Sheridan International Pty Limited & Ors v C.S. Brooks Inc.

An order that in the event that the answer to 1 (iv) is in the negative: (i) the first cross-claim be dismissed; and (ii) the cross-claimant to the first cross-claim pay the cross-defendant to the first cross-claim's costs.

Further, or in the alternative, an order that the first cross-claim be struck out pursuant to Part 15 Rule 26 on the ground that the first cross-claim does not disclose a cause of action against the cross-defendant to the first cross-claim." The proceedings 2 It is unnecessary to repeat the record. Suffice it to say that the principal proceedings concern the legal rights and liabilities of the three Sheridan company plaintiffs [Sheridan International Pty Ltd, Sheridan Australia Pty Ltd and Sheridan US Inc] [for convenience together referred to as "the Sheridan companies"] of the one part and the defendant [C S Brooks Inc] ["Brooks"] of the other part arising out of transactions whereunder the Sheridan companies acquired parts of the Brooks worldwide textile products business. 3 The material allegations made in the summons are that: · Brooks breached a number of warranties contained in the relevant sale agreements; · Brooks engaged in misleading or deceptive conduct in contravention of section 52 of the Trade Practices Act 1974 (Cth) ["TPA"]. 4 Foundational allegations made in the summons are concerned with the provision by Brooks to the Sheridan companies of financial information, there being detailed reference to particular respects in which it is contended that accounts, financial statements and other like materials provided to the purchasers were incorrect or breached accounting standards. 5 The segments of the summons which plead TPA contraventions are closely tied to the representations defined as "the PWC representations", "the Australian Warranty representations", the "US Warranty representations" and "the Other representations". 6 A further issue as between the Sheridan companies and Brooks concerns an allegation that Brooks engaged in misleading or deceptive conduct which induced Sheridan International to issue a "Vendor B Note" pursuant to which it was obliged to pay $4 million (plus interest) towards the consideration for the subject sale. Sheridan International contends that it is entitled to have the "Vendor B Note" set aside or alternatively to an order for damages and compensation. The first cross-claim 7 Brooks by an amended first cross-claim against Mr Moore alleges that: · Mr Moore was employed by Brooks in its Sheridan Australia division ["the subject division"]; · Mr Moore held the positions of controller of the subject division [from at least 1 January 2000 to about October 2000] and chief financial officer of the subject division [from about October 2000 to 13 November 2000]; · Mr Moore was professionally qualified as an accountant; · Mr Moore, as controller, and then chief financial officer, of the subject division, provided professional and accounting advice ands services to Brooks; 8 The amended cross-claim alleges: · that Mr Moore owed, and then breached, a duty of care obliging him to exercise all reasonable care and skill in the performance of his duties as controller and as chief financial officer of the subject division; · sundry particular terms and conditions of Mr Moore's contract of employment requiring him to exercise all reasonable care and skill in the performance of his particular duties and breaches of those terms; · that Mr Moore owed to Brooks an obligation in equity to serve it faithfully and well which he breached; · breaches by Mr Moore of the FTA by conduct said to have been misleading or deceptive or likely to mislead or deceive in contravention of section 42; · breaches of the TPA in that if the allegations made in Part C of the summons be made out and Brooks is held to have contravened TPA section 52, Mr Moore was knowingly concerned in that contravention within the meaning of section 75B of the TPA. 9 The claims to relief pursued in the amended first cross-claim are for: · damages; · equitable compensation; · damages under section 68 of the FTA; · an order under section 72 of the FTA against Mr Moore requiring him to indemnify Brooks for any damages or costs which Brooks is ordered to pay the Sheridan Companies or any one or more of them; · damages and compensation under the TPA sections 82, 87 and/or 87CD. Part 31 - The Principles 10 The general approach is that all issues for determination should be tried together [see Tallglen Pty Ltd v Pay TV Holdings Pty Ltd (1996) 22 ACSR 130 at 141 per Giles CJ in Comm Div; Idoport Pty Ltd v National Australia Bank Ltd [2000] NSWSC 1215 at [7]]. 11 The relevant principles applicable to the exercise of discretion under Part 31 were set out by Giles CJ in Comm Div (as his Honour then was) in Tallglen at 141-142:

