SHADDICK -v- JDV LTD [2012] WASC 120 (5 April 2012)

4 The plaintiff's claim is based around two telephone conversations which the plaintiff says took place on consecutive days in midMarch 1999 or thereabouts between Mr Shaddick and Mr Matthews. Although there was a large amount of evidence about subsequent dealings between the Shaddicks, Mr Matthews and JDV, the plaintiff's claim of misleading or deceptive conduct is based upon the express and implied representations said to have been made in these two conversations.

5 In the first conversation the plaintiff pleads (in par 7) that Mr Shaddick requested that JDV arrange for the plaintiff to be granted a loan of $AUD200,000 by way of a margin loan against the security of Intasys shares then held by the plaintiff and Intasys shares to be purchased by the plaintiff, the margin loan to be utilised by the plaintiff for the purpose of purchasing and holding additional Intasys stock for approximately $AUD200,000.

6 In par 8 of the statement of claim, the plaintiff pleads that on the following day Mr Matthews phoned Mr Shaddick and represented to him that:

(i) RBC would grant to the plaintiff a margin facility ('the Margin Facility') to borrow US$1,000,000 for the purpose of purchasing Intasys stock;

(ii) The terms relating to the Margin Facility which RBC would grant to the plaintiff were that the plaintiff's Intasys stock would be held by RBC as security for the value of the moneys loaned in terms of the Margin Facility ('the Loan') and the value of the Loan at any time would be a maximum of 50% of the total equity value of the Intasys stock to be held ('the 50% Margin Limit') and any shortfall would become repayable.

7 In par 8A, the plaintiff pleads that those representations conveyed express or implied representations as follows:

(i) That the Margin Facility would be suitable for the purpose of purchasing US$1,000,000 of Intasys stock;

(ii) That provided the 50% Margin Limit would be maintained then the plaintiff would not be called upon to repay the Loan or any part of it.

8 Those pleadings appear in the plaintiff's Further Further Further Further Further Further Reamended Statement of Claim filed 18 February 2010. The plaintiff had originally issued a writ of summons with an indorsed statement of claim on 27 July 2004. Until an amendment in May 2008, the plaintiff pleaded the conversations to have taken place in early April 1999.

9 More significantly, until November 2010 the plaintiff had pleaded that Mr Shaddick requested JDV to arrange for the plaintiff to be granted a loan of $US1 million for the purpose of purchasing and holding additional Intasys stock to that value.

10 The plaintiff pleads (and it is not disputed) that the representations were made in trade or commerce. The plaintiff also pleads that

the first defendant thereby engaged in conduct relating to financial services within the meaning of section 12DA of the Australian Securities and Investments Commission Act 1989 and further engaged in conduct in connection with a dealing in securities within the meaning of section 995 of the Corporations Law.

11 In par 10, the plaintiff pleads that during the course of the second telephone conversation, and in reliance on the representations and induced by them, Mr Shaddick instructed Mr Matthews to use the margin facility of $US1 million with RBC to purchase Intasys stock for the plaintiff to that value.

12 The plaintiff pleads, and again it is not disputed, that on or about 12 April 1999, the plaintiff executed an RBC margin agreement which contained the following material terms:

(a) RBC may, without notice, at any time and from time to time, reduce or cancel any margin facility made available to the plaintiff or refuse to grant any additional margin facility to the plaintiff, or require the plaintiff to provide margin in addition to the margin requirements of the regulatory authorities; and

(b) the plaintiff would provide RBC with any margin which is requested by RBC and will promptly pay any indebtedness due as a result of any reduction or cancellation of any margin facility.

13 The plaintiff pleads that she executed the margin agreement in reliance upon, induced by and as a result of representations pleaded in pars 8 and 8A of the statement of claim.

14 The plaintiff pleads that the representations were misleading or deceptive or were likely to mislead or deceive, contrary to and in breach of s 12DA of the Australian Securities and Investments Commission Act 1989 (Cth), s 52 of the Trade Practices Act 1974 (Cth) and s 995(2) of the Corporations Law 1999 (Cth) in that:

(i) ... the terms of the Margin Facility which RBC granted to the plaintiff pursuant to the Margin Agreement were as pleaded [above] 'such that the Margin Facility was a call loan which would be subject to whatever policies or rules might be imposed by RBC in its sole discretion from time to time and the Margin Facility could be cancelled by RBC at any time and any calls were to be met immediately';

(ii) ... the Margin Facility was not suitable for the purpose of purchasing US $1 million of Intasys stock, in that RBC imposed a policy or rule which had the effect that the plaintiff became subject to the immediate risk that RBC would exercise its right to cancel the Loan and call for repayment;

(iii) ... the actual margin which RBC required to be maintained between the amount of the Loan and the total equity value of the stock to be held as security for the Loan was not fixed at 50%, but rather varied in accordance with the equity price of the stock held as security for the Loan ...;

(iv) ... the effect of RBC's policies or rules was that RBC would cancel the Loan and call for repayment in the event that the equity price of the stock held as security fell below US$3.00; and

(v) ... at no material times were there reasonable grounds for the making of the representations and insofar as the representations were representations with respect to a future matter, the plaintiff pleaded the effect of s 12BB of the Australian Securities and Investments Commission Act 1989 and s 51A of the Trade Practices Act 1974.

15 The plaintiff pleads, and it is not in dispute, that the rules imposed by RBC during the period included:

(i) For securities on registered exchanges with an equity price of US $5.00 and over the loan value would be 50% of the total equity value of the securities and any shortfall would become immediately repayable.

(ii) If the equity price of the securities dropped to between US $3.00 and US $4.99 the loan value would be 25% of the total equity value of the securities and any shortfall would become immediately repayable.

(iii) If the equity value of the security dropped below US $3.00 no loan would be available and any balance outstanding on the loan would become immediately repayable.

(iv) Notwithstanding any other policies or rules imposed by RBC a maximum loan of Canadian $50,000.00 would be extended for any one stock held as security.

16 The plaintiff pleads the representations were with respect to a future matter, and relies upon s 12BB of the Australian Securities and Investments Commission Act and s 51A of the Trade Practices Act.

17 The plaintiff pleaded several further or alternative causes of action.

18 First, that the representations pleaded in pars 8 and 8A were made in trade or commerce, in connection with the supply or possible supply of financial services and falsely represented that the margin facility had performance characteristics, uses or benefits which it did not have and such representations were false or misleading concerning the existence of a condition or right contrary to and in breach of s 12DB of the Australian Securities and Investments Commission Act.

19 Second, that, at the time of making the representations pleaded in pars 8 and 8A, Mr Matthews on behalf of JDV knew or ought to have known that the plaintiff would rely on them and would be induced to use the margin facility for the purpose of purchasing Intasys stock for approximately $US1 million. The plaintiff pleads negligence in failing to ensure that the representations were truthful and accurate.

20 Third, the plaintiff pleads breaches of the statutory warranties arising under s 12ED(1) and s 12ED(2) of the Australian Securities and Investments Commission Act, alternatively s 74(1) and s 74(2) of the Trade Practices Act. The first alleged cause of action is breach of the warranty to exercise due care and skill in making the representations pleaded in pars 8 and 8A; the second is breach of the warranty that the margin facility would be reasonably fit for the purpose for which the plaintiff made known it was required and might reasonably be expected to achieve the result which the plaintiff made known she desired to achieve.

21 The defendants plead to those allegations in a Further Further Further Reamended (by Further Substitution) Defence.

22 The defendants plead that JDV maintained an account in the plaintiff's name (in the name Janet Murray the plaintiff's name before her marriage), but were instructed at all times by Mr Shaddick on her behalf. They deny that they provided investment advice, and deny that the plaintiff and her husband sought financial or investment advice about the purchase of the Intasys shares.

23 The defendants plead that they acted as stockbroker to Mr Shaddick, and kept account statements for an account in his name, a joint account with the plaintiff, and accounts in the names of three companies of which the plaintiff and Mr Shaddick, or Mr Shaddick alone, were directors: Teros Pty Ltd, Digital Nominees Pty Ltd, and Totally West Pty Ltd.

24 With regard to the establishment of the margin loan, it is useful to set out the defence in par 13 in full (although I have omitted the particulars which merely identify documents), as it pleads a level of detail:

As to the matters pleaded in paragraphs 7 and 8 of the Statement of Claim, the defendants say:

(a) in or about early March 1999, [Mr Shaddick] in a telephone conversation with the second defendant requested the second defendant to look at ways to borrow money to purchase A$200,000 worth of Intasys shares in the plaintiff's name (Request);

(b) on or about 16 March 1999 the second defendant contacted Tracey Moorehead (Moorehead), an employee of RBC and, in substance, conveyed the Request to Moorehead;

(c) on 16 March 1999, the second defendant received an email from Moorehead in respect of Intasys shares which relevantly stated: 'The above stock is eligible for 50% margin.';

(d) on 16 March 1999, in response to the email pleaded at subparagraph 13(c) herein, the second defendant sent Moorehead an email seeking further information about establishing a margin loan with RBC for the plaintiff and relevantly stated in that email, among other things: '... As discussed, the client has approximately $800k already in the stock and wants to round it up to 1 Million.';

(e) on 17 March 1999, in response to the email pleaded at subparagraph 13(d) herein, the second defendant received an email from Gary Ursell (Ursell), a Vice-President at RBC, which relevantly stated among other things, that RBC: '... can margin the stock currently in either Canada or the U.S.';

(f) on or about 17 March 1999, in a telephone conversation between the second defendant and [Mr Shaddick], the second defendant said, in substance, to [Mr Shaddick] that RBC had indicated that:

(i) it was prepared to offer a margin loan to the plaintiff;

(ii) the loan to value ratio of the margin loan to be offered was 50% (50% LVR); and

(iii) a 50% LVR meant that the loan amount could not exceed more than 50% of the total value of Intasys shares being held as security;

(g) during the telephone conversation pleaded at subparagraph 13(f) herein, [Mr Shaddick], in substance, instructed the second defendant to, among other things, obtain a margin loan with RBC in the name of the plaintiff;

(h) on 18 March 1999, in response to the email pleaded at sub-paragraph 13(e) herein and the instruction pleaded in subparagraph 13(g) herein, the second defendant sent Ursell an email on behalf of the plaintiff, which relevantly stated, among other things:

2. Transfer AUD$800,000 worth of INTAF into the account.

3. Buy additional $200,000 worth of INTAF using the Margin Account.

I need to know what you require from us to get this set up, please Email me with instructions.';

(i) on 19 March 1999, the second defendant received an email from Susan Zdriluk (Zdriluk), an employee of RBC, who informed the second defendant: 'In order for us to speed this process up, please provide us with your fax number. We can work with the fax documentation and obtain the originals later. I will need to fax you a copy of our new account application form and our margin agreement.';

(j) on either 19 or 20 March 1999, the second defendant received a facsimile transmission from RBC comprising:

(l) an RBC New Account Application (KYC) Form;

(ii) a margin agreement form;

(RBC Documents).

(k) on either 19 or 20 March 1999, the second defendant sent the RBC Documents to [Mr Shaddick] by facsimile transmission;

(l) on 20 March 1999, [Mr Shaddick] signed the plaintiff's name for her, wrote on the RBC Documents and purported to execute the margin agreement form pleaded in sub-paragraph 13(j)(ii) herein;

(m) on either 20 or 22 March 1999, or sometime between those two dates:

(i) the plaintiff, or [Mr Shaddick] for the plaintiff and in the plaintiff's name having signed and purported to execute the margin agreement form, sent the same to the second defendant by facsimile transmission; and

(ii) subsequently to the matters pleaded in sub-paragraph 13(m)(i) herein, the second defendant then sent the documents he had been sent on to Zdriluk at RBC;

(n) on 22 March 1999, the second defendant received an email from Zdriluk which stated, among other things: 'I am in receipt of your fax regarding the opening of Janet's account...', and '... I cannot open the account until I have Ms Murray's TAX number.';

(o) on 23 March 1999 and on 26 March 1999, the second defendant provided information about the plaintiff to Zdriluk by email, which relevantly related to the establishment of the Margin Loan;

(p) on 27 March 1999, the second defendant received an email from Zdriluk, which relevantly stated: 'Janet Murray's margin account number with us is 432-23813-2-0-KS6. [(Janet Murray's Margin Loan Account)] Perhaps you could instruct Dan Clancy with your approval to transfer the 202,750 [Intasys shares] to the above noted account.'.

