Nadinic v Cheryl Drinkwater as trustee for the Cheryl Drinkwater Trust

Court of Appeal (NSW)|2019-11-19|Before: Meagher JA, Leeming JA

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

[This headnote is not to be read as part of the decision] On 2 May 2011, the respondent, Ms Cheryl Drinkwater, entered into a joint venture agreement with a company owned and controlled by the appellant, Mr Andrew Nadinic, to develop a block of apartments on the respondent's land in Belmont, NSW. By late 2014, the parties were in dispute about financial matters. On 24 November 2015, the respondent entered into a settlement deed with the appellant and two related companies, which in effect provided for the respondent to pay a sum of money (secured by a second mortgage over the land) to purchase the appellant's interest in the development project (including in the corporate entity undertaking that development), and for the appellant and his related companies to release any claims he or they may have had in relation to the project. On 10 November 2017, the respondent sought relief under the Australian Consumer Law on the basis that the appellant's conduct whilst negotiating the settlement deed was misleading or deceptive. The impugned conduct was a failure to disclose that GST input tax credits were no longer available to the entity that the respondent was to acquire under the settlement deed because they had already been claimed, refunded and paid away to another entity related to the appellant. The primary judge held that the appellant's failure to disclose was deceptive. His Honour found that the settlement deed would not have been entered into but for the appellant's deceptive conduct. His Honour awarded damages of $1,679,790, being the difference between what the respondent would have received had the joint venture proceeded to completion and what she did receive pursuant to the settlement deed. His Honour gave effect to the award by varying the second mortgage - in doing so adjusting both the principal sum secured and the date from which interest was to accrue. The issues in the appeal were: (i) Whether the appellant had in fact disclosed the true position regarding the availability of the input tax credits to the respondent. (ii) Whether the respondent could have had a reasonable expectation that the appellant would correct her misunderstanding in circumstances where she never sought to verify the company's financial position, the parties were in dispute and were both represented by legal and financial advisers. (iii) Whether the primary judge erred in finding that GST input tax credits would in any event have been available to the benefit of the entity which the respondent was to acquire under the settlement deed. (iv) Whether the primary judge erred in varying the date from which interest was to accrue under the mortgage. Held, the Court dismissing the appeal: As to issue (i), per Barrett AJA (Meagher and Leeming JJA agreeing): (1) The relevant documents did not disclose or provide a means of deducing that input tax credits had already been claimed, refunded and paid away: at [36] (Barrett AJA), [1] (Meagher JA), [2] (Leeming JA). As to issue (ii), per Barrett AJA (Meagher and Leeming JJA agreeing): (2) Where the purpose of the relevant letter was to inform, it purported to communicate objective information as to an established financial position and it came from the lawyer for the party who had instructed accountants concerning that position, the respondent was entitled to accept its content at face value, there being no element of the surrounding circumstances giving rise to a rational need for inquiry. That entitlement is not displaced by the fact that the parties were in dispute: at [46] (Barrett AJA), [1] (Meagher JA), [2] (Leeming JA). Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; [2010] HCA 31 discussed; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546; [1988] FCA 40, Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; [1992] FCA 557; and Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2000) 104 FCR 564; [2000] FCA 1572 referred to. As to issue (iii), per Barrett AJA (Meagher and Leeming JJA agreeing): (3) GST input tax credits would not be available to offset a GST liability arising on sale of the apartments because the relevant entity was not the vendor of the apartments, however that entity would have been able to use the credits to generate cash refunds, producing equivalent financial results: at [50]-[52] (Barrett AJA), [1] (Meagher JA), [2] (Leeming JA). (4) The primary judge's mischaracterisation of the precise manner in which the respondent could realise the benefit represented to be available did not cure the deceptive character of the appellant's conduct: at [53] (Barrett AJA), [1] (Meagher JA), [2] (Leeming JA). As to issue (iv), per Barrett AJA (Meagher and Leeming JJA agreeing): (5) It was appropriate that the appellant was deprived of interest which would have been payable under the mortgage because the mortgage would not have been granted were it not for the deceptive conduct of the appellant: at [64] (Barrett AJA), [1] (Meagher JA), [2] (Leeming JA).

