savings. I do not accept that evidence; on the contrary, I conclude, it was the apparent availability, and extent, of the tax savings that were of primary interest to Mr McLean. 78 Nothing in these circumstances provides any support for the proposition that Mr McLean was interested in the value attributed to the business. On the contrary, I think, his failure to carry out any sort of enquiry or due diligence process (particularly when aware of the management accounts for the six months to 31 December 1997), and the failure of Mr Bali to suggest to Mr McLean that any enquiries or due diligence process should be carried out, make it clear that Mr McLean's evidence, that he was interested in this as a business venture and not just because of its apparent tax benefits, should not be accepted.

[41]

Subsequent events 79 After the McLean parties entered into the transaction to acquire their interests in the two partnerships, Mr McLean became aware of a number of problems. For example, the accounts of Digi-Tech Software for the 1998 financial year became available in late February or early March 1999. Those accounts showed that the company had not traded. It had earned less than $3,000 in income, from interest and foreign currency gains. Its salary expense was less than $10,000 (although it had also incurred "Consultancy Fees" in excess of $240,000). Yet, according to the Indicative Valuation, the company was supposed to derive in excess of $64 million revenue, and $15 million in net profit after tax, for the calendar year to 31 December 1998. The financial statements must have given Mr McLean and Mr Bali the strongest possible reason to think that the forecast revenues had not been, and would not be likely to be, achieved (or that anything like them had been, or would be likely to be, achieved); but they made no enquiry, and expressed no complaint. (Indeed, Mr McLean made no complaint as to performance, or lack of performance, until Digi-Tech gave notices of termination to the partnerships in early 1999.) 80 Further, after 30 June 1998, Mr McLean became aware that one of the major "planks" of the Digi-Tech Software business - a tender to supply the products to Telstra - had failed. He also became aware that, contrary to his prior understanding, the Terminal Adaptor was still being developed, and that the Freerider had not been developed at all. Again, he made no complaint; nor even any inquiry. 81 The inference from all this, in my view, is that Mr McLean was not concerned about the commercial success or failure of the venture. It confirms that his motivation in entering into the venture was the apparent availability of very substantial tax benefits, and that his present recollection of focus on the projected value of the business should not be accepted as persuasive.

[42]