"Part 31 r 2 of the rules empowers the court to make orders for the decision of any question separately from any other question, whether before, at or after any trial or further trial in the proceedings, and for the statement of a case and the question for decision. In the ordinary course all issues in proceedings should be decided at the one time, but separate decision of a question may be appropriate where, for example, the decision of the question is critical to the outcome of the proceedings and ( at least if decided in one way) will bring the proceedings to an end. In particular circumstances the separate decision of a question may be appropriate even if it will not bring the proceedings to an end, such as where there is a strong prospect that the parties will agree upon the result when the core of their dispute is decided or where the decision will obviate unnecessary and expensive hearing of other questions, but such occasions must be carefully controlled lest fragmentation of the proceedings (particularly when the exercise of rights of appeal is borne in mind) brings delay, expense and hardship greater than that which the making of an order was intended to avoid. It is often the case that the need to make findings of fact for a decision of the separate question, especially findings which may involve issues of credit, tells strongly against the making of an order because related facts, and renewed issues of credit, will or may arise at a later stage in the proceedings. Experience teaches that it should be able to be seen with clarity that decision of a separate question will be beneficial in the conduct of the proceedings and the resolution of the parties' dispute. 12 Subject to the matters referred to by Giles J above Mr Moore's submissions to the effect that the Court will have regard in exercising its discretion whether or not to make such order to the following matters are generally accepted: · whether there is some preliminary question of fact or law that is dispositive of the proceedings: Carl Zeiss Stiftung v Herbert Smith & Co [1969] 1 Ch 93; CBS Productions Pty Ltd v O'Neill (1985) 1 NSWLR 601 at 606; · whether resolution of the separate question may promote early resolution of the proceedings or, by narrowing the disputed issues, avoid expense and delay: Love v Mirror Newspapers Ltd [1980] 2 NSWLR 112; Tallglen Pty Ltd v Pay TV Holdings Pty Ltd supra at 141-2; CBS Productions Pty Ltd v O'Neill at 606; · whether the question is clearly severable, as opposed to where the question proffered: · involves the whole subject matter of the proceedings; · involves alternative causes of actions or defences; · requires findings of fact likely to be contentious on -remaining issues in the proceedings; or · involves the credibility of witnesses' material to the remaining issues in the proceedings. 13 The burden of showing the Court that it is desirable to have these separate questions determined lies with the applicant for the order (Idoport Pty Ltd v National Australia Bank Ltd supra at [7]). Part 15 Rule 26 14 It is unnecessary to detail the proper approach to strike out applications pursuant to this Rule which is set out in Ritchie's Supreme Court Procedure. Suffice to say that I accept as correct the following submission made by Mr Moore's counsel:

"[I]n appropriate cases the Court may determine a difficult question of law on such an application even where it involves extensive argument: General Steel Industries v Cmr for Railways (NSW) (1964) 112 CLR 125 at 130. Appropriate cases include those where the determination of the application may avoid the need for, or substantially reduce the scope of, a subsequent trial: Williams & Humbert Ltd v W & H Trade Marks (Jersey) Ltd [1986] AC 368 at 436; Sun Earth Homes Pty Ltd v Australian Broadcasting Commission (1993) 45 FCR 265." [cf Applicants Further Submissions in reply 8 March 05] Turning to the present issues 15 The gravamen of the submissions advanced on behalf of Mr Moore on the separate question application is that threshold questions of law can now be answered in a manner which will be dispositive of the amended cross-claim, these questions being: The indemnity question · whether an employer is entitled to be indemnified by an employee for liability incurred to a third party by reason of the employee's negligence, given the Act; The serious and wilful misconduct question · whether the conduct pleaded against Mr Moore can amount to "serious and wilful misconduct" within section 5 of the Act; The " occur in the course of/ arise out of the employment" question · whether the conduct pleaded against Mr Moore can amount to conduct which "did not occur in the course of, and did not arise out of, the employment of the employee" within section 5 of the Act; The trade and commerce question · whether the alleged representations made by Mr Moore were made "in trade and commerce", within the meaning of the FTA in light of the High Court's decision in Concrete Constructions (NSW) Pty Ltd v Nelson (1990) 169 CLR 594. 16 Essentially the proposition put forward on behalf of Mr Moore is that in light of the likely correct answers to each of these questions, the amended cross-claim is not maintainable. Decision 17 In my view the present is a very clear case where the proper exercise of the Court's discretion requires the dismissal of the motion. In the reasons which follow the submissions of Brooks are generally accepted as correct and are adopted. The indemnity question 18 This is not an occasion for a final determination of the questions of construction of the Employees Liability Act 1991 which will fall for construction in a final hearing. It is however appropriate to note that each of the following propositions is very distinctively arguable such as to make it inappropriate either to allow the indemnity question to be separated out by a Part 31 order or to make a strike out order: · section 3 only applies to "third party" claims in tort [the Act containing no definition - of the concept of "tort"]; · in contradistinction to the suggestion by Mr Moore that resort should be had to a dictionary meaning, the word "tort" should be given its normal legal meaning in practice which is a wrongful act giving rise to a cause of action distinct from a breach of contract, statutory breach or equitable breach; · the phrase "negligence or other wrongful acts" in the first paragraph of the Explanatory Note to the Employees Liability Bill 1990 refers to negligence or other torts, not contractual or statutory breaches. This is consistent with section 3 being aimed at a situation where the employer is vicariously liable for the torts of an employee; · for section 3 to have any operation at all it must, at least, be suggested that the Sheridan companies have a cause of action against Mr Moore and Brooks: - This follows from use of the word "also" in the first line of section 3(1) as well as in the section heading. - It also follows from the nature of vicarious liability at the common law. In a classic case of vicarious liability a third party (such as the Sheridan companies) could elect to sue an employer and employee jointly. Recognition of that classic case appears in the Attorney General's Second Reading speech: Hansard , 6 September 1990, Legislative Assembly, page 6778. [There is no suggestion in the Sheridan companies summons, or Mr Moore's submissions, that the Sheridan companies have a claim against Mr Moore (whether in tort or otherwise) that could give rise to vicarious liability in Brooks] · nothing in the Commonwealth or NSW legislation dealing with "proportionate liability" (sections 82, 87 and 87CD of the Trade Practices Act 1974 (Cth) and Part 4 of the Civil Liability Act 2002 (NSW)) would affect, or require an expansive definition of, the concept of "tort" in section 3 of the Employees Liability Act 1991: [that legislation demonstrates that an expansive definition of the section 3 concept of "tort" is not necessary to permit a court to do justice in a particular case]; · the words "or otherwise" in section 3(2) do not in any way qualify the necessity for there to be a joint liability in tort for the section to have any application. Those words qualify only the concept of "contribution", to which no analytical resort is possible or permissible unless and until (to quote the introductory words of section 3(1)) "an employee commits a tort for which or her employer is also liable". What Parliament had in mind by the words "or otherwise" appears at page 6779 of the Attorney's Second Reading speech: for example, contributions under section 151z of the Workers Compensation Act 1987; · insofar as the Employees Liability Act 1991 "confirmed" the decision of the High Court in McGrath v Fairfield Municipal Council (1985) 156 CLR 672, what it confirmed was what appears at 156 CLR 676 (part of which was "common ground" in those proceedings), as is confirmed by paragraph (a) on the first page of the Explanatory Note relating to the Employees Liability Bill 1990. The High Court did not say, and the 1991 Act does not enact, a provision to the effect that, the principal third party liability upon which the operation of such legislation is based can be a contractual or statutory liability rather than a (joint) liability in tort; 19 Further support for it being distinctly arguable that the word "tort" in section 3 of the 1991 Act has the meaning attributed to it under the general law would seem to be reinforced by the following considerations: · the Act being drafted with specific reference to its potential operation in the context of insurance