Judgment

MEAGHER JA: I agree with Barrett AJA.
LEEMING JA: I agree with Barrett AJA.
BARRETT AJA: On 24 November 2015 the appellant, Mr Andrew Nadinic, and the respondent, Ms Cheryl Drinkwater, entered into a settlement deed for the purpose of ending certain disputes that had arisen between them. There were in fact four parties to the deed: Mr Nadinic, Ms Drinkwater, Maxstra NSW Pty Ltd1 ("Maxstra NSW") and Brooks Parade Pty Ltd ("Brooks").
Ms Drinkwater and Brooks had entered into a joint venture agreement on 2 May 2011. Brooks was, at that time, wholly owned and controlled by Mr Nadinic (Ms Drinkwater became a director in July 2013). By the agreement of 2 May 2011, Ms Drinkwater and Brooks agreed to undertake a venture of constructing and selling apartments on land at Belmont owned by Ms Drinkwater. [1] The basis of the agreement, very broadly stated, was that Ms Drinkwater would contribute her land to the venture and Brooks would make available (or procure) financing, construction and property development expertise.
A construction contract was entered into on 17 May 2013 between Brooks as principal and Maxstra NSW as contractor. Ms Drinkwater, the owner of the land, was not a party to the construction contract. Maxstra NSW was a company wholly owned and controlled by Mr Nadinic's father. As building works progressed, contracts for "off the plan" sale of several apartments in the yet to be completed building were entered into by Ms Drinkwater as vendor with various purchasers.
Financial stresses began to develop in late 2014. Ms Drinkwater and Mr Nadinic fell into dispute over financial matters. The culmination was the execution of the deed of settlement of 24 November 2015. The agreed basis of compromise was that Mr Nadinic would sell his interest in the joint venture (including his shareholding in Brooks) to Ms Drinkwater for $2,050,000 and, as security for that payment, Ms Drinkwater would grant to Mr Nadinic a second mortgage of the development site (the first mortgage was held by ANZ Bank which had provided project finance). After the deed of 24 November 2015 had been entered into and the accompanying mortgage had been given, the construction project proceeded to completion.
The sum of $2,050,000 secured by the mortgage was payable on 30 June 2016. Ms Drinkwater did not make payment on that date and Mr Nadinic took action towards enforcement of the security, Ms Drinkwater then brought proceedings in which she sought to have the settlement deed and the mortgage set aside. Ms Drinkwater was successful before Pembroke J [2] but that decision was reversed on appeal [3] and the matter was remitted for a new trial. In that way, it came before Emmett AJA (the primary judge) who heard it over three days in February 2019 and delivered his decision on 5 April 2019. [4]