Mr Bali's evidence 82 Mr Bali was an employee of, or partner in, the firm of Rost & Kitchener for over twenty years, until he retired at the end of February 2004. Rost & Kitchener were the accountants for the McLean parties for many years. From about 1990 until his retirement, Mr Bali was "the primary contact" for Rost & Kitchener in its dealings with the McLean parties. 83 There were some difficulties in Mr Bali's evidence. For example, after Mr McLean had decided that the McLean parties would invest in the Digi-Tech venture, there was a delay in proceeding to settlement. The delay was caused because it was thought that there would be very substantial stamp duty payable on the McLean parties' acquisition of interests in partnerships. That concern was dispelled on 1 May 1998, apparently when it was confirmed that the partnerships had not carried on business in New South Wales up until that time, so that no stamp duty was payable. 84 Mr Bali's memorandum of fees was replete with references to "stamp duty", commencing on 6 April and continue through to 29 April. They show that he had concerned himself with the stamp duty question on twelve occasions between those dates. Nonetheless, Mr Bali, in cross examination, sought to suggest that he had not concerned himself, or been involved in, the stamp duty issue: see, for example, T103.30. He sought to explain the plethora of references by saying that he saw himself "really as a mail box situation" between "the various parties". He suggested - absurdly, in my view - that the parties "wouldn't have dealt with each other": see T105.30-.50. The whole of his evidence on the stamp duty issue, at T103-105, is unacceptable. I think that Mr Bali prevaricated on this issue because he knew that truthful answers would indicate that he was well aware that Digi-Tech's position was that the partnerships had not traded up until the time that the McLean parties acquired their interests in them; and that this was inconsistent not only with Mr McLean's professed interest in buying into a viable business for commercial reasons, but also inconsistent with reliance on cash flows, and a valuation based on them, that were twelve months out of date, and that could be seen, from the simple fact that the partnerships had not traded, to be inaccurate. 85 Although these matters give me some concerns about the reliability of Mr Bali's evidence, I think that, in general, he is to be preferred to Mr McLean to the extent that they are inconsistent. That is because it is apparent that Mr Bali had at least some actual recollection of events, even if that recollection was coloured (as I think it was) by a desire to minimise his involvement in the transaction. 86 Taking Mr Bali's evidence at its highest, it is apparent that he did not give any advice to Mr McLean on the commercial or other aspects of the transaction or, specifically, on the Indicative Valuation or the assumptions and figures on which it was based. 87 Mr Bali said that he scanned, or "skimmed", the folder of material that included the Indicative Valuation, the Gross Margin Review and the tax advice, but that he did not read them in detail and did not identify and analyse the assumptions underpinning them. He was not aware of, and therefore gave Mr McLean no advice as to, the detailed nature of the assumptions on which the Indicative Valuation was based and other matters that he did understand from his scanning of the material. 88 Mr Bali did say that he was aware of certain key features of the investment proposal, including (he said) that the Indicative Valuation "was around $70 million" and that there were tax benefits that were "some multiple of the cash outlay". Although Mr Bali said that "[i]t was unequivocally [his] view that the Deloittes reports were typically relevant to any decision to invest in the Digi-Tech business", neither he nor Mr McLean gave any evidence that he expressed this view to Mr McLean or that he discussed with Mr McLean, or advised him in any way on, the Indicative Valuation or the assumptions, including the Gross Margin Review, on which it was based. 89 At this point, I should note that Mr McLean's evidence was that he left it to Mr Bali and to the McLean parties' solicitor, Mr Peter Simms of Peter Cornelius & Partners, to provide him with commercial advice. Mr Bali has denied that, from his perspective, this was so. Mr Simms has died since the relevant events. However, it is apparent from Mr Simms' correspondence that he was involved (as one would expect) purely in relation to legal aspects of the transaction, including satisfying himself as to stamp duty implications and as to the drafting of the various transaction documents. I do not accept Mr McLean's evidence on this point. But the fact that Mr McLean saw fit to give that evidence, coupled with the lack of any commercial analysis carried out by Mr McLean himself and the fact that neither Mr Bali nor (on the documents) Mr Simms did so, confirms my view that the investment was undertaken for tax purposes, not as a genuine commercial investment.

[43]

