Krakowski v Eurolynx Properties Ltd

183 CLR 563
(1995) 130 ALR 1

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(Decision by: Brennan J, Deane J, Gaudron J, McHugh J)

Krakowski
vEurolynx Properties Ltd

Court:

Judges:
Brennan J
Deane JToohey J

Gaudron J
McHugh J

Subject References:

Legislative References:
Sale of Land Act 1962 (Vic) - s 13(1); s 32
Trade Practices Act 1974 (Cth) - s 52; s 53A
Fair Trading Act 1985 (Vic) - s 11(1); s 13(1)
Fair Trading Act 1985 (Vic) - 11

Hearing date: 5, 6 May 1994
Judgment date: 29 June 1995

Sydney

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Decision by:
Brennan J
Deane J
Gaudron J
McHugh J

This appeal from a judgment of the Full Court of the Supreme Court of Victoria relates to a contract for the sale and purchase of shop premises in a strata title building at Preston known as the Northland Home Centre. Mr and Mrs Krakowski (the appellants) were the purchasers of the premises and the plaintiffs in the proceedings; Eurolynx Properties Ltd ("Eurolynx", the first respondent) was the vendor and the defendant in the proceedings; Mallesons Stephen Jaques ("Mallesons", the second respondents) were the solicitors acting for Eurolynx in the transaction against whom Eurolynx sought relief as a third party. The transaction was entrusted to an employed solicitor who dealt with the client.

The negotiations for the purchase were conducted between one Norman Mermelstein, Mr Krakowski's nephew, on behalf of the purchasers and one Mark Cini, a selling agent acting on behalf of Eurolynx. In May 1989, Cini told Mermelstein that unit 12 in the Northland Home Centre was available for purchase for $1.4 million, with a guarantee that the property would return an income of 8% for three years. Mermelstein conveyed this information to Mr Krakowski, but the proposition was rejected because Krakowski "was looking for a 10% return and ... he was not interested in a guarantee, he wanted a strong tenant". Mermelstein gave evidence that he "relayed that back to Mark Cini". That evidence was not denied. Mermelstein thus made it clear that the purchasers were seeking a leased property as an investment the rent from which would return a reliable 10% per annum.

Mermelstein gave evidence that, in early September 1989, Cini contacted him and informed him that a tenant had been found for unit 12 paying a commencing rent of $156,000 per annum and that a 10% return would be agreeable. On that basis the purchase price would be $1,560,000. Mermelstein conveyed that information to Mr Krakowski and received instructions to go ahead. Mermelstein then spoke to Adam Ryan, who is said to have been a director of Eurolynx, and informed him that the purchasers were wanting a 10% return on their investment Ryan assured Mermelstein that the tenant, Swaeder Sales Pty Ltd (Swaeder), was a "strong, reliable person" and that Mermelstein would not be "making a mistake if [he] was involved with the purchase of that unit". Ryan was not called as a witness.

The negotiations for the lease between Eurolynx and Swaeder were conducted between that company's solicitors and Mallesons. As an inducement to Swaeder to take the lease, Eurolynx agreed that Swaeder should have a three month rent-free period and a payment of $156,000 "for the fitting out and stocking of the premises". It was agreed that this arrangement should be the subject of a "separate agreement in letter form between the parties". Mallesons, who had negotiated the precise terms of the separate agreement with Swaeder's solicitors, drafted the terms which were subsequently typed on Eurolynx' letterhead. It was in the form of a letter of understanding signed by Ryan on behalf of Eurolynx. It was accepted and executed by Swaeder on 12 September 1989. The separate agreement contained the following:

We refer to the Lease in this matter and confirm that notwithstanding anything to the contrary contained in the Lease no rental shall be payable to the Lessee [sic] for the first three months of the term, commencing on 11 September 1989.