The proceedings at first instance

Ms Drinkwater's pleaded case before the primary judge was that, before she entered into the settlement deed and granted the mortgage on 24 November 2015, Mr Nadinic had engaged in misleading or deceptive conduct and that she had relied on that conduct to her detriment in deciding to become party to the deed and the mortgage. The conduct alleged by Ms Drinkwater was Mr Nadinic's failure to inform Ms Drinkwater that, before the deed and mortgage were entered into (specifically, in the period June 2014 to September 2015), the Australian Taxation Office (ATO) had paid Brooks sums totalling $883,675.59 as refunds of input credits for goods and services tax (GST) and Brooks had paid out those sums at the direction of Maxstra Constructions Pty Ltd ("Maxstra Constructions"), a company associated with Mr Nadinic and his father which is to be distinguished from Maxstra NSW. The ATO refunds and the disbursement of them at the direction of Maxstra Constructions were processed for Brooks through the trust account of PKF, accountants appointed for Brooks by Mr Nadinic. Ms Drinkwater's case was that Mr Nadinic knew that Ms Drinkwater was unaware of these matters; that he did nothing to disabuse her of her misapprehension; that, had she known the true position regarding the $883,675.59, she would not have entered into the deed and the mortgage; and that she suffered damage as a result of Mr Nadinic's misleading conduct.
Mr Nadinic did not dispute that Ms Drinkwater laboured under a misapprehension. Nor did he dispute that he was aware of that misapprehension when the parties entered into the settlement deed and the mortgage. But he denied that his failure to inform Ms Drinkwater that Brooks had been paid the sum of $883,675.59 by the ATO and had passed those moneys on as directed by Maxstra Constructions constituted conduct that was misleading or deceptive within the meaning of s 18 of the Australian Consumer Law. [5] Mr Nadinic argued that s 18 does not require a party engaged in commercial negotiations to volunteer information that will assist the decision-making of another party; nor does it impose on a party an obligation to volunteer information in order to avoid the consequences of the careless disregard by another party of equal bargaining power of that other party's own interests.
Mr Nadinic also argued that, had Ms Drinkwater observed her "surrounds", she would have become aware of the matter of which she complained. There had been prior communications in which Brooks' GST position had been mentioned. In fact, in June 2015 there had been a disagreement about the state of the account between Brooks and the builder, Maxstra NSW. In the course of discussions about that, Ms Drinkwater and her husband, Peter Drinkwater, came to think that two versions of the construction contract existed, one showing the contract sum "plus GST" and the other without that addition. Peter Drinkwater suggested that "plus GST" had been written in after the contract was signed. In subsequent correspondence, there were allegations from Mr Nadinic's side that Brooks owed Maxstra NSW some $700,000 being the amount that would have been due if Brooks was liable to pay Maxstra NSW an additional ten per cent of the invoiced amounts.
Mr Nadinic also argued that Ms Drinkwater, a director of Brooks since July 2013, did not take any steps to inquire about the matter. Nor did she obtain a copy of the construction contract until December 2014.
Mr Nadinic placed reliance on communications between Mr Nadinic and Ms Drinkwater and their respective solicitors attempting to agree on an appropriate amount to be paid by Ms Drinkwater to Mr Nadinic to acquire control of Brooks and of the project. Of particular relevance was a letter from Mr Nadinic's solicitor to Ms Drinkwater's solicitor of 16 September 2015.
The letter of 16 September 2015 enclosed "a summary of the cost status of the project and copies of all relevant invoices". The summary dealt with "Cash Position", "Profit & Loss" and "Tax Position" and was set out in Appendix 1 to the primary judge's reasons (that appendix so described is also part of these reasons). Mr Nadinic maintained that although the Appendix 1 summary contained some inaccuracies which required adjustment (necessary corrections, as formulated by him, were set out by the primary judge in Appendix 2 to his reasons which is replicated as Appendix 2 to these reasons), Appendix 1 made it clear to Ms Drinkwater that there was a substantial liability for GST. Ms Drinkwater complained that the unadjusted Appendix 1 summary effectively asserted that the sum of $774,301.81 from input tax credits was available to be offset against estimated GST liability that would be incurred on the sale of the completed apartments, leaving net GST of $485,689.19 payable by Ms Drinkwater if she acquired full ownership of Brooks.