Analysis 90 For these reasons, I do not accept, as having any probative value, Mr McLean's evidence that he relied upon, or was induced by, the statements in the Indicative Valuation as to the likely value, on the assumptions there set out, of the partnership businesses. Nor do I regard the surrounding circumstances as providing sufficient corroboration of Mr McLean's evidence to persuade me to accept it on this point; and, a fortiori, I do not regard those circumstances as sufficient of themselves to enable me to draw an inference of reliance or inducement. 91 In some cases, acceptance of evidence as to reliance may be facilitated because, if the evidence is not accepted, there is no other readily available explanation for what happened. This is not such a case. There are, as I have said, at least two suggested reasons why the McLean parties entered into the transaction with Digi-Tech. Rejection of Mr McLean's account does not mean that there is no explanation; it means that there is no evidence other than the conceded matter, namely the apparent availability of very substantial tax benefits. 92 I have not overlooked Mr McLean's evidence to the effect that it was his understanding that, to get tax deductions, the business had to be successful. However, I think that if that understanding were held by him (and I do not regard his evidence as particularly compelling on the point), then it related to the normal "dollar for dollar" tax loss situation, where profits must be earned before the benefit of the tax losses can be enjoyed. I do not regard it as applicable at all to an investment of this nature, which was promoted on the basis that tax losses of approximately six times the amount actually invested would be available (this, of course, assuming that the investors would put back to the vendor the obligation to make the balloon payment). Although Mr Bali could not recall the precise 6:1 ratio, he was aware that the deductions were a substantial multiple of the amount invested; and I have no doubt that he explained this to Mr McLean. 93 Nor have I overlooked the point that, as the advice of Senior Counsel included in the information given to Mr McLean and Mr Bali made clear, it was necessary for Mr McLean to have a reasonable expectation that the revenues of the business would be sufficient to meet the instalments of purchase price. This does not assist the McLean parties. There are two reasons why this is so. 94 Firstly, as I have already noted, the Court of Appeal pointed out at para [140] that the McLean parties did not plead a case that, had they known there was a serious risk that groundless assumptions had been made in the taxation advice (because of an absence of reasonable grounds for the revenue and profit projections and the represented value of the products), they would not have entered into the transaction. 95 Secondly, and more significantly, neither Mr McLean nor Mr Bali suggested that they had paid any attention to the revenue and profit projections, for the purpose of satisfying themselves that there was material that could enable the McLean parties reasonably to hold the expectation, as to revenues being sufficient to repay the purchase price, upon which the advice of Senior Counsel was founded. Mr McLean did not say that he had paid any attention to, or in any way relied upon, any of the projected figures as to revenues and profit. On his case, his attention was focused on the value of the business; and, having regard to the way in which the relevant assumption was framed in the tax advice, that was not material to enjoyment of the tax deductions. 96 Thus, whilst the assumption on which the tax advice was predicated might have been thought to be conducive to an examination of, and reliance upon, the projected revenues and profits, there is simply no evidence that Mr McLean did so in any direct fashion, or that Mr Bali undertook this task for him. Further, even if Mr McLean's evidence as to his focus and reliance on the valuation were accepted, he did not say that he sought to satisfy himself, by looking at the cash flows that were discounted to arrive at the valuation, that the valuation was reasonable. As I have already said, he did not even look at the Gross Margin Review, or at the extract from the Gross Margin Review set out in the Indicative Valuation as the foundation of the range of values derived (T25.25-.35). That is to say, Mr McLean did not, on his evidence, even look at the key item within para (iii) of the particulars to para 95(b) of the statement of contentions. 97 I therefore conclude that the McLean parties have not proved that they relied on, or were induced by, the Profit Potential Representation in deciding to acquire, and acquiring, their interests in the Terminal Adapter and Freerider partnerships. Loss or damage 98 The conclusion to which I have come makes it unnecessary for me to express a view on the damages claim. However, since the matter was fully argued and in case I am wrong in the conclusion to which I have come, I will set out my findings and (so far as I am able to do) conclusions on the question of damages. 99 The McLean parties sought damages equal to the amounts actually paid by them, together with interest. They also sought either an order under s 87(2ba) of the Trade Practices Act relieving them of their obligation to pay the balloon payments, or damages in the amount of the balloon payments, together with interest. 100 Because separate arguments were addressed to these two claims, they require separate consideration. There was also a separate argument as to the operation, in this context, of s 51A. I will start with that.

[48]

