Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd

REASONS FOR JUDGMENT BEAUMONT J: INTRODUCTION Oraka Pty Limited ("Oraka"), the first respondent, and its managing director, Bryan Clifford Johnson, the second respondent, brought proceedings in this Court against the appellant, Leda Holdings Pty Limited ("Leda"), alleging, amongst other things, that Leda had engaged in misleading and deceptive conduct contrary to s 52 of the Trade Practices Act 1974 ("the Act"). The respondents were seeking damages under s 82 of the Act and relief under s 87 of the Act in relation to a lease executed by Oraka, as lessee, and Leda, as lessor, and a guarantee given in that connection by Mr Johnson. A Judge of the Court ordered that Leda pay Oraka damages (including interest) in the sum of $116,172, and further ordered that the lease be varied in some respects, that the guarantee be set aside, and that Leda indemnify Oraka and Mr Johnson in respect of some of their liabilities under the lease and the guarantee. Leda now appeals from these orders. THE CASE PLEADED BY ORAKA AND MR JOHNSON AT FIRST INSTANCE By their amended statement of claim, Oraka and Mr Johnson alleged the following: Oraka carried on business as master franchisee for New South Wales of outlets for the retail sale of ice-cream and confectionary. Between June and November 1993, Mr Johnson, on behalf of Oraka, conducted negotiations for the lease by Leda to Oraka of a shop at "Rosemeadow Marketplace" shopping centre ("Rosemeadow"), then in the course of construction. During these negotiations, Oraka made "numerous enquiries" of Bruce Sedgwick and of Rosemary Vale (employees of JLW (NSW) Pty Limited, Leda's letting agent) "as to the progress being made by JLW in securing tenants for Rosemeadow". On "a number of occasions" in the period between 6 July and November 1993 (amended during the hearing to the period "in or about July 1993") Ms Vale informed Oraka that "the level of enquiries and the number of positive indications from prospective tenants of Rosemeadow was such that as at [its] official opening date, only the Fruit and Vegetable store and two other shop premises would be vacant". It was accepted in the amended statement of claim that these representations were made on reasonable grounds. Leda knew, or ought to have known: (a) that the level of occupancy of a new retail shopping centre was "a matter of great importance" to prospective tenants; and (b) that Oraka and Mr Johnson believed that the occupancy levels at the official opening date would be as stated in the preceding paragraph. On 1 November 1993 Leda, by its servant or agent, Alan Keast, represented to Mr Johnson that "although tenants... were being located slowly, Rosemeadow would be fully occupied by the time it was due to open for business". Leda failed to disclose to Oraka or Mr Johnson that, as at 1 November 1993, and between that date and 30 November 1993 (the scheduled opening date), only eight of the seventeen shops would be tenanted. Relying upon the representation made by Mr Keast, and in ignorance of the true position, on 3 November 1993 Oraka executed an agreement to lease (for a term of five years from 30 November 1993) and incurred substantial expense fitting out the shop, and Mr Johnson executed the guarantee. Upon opening for trade with the public on 30 November 1993, Rosemeadow had the appearance of being incompletely constructed, and only eight of the seventeen shops were occupied by tenants. But for Leda's misrepresentation and its failure to disclose the true position, Oraka would not have executed the lease agreement. By reason of Rosemeadow's low level of occupancy, Oraka suffered trading and other losses. LEDA'S DEFENCE PLEADED AT FIRST INSTANCE By its defence, Leda admitted that, at the time of the opening on 30 November 1993, only eight of the seventeen shops were occupied by tenants. Although it admitted the execution by Oraka and Mr Johnson of the lease agreement and the guarantee respectively, Leda denied that this was done in reliance on any representation made by it or that Oraka or Mr Johnson were ignorant of the true position. By way of special defence, Leda also relied on the matters raised in its cross-claim, mentioned below. LEDA'S CROSS-CLAIM By its cross-claim, filed in October 1995, Leda sued Oraka for unpaid rent and unpaid levies up to October 1995. Leda stated that in 1994 it had sold the land on which the shopping centre was located to Permanent Trustee Australia Limited ("Permanent Trustee"), but that it was a term of the contract for sale that Leda was entitled to recover moneys owed by tenants at the date of completion of the sale (13 May 1994); and that Permanent Trustee had assigned to Leda its right to claim rent for the period 14 May 1994 to 13 May 1996. Leda also cross-claimed against Mr Johnson on the guarantee. Leda further cross-claimed against Oraka and Mr Johnson as follows: By cl 9.1 of the lease agreement, Oraka represented and warranted to Leda: (a) that Oraka was not induced by any of