Ms Drinkwater read the letter of 16 September 2015 and its enclosure. She noted an item of $774,301.81 labelled "GST payable from input credit" about which it will be necessary to say more presently. The primary judge found that Ms Drinkwater understood that this was a reference to the GST that Maxstra NSW was claiming Brooks should have paid to it. Her view was that there was no such liability because the price specified in the construction contract was inclusive of GST rather than a price with GST "on top". At that stage she was unaware that Brooks had already received refund of GST input tax credits from the ATO and had paid equivalent amounts at the direction of Maxstra Constructions.
On 8 November 2015, Ms Drinkwater sent to Mr Nadinic a handwritten note that Peter Drinkwater had prepared, based on the attachment to the letter of 16 September 2015 (Appendix 1). The note showed an expense item of $440,000 (a rounded figure) labelled "GST Margin scheme". This compared with a total GST expense of $1,260,000 in the 16 September 2015 attachment (Appendix 1), thus reflecting a belief or assumption that the difference of something more than $720,000 of input tax credits would be available to be applied towards the total of $1,260,000. Peter Drinkwater's note concluded: All approx. costs, what am I missing?"
Mr Nadinic responded on the same day with what he said was a corrected version of Mr Drinkwater's figures. The $440,000 in Mr Drinkwater's note remained unchanged in Mr Nadinic's corrected version where it was also labelled "GST Margin scheme".
This exchange took place on 8 November 2015 in circumstances where Mr Nadinic was aware that Ms Drinkwater did not know that the amount of the input tax credits had been refunded to Brooks and distributed at the direction of Maxstra Constructions.
The primary judge's conclusion about the letter of 16 September 2015 and its accompanying summary was that the summary (Appendix 1), which did not in fact contain the adjustments in Appendix 2 and was to that extent inaccurate, also failed to disclose that the GST input tax credits had in fact been refunded by the ATO to Brooks and that Brooks had paid a corresponding amount at the direction of Maxstra Constructions. That part of his Honour's decision is directly challenged by Ground 1 of Mr Nadinic's grounds of appeal.
The primary judge regarded communication of the content of the 16 September 2015 letter and its accompanying summary as the start of a course of conduct by Mr Nadinic that produced the relevant misapprehension in Ms Drinkwater. The letter and the accompanying summary were inaccurate and failed to disclose the particular matters concerning the refunding of input tax credits to Brooks and Brooks' roughly corresponding payments to Maxstra Constructions. Having so found, the primary judge made further findings that: 1. Mr Nadinic knew that Ms Drinkwater was under the misapprehension that the GST input tax credits were still available to Brooks; 2. there was no reason for Ms Drinkwater to think that the GST input credits may have been already refunded; 3. Ms Drinkwater believed the statement that the GST had not been paid to Maxstra NSW and that Brooks had available GST tax credits of $774,301.81 to offset against Brooks' liability to remit $1.2 million of GST to the ATO on the sales of apartments; and 4. it was reasonable for Ms Drinkwater to expect that Mr Nadinic would disabuse her of her misunderstanding regarding the availability of the GST input tax credits.
In this Court, Mr Nadinic challenges, in particular, the last of these findings. He argues by means of ground 1A of appeal that, even if the letter of 16 September 2015 and the accompanying summary did not disclose to Ms Drinkwater that refunds had been received by Brooks from the ATO and paid out by Brooks at the direction of Maxstra Constructions, there was no objective basis for a finding that it was reasonable for Ms Drinkwater to expect that Mr Nadinic would disabuse of her misunderstanding regarding GST, given the circumstances of their relationship at the relevant time.
Having concluded that Mr Nadinic had engaged in misleading or deceptive conduct and that it was reasonable that Mr Nadinic should have disabused her of the misapprehension under which she therefore laboured, the primary judge turned to the consequences. They were, he found, that Brooks, the company Ms Drinkwater was negotiating to purchase, in fact had available to it substantially less in input tax credits than Ms Drinkwater had been led to believe, and that that caused the company she was buying to have a value correspondingly smaller than she understood it to have. By grounds 2 and 3 of appeal, Mr Nadinic challenges that finding.
The ultimate conclusion of the primary judge was that Ms Drinkwater had suffered loss and damage because of Mr Nadinic's conduct which was deceptive [6] and that she would not have entered into the settlement deed had the correct position been disclosed. His Honour assessed the quantum of her loss or damage at $1,679,790, being the difference between what she would have received had the joint venture proceeded to its conclusion and what she did receive pursuant to the settlement deed.