policies available to employers and employees. See section 6 and page 6778 of the Attorney's Second Reading speech; · the operation of section 3 being unpredictable if the concept of "tort" were held to embrace liabilities which under the general law (including the common law, equity and legislation) go beyond the generally understood concept of "tort"; · Astley v Austrust Ltd (1999) 197 CLR 1 which suggests that the law of obligations has not developed to the point of eradication of fundamental distinctions between "tort" and "contract"; · if (as page 6777 of the Attorney's Second Reading speech suggests) the Law Reform (Vicarious Liability) Act 1983 is regarded as cognate legislation, it may be noted that that Act also applies only to "torts" without any extension of the meaning of that concept; · nothing in the Employees Liability (Indemnification of Employer) Act 1982 or the High Court's consideration of that Act in McGrath v Fairfield Municipal Council (1985) 156 CLR 672 appears to permit, or require, that: (a) the word "tort" in section 3 of the 1991 Act be given an extended operation; or (b) section 3 be given an operation independently of cases in which an employer and employee are jointly liable. The observations of the High Court at 156 CLR 678.2 ("only") and 678.6 ("and not otherwise') suggest that the Court was conscious that, even under the 1982 Act, the principal liability (to a third party) to which that legislation applied was a joint liability in tort; · the reference to "negligence or other wrongful acts" ('torts')" in the first paragraph of the Explanatory Note to the Employees Liability Bill 1990 does not appear to provide support for a conclusion that an extended meaning should be given to the expression "torts". "Negligence" is but one form of tort. "Torts" can generally be described as "wrongful acts". The second sentence of the Explanatory Note specifically provides the "common law" context in which the word "torts" is used in the Note; · Section 5 of the Employees Liability Act 1991 appears to demonstrate that, even within the framework of the Act, the operation of section 3 is limited, and hence it would seem incorrect to say that an employee has an absolute entitlement to commit "torts" without the risk of suffering personal recourse. 20 Further there is clear substance in the proposition that Mr Moore's submissions confuse: · the concept of "tort" that appears in the opening line of section 3(1) and governs the scope of the section; and · the means by which under the general law an employer might seek an indemnity or contribution from an employee, which might include (as between employer and employee) breach of a tortious duty of care or breach of an implied term in a contract of employment. 21 Care should be taken to avoid collapsing the distinction between these two concepts. The scope of section 3 very arguably depends upon the existence in both an employer and an employee of a liability in "tort" to a third party. 22 Insofar as Mr Moore drew attention to section 3 (2) of the 1991 Act, Brooks has drawn attention to the fact that the subsection as explained in the Explanatory Note to the 1990 Bill, was aimed at statutory forms of contribution. The proposition for which Brooks contended was that reference in the Explanatory Note to section 151Z of the Workers Compensation Act 1987 (NSW) establishes that the statutory forms of contribution contemplated were ones arising from tortious acts. It is said to follow that the subsection was not intended to cover breaches of contract or statutory causes of action such as that for misleading or deceptive conduct. 23 It seems to me that there is substance in the Brooks contention that at the very least this is a matter where there is some real uncertainty and that therefore this matter is neither the proper subject of an order for strike out nor for a separate determination order. The serious and wilful misconduct question 24 In my view the conduct pleaded against Mr Moore, being gross negligence accompanied by misleading or deceptive conduct under section 42 of the FTA may arguably amount to "serious and wilful misconduct" within section 5 of the 1991 Act. 25 As counsel for Brooks has contended, it is distinctly arguable that conduct of the above described nature is materially indistinguishable from conduct characterised by reckless indifference to performance of an employee's duty, which type of conduct clearly falls within the statutory expression. 26 I accept as correct that the fact that "misleading or deceptive conduct" is consistent with a range of states of mind is not material on a motion in the nature of a "demurrer". On the hearing of the motion insofar as it is to be regarded as pressing a procedure similar to that of a demurrer, Mr Moore is bound to accept the truth of the allegations made in CS Brooks' pleadings. 27 The authorities referred to by Mr Moore in this regard can generally be confined to their particular factual context. The words "serious and wilful misconduct" in section 5 of the 1991 Act have to be construed in the context of the provisions in that Act. The 1991 Act would have to be construed, if Mr Moore be correct, in the light of a particularly wide application of section 3 of the 1991 Act. Clearly it cannot be construed without reference to section 3. 28 The phrase "serious and wilful misconduct" was used in the Employee's Liability (Indemnification of Employer) Act 1982. The definition of "fault" in that Act in section 2(1), clearly contemplated that certain negligence or other acts or omissions could constitute "serious and wilful misconduct". As Brooks has submitted, this may well have been the meaning intended in the 1991 Act if it was intended substantially to re-enact the 1982 Act (see the Explanatory Note to the 1990 Bill) 29 The pervasive fact is that where there is no binding authority on section 5 of the 1991 Act, it would be inappropriate for the Court presently to conclude that conduct which is grossly negligent and misleading or deceptive could not constitute conduct which was "serious and wilful misconduct". Nor is there any suggestion in the amended first cross-claim that the accounts at issue therein pleaded were not intentionally prepared in that form as opposed to being inadvertently prepared in that form.