the representations there described; (b) that Oraka had relied entirely on its own enquiries in relation to the premises; and (c) that Oraka had obtained independent legal advice as to its rights and obligations under the lease agreement ("the representations"). Leda relied on the representations, as Oraka acknowledged in cl 9.2 of the agreement. By cl 9.3 of the lease agreement, Oraka agreed to indemnify Leda for liability or loss arising from breach of the terms set out in cl 9.2 By cl 11.4 of the lease agreement, Mr Johnson agreed to indemnify Leda against any loss arising from Leda's inability to recover from Oraka the moneys owing under the agreement for lease or the lease. By cl 11.7 of the lease agreement, Mr Johnson agreed not to raise any counter-claim or set-off while moneys were outstanding under the agreement for lease or the lease. In instituting the proceedings and in alleging the misrepresentations pleaded in the statement of claim, Oraka had, accordingly, breached the lease agreement. If, contrary to its contention, Leda were to be held liable to Oraka and Mr Johnson, then Leda was entitled to a full indemnity from Oraka and Mr Johnson under the terms of the lease agreement. Alternatively, the representations were misleading and deceptive within the meaning of s 52 of the Act, and Oraka was liable accordingly and Mr Johnson was liable as a "person involved" within the meaning of s 75B of the Act. Leda claimed damages under s 82 of the Act and a declaration that the lease agreement and the lease were valid and enforceable. Alternatively, Leda claimed damages for breach of contract in an amount equal to the total of any verdict gained by Oraka and Mr Johnson, together with costs. THE REASONS OF THE TRIAL JUDGE It will be convenient to summarise the reasons for judgment, published on 4 April 1997, in three stages: (1) findings and conclusions on the claims made by Oraka and Mr Johnson in their statement of claim; (2) conclusions on the relief to be granted; and (3) conclusions on Leda's cross-claims. (1) His Honour's findings and conclusions on the claims made by Oraka and Mr Johnson in their statement of claim (a) The trial Judge's findings on liability The idea for the shopping centre originated with Woolworths. In November 1992, JLW, acting as agents for Woolworths, held a function to promote the project. Mr Johnson attended the function. Woolworths then sold the freehold of the site to Leda. By July 1993, when Leda resolved to proceed to build the centre, "all was optimism at [JLW]". Ms Vale, who was responsible for the leasing of the centre "was, as she acknowledged, 'confident' because of the favourable response that had been elicited from prospective shopkeepers..." Ms Vale got in touch with Mr Johnson by telephone before July 1993. According to her evidence, after some discussion of the rent, Mr Johnson asked: "How is the leasing at Rosemeadow going?"; and she answered by taking him in detail through the position with respect to each of the proposed tenancies. According to his evidence, she went through the proposed tenancies with him; she told him, on this and on other occasions, that "things are going to plan". On this occasion, Ms Vale - "elaborated by giving him an optimistic rendition of the position with respect to each of the individual tenancies proposed." On a subsequent occasion, which Mr Johnson thought "would have been very late September", but which may have been earlier, Ms Vale told him that "but for the fruit and vegetable store and two other external tenancies, the premises would be full on opening". This was in a telephone conversation. On some other occasion also, Ms Vale again took Mr Johnson through the position of the proposed tenancies as she perceived it at that time. The evidence does not allow the fixing of the date of this conversation, nor its details, but nothing was said to suggest that the centre would be far from fully occupied at its opening. On 1 November 1993, a meeting was called to finalise the lease. Present were Mr Johnson, Mr Johnson's solicitor, Mr Lamb, Mr Bruce Sedgwick of JLW, Mr Keast and his assistant, Mr Ell, and Leda's solicitor, Mr D'Agostino. On this occasion - "A number of questions concerning the terms of the proposed lease were debated, but at the end of the meeting, and as it was breaking up, Mr Johnson turned to Mr Keast to ask, according to Mr Johnson's account [which the trial Judge accepted]: 'How is the leasing programme at Rosemeadow going?' - to which Mr Keast replied: 'We are finding tenants slowly but they will all be there on the day. There is nothing to worry about.'" (Emphasis added). The execution by Oraka of the lease and by Mr Johnson of the guarantee on 3 November 1993 was induced by Mr Keast's representation. At the time, Mr Keast knew that the prospects for the letting of the shops at the centre had turned out to be "extremely poor". At no time was Mr Johnson told enough to correct "the wrong impression which... Miss Vale conveyed in or about July". (b) The trial Judge's