TRADE PRACTICES TRADE PRACTICES ACT TRUMPS CONTRACTUAL RIGHTS

TRADE PRACTICES TRADE PRACTICES ACT TRUMPS CONTRACTUAL RIGHTS Pamela Jack, Partner Minter Ellison, Sydney Whilst we are well aware of the strength and influence of the Trade Practices Act 1974 (Cth) (TPA), it is useful to remind ourselves of the extent to which this statutory regime will influence commercial relationships between parties and, in certain circumstances, override what may be the detailed contractual relationships which they have put in place. The TPA has become an important and integral part of the legal landscape, and it is commonly called in aid in all types of commercial disputes, but particularly, and increasingly, in disputes arising in the construction industry. Whilst section 52 of the TPA is essentially a consumer protection mechanism, it has been applied widely in all sorts of circumstances, including the circumstances where parties relationships are governed by private commercial contracts. The breadth of section 52 and its application is considered by Russell Miller in From Acorn to Oak Tree: The Spreading Branches of s 52 of the Australian Trade Practices Act 1974, 1 who notes that misleading and deceptive conduct prohibited under the TPA may include: positive express representations as to the state of relevant circumstances; statements in prospectuses (NRMA demutualisation); 2 inclusion in tender documentation of an incorrect engineering report; 3 representations as to the nature of a product; representations by failing to undertake due diligence; and representations by silence. 4 In all of these situations plaintiffs have been aided by the TPA. NO CONTRACTING OUT It is clear that a party who is engaged in misleading or deceptive conduct cannot escape liability because of the inclusion of contractual terms which purport to exclude any liability for the consequences of such representation. 5 Nevertheless, it is commonplace to include drafting in commercial agreements, particularly in construction contracts containing warranties, to the effect that a party has entered into the contract without relying on any representation or warranty by the other party. It is also relatively commonplace in relation to the provision of tender documents, to require a party to enter into a collateral deed whereby the proposed tenderer agrees to release and indemnify the principal against any claim in respect of any representation, or any material matter not disclosed in the contract documents. Such a deed may be pleaded in complete bar to such a claim. Tenderers for some government contracts in NSW will be familiar with such deeds. What advantage, if any, do such clauses provide? In circumstances where there has been representations constituting misleading and deceptive conduct the clauses referred to may be of little assistance to the principal and will not defeat the claims made in reliance on the representation. The full Federal Court in IOOF Australia Trustees (NSW) Ltd v Tantipech 6 held that such provisions could not defeat a claim arising out of misleading and deceptive conduct. In Tantipech, the trial judge held that a tenant had been induced to enter into a lease by misleading and deceptive conduct on the part of the landlord s agent. The lease contained a whole transaction clause in addition to a statement by the tenant that AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #112 JANUARY/FEBRUARY 2007 39

he entered the lease without relying on any representation. The tenant was also required to enter a collateral deed similar to that described above. In the deed the tenant promised to indemnify the landlord in respect of any claim arising out of any representation not disclosed in the lease. The deed also could be pleaded as a bar to any such claim. The Full Court held that neither the terms of the lease nor the deed could defeat the tenant s claim. Their Honours went on to confirm that the decision reflected the public policy underlying section 52 of the TPA which: must extend to any document which purports to excuse a representor from liability for contravention of section 52. As noted by Lockardt J in Henjo Investments, 7 the policy underlining section 52 required that it could not be ousted by private agreement. Parliament passed the Act to stamp out unfair or improper conduct in trade or commerce; it would be contrary to public policy for special conditions such as those with which this contract was concerned to deny or prohibit a statutory remedy for offending conduct under the Act. MISREPRESENTATION BY SILENCE AGAINST THE BACKGROUND OF PUBLIC POLICY CONSIDERATIONS OF THE ACT This article considers two recent decisions in New South Wales arising from alleged misleading and deceptive conduct, comprised of silence, or a failure to disclose, what was considered to be important or relevant information. The cases considered are: the Warragamba case 8 which now comprises two first instance decisions and two decisions of the NSW Court of Appeal. It is relevant in the context of this case to consider the decision of McDougall J, 9 to whom the matter was remitted by the NSW Court of Appeal, as well as the most recent decision being that handed down by the NSW Court of Appeal on 20 October 2006. the BAL case which is a decision of Hoeben J 10 of the NSW Supreme Court. THE WARRAGAMBA CASE This matter has been much litigated having first been heard before a referee, with the resultant adoption hearing of the referee s report being heard by Nicholas J in 2003. An appeal from Nicholas judgment was heard by the Court of Appeal in 2004. The Court of Appeal remitted the matter back to a judge at first instance for reconsideration of the referee s report. McDougall J issued his judgment in July 2005 an appeal from which was heard by the NSW Court of Appeal in March 2006. 