25 The defendants deny that Mr Shaddick instructed Mr Matthews, during the telephone conversation in midMarch pleaded in par 8 of the statement of claim, to use the margin facility to borrow $US1 million to purchase Intasys stock.

26 The defendants state that, in midMarch 1999 when the phone conversations are alleged by the plaintiff to have occurred, none of the parties had been told by RBC the terms of any margin facility; the second defendant had told RBC that the plaintiff wanted to borrow $AUD200,000; and the plaintiff did not control enough shares to give security for a loan of $US1 million at 50% loan value ratio. Although this is argumentative, it gives a clear statement of the defendants' position.

27 The defendants further plead that the second defendant was merely passing on information to Mr Shaddick which had been conveyed to him by RBC and that neither JDV nor Mr Matthews ever made any representations about the truth or accuracy of that information.

28 The defendants further plead that, by reason of the matters set out in par 13(f) being future matters, it had reasonable grounds for stating those matters and they were statements of fact. The defendants specifically plead that:

(a) the words pleaded in paragraph 8 of the Statement of Claim, even if said, which is denied do not and cannot amount to a representation about the suitability or otherwise of the Margin Loan to the plaintiff; and

(b) the words pleaded in paragraph 8(ii) of the Statement of Claim, even if said, which is denied were a representation about how much the plaintiff could borrow with a 50% Margin Limit, rather than a representation that the 50% LVR was fixed.

29 The margin agreement executed by the plaintiff on or about 11 April 1999 contained material terms including:

(a) RBC may, without notice at any time and from time to time, reduce or cancel any margin facility made available to the plaintiff or refuse to grant any additional margin facility to the plaintiff, or require the plaintiff to provide margin in addition to the margin requirements of the regulatory authorities;

(b) the plaintiff would provide RBC with any margin which it requested and would promptly pay any indebtedness due as a result of any reduction or cancellation of any margin facility; and

(c) the plaintiff certified that the plaintiff had read and understood the Margin Agreement and acknowledged receipt of a copy of the same.

30 The defendants deny that the plaintiff relied or could reasonably have relied on what was said in the telephone conversations alleged by the plaintiff, and plead that the plaintiff and Mr Shaddick had the opportunity to read the margin agreement which governed the terms of the loan. The defendants plead that the telephone conversation was on or about 17 March, the plaintiff had been sent a copy of the margin agreement on or about 19 or 20 March 1999, and the margin agreement was not executed until about 11 April 1999. The defendants plead that the plaintiff had the opportunity to, and should have obtained expert advice before executing the margin agreement. In particular, the defendants point to the inconsistency between the terms of the margin agreement and the representations alleged to have been made.

31 The defendants also plead that the plaintiff would still have entered into the margin loan and borrowed, even if the representations had not been made.

32 The defendants deny that the representations, if made, were made in relation to a financial service as defined in s 12BA of the Australian Securities and Investments Commission Act, at the relevant time. They deny that the representations were made in or in connection with a dealing in securities: s 992 and s 995 of the Corporations Law.

33 The defendants accept that on 3 May 1999, and unknown to the defendants, in a document entitled 'New Margin Policy To Take Effect May 3rd 1999', RBC imposed a new policy or rule on the margin loan, the substance of which is pleaded in subparagraphs 15(i), (ii) and (iii) of the statement of claim. The defendants became aware of the policy or rule change on or about 14 May 1999, although they did not then receive a copy of the document.

34 Otherwise, the matters alleged in the statement of claim are denied.

35 The central issue in the proceedings concerns whether the defendants made the representations pleaded in pars 8 and 8A of the statement of claim. While the plaintiff pleads causes of action in negligence and breach of statutory warranty, in each of them the conduct central to the allegation is the making of the representations.

36 The plaintiff submitted in written closing submissions that the representations were cumulative - that is, the effect of the representations was that the plaintiff would be permitted to borrow up to $US1 million, provided she maintained a 50% loan to value ratio. That is the way the plaintiff pleaded and ran her case. In particular, in par 10, she pleaded that she suffered damage in that, in reliance on the representations, and induced by them, she instructed Mr Matthews and JDV to use the margin facility to purchase Intasys stock to value of approximately $US1 million. Her case, and the evidence led on behalf of the plaintiff, is that this instruction was given immediately in the course of the conversation in which the representations were made.

37 The plaintiff's case is that the defendants, through Mr Matthews, made representations that were misleading or deceptive in two telephone conversations with Mr Shaddick which took place on consecutive days in March 1999 twelve years before the trial and about five years before the proceedings were commenced.

38 The defendants rely on the comments of McLelland CJ in Eq in Watson v Foxman (1995) 49 NSWLR 315, 318 319. Where the conduct in question in a claim of misleading or deceptive conduct is the speaking of words, it is necessary to prove the words spoken with a degree of precision sufficient to enable the court to be reasonably satisfied that they were in fact misleading in the proved circumstances. His Honour continued:

In many cases (but not all) the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition.

39 That may be accepted as a counsel of caution - perhaps even more so when the parties are speaking by telephone and not face to face. But the proceedings are civil proceedings, subject to the civil standard of proof. It is not necessary for the plaintiff to prove the precise words spoken on each occasion. The court needs to be satisfied that it is more probable than not that words were spoken that would reasonably have conveyed the representation alleged. I can reach that satisfaction if I am satisfied that the substance or effect of what was spoken conveyed the misleading representations: James Hardie Industries NV v Australian Securities and Investments Commission [2010] NSWCA 332 [269]. In considering that question, although the plea is that the representations were made in two specified telephone conversations, I must have regard to all of the evidence to the extent it throws light on what was said and what would have been conveyed in those conversations.

40 Further, in determining whether what Mr Matthews said would reasonably give rise to the pleaded representations, I should also have regard to the circumstances in which the words were said and the whole of the course of conduct of the parties. It is important not to be deflected from the true inquiry. Whether conduct is misleading or deceptive or is likely to mislead or deceive is a question of fact that requires examination of the alleged conduct in the light of the whole of the relevant surrounding facts and circumstances. The question of fact should not be decided by examining any particular statement or document or conduct in isolation: Campbell v Backoffice Investments Pty Ltd [2009] HCA 25; (2009) 238 CLR 304 [25] [26], [102]; Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592 [39], [74], [109]; Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd [1982] HCA 44; (1982) 149 CLR 191, 198 199. I approach the evidence on this basis.

41 Some of the narrative of events is either not controversial, or relates to matters solely within the knowledge of the plaintiff and her husband.

42 Mr Shaddick is now retired but formerly was a metal trader with his own business. He was not a stranger to commercial instruments and commercial dealings, although he said that he tended to rely on advice. In about 1997 he began to use JDV, then known as Hartley Poynton, as a stockbroker. The evidence suggests, and I accept, that he was an experienced investor. He maintained several accounts with Hartley Poynton. At least in regard to the purchase of Intasys stock, he did not seek advice about the investment.

43 In or about June 1998 Mr Shaddick sold his business. He said in his witness statement that after repaying all his debts he had about $AUD4 million in surplus funds of which he invested $AUD3 million in Country Wide Mortgage Investments and deposited the remaining $AUD1 million with Hartley Poynton. The existence of this deposit is not agreed, but it is of no consequence. Despite this evidence of comparative wealth, Mr Shaddick said that the investments were made in the name of his wife because he believed there was a prospect that the Australian Tax Office would seek to recover debts of a failed company from him, and if that occurred he expected to be made bankrupt. He was made bankrupt in about October 2005. Mr Shaddick intended to accumulate assets in a way that they were not available to his creditors.

44 Mr Shaddick and his wife became interested in Intasys shares as a result of information they received while on a holiday in December 1998. While on holiday they met a Canadian named Irving Kott and became friends with Mr Kott and his wife. Mr Kott told them that he was a shareholder in Intasys Corporation which was listed on the NASDAQ in America. Mr Shaddick says that he then decided to purchase $400,000 of Intasys shares. The records of JDV show this purchase of 77,000 shares on 15 January 1999 in the joint account of Mr and Mrs Shaddick.

45 Mr Shaddick and his wife visited Mr Kott and his wife in Canada in the second half of January 1999. While there, he met board members and members of the management of Intasys. He said:

In my discussions with the board and management, all members were very positive about the direction of the company and said that they believed the share price would go 'through the roof'.

46 Mr Shaddick was very impressed and became convinced that the company had exceptional growth prospects. It is not possible on the evidence to say whether the information Mr Shaddick received was of the kind that the Intasys board should have disclosed. What is apparent is that Mr Shaddick strongly believed that there would be a large increase in the price of Intasys shares. He decided to 'invest heavily' after further discussion with Mr Kott.

47 Mr Kott also engaged Mr Shaddick to provide 'consultancy services', which Mr Shaddick described as attending several places in the United States and informing Mr Kott of his overall impression

particularly relating to environmental issues and land pollution, based on a physical examination of the company premises and my experience and having previously run my own business [39].

48 For this he was paid $16,000 for reimbursement of his expenses, including first class travel. Having regard to Mr Shaddick's previous business experience as a metal trader, the task he was asked to perform, and the limited nature of his acquaintance with Mr Kott whom he had met only that month while on holiday, the conduct of Mr Kott is unusual. Mr Shaddick, however, did not have his suspicions aroused.

49 In February 1999, Mr Shaddick asked Mr Matthews to purchase further Intasys stock to the value of approximately $300,000 and to open an account in the name of Janet Murray for that purpose. The money for the purchase of these shares came from Teros Pty Ltd, a company controlled by Mr Shaddick and the trustee of the Shaddick Family Trust. Mr Shaddick said that he intended to begin selling when Intasys reached about $US11 a share, with the expectation of achieving an average price of $US11.40. He said that he told Mr Matthews of his intended target price, although Mr Matthews denied it. It is clear that in these conversations Mr Matthews was not advising Mr Shaddick. In fact, Mr Matthews told some of his other clients of Mr Shaddick's enthusiasm for the stock.

50 The account in the name of Janet Murray was opened on 19 February 1999. At about this time Mr Shaddick instructed Mr Matthews to transfer the 77,000 Intasys shares from the joint account to the Janet Murray account. This was done on about 19 March 1999.

51 Mr Shaddick said that in early March he told Mr Matthews that he was interested in purchasing as much Intasys stock as he could. He told him he was expecting a payment of about $1.6 million from Country Wide Credit in the next week to fortnight, and that he should invest it all in Intasys shares through the Janet Murray account when the funds were available. He said that Mr Matthews then said, in effect, 'why don't you take out a margin loan?' He asked what a margin loan was, having previously experienced margin purchases and positions but not margin loans on shares. He says that Mr Matthews explained to him:

I would have to maintain a 50% margin requirement. He explained to me that Jan could use her existing stock holding of about $800,000 and the extra shares purchased with the $1.6 million that was coming from Country Wide Credit and the stock purchased with the margin loan. That stock would be the security for the margin loan. The value of that stock had to be more than twice the amount drawn down on the loan. That 50% margin had to be maintained. If the value of the stock fell below the 50% margin then a call would be made to reduce the loan.

52 Mr Shaddick said that Mr Matthews told him that he would make inquiries, and that Mr Matthews telephoned him either the same day or shortly afterwards and told him that margin loans for US stocks were done by JDV through the RBC. Mr Shaddick said that Mr Matthews also told him that RBC was a majority shareholder in JDV.

53 Mr Shaddick discussed his plans with his wife, and she was happy to proceed. He said that Mr Matthews rang 'a day or two later' and advised him that RBC would provide him with $US1 million through a margin loan facility to purchase Intasys stock. Mr Matthews again said that the margin would be 50% of the value of the stock provided as security. Mr Shaddick said he was happy that it was for $US1 million and not just for $200,000 and he told Mr Matthews 'go and buy me a $1 million worth of stock'.