(2) For the purpose of the application of that provision, a representation with respect to a future matter is "deemed" to have been made without reasonable grounds unless the corporation "adduces evidence to the contrary". 106 Section 52 prohibits a corporation, in trade or commerce, from engaging in conduct that is misleading or deceptive or likely to mislead or deceive. The effect of what in truth is the double deeming effect of s 51A is that a contravention of s 52 is made out where the requirements of s 51A(1) and (2) are met. Subsection (2) deems a representation to have been made without reasonable grounds unless the corporation adduces evidence to the contrary. Subsection (1) provides that a representation made without reasonable grounds "shall be taken" - in effect, deemed - "to be misleading". 107 There is no magic in the concept of deeming. In some circumstances (perhaps the more common use), it creates a "statutory fiction" (Mutual Pools & Staff Pty Ltd v Federal Commissioner of Taxation (1992) 173 CLR 450, 468 (Dawson, Toohey and Gaudron JJ)). In other cases, however, deeming may be used to define, or to express a conclusion: Hunter Douglas Australia Pty Ltd v Perma Blinds (1970) 122 CLR 49, 65-66 (Windeyer J). 108 In the latter case, Windeyer J explained the different senses in which the word "deemed" and its cognate forms are used. Referring to the concept that the word "deemed" is often used to extend the meaning of some term to a subject matter that it does not properly designate, his Honour said: "… the verb 'deem' or derivatives of it, can be used in statutory definitions to extend the denotation of the defined term to things it would not in ordinary parlance denote. This is often a convenient device for reducing the verbiage of an enactment. But that the word can be used in that way and for that purpose does not mean that whenever it is used it has that effect. After all, to deem means simply to judge or reach a conclusion about something. … The words 'deem' and 'deemed' when used in a statute thus simply state the effect or meaning which some matter or thing has - the way in which it is to be adjudged. This need not import artificiality or fiction. It may be simply the statement of an indisputable conclusion …." 109 As his Honour pointed out at 66, the two different senses in which the word is used may be described as "fictitious" and "factitious". He then said, at 67: "There is no presumption, still less any rule, that wherever the word 'deemed' appears in a statute it demonstrates a 'fiction' or some abnormality of context. Sometimes it does. Often it does not. Much depends upon the context in which the word appears …." 110 Gleeson CJ (with whom Cripps JA agreed) expressed similar views in Macquarie Bank Ltd v Fociri Pty Ltd (1992) 27 NSWLR 203, 207, and pointed out that the construction of a deeming provision may turn not on the meaning of the word "deemed", but on the statutory purpose for which the deeming is used. 111 Section 51A(2) is a "factitious" deeming: it is used for the avoidance of doubt, or to express a conclusion, and not to extend the operation of subs (1) to something that it could not otherwise embrace. Likewise, I think, the words "is taken to be" in subs (1) are used in the same way. They require the result that, where the conditions that precede them are met, the conclusion that follows them must be reached. Again, they do not require a conclusion that could not otherwise be available. 112 The result is that, where s 51A is engaged (ie where a corporation makes a representation as to a future matter that is either proved or deemed to have been made without reasonable grounds for doing so), there "is taken to be" a contravention of s 52. 113 In the present case, the operation of s 51A establishes, as between the McLean parties and Digi-Tech, that Digi-Tech has contravened s 52. Thus, for the purposes of ss 82 and 87, it is established between the McLean parties and Digi-Tech that Digi-Tech has engaged in conduct done in contravention of Part V. That being established (or "taken to be" established), it is necessary only for the McLean parties to show that they have suffered (or, for the purposes of s 87, are likely to suffer) loss or damage "by" that conduct. But attention must be paid to the composite expression. The sections do not focus (for example) on conduct that was misleading or deceptive or likely to mislead or deceive. Because the contravention of Part V is established through the operation of s 51A, there is established one of the conditions to the operation of ss 82 and 87. It is the other condition, whether loss or damage was suffered "by" that conduct, that remains for examination. 114 It would have been open to the McLean parties to seek a declaration that Digi-Tech had engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, upon the basis of the matters that were proved (including, proved by operation of the deeming effect of s 51A). That declaration would establish, as between the McLean parties and Digi-Tech, one of the foundations for damages under s 82 or relief under s 87. It is difficult to see why the McLean parties should be in any different, and more disadvantageous, position because they have not sought declaratory relief. 115 Further, when one considers that the purpose of Part VI of the Trade Practices Act (in which ss 82 and 86 are found) is to make provision for the enforcement of and remedies for contraventions of other parts of the Act, it is very difficult to understand what statutory purpose could require the proof again of something that has already been established. The submission overlooks both the evident statutory purpose and the simple proposition that one function of a deeming provision is to provide a mode of proof of that which is deemed. It would be quite extraordinary if the legislature, having smoothed the path of a victim of misleading or deceptive conduct in some circumstances through the enactment of s 51A, thereafter sought to put obstacles in the way of the victim's attempts to obtain damages or other relief. I see no reason to attribute to the legislature such an inconsistent duality of approach.