Grounds of appeal

I have already mentioned in passing the principal grounds of appeal.
Ground 1 is that the primary judge erred in finding: that the document that became Appendix 1 to the reasons failed to disclose that GST input credits had been refunded by the ATO to Brooks which had paid the proceeds away at the direction of Maxstra Constructions; and that Ms Drinkwater had no reason to think that GST input tax credits had already been refunded.
Ground 1A goes to the misleading or deceptive quality of Mr Nadinic's conduct. By this ground it is contended that the primary judge erred: in finding that Mr Nadinic had engaged in misleading or deceptive conduct by failing to disabuse Ms Drinkwater of her misapprehension; in finding that she had a reasonable expectation that he would (or was required to) correct her misapprehension; in failing to have regard to the fact that the parties were operating in a context of dispute; and in failing to have regard to, or give sufficient weight to, the fact that Ms Drinkwater was represented by experienced legal and financial advisers.
Ground 2 is that the primary judge erred in finding that, but for the withdrawal of the input tax credits by Brooks, those credits would have been available to set off against Brooks' liability to pay GST on the sale of the completed units, where Brooks had no such liability as it was Ms Drinkwater who owned the land and was the seller of the units.
Ground 3 is that the primary judge erred in finding that the shares in Brooks had a reduced value because of the absence of the input tax credits.
Ground 4 goes to an aspect of the final relief that involved variation of the mortgage which had been given as part of the settlement.

Ground 1

The basic contention of Mr Nadinic is that he, through his solicitors, disclosed to Ms Drinkwater the true position concerning the matters which formed the basis of the proceedings she eventually commenced and that this was done by means of the solicitors' letter of 16 September 2015 and, more particularly, its enclosure which the primary judge included as Appendix 1 to his reasons. That contention is, however, somewhat modified by Mr Nadinic's acceptance that the Appendix 1 depiction communicated to Ms Drinkwater with the 16 September 2015 letter required adjustment in the way shown in the document that the primary judge included as Appendix 2 to his reasons. Mr Nadinic's acceptance that the Appendix 1 position - that is, the position in fact communicated to Ms Drinkwater by means of the 16 September 2015 letter - was not accurate does much to undermine his reliance on disclosure of the Appendix 1 position as an answer to the allegation of misleading or deceptive conduct. But there is a deeper issue about the Appendix 1 depiction: what did it in fact show - or, more accurately, perhaps, what would a reasonably intelligent person in Ms Drinkwater's position have understood it to show - concerning GST?
The Appendix 1 content, as enclosed with the letter from Mr Nadinic's solicitors, was represented by that letter to be "a summary of the cost status of the project". The first section on the first page, headed "Cash Position", seems, clearly enough, to show in the third line ("Balance") the estimated surplus of proceeds of sale of the completed units over the bank debt, the amount of that surplus being $6,110,000.00. Then follow seven items totalling $5,347,845.29 which are deducted from the $6,110,000.00 to produce "Balance of Cash" of $735,154.71. Among the seven items totalling $5,347.845.29 are "GST Payable" ($485,698.19) and "GST payable from input credit" ($774,301.81). The aggregate of those two amounts, being $1,260,000.00, is shown in the "Summary" later on the first page as "ATO Cash Payable".
The second page of the Appendix 1 content shows, in the right hand column, "Tax Position". This, by reason of its juxtaposition with the left hand column and the percentage relationship between each of the items in the left hand column and its corresponding item in the right hand column, would no doubt have been understood as referring to GST. Three particular items in the right hand column of GST items are emphasised by Mr Nadinic. He points to "Construction Costs" ($703,839.60), "Total other deduction" ($70,462.21) and "TOTAL GST PAYABLE" ($485,698.19). The first two of these, added together, make up the $774,301.81 "GST payable from input credit" on the first page; the third corresponds with the $485,698.19 "GST Payable" on the first page; and all three together represent the $1,260,000.00 "ATO Cash Payable" on the first page.
Based on these items in the Appendix 1 document, Mr Nadinic maintains that the document showed two things: that Brooks would be claiming input tax credits from the ATO for GST liabilities it incurred; and that the GST liabilities Brooks incurred would be paid from those input tax credits. Those propositions are based on the words "input credit" and "payable from input credit" in the item "GST payable from input credit" on the first page of the Appendix 1 document. The fact that that particular label was given to the sum of $774,301.81 on the first page (being the aggregate of the two GST sums on the second page already mentioned) is said to indicate to the reader not only that GST of $774,301.81 would be payable but also that there would exist input tax credits sufficient to cover that GST liability.
The response of Ms Drinkwater is that any such representation as to what Brooks would or might do in the future did nothing to apprise Ms Drinkwater of relevant events in the past, namely, that Brooks had, without Ms Drinkwater's knowledge, obtained refunds of GST input tax credits to the extent of $883,675.59 and paid out the proceeds at the direction of Maxstra Constructions. Nor did the matters relied on by Mr Nadinic by reference to the 16 September 2015 letter and its enclosure gainsay the finding that the effect of Brooks obtaining the refund for input tax credits and paying away an equivalent amount at the direction of Maxstra Constructions had caused a diminution in the value of Brooks.
The availability of the tax credits to Brooks was a product of the fact that each progress payment made by Brooks to Maxstra NSW under the construction contract included an amount equal to the GST for which Maxstra NSW became liable as a result of the supply of the services to which the relevant progress claim related. That, coupled with the circumstances that Brooks used the acquired services wholly for its business of pursuing the project but did not use them in making taxed supplies of its own in any relevant tax period, meant that Brooks was entitled to claim from the ATO a GST credit for each included GST amount and to receive that credit in the form of a cash payment.
The legislation brought about that result in the following way. Brooks made "creditable acquisitions" when it received the taxable supplies in the form of construction work by Maxstra NSW for which it became liable to pay: A New Tax System (Goods and Services Tax) Act 1999 (Cth), s 11.5. A taxpayer which makes a creditable acquisition becomes entitled to an input tax credit: s 7.1. Brooks was under an obligation to lodge GST returns for each tax period: s 31.5. A GST return is to record the "net amount", being the difference between the GST for which the taxpayer is liable on taxable supplies made by it and the input tax credits to which it is entitled: s 17.5. Since Brooks was not itself making any taxable supplies during the construction phase of the project, Brooks was liable to pay no GST and was entitled to a refund of the input tax credits, if its own GST returns took account of those input tax credits. (If for some reason they did not, then the input tax credits would become attributable to the tax period when Brooks' GST return did take them into account: s 29.10(4).)
Ms Drinkwater's response to the submissions of Mr Nadinic is valid. The 16 September 2015 letter and the Appendix 1 and Appendix 2 documents did not in any way disclose (or provide a means of deducing) that input tax credits had already been claimed by Brooks and refunded by the ATO and that the refunded moneys received by Brooks had been paid away at the direction of Maxstra Constructions. The Appendix 1 and Appendix 2 documents depicted the financial position of the venture, without regard to the separate positions of its constituent entities. At the venture level it was no doubt meaningful to consider input tax credits as available towards GST on ultimate sales of completed apartments in circumstances where one venturer was contemplating buying out the interest of the other. But the structure the parties had adopted caused the entity acquiring construction services (Brooks) to be distinct from the entity which would ultimately sell apartments (Ms Drinkwater). Under those circumstances, input tax credits available to Brooks could only be used towards GST on ultimate sales of completed apartments in a quite indirect way. If Ms Drinkwater was to have the benefit of those input tax credits towards GST payable by her on the ultimate sales of apartments, she had to obtain the benefit of the cash refunds received by Brooks from the ATO. That result would have been achieved, in economic terms, if Brooks, when acquired by Ms Drinkwater in accordance with the settlement deed, had still possessed the cash received from the ATO (or, at least, benefits flowing from and commensurate with the receipt of the cash). But Brooks did not have that cash or the benefit of it because the cash had been paid away at the direction of Maxstra Constructions. That reality was in no way indicated or even hinted at in the 16 September 2015 letter and its enclosure.
Ground 1 should be dismissed.