54 Despite the detail with which Mr Shaddick recounted these conversations in his witness statement, I have no confidence that he has an actual recollection. First, the relevant events are two telephone conversations which took place 12 years before trial and, five years before the proceedings were brought. Second, from when these proceedings began, the plaintiff has changed the allegation regarding the time when the conversations took place from April 1999 (when the margin loan was created) to March 1999. Third, Mr Shaddick said that he told Mr Matthews that he was interested in borrowing $200,000, and that is what is now pleaded. Until comparatively recently, however, the plaintiff had pleaded (on Mr Shaddick's instructions) that he asked to borrow $1 million. Fourth, there are no contemporaneous records created by the plaintiff supporting this account, and the records of the defendant and RBC are not consistent with it. Finally, as discussed immediately below, Mr Shaddick's explanation for some difficulties in his evidence causes me to doubt his reliability as a witness. Overall, I am not confident in Mr Shaddick as a witness. He frequently did not answer questions directly, but gave nonresponsive answers. He gave the impression that he was calculating whether an answer would help or hinder the case.

55 Mr Shaddick said that he rang Mr Matthews the same day or the next day following that phone conversation, and instructed him that the stock should remain in the name of Janet Murray. Mr Matthews said he would fax a form to be signed. Within two days or so he spoke to Mr Matthews again who told him that he had started to buy the stock it is not clear what stock he referred to: there was a purchase on 15 March 1999, which must be before this conversation, and the next purchase was booked on 24 March (so was likely to have traded on 23 March).

56 On 20 March, Mr Shaddick received a form by fax from Mr Matthews. Mr Shaddick said in his witness statement:

I signed this form 'Janet Murray' on behalf of my wife and faxed it back to Mr Matthews. I did not discuss this form with my wife before I signed it and I did not retain a copy of this document. I believe it consisted of one page only [76].

57 The form which Mr Shaddick here describes was a two page document, the front page of which contained terms and conditions of the margin loan. Mr Shaddick accepted that he may have received the first page of the document, but said that, if he did, he did not read it because he trusted Mr Matthews '150%' and expected Mr Matthews to inform him if the terms of the loan were different from or added anything material to the 50% margin they had discussed.

58 In the course of his evidence Mr Shaddick was on many occasions asked to refer to documents. This was one of those occasions. Mr Shaddick agreed that when he received the documents from RBC he appreciated that they contained the terms of the agreement between his wife and the bank. He was taken to various parts of the document and agreed that he could read and understand it. He said however, that he was prepared to sign his wife's name on the document without reading it because he relied on Mr Matthews to explain it to him if there was anything in it that was different from what he had been told. When pressed about his willingness to sign the document when it apparently contained conditions which had not been discussed with Mr Matthews and which he had not read and understood, he replied, 'I'm dyslexic, therefore I have always had the best advice around me'.

59 This was not something which had previously been raised. Because of the number of documents involved in the trial, and the extent to which Mr Shaddick had already been taken to documents including his witness statement, I inquired about this statement. There was the following exchange between the bench and the witness (ts 366):

You said, Mr Shaddick, that you are dyslexic. You have on a couple of occasions already been taken to documents and asked to read them to yourself and taken to passages of the witness statement. Do you have any difficulty?---Yes, I do, your Honour. If I could read a document, I could read my statement and I will have difficulty tomorrow remembering what I said.

But you are not having any difficulty in reading the document, you are having difficulty in recalling subsequently what's in the document?---No, I've gone with this over and over again.

I'm just saying, this morning you were, on several occasions, taken for example to your witness statement and given the opportunity to read a paragraph of it?---I can read a paragraph, your Honour, but I can't remember word for word.

I'm just concerned about the way in which we proceed because we are proceeding by consistently putting documents to you. Can you read them?---Yes, I can, your Honour.

60 Mr Shaddick's evidence regarding the signing of the documents on 20 March 1999 is troubling. It was only when pressed about not reading the margin loan agreement that Mr Shaddick said that he is dyslexic. There were several subsequent occasions in evidence when he agreed that he had read a document and understood it, and he never gave the impression of having difficulty understanding a document.

61 This was one of two occasions when Mr Shaddick professed to a condition that affected his evidence. He was asked in crossexamination about the changes in the plaintiff's pleaded case: from claiming that the relevant conversations with Mr Matthews took place in April 1999 to saying they took place in March 1999; and from claiming that he had asked Mr Matthews to arrange a loan of $1 million, to a claim that he asked for a loan of $200,000. Mr Shaddick agreed that he had originally given incorrect instructions to the plaintiff's solicitors, and that was why it had been changed. But his explanation was troubling. He said that at the time (not specified) he was under very heavy medication (ts 342). Counsel for the plaintiff returned to this matter in reexamination. Mr Shaddick then said that at the time of preparing his witness statement, and for about a year before then, he was suffering from extreme confusion caused by his reaction to medication he was taking (ts 523). But the amendment to the statement of claim regarding when the conversations occurred was made in 2008, long before the period when he was taking medication, and the original instructions were some years before that. The claim was brought in 2004. The amendment to correct the claim regarding the amount he had requested was made in 2010 at the time Mr Shaddick says he was confused. He said in reexamination that he was now able to confirm the accuracy of his witness statement because he read it several times after he had ceased the medication.

62 If Mr Shaddick's evidence about dyslexia and confusion caused by medication was true, it must raise doubts about the reliability of his account. In any event, it provided a ready excuse for inconsistencies in his evidence and, significantly, for his claim to rely on the conversation with Mr Matthews when the documents relating to the loan, which I find were provided to him well before the loan was made, were patently inconsistent with what he said was represented to him. All of this contributes to my conclusion that I am not satisfied that Mr Shaddick was a reliable witness.

63 At this point it is useful to deal with a series of submissions made on behalf of the plaintiff in closing, to the effect that the 'critical conversation' probably did not take place until after 19 or 20 March 1999, after the new loan account application form had been completed and returned to RBC. If that were so, Mr Shaddick's recollection would be more consistent with the objective evidence of the documents. But that was not the plaintiff's case. It was not the basis on which the plaintiff opened. Nor was it the evidence. Mr Shaddick said that Mr Matthews told him he would fax a form to be signed in a conversation, perhaps the next day, after the conversation in which Mr Matthews said RBC would lend a million dollars, and Mr Shaddick gave the instruction to purchase a million dollars of stock. Mrs Shaddick also said that she heard her husband tell Mr Matthews to buy a million dollars of stock and on her evidence that conversation was before the papers were sent. I do not accept these submissions indeed they highlight the inconsistency between the evidence of Mr Shaddick and the documents particularly emails - which were made at the time.

64 The form signed by Mr Shaddick in his wife's name was not accepted by RBC. A second form was sent to be signed personally by the plaintiff. In April 1999, the plaintiff signed an RBC margin agreement and an RBC trading authorisation. Mr Shaddick also signed the trading authorisation. The forms are dated 11 April 1999. Mr Shaddick disputed that this was the correct date, it being a Sunday, but there is no dispute that they were signed around this time.

65 The trial documents included a new account application form. Mr Shaddick could not recall completing it, although he agreed that it appeared to be completed in his handwriting.

66 On 16 April 1999, Mr Shaddick caused the sum of $AUD1.6 million to be paid to JDV to the credit of the Janet Murray account for the purpose of buying more Intasys stock. The money came from a trust distribution.

67 In early May 1999, Mr Shaddick wished to purchase more Intasys stock and was told by Mr Matthews that there was still approximately $1 million in his wife's margin loan account with RBC. Mr Matthews agreed to use the margin loan monies to buy further Intasys stock. On 6 May 1999, Mr Matthews faxed a letter from the plaintiff, addressed to RBC, authorising the transfer of the remaining margin loan money to JDV. On 10 May 1999, the purchase of a further $1 million of Intasys stock had been completed.

68 Mr Shaddick said that had Mr Matthews told him that the terms of the margin loan could change, and in particular had he not been told that the plaintiff would just have to maintain a 50% margin, then he would not have caused his wife to take the margin loan facility or to borrow the money.

69 There are occasions when such claims of reliance should be viewed with scepticism. This is one of them. Mr Shaddick also said that the reason why he was prepared to risk the bulk of his family's money in purchasing the stock was because it was an excellent investment. On his account, he was prepared to risk a lot of money on the Intasys stock on the basis of what he had been told by a holiday acquaintance he did not make any other inquiries and invested $400,000 before he met the members of the Intasys board. His desire to make a large profit in a short time seems to have blinded him to any prudent business practice. He now seeks to attribute his risky decisions to representations made by the defendants, seeking in effect to make them the insurers of his adventure in Intasys shares.

70 Although the action is brought in Mrs Shaddick's name, and the investments were in her name, she played little active role in the investment. She relied completely upon her husband.

71 When she gave her evidence Mrs Shaddick clearly had little, if any recollection, and it is surprising the extent to which she could in her witness statement recount conversations and describe events. For example, she gave evidence of a conversation with her husband in which he told her that he expected the share price of Intasys to increase to $US20 and that he would sell at $US11.40 a share and would gross $AUD12 million. This evidence concerned a conversation at the kitchen table in about February 1999, yet she claimed to remember precise amounts.

72 In her witness statement Mrs Shaddick also referred to a telephone conversation that she said occurred during midMarch 1999. She said she overheard her husband on the telephone as he was using the set handsfree. She says that during this conversation she heard her husband instruct Mr Matthews to buy $1 million worth of shares. For the reasons which I have given above, in relation to the evidence of Mr Shaddick, I am not satisfied that this conversation took place. In midMarch, the arrangements that were being made were for a loan to enable the purchase of shares to increase the plaintiff's total holding (then worth about $800,000) to $1 million.

73 Mrs Shaddick appeared to just go along with her husband's decisions. For example, when an application was made for finance to CT Securities in November 1999, Mrs Shaddick signed the form and filled in some of the details in her own handwriting. When asked about this form, Mrs Shaddick had little recollection of it other than her signature on it. She was taken to answers in the form that were in her hand writing. She said she was probably told to fill it in by somebody else she did not know who (ts 549). Those answers included statements that she had net liquid assets of $4 million and net fixed assets of $10 million neither of which was true.

74 The plaintiff said that her husband kept her aware of all Intasys purchases. She was asked about sales, and said there were none. The records, however, show a sale of 2,000 shares on 17 June 1999.

75 Mrs Shaddick said that if she had been made aware that the margin loan

was not suitable for me purchasing Intasys stock because RBC could change its rates/policy at any time or could in practice not accept a single stock as adequate security irrespective of the stock's value I would never have agreed to the proceeds of the loan being utilised to purchase Intasys stock.

76 There is an air of unreality in this evidence. The decisions were not being made by her. Her name was being used to enable Mr Shaddick to trade without exposing any profits to his creditors in an anticipated bankruptcy.

77 The second defendant, Mr Matthews, was the principal witness for the defendants. Mr Matthews started working for JDV, then called Hartley Poynton, in June 1997. He initially worked with a group of investment advisors, including a Mr Michael Hendriks. Mr Shaddick was a client of Mr Hendriks. When Mr Hendriks left JDV in late 1998, Mr Matthews took over some of his clients, including Mr Shaddick.

78 In his witness statement and in oral testimony, Mr Matthews showed a poor memory of these events. He agreed that his statement was prepared to a large extent by refreshing his memory from contemporaneous documents. It is difficult to make an accurate assessment of the extent to which he has refreshed his memory, and the extent to which he has reconstructed what must have happened from the documents. I was satisfied that he was trying to tell the truth in his oral evidence, but was not satisfied that he had any accurate recollection of what was said and when.

79 Mr Matthews identified several accounts operated by Mr Shaddick at JDV:

1. Digital Nominees Pty Ltd;
2. Mr Brian John Shaddick;
3. Teros Pty Ltd; and
4. a joint account in the names of Mr Shaddick and Mrs Shaddick.

The account statements for these accounts were in evidence as part of the trial bundle.

80 Mr Matthews said that in February 1999 he was informed by Mr Shaddick that he wished to open an account in the name of his wife the Janet Murray account. That account was formally opened on 19 February 1999 although trades were executed in that account from 17 February 1999. It operated until December 2000.

81 Mr Matthews recalled discussing Intasys shares with Mr Shaddick, and Mr Shaddick expressing the view that he expected the price to increase to $US20. Mr Matthews denied being told of a target price of $US11.40 for selling the shares. Mr Shaddick told him at one point that he wanted to purchase as much Intasys as he could. Mr Matthews could not recall when that conversation took place.