The " occur in the course of/ arise out of the employment" question 30 Neither party has been able to cite binding authority as to the meaning of the phrase "did not occur in the course of, and did not arise out of, the employment of the employee" in section 5 of the 1991 Act. 31 Clearly enough and as Brooks has submitted, the statutory context is important as to the meaning of this phrase. The authorities relied upon by Mr Moore in his submissions arise in a number of different statutory and factual contexts. 32 The context here is not one where the statute refers to the imposition of liability on an employee, but rather is a circumstance where the statute relates to the exemption of a protection otherwise conferred by section 3. It is clearly arguable that if, as Mr Moore submits, section 3 should be given a particularly wide scope, then it would be logical that section 5 would be intended to have some remedial work to perform. 33 Further and again as Brooks has submitted , an additional issue which arises is that presently the conduct of a professional accountant in the context of statutory accounts is put in issue. It is plainly arguable that what might be regarded as "in the course of employment" for a low level employee might be different for a high level professional person (such as Mr Moore) engaged in alleged misleading or deceptive conduct.

Strike out claim 34 These factors, in the context of the absence of relevant binding authority, demonstrate the existence of an arguable case about the meaning of sections 3 as well as subsections 5 (a) and (b) such that is inappropriate on accepted principles for the subject pleadings to be either struck out or made the subject of the proposed separate questions. The trade and commerce question 35 Here again it is inappropriate to make the separate Part 31 order in relation to this issue and likewise inappropriate to uphold the strike out claim at this stage. 36 There are number of reasons why it cannot be said that it is sufficiently arguable that Brooks is bound to fail in its action under FTA section 42 to permit the matter to go forward as a separate question for determination. Here again in what follows the submissions put on behalf of Brooks are generally accepted in terms of distinctly arguable propositions. In short: · it should not be taken as a given that the expression "in trade or commerce" in section 42 has a scope equivalent to the same expression in TPA section 52; · the two Acts have different definitions of "trade or commerce":

TPA Section 4 provides that "'trade or commerce' means trade or commerce within Australia and places outside Australia ". That definition does not pick up the definition of "business" in the same section. However, as a contrast to the FTA, it might be noted that the section defines "business" only as including "a business not carried on for profit". Nowhere in the TPA is there any direct reference to "professional activity";