Ground 1A

The primary judge held: Ms Drinkwater was under a misapprehension, in that she did not know about the refunds of the GST input tax credits and understood that Maxstra was demanding payment of GST by Brooks, implying that there would be GST input credits of $774,301, as indicated in the summary enclosed with the letter of 16 September 2015. Andrew Nadinic knew that Ms Drinkwater was under a misapprehension and that he had played a part in giving rise to the misapprehension. In those circumstances, it was misleading or deceptive, or at least it was likely to mislead or deceive, to have participated in giving rise to the misapprehension and not to have disabused Ms Drinkwater of her misapprehension.
By Ground 1A, Mr Nadinic challenges the finding that it was misleading or deceptive of Mr Nadinic not to disabuse Ms Drinkwater of her misapprehension. He says that, in the circumstances as they existed, it was not reasonable for Ms Drinkwater to have had any expectation of being enlightened by Mr Nadinic, given that they were at arm's length after incidents in March and June 2015 when Ms Drinkwater expressed distrust of Mr Nadinic; that each had retained solicitors in March 2015; that they were communicating through those solicitors; and that, on each side, there was reliance on lawyers.
Mr Nadinic accepts that an analysis of whether conduct is misleading or likely to mislead requires consideration of all the relevant circumstances. He also accepts that, in Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; [2010] HCA 31, the High Court made clear the circumstances in which non-disclosure or silence can be misleading or deceptive - in essence, where, in the whole of the circumstances in which the parties are situated, a "reasonable expectation" exists that disclosure should be made or silence broken. [7] Silence is itself a fact that must be assessed like any other and, unless the circumstances as a whole are such as to give rise to a reasonable expectation of disclosure of some relevant fact known to exist but not communicated, there is no basis on which silence of itself can warrant an inference of a representation that the fact does not exist. As French CJ and Kiefel J pointed out in Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (at [19]): The language of reasonable expectation is not statutory. It indicates an approach which can be taken to the characterisation, for the purposes of s 52, of conduct consisting of, or including, non-disclosure of information. That approach may differ in its application according to whether the conduct is said to be misleading or deceptive to members of the public, or whether it arises between entities in commercial negotiations ...
French CJ and Kiefel J also said (at [22]): It would no doubt be regarded as an unrealistic expectation, inconsistent with the protection of that "superior smartness in dealing" of which Barton J wrote in W Scott, Fell & Co Ltd v Lloyd, that people who hold things back for their own profit are to be regarded as engaging in misleading or deceptive conduct. As Burchett J observed in Poseidon Ltd v Adelaide Petroleum NL, s 52 does not strike at the traditional secretiveness and obliquity of the bargaining process. But his Honour went on to remark that the bargaining process is not to be seen as a licence to deceive, and gave the example of a bargainer who had no intention of contracting on the terms discussed and whose silence was to achieve some undisclosed and ulterior purpose harmful to a competitor.
It is the contention of Mr Nadinic that, in the lead-up to the signing of the settlement deed and the mortgage on 24 November 2015, the parties were "in the trenches" and likely headed towards litigation; and that any expectation of disclosure that might have existed while they were at peace no longer prevailed. Mr Nadinic also points to a number of other matters: in mid-2013, Ms Drinkwater had insisted on being appointed to the board of Brooks so that she could monitor Mr Nadinic's conduct of the business; distrust had developed by early 2015; Ms Drinkwater, when agreeing to contribute more money to the venture in March 2015 (to match an injection of funds by Mr Nadinic), insisted on the establishment of a separate bank account controlled by both parties and used exclusively for the payment of subcontractors; at meetings in June and July 2015, particular distrust had been exhibited by Ms Drinkwater and her husband; and solicitors were increasingly involved as the relationship deteriorated.
Mr Nadinic also refers to the fact that, after being appointed a director of Brooks in 2013, Ms Drinkwater never sought to inform herself of the company's financial position or to be given information or access to the company's books; Ms Drinkwater did not attempt to obtain a copy of ATO running balance account for Brooks (showing GST payment made and input tax credits refunded) despite having been informed that ANZ, the project's financier, had asked for that document; and, despite having retained solicitors, Ms Drinkwater never sought advice from them (or asked questions of Mr Nadinic) to confirm her assumption about the availability of input tax credits to Brooks.
On this basis, Mr Nadinic contends, there was no reasonable expectation that he should have volunteered to Ms Drinkwater information that she was perfectly able to obtain for herself and, being mindful of her own welfare in circumstances of growing antagonism, should have taken steps to obtain.
The response by Ms Drinkwater is that her misunderstanding about GST was a direct result of what she was told by Mr Nadinic. He, she says, engaged in misleading or deceptive conduct and was aware that she had been misled. It was not a case of his standing by while she failed to take steps to inform herself. Indeed, why should Ms Drinkwater have sought to inform herself or to make inquiries about the GST position when she believed that Brooks owed nothing to the builder for GST, the builder had asserted that it was owed GST and the attachment to the letter of 16 September 2015 had represented that input tax credits of $734,301.81 could be used to offset the obligation to remit $1,200,000 GST on sales?
Again, Ms Drinkwater's submissions must be accepted. Absence of inquiry is significant in cases such as this only if some element of the surrounding circumstances gives rise to some rational need for inquiry. It is true that the letter of 16 September 2015 was sent in the course of the parties' negotiations. It is also true that the parties had fallen out. But the letter was not framed or sent as part of a bargaining process. It did not make a claim, advance a proposal or seek to obtain an advantage. Rather, its purpose was merely to inform. It communicated objective information about the position occupied by the parties as co-venturers; and it came from the lawyer for the party who had instructed accountants on behalf of Brooks concerning GST and who had had carriage of the relationship with those accountants. Nothing in the context in which Ms Drinkwater received and read the letter indicated (or should have indicated) a need for her to be cautious about its content or to seek verification. The difference of opinion as to whether the contract sum was GST inclusive or GST "on top" had been in the open for some time and was part of the negotiating context. Beyond that established and recognised difference of opinion, there was nothing that should have put Ms Drinkwater on inquiry or caused her to make her own investigations concerning GST. She was entitled to accept at face value, and to trust, what she was told by Mr Nadinic through his solicitor. The fact that the parties were in dispute did not somehow displace that entitlement - it is not the law that, once a dispute has emerged and lawyers are engaged, the prohibition on misleading or deceptive conduct is somehow cast aside. Having regard to its status as a letter simply transferring objective information from the party possessing relevant knowledge to the party lacking that knowledge and to the circumstances in which it was sent and received, the letter was not an exercise in "superior smartness in dealing"; nor did it represent an aspect of "the secretiveness and obliquity of the bargaining process". It communicated what was represented to be an established financial position.
Ground 1A should be dismissed.