82 Mr Matthews recalled Mr Shaddick asking him to look for ways to borrow money to buy more Intasys shares. He denied recommending a margin loan. Mr Matthews had no experience with margin loans from RBC, although he had previously dealt with perhaps 10 margin loans from Australian lenders. Mr Matthews recalled making inquiries with Australian lenders regarding a possible margin loan for the purpose of purchasing the Intasys stock, but that none of the Australian lenders were prepared to offer a facility when it was an overseas stock. He did not refer to these inquiries in his witness statement, and mentioned them for the first time in crossexamination. I accept his evidence that he made those inquiries.

83 Mr Matthews did not recall Mr Shaddick asking him what a margin loan is. But he could recall telling Mr Shaddick how a margin loan operated, and that the loan amount 'could not exceed more than 50% of the total value of Intasys shares being held as security'. I am satisfied that Mr Matthews did describe a margin loan to Mr Shaddick, but I can make no positive finding about the terms in which he did so. I am not satisfied that he did so in terms which stated that the loan to value ratio was immutable during the term of the loan. Whether what he said had that effect must be considered in the light of all of the evidence.

84 There are other matters the timing of the lending, whether a specific amount for the loan was mentioned where Mr Matthews recollection is based almost entirely on what the contemporaneous documents say. He said in evidence that the chain of emails between Mr Matthews and RBC did not indicate a specific request for a particular loan to value ratio. The court is in as good a position as he is to draw inferences from what is said in the documents. But because I accept that Mr Matthews was a truthful witness and testified to the best of his memory, I am satisfied that if his recollection had differed from what the documents appeared to show, he would have said so.

85 Mr Matthews recalled the margin loan agreement was transmitted to Mr Shaddick in March 1999, although only by reference to the document. He also remembered that it was not accepted by RBC due to an inconsistency in signatures by Mrs Shaddick, which indicated that she perhaps had not signed the form. He could say little else.

86 The evidence showed, at several points, that Mr Matthews had poor practices with regard to ensuring that the documentation of a deal was complete before proceeding. For example, in a purchase of Intasys shares in late March (booked 24 March and settled some time later), he was left with the obligation to pay interest on the late settlement when funds were not available to settle the purchase because the RBC margin loan was not yet established.

87 Those poor practices were not, however, the basis of the claim.

88 I have reservations also about the evidence of Mr Matthews directed mainly to his lack of recall. None of the principal witnesses had a good memory of the critical events.

89 In my opinion, the most reliable evidence about the events of March and April 1999 is in the documents passing between JDV and RBC, inquiring about and then setting up the margin loan.

90 Mr Shaddick and Mr Matthews must have discussed whether a margin loan could be obtained from RBC before Tuesday, 16 March 1999, because on or by that date Mr Matthews had made inquiries with RBC. I accept Mr Matthews' evidence that he first made inquiries regarding a loan from an Australian lender, so the first discussion with Mr Shaddick about a margin loan may have been during the preceding week.

91 On 16 March 1999, Mr Matthews received an email at 4.16 am from Ms Moorehead of RBC in respect of Intasys shares on NASDAQ which simply stated: 'The above stock is eligible for 50% margin'. The query to which it responded, and when that was sent or made, was not in evidence.

92 At 5.49 pm, Mr Matthews responded by email, thanking Ms Moorehead for getting back to him and asking about setting up an account, including how long it would take. The email asked for information as soon a possible. It concluded: 'As discussed, the client has approximately $800k already in the stock and wants to round it up to 1 million'.

93 On 17 March 1999, Mr Gary Ursell, a Vice President at RBC, responded seeking information including where the client lived, and where the stock was lodged, saying that RBC 'can margin the stock currently in either Canada or the U.S.' This response suggests that the query was in respect of lending against the stock already held. That is more consistent with lending for the purpose of rounding up to $1 million, rather than with a million dollar loan.

94 On 18 March 1999, Mr Matthews responded, advising that the client (still not named) was in Australia, and had been buying Intasys through RBC. He continued:

1. Set up Margin Lending Account with RBC DS.
2. Transfer AUD$800,000 worth of INTAF into the account.
3. Buy additional $200,000 worth of INTAF using the Margin Account.

All as soon as possible!

I need to know what you require from us to get this set up, please Email me with instructions.

95 On 19 March 1999, Ms Susan Zdriluk, an employee of RBC, sent an email to Mr Matthews, saying:

In order for us to speed this process up, please provide us with your fax number. We can work with the fax documentation and obtain the originals later. I will need to fax you a copy of our new account application form and our margin agreement.

96 There is some uncertainty on the evidence about the documents that were then sent to Mr Matthews and faxed on to Mr Shaddick. The RBC margin agreement is two pages. Mr Shaddick cannot be certain whether he received only one page or two. Mr Matthews has no recollection of the fax, other than it has some of his handwriting on it. There is no fax cover sheet or any other evidence now available to show the number of pages transmitted, and Mr Shaddick did not retain anything. The content of the page that Mr Shaddick signed, however, does not even reveal the nature of the document (that it is an RBC margin agreement). Further, it starts at subpar (d). I do not believe it likely that only that page was sent.

97 On 22 March 1999, Mr Matthews received an email from Ms Zdriluk which raised several questions in relation to answers given on documents signed on behalf of the plaintiff, including questions asking who was the plaintiff's employer, and her bank. None of those matters appears on the page signed by Mr Shaddick. The email asked for the plaintiff's Tax ID number, and asked in what account the shares were held. Mr Matthews replied on 23 March 1999. Not all information was then available. Ms Zdriluk followed up on 25 March, and Mr Matthews provided the information required on 26 March 1999. In his reply he referred to the plaintiff then holding 202,750 Intasys shares.

98 On 30 March 1999, Mr Matthews again emailed Ms Zdriluk, advising her that of the shares now held by the plaintiff (202,750 shares with current value approximately $AUD1,378,700), there was $386,870.82 still outstanding on recent purchases not yet settled. He said in the email that the plaintiff wished to finance the balance using the margin loan account and asked for instructions on what to do. This, again, is consistent with the purpose of holding about $1 million stock, with part of it paid with the funds available from the margin loan.

99 On 1 April 1999, Mr Matthews attempted to have the shares transferred by journal to the margin loan account. On 6 April this had still not been done, and Mr Matthews again tried to effect the transfer.

100 On 7 April 1999, Mr Matthews emailed instructions for the purchase of 14,250 further Intasys shares for the margin loan account. Notes made by Mr Matthews around this time show that he was aware that about $AUD1 million was then available under the facility. The plaintiff relies on this as evidence that he had earlier represented that the margin agreement was suitable for borrowing this amount. I do not accept that to be so. There is nothing in evidence, for example, to show that Mr Matthews made any inquiries of RBC regarding whether Mrs Shaddick could borrow such sums. And the major purchase around this time was primarily paid for with funds from sources other than the margin loan. Even if I were to accept that at some time during the currency of the loan Mr Matthews said that the plaintiff could borrow $1 million under it, that is not the case which she has brought.

101 The documents for opening the account were still not complete at this point in early April, although the account may have been opened. On 8 April 1999, Ms Zdriluk sent further documents for completion, including a trading authorisation to allow Mr Shaddick to give orders for trading.

102 The documents were completed and signed. They bear a variety of dates: 9 April, 11 April and 12 April 1999. On 13 April 1999, Mr Matthews sent the trading authorisation through again as requested by Ms Zdriluk. It is not clear what further signature was then required, as all signatures on the document are dated before 13 April. This again shows poor attention to the details of documentation by Mr Matthews.

103 A series of internal emails within JDV show that the first of the trades which was to be booked to the margin loan account was booked on 24 March 1999, although most of that purchase was paid for with funds from other accounts, and money was drawn on the margin loan account only on 20 April 1999.

104 Before considering later events, it is convenient to consider the trading that took place on the various accounts held by the plaintiff, Mr Shaddick and companies associated with them.

105 The first three purchases preceded the margin loan. On about 15 January 1999, 77,000 shares were purchased on the joint account for $AUD410,581.35. These shares were transferred to the Janet Murray account on 19 March 1999. Shares were purchased on the Janet Murray account on about 17 February 1999 (49,050 shares for $AUD305,144.63) and 15 March 1999 (10,500 shares for $AUD63,081.57). On the evidence, the purchases are likely to have been made the day before the date shown on the statement - the account statement showing the date the purchase was booked, and not the date it was made. I will refer to the dates booked. The shares were paid for with funds from the joint account, and the Teros and Digital Nominees accounts.

106 These purchases gave the plaintiff a holding of around $AUD800,000 (at purchase price), consistent with the instructions given to RBC about the stock she held.

107 On 24 March 1999, a further 66,200 shares were purchased for $AUD391,906. These shares were also paid for with funds from the Digital Nominees account and the Teros account, although Mr Matthews accepted (ts 742) that it had been intended that they be paid from the margin loan account. That purchase gave the plaintiff the 202,750 shares referred to by Mr Matthews in his emails to Ms Zdriluk on 26 and 30 March 1999.

108 On 30 March 1999, Mr Matthews requested RBC to draw down $386,870.82 against the margin loan to settle an outstanding balance with JDV for Intasys purchases. On 7 April, Mr Matthews again requested a draw this time $418,182.62. This sum appears to include the draw requested on 30 March 1999, as there had been no payment, and no further shares had been purchased.

109 The next purchase was on 9 April 1999, of 159,100 shares for $AUD1,280,261.60. The major part of this purchase was with a cheque from Teros ($AUD1,213,129.18) on 16 April 1999, with the balance from the margin loan account. The first draw on the margin loan account is on 20 April 1999, of $418,182.62.

110 On 16 April, the plaintiff purchased a further 34,150 Intasys shares for $AUD306,012.86, wholly paid from the margin loan account.

111 On 10 May, she purchased 90,000 shares for $AUD841,231.32, and in a separate transaction on the same day, a further 17,500 Intasys shares for $AUD172,165.34. Both purchases were paid for with funds from the margin loan account.

112 The purchases on 10 May 1999 were the last of the plaintiff's purchases. Throughout this period, the share price for Intasys had climbed steadily from just over $AUD5 in January, with the last purchases at over $AUD9 a share.

113 The plaintiff sold 2,000 shares on 17 June 1999.

114 Mr Shaddick also bought Intasys shares on the account in the name of Digital Nominees. On 19 May 1999, Digital Nominees bought shares for approximately $300,000, but sold them on 2 June 1999 at a loss the share price having fallen about 50 cents.

115 The exchange rate with the US dollar at this time was not favourable to the Australian dollar.

116 It is common ground that the margin agreement which was executed by Mrs Shaddick in April 1999, and first transmitted to her on about 20 March, included cl 5 under which:

(a) RBC may, without notice, at any time and from time to time, reduce or cancel any margin facility made available to the customer or refuse to grant any additional margin facility to the customer, or require the customer to provide margin in addition to the margin requirements of the regulatory authorities; and

(b) the customer would provide RBC with any margin which is requested by RBC and will promptly pay any indebtedness due as a result of any reduction or cancellation of any margin facility.

117 RBC adopted a new margin policy to take effect on 3 May 1999. Again, it is common ground that the effect of the new policy was that the loan to value ratio would be 50% only for securities with an equity price of $US5 and over. Where the equity price was below $US5, the ratio dropped to 25%; and there was no margin for shares with a price below $US3. Further, a concentration rule was introduced (although not immediately applied), under which a maximum loan of $CAN50,000 would be extended for any one stock held as security.

118 On 14 May 1999, Ms Zdriluk sent an email to Mr Matthews about a stock transfer, but included in it the advice that the margin policies had changed and margins would be reduced if the stock fell below $5, and no margin would be given below $3. The email did not mention the concentration rule. The share price at this time remained above $US5. There was some uncertainty at the time whether the share prices were in United States or Canadian dollars. The Australian dollar traded at a better rate against the Canadian dollar.

119 From June, however, the share price for Intasys began to fall. In July 1999, RBC made a margin call of $CAN79,000. On 28 July 1999, Mr Matthews sent an email to RBC in relation to the plaintiff's account. He said that she would clear the margin call of $79,000 immediately 'based on the 50% loan value' but continued:

It is felt that due to the misinformation received that this account remain with a 50% loan value. The client has invested in other securities in Australia with the knowledge that this account would be operated with a 50% loan value (understanding that downward movement in the price may result in amended loan values, but not concentration rules).