[51]

(3) Legal, accounting and other fees totalling $51,636.50. 117 The amount referred to in subpara (1) is the total of the first two years' instalments for each of the partnerships - the figure that has been referred to, more than once, as $1.2 million. 118 The amount in subpara (2) represents in substance the McLean parties' share of further research and development expenses incurred in relation to the products. I note that, to the extent that these amounts included items of consequential loss, Digi-Tech did not submit that they were thereby irrecoverable. Nor did Digi-Tech submit that the amounts had not been paid, or that they were not in principle proper to be included among the damages that would be recoverable if the McLean parties otherwise succeeded. Digi-Tech's case, both in relation to these amounts and in relation to the obligation to make the balloon payments (in respect of which the McLean parties sought either relief under s 87 or damages under s 82) was that the McLean parties had failed to demonstrate "that the obligations [they] assumed were more burdensome than the rights they received were valuable". Digi-Tech submitted that the rights obtained by the McLean parties had some value and that, this value not being proved, the damages case must fail. (Separate submissions were addressed to the balloon payments, with which I deal in the next section of these reasons.) 119 In a representation case (be it a case claiming damages for fraud, or a case under s 52 based on misleading and deceptive representations), damages are sometimes assessed by comparing the price paid by a plaintiff with the value it received: both being assessed at the date the relevant transaction was undertaken. In HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54, the High Court discussed this approach, and qualifications to it, at paras [35] and following. Their Honours pointed out that the rule, "sometimes described as the rule in Potts v Miller" (1940) 64 CLR 282, was neither universal nor inflexible. They said that the test was not the difference between price and "market value", but between price and "real value" or "fair value" (or a number of other synonymous expressions). Market value was relevant only where it could be equated to real or fair value. Their Honours said further that market value might be disregarded for a number of reasons, including that there may be no market. 120 Their Honours at para [39] referred to the way in which courts may take into account matters occurring after the date at which the investment was made (the later date, of course, being the date when the assessment is being performed). In this respect, their Honours said (citing Dixon J in Potts at 298 and Gibbs CJ in Gould at 220) that causes of decline in the value of what has been bought, which were inherent in the thing itself, could be taken into account, where causes that were extrinsic or supervening or accidental should not. 121 In the present case, that approach would enable the Court to take account of supervening events that bear on the quantification of damages where those supervening events reflect the incidents of the transaction itself. For example, if it were the nature of the property bought that there was no real market for it (as, I think, is the present case), then the failure of the McLean parties to seek to sell the property cannot necessarily amount to a failure to mitigate; and the absence of a market can be taken into account in assessing whether the rights had any real value. 122 However, the High Court also considered an alternative approach. This approach focused on the value of the benefits left in the plaintiff's hands at trial. In this case, their Honours at para [63] cited with approval the approach of the House of Lords in Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254. The majority in that case held that there might be circumstances in which a defendant was required to bring to account only the actual proceeds, or value, of the asset, where it was shown that he had acted reasonably in retaining it. The fifth member of the House, Lord Steyn (who concurred in the result) stated that the fundamental requirement was to compensate the plaintiff for loss, that the rules of assessment are means of giving of effect to that fundamental principle, and that the approach of valuing assets at the date of the transaction is "simply a second order rule applicable only where the valuation method is employed" (at 284). His Lordship concluded that, where the valuation method was not appropriate, the Court could assess loss without reference to the date of the transaction or any other particular date, if so to act would give effect to the fundamental compensatory principle. 