Grounds 2 and 3

Mr Nadinic contends that the primary judge erred in finding: 1. that, but for Brooks having obtained refunds of input tax credits, those credits would be available to set off against Brooks' liability to pay GST on sales of apartments in the development; and 2. that the shares in Brooks had a reduced value as a result of the absence of the input credits.
The central point here is one already noted: that, while Brooks was the developer, it was Ms Drinkwater who was (and remained throughout) the owner of the development site, so that it was she, rather than Brooks, that became the seller of completed apartments under sale transactions involving taxable supply for GST purposes.
It may be accepted that the primary judge misapprehended the position when he said that, but for having obtained refunds of input tax credits, Brooks would have been able to set off those credits against the liability to pay GST that Brooks would incur upon completion of sales of completed apartments. Not being the landowner, Brooks would never incur any liability to remit GST amounts collected on the sale of apartments and no question of set off of input tax credits held by Brooks would arise in that connection.
But, as submissions made on behalf of Ms Drinkwater point out, it does not follow that the unavailability of input tax credits to Brooks by way of set-off against GST on sales of apartments did not reduce the value of the shares in Brooks. Offsetting was only one way in which Brooks might have taken advantage of input tax credits. Because Brooks had not made any taxable supplies, the input credits to which Brooks was entitled were available to generate cash refunds for Brooks in the manner described above at [35]. That in fact occurred, Brooks having, without Ms Drinkwater's knowledge, realised such refunds and disposed of the proceeds as directed by Maxstra Constructions to the extent of $883,675.59.
As counsel for Ms Drinkwater also pointed out, the misapprehension of the primary judge as to the way in which advantage would or might be taken of input tax credits did not affect the substance of his Honour's decision. What he apprehended would be availed of in one way was capable of being availed of in another, producing equivalent financial consequences. Furthermore, that the settlement deed provided for Maxstra NSW to forgo its claim to some $700,000 representing an asserted entitlement to a GST component of the contract price, without any adjustment of the figures in Appendix 1, would have reinforced the impression created in Ms Drinkwater's mind by Mr Nadinic's deceptive conduct that the input tax credits would continue to be capable of being claimed and retained by Brooks and therefore represented an enhancement of the value of the shares in Brooks. The forgoing of that claim by Brooks might in fact have required minor adjustments to the figures in Appendix 1 to reflect a reduction in the value of the GST component of the total construction costs. [8] Nonetheless the adjusted figures would have continued to represent that there was a substantial asset available to Brooks, of which Ms Drinkwater might take advantage upon acquiring that entity, when the reality was that at that point in time that asset had been paid away at the direction of Maxstra Constructions.
Mr Nadinic was aware of that reality and by his representations and silence participated in causing Ms Drinkwater's contrary misapprehension, of which he was also aware. That was the gravamen of the deceptive conduct which the primary judge found had occurred. Neither the primary judge's mischaracterisation of the precise manner in which Ms Drinkwater might have realised the benefit that was represented would be available to her, nor both parties' oversight regarding the necessary minor adjustments which had not been made to the figures in Appendix 1, somehow have the consequence that Mr Nadinic's conduct in not disabusing Ms Drinkwater of her misapprehension was no longer deceptive.
Grounds 2 and 3 should also be dismissed.