We understand the concern of concentration the client does have other investments, and when the overall portfolio is viewed concentration is not apparent.

If the client were to be put in a position of having to reluctantly sell off some of the holding there is a good chance that we would affect the price of the security unnecessarily and also jeopardise the relationship with the client.

We trust that the immediate clearance of this call in the amount of C$79,000 will rectify the situation.

120 The 'misinformation received' is not specified. The reference to other investments entered with the knowledge that the account would be operated with a 50% loan value is false, and was known to Mr Matthews to be false. In my opinion, in this email and in other communications at about the same time, Mr Matthews was prepared to put arguments based on matters he knew not to be true. I also accept that the change in policy was not expected, but I am not satisfied that I can read back from these emails that a representation was made that the 50% ratio would be maintained by RBC.

121 In my opinion, while Mr Matthews was dealing with RBC in this way, it was not unreasonable for the plaintiffs to maintain their investment rather than sell their shares at a loss to pay out the margin loan.

122 There were further exchanges between Mr Matthews and RBC. Mr Matthews tried valiantly, but unsuccessfully, to have RBC keep a 50% margin on the account. At this stage, although a concentration policy had been adopted by RBC, the bank was not requiring the account to comply with that policy.

123 On 4 August 1999, Mr Matthews again went in to bat for his client. In an email to Ms Zdriluk he set out a sequence of events on the basis of which 'it is hoped that your credit department will maintain the margin loan at the current 50% rate'. In particular, Mr Matthews referred to an earlier email from Ms Kershner of RBC in which she had confirmed that the margin limits were in Canadian dollars and not US dollars. He continued, '[w]ith this new information all arrangements to settle the account were retracted. The client assuming that their cash flow position was now safe proceeded to commit their funds to alternative investments'. The reference to the email from Ms Kershner was true. Other matters asserted by Mr Matthews were not.

124 During this period, Mr Matthews advised Mr Shaddick by fax of the position of the Intasys shares, and when calls were likely to be made. He forwarded to Mr Shaddick his correspondence with RBC which he described as 'pertaining to the constantly changing margin ratio limits'.

125 At the request of RBC, 105,500 shares were transferred to the margin loan account on 9 August 1999, to provide additional security for the loan. That action put the transferred stock at risk of being sold by RBC under the agreement. The transfer of stock, with the share price falling, did not substantially improve the position of the account.

126 On 11 August 1999, Mr Ursell of RBC advised Mr Matthews by email that, on that day's trading prices, the account would be under margin by over $300,000. On 11 August 1999, Mr Matthews asked Ms Zdriluk to arrange the sale of 15,000 shares on the account. The sale was completed, but on 11 August 1999 Mr Ursell advised that the account remained under margin even with that sale. Another 30,000 shares were required to be sold at the same price to cover the existing call.

127 On 17 August 1999, Mr Ursell advised that as of the close of trading the day before, the account was under margin by $93,000. RBC would 'be selling stock to cover the under margin position on a daily basis'.

128 From 18 August 1999, Mr Matthews gave a series of instructions for further packages of around 10,000 shares to be sold. The price was now dropping, and by 20 August the share price was below $US3.60. During August, RBC sold 41,200 Intasys shares to meet margin calls. The plaintiff accepts that these margin calls would have applied on the 50% loan to value ratio and the loss of these shares is not included in the claim. The plaintiff's shareholding after these sales was 474,300.

129 On 24 August 1999, RBC advised Mr Matthews that the account was under margin by over $700,000 and immediate action was required. By late August RBC were threatening to 'liquidate positions' at prevailing market prices.

130 On 27 August 1999, Mr Matthews sent an internal email to Mr Beeton of JDV, advising that the stock had rallied 19% the previous night 'beyond any margin call zone'. The plaintiff relies on this email, as in it Mr Matthews said he could not understand how RBC kept changing the rules. He continued:

[T]hey have told me that they are only willing to lend C$50,000 on Intasys Corp. Why did they originally let us borrow $1.5 million then!

As you can appreciate this makes decision making near impossible.

131 On 2 September 1999, Mr David Craig, a director of JDV, wrote to RBC by email at the request of Mr Matthews seeking assistance in resolving issues on the account of the plaintiff. His letter includes the following:

1. When the margin agreement was established in April 1999:
   1. No stock price margin ratio rules were advised.
   2. No concentration policy or loan limit per security was advised to our client. Our client points out that the absence of such a policy is implied given that a margin facility providing over $1.5 million was granted on the one security.
2. On the issue of stock price limits, Susan Zdriluk's email message of 14 May 1999 referred to new margin policies but did not state which currency the stock price limits were in. To clarify the position, Luke Matthews called Leigh Kershner who confirmed the currency limits were in Canadian dollars and that was confirmed by email on 15 June 1999.

...

From our client's viewpoint, with which I have sympathy, the contractual arrangements for the margin loan were established in April 1999 and operated on that basis since that date. Our client has purchased stock and changed his financial position based on those arrangements. To now be told of a unilateral change in the agreed margin loan arrangements appears to our client to be unfair and capricious to what was agreed. This is especially so when the value of his holding is $2,900,000 and the loan is $1,300,000.

132 On 3 September 1999, the National Risk Manager of RBC responded. He offered no relief.

133 Mr Shaddick then attempted, with Mr Matthews' assistance, to resolve the problem. In early September 1999, he asked Mr Matthews to try to arrange an alternative loan facility at a 50% margin. Mr Matthews arranged an application for finance to Yorkton Securities, and obtained an extension of time from RBC before it took action to sell shares to meet margin calls. The extension was to 30 September 1999, later extended to 26 October. The application to Yorkton Securities did not proceed after Yorkton Securities advised that it would only accept transfer of the Intasys shares as security for the finance on receiving written confirmation that shares could be sold immediately to bring the loan 'on side'.

134 By late October 1999, the loan had to be reduced immediately. The plaintiff needed to pay RBC about $AUD1.35 million or her Intasys stock would be sold. The plaintiff says RBC was threatening to dump the stock in a manner which may cause the price to collapse. Mr Shaddick then sought assistance from Mr Kott, and through Mr Kott approached Standard Securities Inc. The plaintiff entered into an agreement with Standard Securities and Mr Kott whereby Felder International (a company associated with Mr Kott) paid $US940,000 then owing to RBC, and held the plaintiff's 474,300 shares (the Felder Agreement).

135 At about the same time, Mr Matthews had arranged for JDV to purchase 224,300 of the plaintiff's Intasys shares on the account of Teros to discharge the RBC margin loan debt. JDV provided credit to Teros to enable that to be done. Mr Shaddick said he was not aware of these arrangements. A document executed by the plaintiff, Mr Shaddick and Mrs Shaddick around this time, but undated, declares that 474,300 shares were held in trust for Felder International 224,300 by Teros and 250,000 by the plaintiff.

136 What followed in the dealings with Mr Kott and Felder International is unclear.

137 Mr Shaddick, in evidence, gave the following account. His account is the only evidence about the details of the Felder Agreement and subsequent events, and I approach it with caution due to my general findings about his reliability.

138 Mr Shaddick said that, around 2 November 1999, he had slept very little in the previous few days. He and his wife signed the declaration that the shares were held in trust without reading it, and faxed it to Standard Securities.

139 On 9 November 1999, in the early hours of the morning, he telephoned Mr Kott, who agreed to hold the stock on the basis that Mr Shaddick could begin selling it at about $US11.00. Mr Shaddick said that during that phone call, he could hear both sides of another call between Mr Kott and Ms Miller of Standard Securities, in which Mr Kott and Ms Miller discussed splitting the stock so it could be held by several other entities. Mr Shaddick expressed concern, but Mr Kott said not to worry 'because he loved my wife and kids, we were like family'. This, apparently, was reassuring.

140 In January 2000, the Intasys price rose again and by 24 January 2000 was selling at a high of more than $US12.00. Mr Shaddick rang Mr Kott to tell him that he wanted now to sell the plaintiff's shares. Mr Kott told him he had sold already at $US9. Mr Kott agreed to forward money from the proceeds, and between January and March sent a total of $US700,000 to Teros. Mr Shaddick said he did not know why the money was sent to Teros. The amounts he says were actually received (in Australian dollars) are:

141 In April 2000, Mr Shaddick went to Canada and stayed overnight at Mr Kott's home. He said that Mr Kott then told him he was still holding the plaintiff's stock, and was happy to return it. At that stage, the share price had dropped to about $US6. Mr Shaddick said he would hold Mr Kott to $US9 a share, and the two parted on bad terms. There were further dealings, in which Mr Kott said he would pay the plaintiff the full amount owing on the basis of $US9 a share. It is unnecessary to detail the whole course of the dealings. In the end, Mr Kott offered to transfer the whole of the plaintiff's stock back against payment of moneys owed by Mr Shaddick the $US940,000 paid to RBC and the $US700,000 already forwarded. The share price of Intasys, after peaking in March 2000, declined and never recovered.

142 By March 2001, Intasys shares were trading at less than $US0.50. Mr Shaddick said that, by this time, he believed Mr Kott to be a liar and a crook. But he still maintained contact with him. In August 2001, Mr Shaddick again travelled to Canada to see Mr Kott. He said that Mr Kott was threatening, and did not offer to help. Shortly afterwards, Mr Kott had lawyers in America write to Mr Shaddick demanding that he cease to harass Mr Kott.

143 Even then, Mr Shaddick approached Mr Kott again, in about August 2002, but was rebuffed.

144 Mr Shaddick said in evidence that at the time the stock was transferred to Mr Kott's control he realised that this was not the most secure way of dealing with the stock. There was no proper documentation, and he did not even know the names of the entities to which the stock had been transferred. For these reasons, he said, he did not later contemplate seeking to recover from Mr Kott or entities associated with him.

145 In effect, if I accept what Mr Shaddick said, the plaintiff put the stock under the control of Mr Kott in return for Mr Kott paying the amount the plaintiff owed to RBC. Mr Kott put the stock into entities where the plaintiff could not trace it; he has since either sold it and failed to account for the proceeds; or he did not sell it but demanded that he be paid the money he had paid ($US1.64 million) before he would release it. By the time of this demand, the stock was worth much less than the plaintiff had paid for it. By November 2000, the shares were trading at less than $US1, and the 474,300 shares were worth far less than Mr Kott had paid and said he was owed.

146 The dealings between Mr Matthews and RBC at the time leave me satisfied that what was requested and discussed - both with the bank and Mr Shaddick - was a loan for the purpose of purchasing stock to the amount of about $200,000, so as to leave the plaintiff with a holding of about $AUD1 million. That is what Mr Matthews said in his email of 16 March 1999, and confirmed on 18 March. The first request for funds from the margin loan account was in relation to the plaintiff then holding shares with a current value of about $AUD1,378,700, and wishing to finance an outstanding balance of around $AUD386,870.82 from the margin loan account.

147 The later conduct of the parties - in particular Mr Matthews' dealings and correspondence with RBC from June 1999 do not lead me to doubt that conclusion. The fact that RBC granted a loan which, by the end of May, was over $1.5 million does not assist with respect to what was said or implied in March.

148 The subsequent course of events does not assist the plaintiff with regard to the plea that Mr Matthews and JDV represented in the telephone conversation of midMarch 1999 that the margin facility would be suitable for the purpose of purchasing $US1 million of Intasys stock. I do not accept that anything to that effect was said in March, or at any time before the plaintiff had entered into the margin loan.

149 There is, of course, one representation which the defendants admit was made that Mr Matthews told Mr Shaddick that a 50% loan value ratio meant that the loan amount could not exceed more than 50% of the total value of Intasys shares being held as security. That, in itself, is not misleading. In par 8A of the statement of claim the plaintiff pleads the further implied representation, that provided the 50% margin limit would be maintained then the plaintiff would not be called upon to repay the loan or any part of it.

150 The comments McLelland CJ in Eq in Watson v Foxman (318 319) are particularly apt. The plaintiff has not proved what was said or the substance of what was said with any precision. This is one of those occasions where

the question whether spoken words were misleading may depend upon what, if examined at the time, may have been seen to be relatively subtle nuances flowing from the use of one word, phrase or grammatical construction rather than another, or the presence or absence of some qualifying word or phrase, or condition.