Furthermore on the signing of the Lease the sum of $156,000 shall be paid to [Swaeder's solicitors] to be placed immediately in an interest bearing cheque account ... The account shall be in the name of the Lessee and [Swaeder's solicitor] (the Trustee) shall be the sole signatory thereto.

The Lessee shall submit invoices for the fitting out of the premises to the Trustee and the Lessor prior to payment thereof. If in the opinion of the Trustee and the Lessor the invoices relate to the fitting out and stocking of the Premises the Trustee shall pay the invoices ...

... The Trustee shall be entitled to close the said account and remit the balance of principal to the Lessee if, in his sole and absolute opinion (after making due inquiries) the Lessee has commenced business (as defined in the Lease) at the premises.

Thus Swaeder was entitled to a rent-free period of three months ending on 10 December 1989 and a sum equal to a year's rent which could be spent on fitting out the premises ^[1] and on stock and which was payable to Swaeder in any event on Swaeder's commencing business. Without those benefits, Swaeder would not have entered into the lease containing a covenant for payment of $156,000 per annum rent. That rent was significantly in excess of the market rental at the time.

The instrument of lease, which contained no reference to the separate agreement, was executed by Eurolynx and Swaeder on either 8 September or 12 September 1989. The lease was for a term of six years commencing on 11 September 1989 with two options to renew for further terms of six years. The lease reserved an annual rent of $156,000 subject to biennial review.

Neither Mermelstein nor Mr and Mrs Krakowski (the purchasers) had any knowledge of the separate agreement between Eurolynx and Swaeder. The vendor's statement, furnished in accordance with s 32 of the Sale of Land Act 1962 (Vic), ^[2] contained an undated copy of the lease (but no copy of the separate agreement) as a "similar restriction" under the heading of "Information concerning any easement, covenant or other similar restriction ... affecting the property". The lease included cl 9.8, which provided:

The terms conditions covenants and other provisions contained in this Lease (and any Guarantee executed prior to or contemporaneously with this Lease) cover and comprise the entire understanding and the whole agreement between the parties hereto relative to the subject matter hereof and all previous negotiations, representations, warranties and arrangements and statements (if any) whether expressed or implied with reference to the subject matter hereof or to the intentions of either of the parties hereto are merged herein and otherwise are hereby excluded and cancelled save and except for the obligations of the Lessee contained in any Agreement to Lease between the parties hereto in respect of the Premises.

The s 32 statement itself was attached to the contract of sale which was proffered by Eurolynx' solicitors for execution by the purchasers and which was executed by the purchasers on 19 September 1989. The contract contained cl 19.4, drafted by Mermelstein, which provided:

A fundamental condition of this contract is:

(i)

the tenant must sign a lease prior to the signing of this contract.

(ii)

the above lease must be stamped prior to settlement.

(iii)

the terms of the lease are:

(a)

a period of six years with a further option of six years

(b)

commencement rental of $156,000 pa

(c)

bi-annual [sic] rent reviews to market.

It was common ground between the parties that the execution and stamping of the instrument of lease was a literal satisfaction of this clause.

On 21 September 1989, two days after the contract of sale was executed, Mermelstein, acting on behalf of the purchasers, delivered requisitions on title to Mallesons. Mallesons drafted "suggested replies based upon the Company's instructions and upon [Mallesons'] searches and the information [they had] obtained from the relevant authorities" and forwarded them to Eurolynx requesting it to "make any necessary amendments" before returning them to Mallesons. ^[3] Requisition 8 read in part as follows:

(a)

Who is in possession of the property and under what right?

(b)

Particulars are required of all tenancies and occupancies affecting the property or any portion of the property and of the rentals payable in respect thereof.

(c)

Production is required for our inspection of all leases sub-leases and agreements relating to the tenancy or occupation of the property or any part or parts of it.

The suggested answers to requisitions 8(a)-(c) were as follows:

(a)

Swaeder Sales Pty Ltd under a Lease dated 12 September 1989.