Ground 4

Ground 4 concerns an aspect of the primary judge's decision that has not been mentioned to this point.
His Honour concluded that Mr Nadinic's misleading or deceptive conduct had occasioned loss or damage of $1,679,790 to Ms Drinkwater and that she should have judgment for that amount together with interest. The sum of $1,679,790 was ascertained by the primary judge by determining the difference between what Ms Drinkwater would have received had the joint venture proceeded to completion and that amount that she would receive under the deed of settlement.
In the course of a further hearing after delivery of the primary judge's principal reasons, two particular questions arose in relation to the formulation of orders. The first may be ignored. The second was whether the mortgage granted by Ms Drinkwater to Mr Nadinic as part of the settlement between them should be varied by reducing the principal sum by the amount of $1,679,790 that it had been determined that Mr Nadinic should pay to Ms Drinkwater. His Honour dealt with that matter as follows: [9] In relation to the second question, as Mr Ashhurst pointed out, the relief claimed by Ms Drinkwater has always included an order varying the Mortgage. If there had been no misleading conduct, such as I have found, the Mortgage would never have been given by Ms Drinkwater. In that event, on the taking of accounts, following the completion of the joint venture, whatever was found to be owing would be paid to the party who was entitled to receive it. In all of the circumstances, it seems to me to be logical that the relief to be granted in the light of the conclusions that I have reached is that the amount secured by the Mortgage should be varied to reflect the amount that is payable to Mr Nadinic by Ms Drinkwater, after deducting the amount payable by her to him pursuant to the conclusions that I have reached.
This reduction, coupled with an adjustment for pre-judgment interest to which it is not necessary to refer, caused the original principal sum of $2,050,000 to become $147,183.80.
In addition, however, the primary judge ordered that the mortgage be varied by changing the date for payment of the principal sum from 30 June 2016 to 31 May 2019, being ten days after the making of the order.
By Ground 4, Mr Nadinic challenges the order varying the payment date. He complains that there was no explicit application for that order and no explanation by the primary judge of the reason for making the order. He also complains that the effect of the order, viewed together with the order reducing the principal sum to $147,183.80, was that he was denied interest on that sum of $147,183.80 from the original payment date of 30 June 2016 to the revised payment date of 31 May 2019.
In order to assess this ground, it is necessary to look more closely at the mortgage. As executed on 24 November 2015, the mortgage secured a "Principal Sum" of $2,050,000 payable on 30 June 2016 [10] and provided that, from 30 June 2016 (but not in respect of any earlier period), the "Principal Sum" was to carry interest at the rate of ten per cent per annum, payable monthly. The effect of the primary judge's orders was to cause all references to the "Principal Sum" to be references to $147,183.80 (instead of $2,050,000) and all references to 30 June 2016 to be references instead to 31 May 2019. Had the primary judge made the order varying the principal sum but not the order varying the payment date, Mr Nadinic would have been entitled to interest at the contracted rate from 30 June 2016 to the date on which the revised principal sum of $147,183.80 was eventually paid. But because the date for payment was changed from 30 June 2016 to 31 May 2019, he was entitled to interest on that revised principal sum only from 31 May 2019 to the date of eventual payment. Mr Nadinic's complaint is that the order varying the payment date deprived him of interest that he should have enjoyed for the period 30 June 2016 to 31 May 2019; and that there was no rational basis for visiting that deprivation upon him.
The submission of Ms Drinkwater on this aspect is that the reason for the order varying the payment date was obvious and that the effect of the order in denying interest on the reduced principal sum from 30 June 2016 to 31 May 2019 was entirely consistent with redressing of the wrong done by Mr Nadinic. The primary judge reasoned that, if the misleading or deceptive conduct had not occurred, Ms Drinkwater would not have entered into the settlement deed or given the accompanying mortgage. The original date for payment of the principal sum was therefore irrelevant to proper adjustment of the parties' interests in light of the court's conclusions.
The original bargain of the parties was that the price payable by Ms Drinkwater to acquire Brooks was $2,050,000 and that that sum should be paid by Ms Drinkwater on 30 June 2016, failing which interest should run on the $2,050,000 from 30 June 2016. The primary judge held that Mr Nadinic's statutory misconduct had given rise to an entitlement on Ms Drinkwater's part to compensation in an amount that, when set off, caused her liability to Mr Nadinic to be reduced from $2,050,000 to $147,183.80. The decision was, in substance, that the price to be paid by Ms Drinkwater to acquire Brooks should have been $147,183.80 instead of $2,050,000.
On the view Mr Nadinic takes, the primary judge should, as to interest, have preserved the original bargain in relation to the reduced sum of $147,183.80, so that interest on that sum ran from the agreed date of 30 June 2016; and there was no good reason for the his Honour to deprive Mr Nadinic of interest on $147,183.80 for the period 30 June 2016 to 31 May 2019. While there is force in that argument, the position taken by Ms Drinkwater is to be preferred. The primary judge held that the grant of the mortgage by Ms Drinkwater was procured by statutory misconduct of Mr Nadinic. Had it not been for that misconduct, Ms Drinkwater would not have given the mortgage at all, a due date of 30 June 2016 would never have played a part in the financial relationship between the parties and there would have been no basis for the payment of interest on any sum from that date. The approach taken by the primary judge caused the mortgage procured by misconduct to be put to one side, as far as its substantive operation was concerned. That mortgage was then, as it were, taken up, in a modified form, and used as a convenient vehicle for giving effect to the substantially reduced net financial entitlement of Mr Nadinic emerging from the court's decision.
Ground 4 should be dismissed.

Conclusion

In my opinion, orders should be made as follows: 1. Appeal dismissed. 2. The appellant pay the respondent's costs of the appeal. Appendix 1 (19.5 KB, docx) Appendix 2 (25.5 KB, docx)

Endnotes

Before the settlement deed was entered into, that company changed its name to Commercial Builders Pty Ltd but it is convenient to refer to it by its original name.
Ms Drinkwater held the land and entered into the Joint Venture agreement as a trustee but nothing turns on this.
Drinkwater v Nadinic [2016] NSWSC 1733.
Nadinic v Drinkwater (2017) 94 NSWLR 518; [2017] NSWCA 114.
Drinkwater v Nadinic [2019] NSWSC 365.
Set out in Schedule 2 to the Competition and Consumer Act 2010 (Cth).
[2019] NSWSC 365 at [75].
The "reasonable expectation" test emerges from cases such as Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546; [1988] FCA 40, Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31; [1992] FCA 557; and Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2000) 104 FCR 564; [2000] FCA 1572.
Assuming that the "Construction Costs" in the "Profit & Loss" table reflects the total construction costs (rather than, as was asserted, an amount which required payment of an additional ten per cent representing the disputed GST component of the price) then the "Construction Costs" in the "Tax Position" table would need to be correspondingly adjusted to $639,854.18 (representing one eleventh of the total construction costs). In turn that would require adjustment of the "GST Payable from input credit" amount in the "Cash Position" table to $710,316.39 (that figure being the sum of the "Construction Costs" and "Total other Deduction" line items in the "Tax Position" table).
Drinkwater v Nadinic (No 2) [2019] NSWSC 604.

Amendments 07 February 2020 - Headnote amended 07 February 2020 - Headnote amended DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 07 February 2020

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