123 The High Court at para [65] indicated that such an approach might be available under s 82, and that it might be appropriate in particular circumstances. They said (omitting citations): "There is certainly no reason why an approach of that kind is not open under s 82 of the Act. The deduction of true value at the acquisition date from the price paid is no more than a guide to the assessment of damages under s 82. Section 82 does not in terms refer to that method, and the width of s 82 permits other approaches to the assessment of damages so long as they work no injustice. The alternative approach advocated by the plaintiff has particular appropriateness in the present circumstances. That is because a primary reason for the common adoption, in assessing damages in deceit, of the test of comparing the price paid for an asset with its true value when acquired is the desirability of separating out losses resulting from extraneous factors in the later history of the asset. … [Where] there are no losses resulting from extraneous factors to separate out, there is correspondingly less need to look to a comparison of purchase price and real value on acquisition as the appropriate approach." 124 Thus, at para [67], their Honours concluded that this approach was capable of producing a fair outcome where the asset bought was not readily marketable, and where there were no extraneous factors bearing upon its depreciation in value. However, in view of the conclusion to which their Honours had come on the primary position put by the plaintiff, it was not necessary for them to express a considered view. 125 In the present case, the McLean parties relied upon what the High Court in HTW Valuers called "an alternative approach". Of course, the rights acquired by them under the Digi-Tech transaction had expired by the time of the hearing before me. That could be thought to make it inappropriate to carry out an assessment of the value of the benefits received by the McLean parties as at the date of hearing (or as at any date after the rights expire). I am not sure that this is so, because it is possible now to look back and see precisely what benefits flowed to the McLean parties under the transaction. But in any event, the exercise could be carried out at some other time (for example, the date of expiry of the rights); and the precise time chosen is unlikely to produce a significantly different outcome. 126 If, as the decision in HTW Valuers appears to indicate, the alternative approach is open in principle, I think that this would be an appropriate case to adopt it. Firstly, as I have indicated, the very nature of the rights is that there is no ready market for them, so that it is difficult, to the point of impossibility, to attribute a real "market value" to them at any given time. Secondly, the valuation of the rights necessarily involves some informed assessment of sales and revenues. The only assessment that was carried out is the one, prepared by Digi-Tech and summarised in the Gross Margin Review and relied upon in the Indicative Valuation, that was found to be misleading or deceptive. Thirdly, to the extent it is appropriate to have regard to events that occurred after the transaction was consummated in May 1998, those events suggest very strongly that the rights are unlikely to have had substantial value. 127 If the assessment is carried out as at the date the McLean parties entered into the transaction, then it is correct to say that some value might be assigned to the rights, because then, looking forward and ignoring what has happened since, they might be thought to have had some value - even if not the value attributed to them by the parties in their agreement. But if, as I think is the case, it is appropriate to take account of events that have since occurred (at least to the extent already indicated), then it can be seen that those prospective benefits were in fact valueless. The benefit flowing under the transaction, or under the agreement, was the capital value of the cash flows. There were in fact no positive cash flows; on the contrary, there were substantial negative cash flows; and there were substantial amounts paid out by the McLean parties. 128 I do not think that the tax benefits are to be taken into account either way. They were not rights received by the McLean parties under their agreement with Digi-Tech; at most, they were a benefit that might have accrued to the McLean parties had the tax treatment of the arrangements followed the expectation that was held when the McLean parties entered into the transaction. Equally, the unavailability of those tax benefits does not form loss for which the McLean parties are entitled to be compensated; and no such claim was made. This is not to say that the apparent availability of the tax benefits was not a major attraction (indeed, on my findings, the only inducing attraction) of the arrangements. It is to say only that the benefits are an incident, or result, of the transaction, and not something that was offered under it; and that the failure to recoup them does not form a head of recoverable loss. 129 The McLean parties (strictly speaking, AI McLean, to whom the benefit of the losses was transferred) lodged tax returns claiming the benefit of the deductions. They learned that the Commissioner of Taxation had disallowed the claims by other partners. Upon learning that, AI McLean withdrew its returns and submitted fresh returns in which the deductions were not claimed. Digi-Tech did not submit that it was unreasonable for AI McLean so to act; and the McLean parties did not submit that the loss of the benefit of the deductions was something for which they were entitled to be compensated in damages. 130 Mr Sheahan submitted that the findings of Einstein J "powerfully support a conclusion that the rights had substantial value". His Honour's findings were:

[55]

The balloon payments 133 The issue in relation to the balloon payments was whether, as Digi-Tech put it, the McLean parties' liability for those payments was due not to the misleading conduct alleged against Digi-Tech, but to the McLean parties' failure effectively to exercise the option to avoid the liabilities. 134 The McLean parties' response was to characterise this as a defence relying upon contributory negligence. That is to say, they characterised Digi-Tech's submission as being that the loss (or risk of loss) in respect of the balloon payments flowed not from the misleading or deceptive conduct that engendered the transaction "but rather by the [McLean parties'] negligence in failing to properly exercise the option". 135 I am not sure that Digi-Tech's submissions on this point should be so characterised. For Digi-Tech's submission to succeed, it is necessary to show that the cause of the loss, in respect of the balloon payments, was not any misleading or deceptive conduct but the failure effectively to exercise the option. For Digi-Tech to succeed, it would not be necessary to show that the failure to exercise the option was negligent; this defence could succeed equally well if the McLean parties had made a conscious and rational decision not to exercise the option. 136 The law accommodates multiple causation in this context, as in the context of reliance. Thus, in Henville, McHugh J (with whom Gummow J agreed) said at 493 [106] that a contravention that "materially contributed" to the loss or damage suffered would be regarded as a cause of that loss or damage. It would not matter if other factors or conditions played an even more significant role. There might, however, be a limiting case where the intervention of some "abnormal event" between breach and damage led to the "common sense" result that the breach was not a cause of the damage. His Honour said (omitting citations): 106 If the defendant's breach has "materially contributed" to the loss or damage suffered, it will be regarded as a cause of the loss or damage, despite other factors or conditions having played an even more significant role in producing the loss or damage. As long as the breach materially contributed to the damage, a causal connection will ordinarily exist even though the breach without more would not have brought about the damage. In exceptional cases, where an abnormal event intervenes between the breach and damage, it may be right as a matter of common sense to hold that the breach was not a cause of damage. But such cases are exceptional. 137 His Honour's point was picked up by the majority (Gaudron, Gummow and Hayne JJ) in I&L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109, 130 [62]. Their Honours endorsed the "material contribution" approach, and said that it was only where the alleged contravention did not materially contribute to some part of the loss that it was appropriate to speak of the cause of that part of the loss as being "independent" of the contravention. Their Honours said (omitting citations): 62 As was recognised in Henville v Walker , there may be cases where it will be possible to say that some of the damage suffered by a person following contravention of the Act was not caused by the contravention. But because the relevant question is whether the contravention was a cause of (in the sense of materially contributed to) the loss, cases in which it will be necessary and appropriate to divide up the loss that has been suffered and attribute parts of the loss to particular causative events are likely to be rare. Further, it is only in a case where it is found that the alleged contravention did not materially contribute to some part of the loss claimed that it will be useful to speak of what caused that separate part of the loss as being "independent" of the contravention. Although the respondent submitted to the contrary, for the reasons given earlier, there is no basis in this case for concluding that some identifiable part of the loss suffered by the appellant was caused by the appellant's carelessness and not by the respondent's contravention. Indeed, the division of responsibility made by the primary judge (attributing two-thirds of the "fault" to the respondent and one-third to the appellant) reveals that this is so. Subject to one qualification, no attempt was made, whether at trial or on appeal to the Court of Appeal or this Court, to identify particular elements of the overall loss as attributable to particular causes. 138 In Henville, McHugh J at 505 [140] dealt with the way in which "the unreasonable conduct of the claimant" could be taken into account in assessing damages under s 82. He said that, "if part of the loss or damage would not have occurred" but for that conduct, "it will be appropriate in assessing damages under s 82 to apply notions of reasonableness in assessing how much of the loss was caused by the contravention of the Act …". This suggests that, if conduct of the claimant is to be relied upon as breaking the chain of causation, then that conduct must be a "but for" independent cause of at least some part of the loss or damage. However, in I&L Securities, the majority pointed out at 128-129 [58] that this was not a sufficient test. Their Honours said that it might be said, of two independent causes, that the loss would not have occurred "but for" each. However, their Honours said, this does not demonstrate either that one rather than the other was the cause, or that neither was a cause, of the loss. 139 Further, at 129 [60] their Honours showed why it was that s 82 did not require enquiry into and comparison of