11 The Court of Appeal held in favour of the appellant Abigroup, with the judgment being written by Beazley J. The Warragamba case principally, or at least before the Court of Appeal, turned on whether the Sydney Water Corporation (as forerunner to the Sydney Catchment Authority) had engaged in misleading and deceptive conduct in failing to reveal certain information in its possession in the provision of information for the preparation of tenders for the construction of dam works. The facts The facts of the case can briefly be set out as follows: Abigroup was a tenderer for the undertaking of the design and construction of the auxiliary spillway at Warragamba dam. Documents were provided to tenderers including geotechnical information which, relevantly, purported to indicate the natural rock level in an area known as Folly Creek. There was no dispute in the proceedings that the information shown in the geotechnical report was wildly wrong. Some considerable time after Abigroup was selected as the successful contractor, and was engaged in the work, it was required to undertake substantial additional excavation and filling in the Folly Creek area which resulted in Abigroup incurring substantial additional cost. In the course of discovery for these proceedings it was found that Sydney Water had in its possession a plan dated 30 November 1951 entitled Foley Creek disposal area fill over 30 inch pipe. The contract entered into by Abigroup provided that the contractor bore all responsibility for dealing with all site conditions, including latent conditions. The contractor warranted that it had conducted all necessary investigations, had satisfied itself as to the site and would have no entitlement in relation to anything arising out of the site. Further, the risk of any errors in the specifications lay with the contractor. Other than observing that: Since the proposed contract was a lump contract under which the contractor bore responsibility for dealing with latent conditions, it was critical for the tenderer to have accurate information available to it at the time of preparing the tender, the Court of Appeal did not otherwise trouble itself with the terms of the contract between Abigroup and Sydney Water Corporation. 40 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #112 JANUARY/FEBRUARY 2007

The issues The first Court of Appeal judgment focused on three issues referred to as: the representation issue ; the reliance issue ; and the passing on issue. In respect to the representation issue, and notwithstanding considerable confusion amongst the parties as to exactly what the 1951 cross section plan depicted, the Court of Appeal found that the findings of the referee were, on the basis of the evidence, in error, and that, as they proceeded on a false premise as to what the plan showed, the error was appellable. The referee had found that there was no evidence that the representation was wrong, as he did not accept that the 1951 plan contained information in any way contrary to the representation made in the contract documents. As to the reliance issue the Court of Appeal found that the relevant test for reliance was the common law practical or common sense concept of causation. The Court of Appeal also observed that: in the case of an express negative statement that something does not exist, which is accepted at face value, it is not necessary, in order to prove reliance for there to be an evidentiary statement to the effect that the representation was relied upon. Reliance can be inferred from all of the circumstances including from a parties conduct. The passing on issue was a matter raised by the respondent suggesting that it had simply passed on information for what is was worth and was not responsible for it. This submission was at odds with the express statements in the documents that the principal has prepared the documents, and further there was no express commentary that the principal had no input into the documents. The Court of Appeal held that the referee was in error in holding that the geotechnical report had not been adopted by the principal. Accordingly this part of the referee s report should not have been adopted. Decision of McDougall J In view of these findings, the matter was remitted back to McDougall J who considered at some length the facts relating to the excavation at Folly Creek and the information known to Sydney Water Corporation. The terms of the contract between Sydney Water Corporation and Abigroup, noted briefly above, provided that: the risk of all site conditions was a matter for the tenderer; any information provided to the tenderer was not represented to be accurate, or complete by the principal; the principal is not responsible for any interpretation, deductions or conclusions made in respect of the information; and the contractor should