151 The allegation in par 8A(ii) raises a significant additional matter in alleging the implication that the loan to value ratio would be maintained and the plaintiff would not be called upon to repay any part of the loan provided she maintained the 50% margin. I do not accept that the representation in par 8A(ii) is implied solely from what the defendants have admitted, and I am not satisfied on the evidence that I can find with any greater precision what was said.

152 Nor do I accept that is what the plaintiff and Mr Shaddick understood Mr Matthews to be representing at the time. The conversation must be considered in the light of all of the events of that time. First, contrary to what the plaintiff submits, I find that the margin loan was discussed in the context of a loan to enable the plaintiff to increase her Intasys shareholding from about $800,000 to $1 million, and when she was also intending to use $1.6 million expected from the trust distribution to purchase Intasys stock.

153 Second, shortly after the telephone conversations, and before the plaintiff had entered the margin loan, Mr Matthews forwarded the loan documents first around 20 March and then around 9 April 1999. It may be that a positive representation regarding the margin rules may have been misleading in the circumstances, even with the provision of the actual agreement. But where the agreement was only two pages, was provided on or about 20 March, and then again on about 12 April, and where I am not satisfied that Mr Matthews said anything about the loan margin being unchangeable, there was, in my view, no implied representation, on the whole of the conduct before the loan was entered, that the loan value ratio would not change.

154 Third, while Mr Matthews said in evidence that, as a matter of practice, he did not expect RBC to alter the rules in the way they did, that does not show either what he said or how it would be understood.

155 The events subsequent to June 1999, when the stock price began to fall and RBC made calls under the amended policy, do not greatly assist in determining whether the pleaded representation was made in March of that year. Mr Matthews was prepared to argue strongly, and not always truthfully, his client's position. His readiness to put forward arguments without a proper factual basis may not reflect well on him. But it does not fill in gaps in the plaintiff's case where, in relation to the critical conversations, I do not find Mr Shaddick was reliable.

156 The plaintiff has not established what was said in the phone conversations in March 1999 on which she relies. Having regard to all of the evidence, I am not satisfied that what Mr Matthews said on that occasion (or those occasions) conveyed the representation pleaded.

157 There can be no dispute that JDV and Mr Matthews owed a duty of care to the plaintiff as a client. The plaintiff pleads that Mr Matthews was negligent in making the representations pleaded at pars 8 and 8A, in that he:

(a) failed to make any assessment or any proper assessment as to whether they were truthful and accurate;

(b) failed to inform the plaintiff that they were incorrect.

158 On the findings I have made, the representations were not made, save for a representation to the effect of that pleaded in par 8(ii), and that was accurate.

159 The plaintiff pleads two causes of action in implied warranties.

160 The first is under s 12ED(1) of the Australian Securities and Investments Commission Act, alternatively under s 74(1) of the Trade Practices Act. Each is based on an implied warranty that services would be rendered with due care and skill. The sole allegation of breach is that the defendants made the representations pleaded in pars 8 and 8A without due care and skill.

161 On the findings I have made, that allegation cannot be sustained. I am not satisfied that the representations which are alleged were made. Nor am I satisfied, on those findings, that there was any lack of care and skill in what was said.

162 The next cause of action is under s 12ED(2)(c) of the Australian Securities and Investments Commission Act, alternatively s 74(2) of the Trade Practice Act. These claims have as an element that, in the telephone conversations pleaded in pars 7 and 8 of the statement of claim, the plaintiff made known, expressly or by implication, the particular purpose for which the margin loan was required or the result she desired to achieve. The plaintiff's case is that the relevant purpose and result were the purchase and holding of Intasys stock with the value of approximately $US1 million, against the security of the Intasys stock then held by the plaintiff and the Intasys stock to be purchased by the plaintiff using the margin loan.

163 On the findings I have made in particular, that it is more likely that the purpose at the relevant time was to borrow about $200,000 to bring the plaintiff's shareholding up to $1 million I am not satisfied that the plaintiff then had the purpose and desired the result which she has pleaded. Further, I am not satisfied such a purpose or desired result was made known to Mr Matthews in those telephone calls. The conversations between Mr Shaddick and Mr Matthews cannot be shoehorned into the statutory criteria. They do not fit.

164 Finally, the defendants submitted that the services provided in relation to the arranging of the margin loan were not financial services for the purposes of the Australian Securities and Investments Commission Act. The argument is pointless when the same warranties are alleged under the Trade Practices Act and there is no requirement that the contract be for the supply of financial services. In each case, the result would be an implied contractual warranty with the same content. Having regard to my overall findings, I do not propose to separately consider this question.

165 The defendants also asserted that the claim in relation to the warranties implied under s 74 of the Trade Practices Act was statute barred. I do not accept that argument. The cause of action is for breach of a contractual warranty, not damages under s 82. Further, the plea referring to s 74 arose out of the same facts as the claims earlier pleaded. The plaintiff was, in fact, constrained in the way it pleaded the relevant warranty and breach by the facts it had earlier pleaded.

166 The defendants submitted that the plaintiff did not rely on the alleged representations in entering into to the margin loan agreement, so that even if there was misleading or deceptive conduct it did not cause the plaintiff's loss.

167 The statutory causes of action on which the plaintiff relies arise when the plaintiff suffers loss of damage 'by' contravening conduct of another person Wardley Australia Ltd v Western Australia [1992] HCA 55; (1992) 175 CLR 514, 525. General principles of causation apply: Wardley (525). The contravening conduct need not be the sole inducement in sustaining the loss although it is necessary that the contravening conduct had a substantial rather than a negligible effect: Gould v Vaggelas [1985] HCA 75; (1985) 157 CLR 215; Como Investments Pty Ltd (in liq) v Yenald Nominees Pty Ltd (1997) ATPR 41-550, 43,619; Henville v Walker [2001] HCA 52; (2001) 206 CLR 459 [109]; I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited [2002] HCA 41; (2002) 210 CLR 109 [33], [57].

168 Reliance must 'be addressed from the subjective perspective of the party or persons said to have been affected by the misleading and deceptive conduct, at least until the point where it might be argued that their reliance was so unreasonable as to break the chain of causation': Grainger v Williams [2009] WASCA 60 [26].

169 In one sense, Mr Shaddick's evidence (echoed by the plaintiff) is the most direct evidence on the issue of reliance. But his assertion, in hindsight, that he would not have caused his wife to enter into the margin loan agreement but for Mr Matthews' statements must be considered in the context of all of the facts. As Handley AJA (Beazley and Giles JJA agreeing) observed in Baiyai Pty Ltd v Guy [2009] NSWCA 65 [56]:

Inferences from the surrounding circumstances, other objective facts, and the probabilities may be a more reliable guide on questions of causation than ex post facto evidence from an interested party: Seaton v Burnand [1900] AC 135, 140; Cackett v Keswick [1902] 2 Ch 456, 4634; Rosenberg v Percival [2001] HCA 18; 205 CLR 434, 4434.

See also Kowalczuk v Accom Finance [2008] NSWCA 343; (2008) 77 NSWLR 205; [319]; Gardiner v Agricultural and Rural Finance Pty Ltd [2007] NSWCA 235 [405].

170 The plaintiff's counsel submitted that the representations were cumulative. I think that is right. The plaintiff pleads that had the representations not been made she would not have borrowed $1 million from RBC for the purpose of purchasing Intasys stock. Had I been satisfied both representations pleaded in par 8A were made, and that the plaintiff then intended to use the loan to purchase $1 million of Intasys shares, I would have inferred causation in all of the circumstances, even with my reservations about the plaintiff's evidence.

171 There would be an air of unreality, however, in assessing the effect of the representations individually.

172 If it is necessary to state it, I do not regard the representation pleaded in par 8(ii) to be false or misleading in itself.

173 The plaintiff has pleaded her case in damages on two bases. First, for the misleading or deceptive conduct under s 12DA and s 12DB of the Australian Securities and Investments Commission Act, s 52 of the Trade Practices Act and s 995(2) of Corporations Law, she claims that had the representations pleaded not been made:

(i) she would not have borrowed $US1 million from RBC for the purpose of purchasing Intasys stock;

(ii) she would not have borrowed moneys for the purpose of purchasing additional Intasys shares and would have been able to retain 329,800 Intasys shares, alternatively 324,250 Intasys shares;

(iii) she would not have entered into the agreement with Mr Kott or Felder International and would not thereby have lost her entitlement to those shares; and

(iv) she would not have lost the opportunity to sell those 329,800, alternatively 324,250, Intasys shares at an on market price of at least $US11 per share alternatively, at an on market price at least equivalent to the highest price the plaintiff paid for the shares, alternatively at an on market price at least equivalent to the average price the plaintiff paid for the shares.

174 The common law principles relevant to assessing damages in contract or tort are not directly relevant to the assessment of damages in these statutory causes of action, and rigid distinctions between the measures of damages do not apply in this context: Henville v Walker [18]; Murphy v Overton Investments Pty Ltd [2004] HCA 3; (2004) 216 CLR 388. In general terms, if the plaintiff had succeeded in her claim, she would be entitled to damages to restore her to the position she was in had the misleading or deceptive conduct had not occurred that is, if she had not entered into the margin loan agreement: see Gould v Vaggelas (220 221); Gates v City Mutual Life Assurance Society Ltd [1986] HCA 3; (1986) 160 CLR 1, 14; Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494. She is not entitled to be compensated on the basis that she be placed in the position she would have been had she entered the margin loan agreement and the misleading representations had been true.

175 The objects of the legislation tell against a narrow, inflexible construction of causation in determining the loss caused by the breach: Henville v Walker [96] (McHugh J); Marks v GIO Australia Holdings [56] (McHugh, Hayne and Callinan JJ), [99] (Gummow J). The essential test to be applied is 'how much worse off the plaintiff is as a result of entering into the transaction which the representation induced [her] to enter than he would have been had the transaction not taken place'. She is entitled to 'all the consequential loss directly flowing from [her] reliance on the representation ... at least if the loss is foreseeable': Gates v City Mutual Life Assurance Society Ltd (12). In Henville v Walker, McHugh J said:

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 [106].

176 The second basis is contractual. With regard to the causes of action for breach of warranty, the plaintiff claims that had the defendants not breached the warranties implied under s 12ED of the Australian Securities and Investments Commission Act, alternatively under s 74 of the Trade Practices Act:

(i) she would not have entered into the Felder Agreement and would not thereby have lost her entitlement to 474,300 Intasys shares; and

(ii) she would not have lost the opportunity to sell the Intasys shares at an on market price of at least $US11 per share, alternatively at an on market price at least equivalent to the highest price the plaintiff paid for the shares plus borrowing costs; alternatively, at an on market price at least equivalent to the average price she paid for the shares, plus borrowing costs.

177 I have difficulty with the formulation of the plaintiff's claim for breach of warranty. The assessment of the damages she suffered as a result of the defendants' breach of warranty is to be carried out according to the principle that the plaintiff is to be placed in the same situation with respect to damages, so far as money can do it, as if the contract had been performed: Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272 [13]; Robinson v Harman [1848] EngR 135; (1848) 1 Ex 850, 855 (Parke B); Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64, 80. The plaintiff is entitled to recover such damages as arise naturally, that is, according to the usual course of things, from the breach of contract, or such damages as may reasonably be supposed to have been in the contemplation of both parties concerned at the time they made the contract as the probable result of the breach: Hadley v Baxendale [1854] EngR 296; (1854) 9 Ex 341.

178 The claim for damages arising from the alleged breach of agreement by Mr Kott and Felder International falls outside the scope of damages for breach of contract. The entry into another agreement to enable the plaintiff to pay RBC and avoid the sale of her shares is something which flows naturally from the breach: it is a link rather than a break in the chain of causation: see Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332, 356 - 357 (Brennan J). Entry into the Felder Agreement was not, however, productive of the loss.