conclusions on liability After observing that "silence, in circumstances calling for some clarification, may amount to misleading conduct", his Honour concluded that in the present circumstances, Leda had contravened s 52. The trial Judge then held that Leda could not rely upon the provisions of cl 9 of the lease agreement, in the following terms: "9.1 The Tenant represents and warrants that: (a) the Tenant was not induced to enter into this deed by and has not relied on any statements, representations or warranties whether orally [sic] or in writing or contained in any brochure including, without limitation, statements, representations or warranties about the fitness or suitability for any purpose of the Premises or about any financial return or income to be derived from the Premises; and (b) in entering into this deed the Tenant has relied entirely on enquiries relating to and inspection of the Premises made by or on behalf of the Tenant; and (c) the Tenant has obtained independent legal advice on and is satisfied about the Tenant's obligations and rights under this deed; and (d) the Tenant has obtained independent expert advice on and is satisfied about the nature of the Premises and the purposes for which the Premises may be lawfully used. 9.2 The Tenant acknowledges that the Landlord has entered into this deed on the basis that the representations and warranties contained in clause 9.1 are true and not misleading. 9.3 The Tenant indemnifies the Landlord against any liability or loss arising from, and any costs, charges and expenses incurred in connection with any breach of the representations and warranties contained in clause 9.1 including, without limitation, legal expenses on a full indemnity basis or solicitor and own client basis whichever is the higher. 9.4 References to this deed set out in this clause include the Lease." His Honour said: "But there is a difficulty in depending on such a provision according to its literal terms. It cannot be thought that the very agreement that was obtained by a misrepresentation can be made good by incorporating in it a further misrepresentation falsely asserting that it was not procured by the means which were in fact employed. The agreement that so seeks to sustain itself was obtained by a misrepresentation, and no verbal magic of an added clause can change that." The trial Judge went on to say: "Indeed, it is noteworthy, but unsurprising, that Leda was not prepared, by an appropriate cross-claim, to assert that its own execution of the documents was actually induced by the representation expressed to be made by Oraka, and to claim damages accordingly! Nor was it prepared to sue for damages for beach of the warranty it had procured from Oraka. [As has been noted, his Honour erred here. Leda had, in fact, so cross-claimed.] But if claims so divorced from the true circumstances of the transaction, and so directly contrary to the statute, were unthinkable, of what value is clause 9? In my opinion, a clause of this kind could only assist [Leda] if, in reality, its terms formed part of a complex of circumstances leading to the conclusion that [Leda's] conduct was not truly misleading, or did not truly induce the action it was alleged to induce. If, on the other hand, the conduct really was misleading, and did induce [Oraka and Mr Johnson] to execute the document headed 'AGREEMENT FOR LEASE', the fact that this document happened to include clause 9 cannot enable [Leda] to evade the consequences of its conduct." His Honour, holding that this case fell into the second category, said: "[Although] Mr Johnson made enquiries of his own... [i]n my opinion he distinguished between formal drafting, as to which he relied on his lawyers, and the representations actually made to him with a view to persuading him to enter into the transaction, which he accepted. That is not to say he was not influenced by other factors as well, but the causation that seals the operation of section 52 in a particular case does not have to be sole and exclusive of other factors." (2) The trial Judge's conclusions on the relief to be granted His Honour concluded that the agreement for lease and the lease would never have been entered into without Leda's misleading conduct. In many cases, this would lead the Court to set aside the lease. However, the lease had been assigned to someone not a party to the action. Accordingly, orders were made under s 87(1A) of the Act: (1) setting aside any obligation of Oraka to pay rent or make any other payment under the lease during the period prior to the assignment; (2) requiring Leda to indemnify Oraka and Mr Johnson thereafter; and (3) setting aside the guarantee. His Honour assessed damages at $4,245.86 for rent paid, and $81,394.70 for the net amount lost in fitting out the premises. (3) His Honour's conclusions on Leda's cross-claim In his reasons for judgment, the trial Judge directed that the parties bring in short minutes of appropriate orders, which were to provide for, inter alia, the dismissal of the