By contrast, FTA section 4 defines "trade or commerce" as including "any business or professional activity", and it defines "business" as including, not only "a business not carried on for profit", but also "a trade or profession". · the concepts of "profession" and "professional activity" incorporated by reference in FTA section 42 appear to embrace the idea that a person with professional qualifications, and the independence of mind traditionally required of a professional person, should be liable for misleading or deceptive conduct that occurs in the course of practising the person's profession. Whether such a person provides professional advice or services as an independent contractor or as an employee of his or her client does not alter exposure for liability for misleading or deceptive conduct in the course of professional activity; · the ambit of the expression "trade or commerce" in section 42, incorporating the concept of "professional activity", is not the subject of any definitive decision. See Lockhart, The Law of Misleading or Deceptive Conduct (2nd ed, 2003) paragraphs [2.23] and [2.26]-[2.31], read with paragraphs [2.8]-[2.15]; · the judgment of the High Court in Concrete Constructions (NSW) Pty Ltd v Nelson supra might be incidentally relevant to the proper construction of section 42 but, as it deals with different legislation, it cannot be determinative; · moreover, the tendency of Parliaments since 1990 to subject professional activities to the same legislative regulation as other commercial activities [as, for example, in TPA section 6(4)] suggests that the Court should not at this early stage of the proceedings presume that the reasoning in Concrete Constructions is, or should be, applied to the concept of "professional activity" in the FTA. 37 Further the mere fact that Mr Moore was an employee of Brooks at the time he is alleged to have engaged in misleading or deceptive conduct does not necessarily preclude an application of FTA section 42. Hence before venturing any opinion as to the application of the section to the facts of the case, the Court should plainly determine the facts. 38 Whilst it is fair to say that Mr Moore has put forward a carefully reasoned set of propositions in support of a narrow interpretation being given to the "professional activity" words as used in the FTA [cf in particular Prestia v Aknar (1996) 40 NSWLR 165 per Santow J, followed by a number of other authorities], this is another area in which there is no binding authority which has considered the conduct of a professional person in similar circumstances to those to be dealt with in the instant proceedings. 39 As Brooks has submitted: · it is important to acknowledge that the definitions of "business" and "trade or commerce" in section 4 of the FTA are inclusive definitions; · it should also be noted that the term "professional activity" used in the definition of "trade or commerce" in section 4 of the FTA is itself not defined; · the factual context of Mr Moore's alleged activity in the amended first cross-claim is at least arguably sufficient to bring Mr Moore's conduct within the expanded definition of "trade or commerce" or "business" in section 4 of the FTA. 40 Clearly the matter is one not free from doubt in the absence of binding appellate consideration of the definitions in the section. 41 Whilst not determinative it is of relevance to note that the above reasons make clear that Mr Moore is in any event to be required to litigate the causes of action against him earlier discussed. Obligation to serve faithfully 42 It is clearly arguable that a breach of equitable duty does not fall within section 3(1) of the 1991 Act. Recoverability of damages from Mr Moore 43 There is no substance in the submission that in the present state of the proceedings the Court can proceed upon the basis that the Sheridan companies overpaid for the subject businesses. The true value of the businesses cannot be presumed in the absence of evidence. 44 Further and as Brooks has submitted even if: · the Sheridan companies ultimately prove that they overpaid for the business; and · as between the Sheridan companies and the reasoning of McHugh J in Burke v LFOT Pty Ltd (2002) 209 CLR 282 at paragraph [26] is apposite,

Brooks is entitled to claim that it suffered damage in that (by reason of the wrongful conduct alleged against Mr Moore) it incurred expense in negotiating the sale to the Sheridan companies, preparing for and effecting completion of the sale, undoing the sale insofar as that might be a consequence of relief obtained by the Sheridan companies, investigating the claims made by the Sheridan companies in the principal proceedings and incurring costs in and in relation to the principal proceedings. General Steel 45 In the result applying General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 at 128-129, the first cross-claim cannot properly be the subject of any order for summary determination. 46 It is appropriate to make the point that the complex of questions of liability, causation and damage in issue in the principal proceedings and the circumstance that Mr Moore potentially occupies a central role on both sides of the record in the proceedings, seen together with the relatively early stage which the interlocutory steps have achieved, confirm that there no ground whatever has been made out for the orders sought in the motion. Paragraph 14 A of the amended first cross-claim 47 Brooks now has accepted that paragraph 14A of the amended first cross-claim is demurrable, my understanding being that that paragraph will not be pressed. 48 For those reasons the notice of motion is dismissed. 49 Nothing in the above reasons should be taken as expressing a final view on the questions of law which will require determination at the final hearing. The holding has been that the propositions put forward by Brooks: · are distinctly arguable; · are inappropriate for resolution by a Part 31 order route; · are inappropriate for a summary Part 15 Rule 26 strike out.

I certify that paragraphs 1 - 49 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 11 March 2005

      Susan Piggott
      Associate

11 March 2005

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

Trade Practices Act 1974(Cth)

At a glance

Court

Decision date

Before

Catchwords

Source

Catchwords

Judgment (22 paragraphs)

Parties

Legislation Cited (6)

Cases Cited (9)

Cited By (1)