179 The court, of course, does not have Mr Kott's version of events, and the allegations against him are very serious. In the circumstances described by Mr Shaddick, Mr Kott first put the shares in the names of other entities to which Mr Shaddick could not trace them. He then either sold the shares and fraudulently refused to account for the proceeds (save for $US700,000); or he fraudulently refused to deliver them to Mr Shaddick at the time he was asked to. The loss caused by that conduct is too remote from the defendant's breach to be attributable to the breach of warranty. And damages from such a fraud would not have been in the contemplation of the parties at the time of the contract.

180 But if there was a breach of warranty under either s 12ED(2) or s 74(2), that the margin loan would be reasonably fit for the purpose for which it was required and might reasonably be expected to achieve the result which the plaintiff desired to achieve, there is a case for damages to compensate the plaintiff for the loss of the profit she would have made had the margin loan been reasonably fit for the purpose of purchasing Intasys stock to the value of $US1 million on the security of the shares to be purchased and those held by the plaintiff. The plaintiff did purchase shares to accumulate a total holding of 474,300. Some of the shares were sold to meet margin calls which the plaintiff accepts were required on the 50% margin. While the share price remained steady (and below $US4) in November 1999, it began to rise in December and there were only three days from 1 December 1999 to April 2000 when the volumeweighted average price fell below $US5, and only one day when it closed below $US5. In my opinion, it is probable that the plaintiff would have retained all of the 474,300 Intasys shares had the margin on the loan remained at 50%.

181 I accept, accordingly, that the loss she suffered is measured by the amount she would have recovered on a sale of the whole of her share holding.

182 I accept that the plaintiff held 329,800 shares that she would have held if she had not entered into the margin loan.

183 The next question is whether the plaintiff could have sold those shares at $US11 or $US11.40 (Mr Shaddick's asserted target price) had she retained them. This was the subject of concurrent expert evidence from Dr Bernardo da Veiga and Dr Marvin Wee. It is unnecessary to discuss the evidence in any detail, as ultimately there was no disagreement that Mr Shaddick could have sold a parcel of shares of this size at around $US11.40. I am satisfied that the sale of that number of shares could have been achieved in the market either entirely in January 2000, or at worst in January and then in March 2000, at an average price of $US11.40.

184 The question of whether the shares would then have been sold is a matter of conclusion from Mr Shaddick's evidence of his intention, and to some extent inference from the circumstances. Mr Shaddick was firm that he had a target price of $US11.40. Whether he told Mr Matthews of that target was in dispute, but save to the extent it would be supportive evidence, Mr Matthews' knowledge of the target is of no consequence.

185 I was generally not satisfied with Mr Shaddick's evidence. It is difficult to arrive a level of satisfaction as to the facts including his target price - based solely on his evidence. The figure of $US11.40 is close to the peak at which Intasys traded before it slumped dramatically.

186 On the other hand, he purchased the shares for between about $US3.50 and $US7, so needed to sell above that price for a profit. Further, I accept that Mr Shaddick had high expectations for these shares fuelled by Mr Kott and his meeting with the board of Intasys, and demonstrated by his conduct in not abandoning the stock when the price began to fall and RBC were making calls. I accept, as submitted by the plaintiff, that it should be assumed that he would have sold the shares in accordance with the ordinary expectations of the world of commerce: Commonwealth v Amann Aviation (155 - 156).

187 The shares only, and temporarily, recovered their price between January and March 2000. I accept that, in the ordinary course, Mr Shaddick would have sold then, and could have sold a parcel of that size in January or, at worst, in January and March at an average of US$11.40. Accordingly, I am satisfied that it is proper to assess loss on the basis that the shares would have been sold at an average of $US11.40 during January and March 2000. That is:

(i) the plaintiff would have sold 329,800 Intasys shares during January 2000 to March 2000 for an average price of $US11.40 for a total price of $US3,759,720;

(ii) during that period she could have converted US dollars to Australian dollars at a rate of about $US0.6558 to $AUD1 (depending on the date of the exchange);

(iii) the plaintiff would thus have received a total of about $AUD5,733,028.36;

(iv) Mr Kott paid the plaintiff at total of $AUD1,117,641.39 or $AUD1,027,371 (the amount stated by Mr Shaddick in his evidence)

188 There would be amounts of brokerage incurred. The assessment also assumes an average of $US11.40, and averages the exchange rate over the period. The total is about $4.6 million and it is not practical to be more precise than that.

189 The difference in the claim for breach of warranty requires consideration of whether the same average price could have been achieved over January to March 2000 for the greater number of shares. Again, however, I did not perceive a great deal of difference between the conclusions of the experts. In particular, I accept the evidence of Dr da Veiga (ts 909, 920) that, while he could not say the whole parcel would have sold on those days with 100% certainty, there were sufficient days during the trading period when the price level was such that the whole parcel could have sold at the target price during that period.

190 As the plaintiff submitted, assessing damages on this basis would need to take into account that the plaintiff would have to repay the margin loan, and also account for the payment received from Mr Kott. The proceeds of the sale of shares would be $AUD8,244,922.23, from which would be subtracted $AUD2,552,573.99, giving a balance of about $AUD5.7 million. Again it is not practical to be more precise.

191 In each case, interest would be payable from April 2000.

192 The defendants brought a third party claim against Mr Shaddick seeking an indemnity against, alternatively a contribution to, any liability to the plaintiff, on the grounds that he represented her and acted on her behalf and owed her a duty of care to act with reasonable care, skill and diligence. The defendants say the sole cause of the plaintiff's loss was the negligence and breach of duty of Mr Shaddick, both in the entry into and transactions on the margin loan account, and in relation to the Felder Agreement.

193 As I have dismissed the claim, the third party proceedings also should be dismissed.

194 The claim is dismissed against both defendants. The third party notice is dismissed.

CITATION : SHADDICK -v- JDV LTD [2012] WASC 120 (S)

HEARD : 29 NOVEMBER - 2 DECEMBER 2010, 18-21, 27-29 APRIL 2011, 6 MAY 2011, 27 APRIL 2012

Costs - Third party proceedings - Award of costs against a non­party - Calderbank offer - Whether rejection of Calderbank offer was reasonable - Turns on own facts

Legal Profession Act 2008 (WA), s 301

Rules of the Supreme Court 1971 (WA), O 66 r 1, O 19 r 1, O 19 r 12

Supreme Court Act 1935 (WA), s 37

Defendants to pay the costs of the third party in the third party proceedings

Plaintiff and third party to pay the defendants' costs of the primary proceedings

1 ALLANSON J: On 5 April 2012, I gave judgment dismissing the plaintiff's claim for damages against the defendants, and also dismissing the defendants' third party claim against Mr Shaddick. Mr Shaddick and the defendants have applied for costs orders.

2 The costs of and incidental to all proceedings in the Supreme Court are in the discretion of the court or judge, and the court or judge shall have full power to determine by whom, and to what extent, such costs are to be paid: Supreme Court Act 1935 (WA) s 37(1). The discretion regarding costs has been described as absolute, unconfined or unfettered, although a discretion that must be exercised judicially, not arbitrarily or capriciously, or on grounds unconnected with the litigation: Oshlack v Richmond River Council [1998] HCA 11; (1998) 193 CLR 72 [21] [22], [134]; Latoudis v Casey [1990] HCA 59; (1990) 170 CLR 534, 540, 558, 562, 568; Donald Campbell & Co v Pollak [1927] AC 732, 811. The courts have developed principles for the guidance of judges in exercising the discretion. The guiding principle, set out in O 66 r 1 of the Rules of the Supreme Court 1971 (WA), is that the court will generally order that the successful party to any action or matter recovers its costs.

3 For third party proceedings, O 19 r 12 provides that the court may decide all questions of costs as between a third party and other parties to the action, and may order any one or more of them to pay the costs of any other, or others, or give such directions as to costs as the justice of the case may require.

4 The present applications require the court to apply those principles in resolving the following issues:

1. Should the defendants pay Mr Shaddick's costs of the third party action;
2. Should the defendants pay the costs thrown away by the amendment of the third party statement of claim on 1 December 2010;
3. Should the defendants pay the costs thrown away by reason of the adjournment of the proceedings on 2 December 2010;
4. Should Mr Shaddick rather than the plaintiff pay the defendants' costs of the action, or should he be liable for them jointly with the plaintiff;
5. Should Mr Shaddick, or the plaintiff, or both of them pay the defendants' costs on an indemnity basis from the date they had to respond to a Calderbank offer, that is, from October 2010.

5 The defendants have also asked the court to grant a certificate for second counsel, and a certificate for transcript.

6 First, it is necessary to consider Mr Shaddick's involvement in the proceedings, and the basis on which he was joined as a party. There are two separate issues: Mr Shaddick's involvement in the transactions which led to this claim, and his conduct in the litigation.

7 The plaintiff's claim, very broadly stated, was that Mr Shaddick represented her in her dealings with the defendants. She claimed that she suffered loss because of the defendants' misleading or deceptive conduct, further or alternatively because of the defendants' breach of duty or breach of contract. The representations that founded the plaintiff's Trade Practices Act 1974 (Cth) claim also lay at the heart of the other causes of action pleaded. The plaintiff's primary case was that she suffered loss because Mr Shaddick was misled.

8 The share dealings that were the subject matter of the plaintiff's claim were carried on in the plaintiff's name, primarily because Mr Shaddick believed there was a prospect that the Australian Taxation Office would seek to recover debts of a failed company from him, leading to his bankruptcy. Mr Shaddick and his wife intended to accumulate assets that were in reality joint assets. Her name was used to enable Mr Shaddick to trade without exposing any profits to his creditors in the anticipated bankruptcy. But there is no doubt that Mr Shaddick gave all of the instructions to the defendants in relation to the share transactions, and made all of the decisions, to the extent of signing documents in his wife's name. He was the one who attempted to deal with Mr Kott, and who ultimately abandoned that course.

9 There is, as submitted by counsel for Mr Shaddick, a difference between Mr Shaddick having the carriage of the investment and matters relating to it, and his being, in effect, the plaintiff in the litigation. But the extent of his involvement in the conduct of the litigation was far beyond that of the principal witness. The plaintiff and the third party were represented by the same solicitors and counsel. He was the one who provided instructions to the solicitors, not only about his own case but the case brought by his wife. In evidence, Mr Shaddick agreed that he was primarily involved in instructing the solicitors for the plaintiff, and he was the person making decisions in the interests of both himself and his wife. I understood this to apply to both the investment and the litigation. Specifically, he was taken to various changes in the plaintiff's pleaded case over the years and agreed that he was the one who gave instructions on those changes (ts 325 327, also at 337, 341, 359).

10 The third party claim against Mr Shaddick sought an indemnity against, alternatively a contribution to, any liability on the part of the defendants to the plaintiff. The defendants pleaded that Mr Shaddick represented the plaintiff and acted on her behalf, and owed her a duty of care to act with reasonable care, skill and diligence. The defendants said that the sole cause of the plaintiff's loss was Mr Shaddick's negligence and breach of duty.

11 The present proceedings were brought before the amendments to the Trade Practices Act and the introduction of the Civil Liability Act 2002 (WA) provisions which permit apportionment of liability.

12 Save for Henry v Australian Guarantee Corporation Ltd [1985] WAR 137, which was concerned with the 'normal rule' where damages are claimed for breach of one of a string of contracts, and the seller brings in its immediate seller as a third party, I am not aware of any decision of the Court of Appeal offering guidance on the award of costs in third party proceedings. Counsel referred me to none. There are appeal court decisions in other Australian jurisdictions to the effect that the usual rule that a successful party will generally recover its costs is applicable to third party proceedings, subject to the overriding power of the court to do justice between the parties: Kheirs Financial Services Pty Ltd v Aussie Home Loans Pty Ltd [2010] VSCA 355; Furber v Stacey [2005] NSWCA 242; Lombard Insurance Co (Australia) Ltd v Pastro [1994] SASC 4481; (1994) 175 LSJS 448.

13 In Kheirs Financial Services [28], the court set out the following principles derived from the authorities:

(1) The usual rule as to costs applies to proceedings as between defendant and third party, the 'event' being the success or failure of the defendant's claim against the third party.

(2) Where the third party claim is dismissed because the plaintiff's claim against the defendant fails, the defendant will ordinarily be liable for the third party's costs of the third party proceeding.

(3) The award of costs remains a matter of discretion, however, and there may be circumstances of the case which justify a departure from the usual rule.