cross-claim. THE ORDERS MADE AT FIRST INSTANCE Having heard further submissions from the parties, on 9 April 1997 his Honour made orders as follows: (1) Leda was ordered to pay Oraka damages in the sum of $116,172; (2) as between Oraka and Leda, the agreement for lease and the lease were varied ab initio so as to eliminate Oraka's obligation to make payments of rent or otherwise prior to the assignment; (3) as between Mr Johnson and Leda, the guarantee was set aside ab initio; (4) Leda was to indemnify Oraka and Mr Johnson against their liability to Permanent Trustee; (5) the cross-claim was dismissed; and (6) Leda was ordered to pay the costs of Oraka and Mr Johnson, including the costs of the cross-claim. LEDA'S GROUNDS OF APPEAL By its grounds of appeal, Leda challenges his Honour's conclusions: (1) that Leda's conduct, including its silence, was misleading and deceptive; (2) that Oraka and Mr Johnson executed the agreement for lease and the guarantee respectively in reliance upon Leda's conduct, specifically the representation found to be made by Mr Keast on 1 November 1993; and (3) that cl 9.1 of the agreement for lease did not operate as a defence. Leda also contends that his Honour should have dealt with its cross-claim based on misrepresentation and breach of warranty. Leda further challenges the indemnity ordered as made beyond power. Leda now seeks orders: (1) allowing the appeal and setting aside the orders made at first instance; (2) judgment for Leda on the cross-claim; (3) an order that Oraka and Mr Johnson indemnify Leda for any liability or loss arising from or in connection with a breach of cl 9.1 of the agreement for lease; (4) an order that Oraka and Mr Johnson pay damages to Leda for contravention of s 52 of the Act; and (5) costs at first instance and on the appeal. In this aspect, Senior Counsel for Leda sought to challenge the trial Judge's process of reasoning and conclusions in a number of fundamental respects. In particular, he submitted that: Representations which his Honour found to have been made, and which were critical, in his view, were made at a time which (a) did not accord with the evidence; (b) was disputed by both sides; and (c) controverted the express terms of Oraka's and Mr Johnson's pleadings as (as has been seen) they were amended during the hearing. His Honour placed great store upon an assumption, now shown to be incorrect, that Leda was not prepared to propound a cross-claim based upon cl 9.1 of the agreement for lease. The overwhelming inference to be drawn from the evidence was that Oraka and Mr Johnson were not induced to enter into the transaction by any conduct of Leda. Clause 9 of the agreement for lease "militated" against a finding of liability against Leda. Senior Counsel acknowledged that views as to credibility were expressed by his Honour, but contended that the appeal should turn substantially upon inferences to be drawn from the primary facts established by the evidence. Reliance is placed upon the reasoning in Warren v Coombes (1979) 142 CLR 531 and Italiano v Barbaro (1993) 40 FCR 303 (at 326) to that effect. CONCLUSIONS ON THE APPEAL It will be convenient to deal with the several aspects of the appeal in turn. (a) The issue of liability It is true, as has been seen, that in their amended statement of claim Oraka and Mr Johnson accepted that Ms Vale's initial optimistic statements about occupancy rates were reasonably based. But it was plain enough that the case they sought to make was grounded upon the express representation alleged to have been made orally by Mr Keast on 1 November 1993. Whether Mr Keast made that statement, and whether Mr Johnson relied upon it, were not only questions of primary fact, they were credit issues in respect of which the trial Judge had the advantage of seeing and hearing the witnesses. There was, clearly, evidence upon which his Honour could find that Mr Keast made the statement alleged on 1 November 1993. There was also evidence upon which the trial Judge could find that Mr Johnson relied upon that representation. We were taken to much of the detail of the evidence for and against the making of these findings. I am not persuaded that any basis for disturbing the primary Judge's findings has been made out. That evidence includes the circumstance, already noted, that, in cl 9 of the agreement for lease, Oraka purported to warrant and represent that it had not been induced to enter into the lease by any representation made by Leda. With one obvious qualification, and whilst I accept that the existence of cl 9 is a material consideration on the issue of inducement, I agree with his Honour's reasons, previously mentioned, why such a provision cannot provide a conclusive defence. The qualification is, of course, that the additional consideration relied on by the trial Judge that Leda was not prepared to cross-claim on cl 9, is not available. Yet, this does not detract from his Honour's other, independent, reasons for holding that cl 9 was not, of itself, an answer in law