fully familiarise itself at the site and undertake all necessary site investigations to perform the works. The contract further provided that the principal shall not be liable for any incorrect, misleading or inaccurate information. In addition, the concept design report at section 2.10.2.3 provided: during the closing phases of the original Warragamba Dam construction Folly Creek was filled in just up stream of the now proposed auxiliary spill forming an embankment of some 20 meters height. No plans are available of this embankment or of any outlet pipe This express representation also appeared in the detailed specification. Misrepresentation and reliance McDougall J found that the presence of the 1951 plan did, in fact, depict an outlet pipe being the same outlet pipe specifically referred to in the representation. He concluded that the representation, in denying the existence of any such plan, was misleading or deceptive. Evidence had been provided before the referee of the extent to which Abigroup relied on the representation and that it had prepared its tender calculations based on the information provided to it. Abigroup contended that, had it known of the existence of the 1951 plan, it would have detected that the geotechnical information provided in the tender documents was incorrect and that its tender would either have to be heavily qualified, or priced differently. Reliance having been made out, McDougall J then went on to consider the estoppel defence which was raised by the principal (the Sydney Catchment Authority) which was based on clauses 12 and 12A of the general conditions of contract. These provisions provided as follows: 12 Site conditions The contractor accepts the condition of the Site and of the Existing Facility. The contractor has not relied on any information provided by the Principal relating to the Site or the Existing Facility or as to any other matter relating to the performance of the contact. The contractor has itself conducted all necessary investigations of the Site, its environs and the existing services. 12A Principal s information AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #112 JANUARY/FEBRUARY 2007 41

12A.1 The contractor acknowledges that it has received certain information from the Principal including but not limited to information listed in DS 16.7 of the detailed specification, schedule 39 and various addenda. 12A.2 Subject to clause 28.1, the Principal gives no warranty and makes no representation as to the completeness or the accuracy of any information provided by it to the contractor. 12A.3 The Contractor acknowledges that it has not relied on the information and shall make no claim and has no entitlement arising out of the condition of the Site or the existing facility. McDougall J rejected the estoppel defence on the basis that it is not available to a party, which has engaged in misleading and deceptive conduct, to rely on the terms and conditions of any document to exculpate it from the consequences of that conduct. At paragraph 66 of his judgment McDougall J stated that: It is clear that, if one party (A) to a contract was induced to enter the contract by misleading or deceptive conduct (for example a material misrepresentation of fact) on the part of the other (B), B cannot escape liability because the contract contains a term that purports to acknowledge that (for example) there was no anterior representation made to A, or on which A relied; or that purports to exclude liability for the consequences of any such representation. Further, the Sydney Catchment Authority sought to assert that Abigroup was estopped from withdrawing or resigning from the representations it had made, namely as to the adequacy and completeness of its tender and that it was fully responsible for all latent conditions. Again, having regard to the underlying public policy issue, it was not considered unconscionable for Abigroup to resile from its representations. Conclusions from Warragamba In relation to the representation: the representation made by the Sydney Catchment Authority was misleading and deceptive on its terms, and had been relied upon; and the contractual undertakings, contractual representations and contractual warranties were of no effect in relieving the principal from any liability in respect of that representation. Interestingly, McDougall J found that had the representation been made in terms that no plans are available of this embankment without the additional words or of the outlet pipe, the representation would not have been misleading and deceptive and Abigroup would have failed on that count. Notwithstanding the success of Abigroup in establishing both the existence of misleading and deceptive conduct and reliance, the court held that Abigroup failed to prove any loss. The approach Abigroup took to establishing its loss was isolated to the cost of undertaking the additional excavation works and the placement of substantial additional quantities of concrete reinforced fill necessary to address the original rock level, as against the amount allowed for that work within the overall contract pricing. This element of the contract could not, however, be excised or distinguished from the acts of the contractor in entering into the contract as a whole. Accordingly, in the absence of demonstrating any