the relative degrees of culpability of a plaintiff and a defendant. Their Honours said that is because the terms in which the Trade Practices Act prescribes norms of behaviour, and provides remedies for contravention of those norms, do not require the consideration of "some a priori assumption about distributing responsibility for loss or damage suffered between those who have contravened the Act and those who have not". The policy of the Act did not require a claimant's carelessness that did not involve a contravention of the Act to be taken into account to reduce the amount of loss or damage caused by the contravener's conduct, for which the claimant is to be compensated or for the prevention of which orders are to be made under s 87. Thus, their Honours concluded at 130 [61]: "Nothing in the words of ss 82 or 87 requires or permits a court to make orders which will compensate a person who has suffered loss or damage by conduct in contravention of a relevant provision of the Act for only part of the loss or damage which has been suffered by that person by that conduct and which will not be, or has not been, remedied by the making of some other order under s 87." 140 A plaintiff's conduct will only become relevant in the causation enquiry where it is so dominant that it constitutes a fresh and independent cause. As Gleeson CJ put it in Henville at 468 [13], "[n]egligence on the part of a victim of a contravention is not a bar to an action under s 82 unless the conduct of the victim is such as to destroy the causal connection between contravention and loss or damage". (I do not regard his Honour's dissent in the result of that case as detracting from the force of that observation.) McHugh J expressed a similar view in I&L Securities at 136 [85] where he approved the approach of French J in Pavich v Bobra Nominees Pty Ltd [1988] ATPR (Digest) ¶46-039: "contributory negligence was irrelevant unless it could be shown that the applicant's carelessness or disregard for their interest was the cause of or or some part of a claimed loss" (his Honour's emphasis); and that "although the contravening conduct may be the sine qua non of the loss claimed, there may come a point where the applicant's own conduct was "so dominant" in the causal chain as to constitute a novus actus interveniens". 141 The facts relating to the failure of the McLean parties to exercise their options are relatively simple. The McLean partner in each of the partnerships was McLean Tecnic. Thus, McLean Tecnic had a liability to Digi-Tech under the Terminal Adapter partnership documents for the balloon payment relating to that partnership; and a separate liability to Digi-Tech under the Freerider partnership documents for the balloon liability to Digi-Tech in respect of that partnership. 142 Clause 2.2 of each of the option agreements provided that the options could be exercised by AI McLean "provided that there is no outstanding breach of any of the warranties and undertakings" set out in clause 4. By clause 4.1(b), AI McLean warranted that, on the date of exercise of the option, McLean Tecnic would have no indebtedness to any person other than the debt in respect of which the option was exercised. 143 Einstein J held, and the Court of Appeal agreed, that for each option, the existence of indebtedness under the other partnership agreement meant that there was a breach of clause 4.1(b). Thus, in neither case was the exercise of option effective. 144 Digi-Tech submitted in the Court of Appeal, and the Court of Appeal appeared to accept, that AI McLean could have escaped this problem simply by incorporating two wholly owned sole purpose companies: one to be the partner in each partnership (see paras [216], [217] and [221]). 145 This is not a case where the McLean parties did not seek at all to exercise the options - either because of negligence or otherwise. They sought to exercise them, but were thwarted because they had not understood or applied the terms of the relevant agreements. That may amount to negligence; but it is hard to see it as amounting to negligence of such magnitude as to displace entirely, in the consideration of causation of loss, the hypothetical effect of Digi-Tech's misleading or deceptive conduct. 146 Because I have concluded that the question of reliance must be answered against the McLean parties, it is impossible for me to express a concluded view on this aspect of the case. It only arises if, contrary to my findings, there are two separate causes of this loss. If it arose, it would require an analysis of the relevant significance, or dominance, of those causes, and an analysis of whether one was, in relation to the loss relating to the balloon payments, so dominant as in effect to demonstrate the absence, in the exercise of common sense, of any causal effect to the other. That having been said, on the hypothetical assumption that the transaction (involving the complexities that led to the failure of the attempts to exercise the options) had been induced by reliance on misleading or deceptive conduct, it is difficult to see how the ineffective exercise of the options, flowing from the very complexity of the transaction hypothetically induced, could be said to constitute a fresh cause, or novus actus interveniens . Conclusions and order 147 I return to the issues that were remitted by the Court of Appeal and answer them as follows:

McLean Tecnic & Anor v Digi-Tech & Ors

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Judgment (59 paragraphs)

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Cases Cited (17)

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