to Oraka's claim that it had been misled by Mr Keast. The provisions of cl 9 were no more than some of the surrounding circumstances. (See, e.g. Lezam Pty Ltd v Seabridge Australia Pty Limited (1992) 35 FCR 535 at 544, 556-7). Their weight was a matter for the trial Judge to assess. Again, this was a credit question. Having been taken to the evidence, there is no basis, in my opinion, for appellate intervention on the issue of liability. On behalf of Leda, it was strongly argued that it was not open to Oraka and Mr Johnson to place reliance upon the conversation on 1 November. Leda's counsel sought to invoke policy considerations in this connection, submitting that s 52 should not be pressed this far, especially given the subsequent execution of the formal documentation after Oraka and Mr Johnson had had the benefit of professional legal advice. But, in the light of the observations of Sheppard J (with the agreement of Hill J) in Lezam, above, (at 541-2), Leda's argument must be rejected. As Sheppard J said (at 541): I do not think that one can lay down any general rule which determines the circumstances in which evidence of conversations had by parties in the course of their negotiations for a contract should be admitted or used by the court. Every case will depend upon its own facts and circumstances. Actions for breach of s 52 of the Act do not involve an applicant for relief in establishing that a person making representations made them knowing that they were false. Innocent misrepresentation is actionable; but, subject to that important distinction, there is a marked similarity between an action under s 52 of the Act and an action for deceit. In actions for deceit the court has invariably admitted evidence of parties' conversations about the subject matter at issue as well as of letters and other documents passing between them before the contract is signed. If they contain statements which are found to be representations inducing the contract, they will be relevant. Obviously the evidence needs to be looked at as a whole and put in context." (b) Leda's cross-claim on cl 9 As we have seen, although his Honour failed to address this issue in his reasons for judgment, and although he subsequently heard the parties on the form of the appropriate orders, the trial Judge ordered that the cross-claim be dismissed. It is thus necessary for us to consider the question ourselves. In my opinion, once it is accepted that his Honour's finding of inducement should stand, notwithstanding the existence of cl 9, it must follow that the cross-claim cannot succeed; in other words, the position is the same, in point of principle, as in the case of the plea relying upon cl 9 by way of defence. As has been said, although cl 9 was properly to be taken into account on the issue of liability, his Honour held, on the facts, that notwithstanding the terms of cl 9, Oraka and Mr Johnson were, in truth, induced to enter the agreement for lease by the misleading representation made by Mr Keast. That being so, the purported representation contained within the language of cl 9 should, in the eyes of the law, be ignored as not, on the actual facts as found by the trial Judge, reflecting the real or true situation. That is, the document sued on was, to this extent, a sham. Even apart from s 52, any attempt to rely upon a provision such as cl 9.1 in the present circumstances is conduct which the common law should not accept (cf. RobertBradgate "Unreasonable Standard Terms" (1977) 60 MLR 582 at 593). It must follow that no cause of action of the kind propounded in the cross-claim be grounded upon the wording of cl 9. It must further follow that the cross-claim could not be upheld. I should add for completeness, that it may be that the cross-claim could, in any event, be defeated by the application of the principle of "circuity of action" (see Co-Operative Bulk Handling Ltd v Jennings Industries Limited, Scott J, Supreme Court of Western Australia, 1 September 1995, unreported, and "MacGillivray & Parkington on Insurance Law", 8th ed. at par 1244). (c) Relief As has been mentioned, Leda also challenged the grant of the indemnity relief. It is submitted for Leda that there was no power to make such an order in the absence of: (a) evidence that the assignee of the least threatened to seek redress against Oraka or Mr Johnson; or (b) a finding that Leda acted fraudulently. I have difficulty accepting the submission. The Court's power to grant the indemnity relief under s 87(1A) of the Act was plainly discretionary. In my opinion, whilst it may be accepted that this remedy should be proportionate to the circumstances of the case at hand, it cannot be contended that the indemnity granted here went beyond what was, in the exercise of that judicial discretion, proportionate. Moreover, to suggest that Oraka and Mr Johnson needed to show fraud before s 87(1A) could be applied, is to travel beyond the language of the provision. (d) Orders on the appeal I propose that the appeal be dismissed, with costs.