loss from entering into the overall contract and establishing any alternative contract (which would have been entered into by Abigroup but for the misrepresentation), there was no loss directly established as a consequence of the misleading and deceptive conduct. Abigroup appealed from the decision of McDougall J on the basis of the appropriate approach to be taken in relation to calculation of loss. The final chapter In late October 2006 the NSW Court of Appeal brought down its further judgment in the Warragamba case. 8 The judgment addressed firstly issues of causation and reliance, and secondly, the proper approach to damages. The court upheld the findings of McDougall J in relation to reliance. The Sydney Catchment Authority asserted that if the wrongful conduct had not occurred and the representation not made at all, the contractor would have had no cause of action and would have been obliged to comply with its contractual obligations for which, as a matter of contract, the contractor had taken the express risk. In concluding on causation, Beazley J noted: There is not a single immutable test for causation for the purposes of section 82. Marks v GIO12 and Henville v Walker 13 both involved an express positive representation. In the case of Marks the representation was likely to have been deliberate. In Henville and Walker the representation appears to have been negligent. However, section 52 is not confined to deliberate or negligent misrepresentation. Contravening conduct includes both express misrepresentations and non disclosure and there may be a contravention of the section even though the conduct is innocent. 42 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #112 JANUARY/FEBRUARY 2007

To establish an entitlement to damages Abigroup had to establish that it suffered a loss by conduct which contravenes the TPA. The contravening act was the representation that no plan existed of the embankment.. That representation was misleading, simply because, such a plan did exist and was in the possession of the respondent. Whilst if the reference to the outlet pipe had been removed from the representation, it may be said that no misrepresentation would have resulted and therefore no misleading conduct would have eventuated, the court did not accept that as an answer to the action. As observed by Beazley J: The appellant did not agree to bear the contractual risk in the face of a misrepresentation. But in any event section 82 does not operate so simplistically. As Gleeson C J said in Tambree 14 the question of causation is to be found in the purpose of the statue as related to the circumstances of the particulars of the case. Accordingly, the Court of Appeal found that in this case the but for test was not applicable or relevant. Beazley J took a more holistic view and considered that the appropriate test was to have regard to the outcome if the relevant plan of the subject of the misrepresentation had been disclosed. In that regard, the appellant had led evidence as to the steps it would have taken if it had seen the plan, to establish the proper amount of excavation and fill that would have been necessary to undertake the contractual works. As to damages, the court rejected the findings of the trial judge that there was no evidence of loss. The appellant had failed to bring any evidence of loss on the basis of the whole of contract but the court considered this unnecessary. The evidence provided was of loss associated with the additional excavation and fill in the Folly Creek area, being a discrete aspect of the contract, rather than any loss suffered as a consequence of having entered into the contract overall. The Court of Appeal considered that there was nothing in the relevant authorities, particularly in the decision of the High Court in Marks v GIO:12 Which requires, as a matter of law that the appellant must prove a loss on the whole contract in order to be entitled to damages. The court considered the judgment of the High Court in Henville v Walker 13 and noted the statement of McHugh J who said: Indeed, general principles for assessing damages may have to give way altogether in particular cases to solutions best adapted to give the injured claimant an amount which will most fairly compensate for the wrong suffered. A common theme of the cases cited is the flexibility of the relief available under sections 82 and 87 and whilst analogies as to the manner of calculation of damages in similar claims under the general law may be useful, the assessment of damages under sections 82 and 87 should by no means be constrained by such analogies. Beazley J continued: The authorities are clear in my opinion that in order to be able to recover damages for its loss, the appellant was not required to prove that it had suffered a loss on the whole contract. Provided it had otherwise proved its cause of action it was entitled to recover damages on the basis of the discrete loss it sustained in undertaking the additional work at Folly Creek, subject of course, to proper proof of such loss. THE BAL CASE The issue of the extent to which silence or a failure to disclose relevant information may constitute misleading and deceptive conduct was also considered in the BAL case. The facts and issues The plaintiff in the BAL case sought damages from Bankstown Airport Limited (BAL), as the successor in title from the Federal Airports Corporation (FAC), on a number of counts including that BAL had engaged in misleading and deceptive conduct in failing to advise the plaintiff of contamination of the site which was the subject of a lease entered into by the plaintiff with the FAC. The plaintiff asserted that had they been aware of the contamination they would not have commenced operating on the airport site but would have sought another site. In 1994, the plaintiff was seeking a suitable site for a school and entered into negotiations with representatives of the FAC. Various meetings and communications took place between the parties and lease documentation was prepared in late 1994, for the plaintiff to take a 7 year lease of a specified site at the airport from which a school could be operated. In 1998, the plaintiff entered into another lease with FAC for some additional land which adjoined the existing site. The plaintiff had expressed a desire to enter into a 25 year lease of the land, a long term lease being an essential element of the school being able to obtain recurrent Commonwealth funding.. In August 1998, BAL offered the plaintiff a 25 year lease of the land covered by both the 1994 and 1998 leases. The offer of the 25 year lease made by BAL was subject to certain special conditions AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #112 JANUARY/FEBRUARY 2007 43

including a requirement that any excavated material will be tested for contamination and any such material found to be contaminated will be removed and disposed of in a proper manner. These special conditions went on to provide for a sharing of costs in relation to the removal of any contaminated material. At this time BAL also provided to the plaintiff a report titled Preliminary Soil Contamination Investigation for the Condell Park Islamic School Noor Al Houda Bankstown Airport 1998. That report referred to an earlier report obtained by BAL prepared in 1994. The decision It was a matter of fact that part of the site on which the school was situated had been used for many years as a dump site for sanitary can waste (night soil) collected in the Canterbury and Bankstown areas prior to main sewer connections. In addition various other waste pits were contained on the site. The various pits had been covered by topsoil. There was extensive evidence before the court as to whether or not the site was contaminated, so as to pose an unacceptable risk to human health and in particular as to whether or not the site was appropriate for the operation of a school. Detailed evidence was before the court that the contamination identified did not pose a significant risk to human health in its present condition due to the presence of the clean soil capping layer. Hence that it would be safe to operate a school on the site whilst ever it was operated from demountable buildings, as long as there was no disturbance of the topsoil cover by any excavation or other activity. However, the court was of the view that the airport site was not suitable for use as a school if permanent buildings were to be constructed. This is because the management of the contamination during necessary excavation as part of the construction process would have added considerably to the cost of any construction. Hoeben J went on to confirm at paragraph 195 that: had the second Plaintiff been told about the potential for contamination at the airport site, the Plaintiff would not have entered the lease and would not have commenced conducting a school at that site. The court considered whether when considering misleading conduct by silence, a plaintiff was required to establish an obligation to disclose relevant facts7 or whether the proper test is that there must be a reasonable expectation of disclosure. Hoeben J favoured, as the proper test, whether or not there is a reasonable expectation of disclosure. In the circumstances of the particular case where the plaintiffs had made it known that they intended to use the lease site for a sensitive purpose, namely the operation of a school, the plaintiffs would have a reasonable expectation that, had there been a risk of contamination, they would have been told. Indeed, this was particularly relevant in the current circumstances where the FAC employees involved in the original discussions with the plaintiff about the 1994 lease had gone to some pains to provide full and complete information about the risks and issues that may arise on the site, but at the same time failed to mention the potential risk of contamination. As noted by Hoeben J the very candour of Ms Williams on other issues increased the misleading effect of the failure to mention the potential risk of contamination. Did the misleading conduct by silence only involve a breach of section 52 if the silence or failure to disclose was deliberate? The court in Vraca 15 held that in the circumstances of that case unintentional non disclosure did not amount to a breach of section 52. However, proof of intention as to misleading or deceptive conduct is generally not required in order to establish that section 52 has been contravened. The issue was considered by the Federal Court in Johnson Tiles 16 in which it was confirmed that it is not necessary to show that the contravener intended to mislead or deceive