(4) In deciding (in a case of the kind referred to in (2)) whether any departure from the usual rule is warranted, the Court will ordinarily need to consider at least the following matters:

• the reasonableness of the defendant's decision to join the third party;
• whether the joinder of the third party was reasonably foreseeable by the plaintiff, such that the plaintiff might be viewed as having some responsibility for the costs of the third party proceeding;
• the responsibility of plaintiff, defendant and third party, respectively, for the time taken up in the hearing of the third party proceeding.

14 In the main proceedings, counsel for Mr Shaddick submitted that liability to contribute or indemnify the defendants would not lie. It was unnecessary to decide that question then, although in my opinion the submission is correct. If the plaintiff's loss was caused by a misleading representation to Mr Shaddick, it was because his decisions about the investment were infected by the error induced by the defendants' conduct: Burke v LFOT Pty Limited [2002] HCA 17; (2002) 209 CLR 282 [20], [139]. In those circumstances it would not be just to order contribution.

15 I doubt that the joining of the third party contributed significantly to the time taken up in the hearing, as the same issues arose in the main proceedings. But the third party was required to plead, and there may be other matters which he can properly establish in taxation. That is for the taxing officer.

16 In the circumstances, there is no basis to depart from the usual rule. The defendants should pay the third party's costs of the third party proceedings.

17 Two particular issues then arise. This matter was originally listed for trial for six days, commencing on 29 November 2010. On the first day the plaintiff applied to amend the statement of claim. The defendants objected to that amendment, but I allowed it to be made. The defendants then amended their defence, with a corresponding amendment in the third party statement of claim. The defendants' amendments were not confined to a response to the changes made by the plaintiff. The defendants' amendments, in turn, required the plaintiff to amend (in her reply), and the third party to amend his defence to the third party statement of claim. I anticipated that further amendments would follow.

18 The first issue is whether the defendants should pay the costs thrown away by reason of the amendment to the third party statement of claim. No reason has been put forward why they should not, other than the general opposition to the third party having its costs. The amendment to the third party statement of claim was not simply responsive, but introduced a significant additional matter. In my view, the third party should have the costs thrown away by reason of the amendment.

19 Mr Shaddick also seeks the costs thrown away by reason of the adjournment of the trial on 2 December 2010. The trial began on 29 November, and the plaintiff's counsel commenced the opening address, taking the court in some detail through the documents on which the plaintiff relied. The amendments to each party's pleadings were also dealt with, although it was apparent that further consequential amendments were likely to be made, and the parties may need to consider the leading of further evidence in light of the amendments. By the middle of day three, the testimony of witnesses had not begun, and there were many objections to witness statements still to be heard and resolved. By then, it was clear that the matter would not be completed in the time set aside for trial. Indeed, it was likely that the evidence of the principal witness for the plaintiff would not have been completed. The decision to adjourn was made on the third day (1 December 2010), although part of the next day was used to deal with objections and the trial was only formally adjourned then. When the trial resumed, it took another eight days.

20 While the defendants' amendment of the defence and third party statement of claim was one catalyst for the adjournment, it was just one of several. It would, in my opinion, be artificial to identify the defendants' conduct of the action as the cause of the adjournment. The fair apportionment of costs does not call for such an artificial exercise. I would not allow the third party (or the defendants) the costs thrown away by reason of the adjournment.

21 Under O 19 r 12, the court may decide all questions of costs as between a third party and other parties to the action, and may order any one or more of them to pay the costs of any other, or others.

22 The defendants seek an order that Mr Shaddick, who was the third party in the proceedings, pay the costs of the claim between the plaintiff and the defendants. Although, having regard to O 19, Mr Shaddick is a party, I have found the principles regarding the award of costs against a nonparty to be a useful guide.

23 In Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178, Mason CJ and Deane J (Gaudron J agreeing) recognised a general category of case in which an order for costs should be made against a nonparty: where the party to the litigation is insolvent or man of straw, where the nonparty has played an active part in the conduct of the litigation, and where the nonparty, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. In that category of cases, an order for costs should be made against the non-party if the interests of justice require that it be made (192 193). Dawson J held there was jurisdiction to award costs in appropriate cases against a person who is not a party to the proceedings 'where that person is the effective litigant standing behind an actual party or where there has been a contempt or abuse of the process of the court' (202).

24 In a recent review of the authorities, the Full Court of the Federal Court accepted that the category of cases in which an order may properly be made is not closed, and that it is not a precondition to the exercise of power to award costs against a non-party that the unsuccessful party is impecunious: Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) [2012] FCAFC 50 [71] [93]. The court accepted that it had power to make an order for costs against a nonparty

where the non-party is connected with the unsuccessful party to the proceeding, and has caused that party to start, continue or prosecute the proceeding in circumstances where the nonparty's conduct makes it just and equitable that the non-party be visited with an order for costs in favour of the successful party either in addition to such an order against the unsuccessful party or in substitution for such an order [88].

25 On the view I formed of the way in which the proceedings were conducted, Mr Shaddick was the effective litigant. This was not an abuse of process or contempt it is simply the fact. The proceedings had to be commenced in the plaintiff's name because Mr Shaddick had traded in her name, and she had owned the shares.

26 There is no evidence before me that the plaintiff is impecunious, and would be unable to meet an order for costs. And there is no evidence that Mr Shaddick funded the litigation. But none of those factors is essential to making a costs order against him. Had he not been joined as a third party, I would have considered it just and equitable that he be responsible, together with his wife, for the costs of the successful defendants because of his connection with the plaintiff, his interest in the claim, and his effective control of the action. Where, by reason of O 19, he is a party to the proceedings, the same result should follow.

27 On 17 September 2010, the solicitors for the defendants delivered to the solicitors for the plaintiff and third party a letter marked 'without prejudice except as to costs'. It set out an offer to settle 'the Proceedings' on the basis that the defendants would, within 30 days of entering a deed of release with the plaintiff and the third party, pay the plaintiff the sum of $1 million, the plaintiff would discontinue her claims against the defendants with no order as to costs, and the defendants would discontinue their claims against the third party with no order as to costs. The offer was open to 5.00 pm on 15 October 2010. It contained a statement that the defendants would produce the letter to the court on the question of costs and seek an order that the plaintiff and the third party pay the defendants' costs on an indemnity basis.

28 The letter proceeded to set out several grounds on which it said the offer should be accepted, including that the plaintiff's claim (and by extension the third party's defence) was devoid of merit.

29 The plaintiff and third party did not accept the offer.

30 Where a party does not accept a Calderbank offer the court will not depart from the ordinary rules as to costs unless, in the circumstances, the offeree's failure to accept the offer was unreasonable: RJ Baker Nominees Pty Ltd v Parsons Management Group Pty Ltd [2010] WASCA 128; Ford Motor Company of Australia Ltd v Lo Presti [2009] WASCA 115; (2009) 41 WAR 1; Hazeldene's Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298; (2005) 13 VR 435 [23]; Brymount Pty Ltd v Cummins (No 2) [2005] NSWCA 69 [16].

31 The party who made the offer bears the onus of establishing that its rejection was unreasonable. An offeree will not be found to have acted unreasonably in rejecting an offer except on clear grounds: Ford Motor Company of Australia Ltd v Lo Presti [19], [21]. Whether a refusal was unreasonable will depend upon all the circumstances and will always involve matters of judgment and impression: Hazeldene's Chicken Farm [24]. Generally, it will not be unreasonable for an offeree to reject an offer that leaves the offeree in any reasonable doubt as to what is being offered: Grbavac v Hart [1996] VSC 37; [1997] 1 VR 154, 155.

32 In Hazeldene's Chicken Farm [25], the court said regard should be had to, at least, the following:

(a) the stage of the proceeding at which the offer was received;

(b) the time allowed to the offeree to consider the offer;

(c) the extent of the compromise offered;

(d) the offeree's prospects of success, assessed as at the date of the offer;

(e) the clarity with which the terms of the offer were expressed; [and]

(f) whether the offer foreshadowed an application for indemnity costs in the event of the offeree's rejecting it.

33 The Calderbank offer from the defendants was about 10 weeks before trial. It allowed four weeks for the plaintiff and third party to consider the offer and take advice on it, which was a reasonable period in the circumstances.

34 The offer clearly foreshadowed the application for indemnity costs against the plaintiff and the third defendant, although it is not clear whether the defendants were warning of their intention to claim the costs of the plaintiff's action from the third party. They asserted also that the third party defence was devoid of merit.

36 On the other hand, the provisional assessment of damages was for $4.6 million or $5.7 million, depending on which basis the damages were assessed, with interest from April 2000. The offer made did not include interest or costs. Interest alone on the plaintiff's loss (as provisionally assessed) far exceeded the amount of the offer. Even if the plaintiff had recovered part only of the claimed loss, she would have been entitled to interest over about 10 years. Further, the matter had been proceeding for about six years, so costs may have been substantial.

37 The offer also included the condition that the third party proceedings would be discontinued with no order as to costs. The third party action was, in my opinion, unlikely to succeed. It has been dismissed with costs.

38 In these circumstances I am not satisfied that the plaintiff and the third party acted unreasonably in rejecting the offer. There will not be an order for indemnity costs.

39 Finally, the defendants ask for a certificate for transcript and a certificate for two counsel. I am not aware of any current basis in the Rules or subordinate legislation for the court to grant a certificate for transcript. The practice of certifying for second counsel has not been required by the determinations made under the Legal Profession Act 2008 (WA) or its predecessors, since 2006. In the Legal Practitioners (Supreme Court) (Contentious Business) Determination 2008, cl 5 of the schedule provided:

The practice of certification for second counsel or for Senior Counsel is no longer required by the Scale, which brings the practice in this State into line with other Australian jurisdictions. However, where fees are claimed for second counsel or for Senior Counsel, it is anticipated that the Taxing Officer shall consider whether the briefing of second counsel, or Senior Counsel, was reasonably necessary in the circumstances.

This clause was not repeated in the 2010 determination, but the practice of certifying for second counsel has gone.

40 Under pt 10, div 8 of the Legal Profession Act, the taxing officer of the court is to assess costs. Section 301 specifies the criteria for assessment. The schedule to the Legal Practitioners (Supreme Court) (Contentious Business) Determination 2010 provides, in item 34 of the table to cl 11:

As between party and party, a party may be allowed disbursements incurred by that party except insofar as they are of an unreasonable amount or have been unreasonably incurred, so that subject to the above exceptions, that party is fully reimbursed for its disbursements.

41 This is consistent with O 66 r 19, which sets out disbursements, expenses, payments, or charges that are allowable on taxation, including items of costs allowable under any relevant scale and such counsel fees as may be allowed, and other necessary disbursements or payments made or incurred in the conduct of the litigation.

42 Section 301(1) of the Legal Profession Act provides:

(1) In conducting an assessment of legal costs, a taxing officer must consider

(a) whether or not it was reasonable to carry out the work to which the legal costs relate; and

(b) whether or not the work was carried out in a reasonable manner; and

(c) the fairness and reasonableness of the amount of legal costs in relation to the work, except to the extent that section 302 or 303 applies to any disputed costs.

43 Subsection (2) sets out matters to which the taxing officer may have regard in considering what is a fair and reasonable amount of costs. These provisions must be read with s 280, under which the court may make a special costs order.

44 It may still be appropriate, in particular cases, for the judge who has immediate knowledge of the facts and complexity of the case to give directions regarding what the taxing officer should or should not allow: see, for example, Lighting By Design (Aust) Pty Ltd v Cannington Nominees Pty Ltd [2008] WASCA 23 (S) [3], [20]. Otherwise, the current legislative scheme leaves assessment to the taxing officer by reference to specified criteria. In the present case, I see no reason to direct the taxing officer in how he or she will carry out that task.

(1) the defendants are to pay the costs of the third party in the third party proceedings, including costs thrown away by reason of the amendment to the third party statement of claim on 1 December 2010, to be assessed if not agreed;

(2) the plaintiff and the third party are to pay the costs of the defendants of the action between the plaintiff and the defendants, to be assessed if not agreed;

(3) there is no order as to the costs of the adjournment on 2 December 2010.

Each party has been successful in part only on the costs applications. The appropriate order, in my opinion, is that each bear their own costs of the applications.