to prove misleading or deceptive conduct. Therefore, in the case of alleged non disclosure, it is not necessary to show that the contravener knew of the facts not disclosed. The test must be that, if by reason of what was said or what was left unsaid, conduct is misleading and deceptive, then the contravention would occur whatever the state of knowledge on the part of the corporation or its officers. That is not to say that knowledge may not be a relevant circumstance. The circumstances in the BAL case involved a combination of full and extensive disclosure by employees of FAC as to be the possible disadvantages relating to the proposed lease site, combined with the failure to disclose the existence of potential contamination on the site. In that context, the court found that the failure to refer to the risk of contamination involved FAC conduct which was misleading and deceptive. The court accepted that the plaintiff would not have proceeded with the lease had it known of that risk. 44 AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #112 JANUARY/FEBRUARY 2007

The Plaintiff s claim for loss of profit The loss claimed by the plaintiff was principally loss of profit in relation to the operation of the school, costs of moving and in particular the loss arising out of the 2002 year in which the plaintiff moved from the airport site and the 2003 year in which it sought again to re establish the viability of the school. The plaintiff ultimately succeeded in recovering amounts in respect of specific past loss, future lost profits, loss of capital grants, redundancy payments and relocation costs. BAL s arguments of defence BAL sought to rely on three clauses of the lease which provided that the tenant: did not rely on any representation by the corporation, made its own appraisal of the premises; and was aware of all provisions and restrictions applying to the premises. Further, clause 28.3 of the lease provided that: The tenant has made and relied on its own inquiries in relation to all matters relevant to its decision, whether or not to enter into this lease that is not relied on any representation, warranty or undertaking (except especially contained in this lease) given that the corporation in determining whether or not to enter into this lease. A further clause in the lease provided that the corporation as landowner was not responsible to the tenant for anything relating to design and construction plans and specifications or any other error or omission in any proposed works. It also expressly sought to exclude any responsibility by the corporation in respect of accuracy or adequacy of information, and made no representation and assumed no duty of care. Those provisions of the lease failed to provide any meaningful defence to BAL either in respect of the claims under the TPA or further in respect of the claim made in the proceedings in negligence. Conclusions from BAL For the reasons set out above and considered in relation of the Warragamba 8 case, the lease provisions provided no defence in relation to the TPA claim. In relation to the negligence claim, the provisions of the lease were found not to exclude a duty of care owed by the defendant to the plaintiff. Accordingly, and like the Warragamba case, extensive contractual provisions and arrangements made by the parties did not prevent the success of actions where a party was found to have engaged in misleading and deceptive conduct. The cases dealt with in this paper evidence the willingness of the courts to address conduct which is considered to be misleading and deceptive. Even where the conduct may be innocent, the courts will look to remedy the loss suffered as a result of such conduct. As the making of representations and the ensuing conduct, including both reliance and proof of loss will be approached flexibly, this may generate new focus on rights under the Trade Practices Act for contractors and principals alike. REFERENCES 1. (2005) 79 Australian Law Journal 43 2. Fraser v NRMA Holdings Limited (1995) 55 FCR 452 3. Westham Dredging Company Pty Ltd v Woodside Petroleum Pty Limited (1983) 66 FLR 14 4. Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 5. Leda Holdings Pty Limited v Oraka Pty Limited [1998] ATPR 41 601 6. IOOF Australia Trustees (NSW) Limited v Tantipech and Anor (1998) 156 ALR 470 7. Henjo Investments Pty Limited v Collins Marrickville Pty Limited (No. 1) (1988) 79 ALR 83 8. Abigroup Contractors Pty Limited v Sydney Catchment Authority [2004] NSWCA 270 9. Abigroup Contractors Pty Limited v Sydney Catchment Authority [2005] NSWSC 662 10. Noor Al Houda Islamic College Pty Limited and Anor v Bankstown Airport Ltd (2005) 189 FLR 11. Abigroup Contractors Pty Limited v Sydney Catchment Authority (No 3) [2006] NSWCA 282 12. Marks v GIO Australia Holdings Limited (1998) 196 CLR 494 13. Henville v Walker (2001) 206 CLR 459, paragraph 131 14. Travel Compensation Fund v Tambree (t/as R Tambree & Associates) and Ors (2005) 222 ALR 263 15. Costa Vraca Pty Limited v Berrigan Weed and Pest Control Pty Limited (1998) 155 ALR 714 16. Johnson Tiles Pty Ltd v Esso Australia Pty Limited [2000] FCA 1572 Pamela Jack s paper was previously presented to a Minter Ellison Client Seminar in Sydney in 2006. Reprinted with permission. AUSTRALIAN CONSTRUCTION LAW NEWSLETTER #112 JANUARY/FEBRUARY 2007 45