(b)

A copy of the Lease was included in the Contract.

(c)

See (b) above.

These answers were adopted by Eurolynx and forwarded to Mermelstein by Mallesons by letter dated 23 October 1989. The Eurolynx employee who was responsible for the answers to requisitions, one Nicholas Gilbert, gave evidence that on receipt of the suggested answers to requisitions on title he "would've had a quick look through it as with all the others we'd done and approved it, relying on [Mallesons'] advice." Gilbert knew of the separate agreement. And Mallesons, having negotiated the terms of the separate agreement on behalf of Eurolynx, knew its terms.

The sale contract was settled on 20 November 1989. The price of $1,560,000 was paid and title was transferred to the purchasers. As the rent was payable under cl 3.1(2) of the lease on the first day of each month, Eurolynx allowed credit to the purchasers on settlement for an amount equal to the portion of rent attributable to the period 20 to 30 November 1989 that would have been payable by Swaeder if that period had not been rent free. On 8 December 1989 Mermelstein received from Collings Real Estate Ltd (the agent administering Northland Home Centre) a cheque for $4144.47, a sum that approximates the rent that would have been payable in respect of the period 1 to 10 December 1989 had that period not been rent free. Later Collings paid $8946.16, which approximates the rent in respect of the balance of December 1989. Presumably, the latter amount had been paid as rent by Swaeder. Thus the purchasers received a total of $13,090 during the month of December 1989, $90 more than the monthly rent reserved by the lease. But Swaeder failed to pay the rent due on 1 January 1990 and sought an extension of time for the payment. Swaeder defaulted in the payment of rent in February and vacated the premises in April 1990.

In about February 1990, Mermelstein discovered that Swaeder had been given the first three months of its tenancy rent free. Mermelstein passed on this information to the purchasers. In April 1990 he also spoke to Ryan who, by this time, had parted company or was about to part company with Eurolynx. Mermelstein gave evidence, which was neither objected to nor denied, that Ryan asked him: "was the three month rent-free period still in existence at the time when Mr Krakowski had purchased the property". Ryan's response to an affirmative reply was merely to say: "Mmm". By June 1990, Mermelstein had heard that a lump sum payment had also been made, but he was unaware of the amount of the payment until September or October 1990. He did not obtain a copy of the separate agreement until about 7 December 1990.

By letter from their solicitors dated 7 December 1990, the purchasers purported to rescind the contract "by reason of ... misrepresentations with respect to the terms of the lease of the premises to Swaeder Sales Pty Ltd". They demanded a full refund of the purchase price, cooperation in transferring the premises back to Eurolynx and damages for all loss suffered by virtue of the alleged misrepresentations. Eurolynx failed to accede to those demands and, on 12 December 1990, the purchasers brought an action against Eurolynx in the Supreme Court of Victoria alleging deceit and, in the alternative, misleading or deceptive conduct in contravention of s 52 and/or s 53A of the Trade Practices Act 1974 (Cth) and s 11(1) and/or s 13(1) of the Fair Trading Act 1985 (Vic). They claimed, inter alia, a declaration of due rescission of the contract on 7 December 1990 and all necessary consequential orders.

By para 4 of their amended statement of claim, the purchasers pleaded that, in order to induce them to enter into the contract, Eurolynx had represented to them in writing:

(a)

that the Defendant had leased the said premises to Swaeder Sales Pty Ltd for a term of 6 years commencing on 11 September, 1989; and

(b)

that the said lease provided that the rent payable by Swaeder Sales Pty Ltd for the initial 2 years of the term was $156,000 per annum.

The purchasers specified the documents containing the pleaded representations as being "in part in the ... contract of sale and in part in a copy of the ... lease attached to the ... Statement delivered ... pursuant to s 32 of the Sale of Land Act 1962 ... dated 16 September, 1989". They furnished particulars of the alleged falsity of the representation as follows:

the contractual arrangements between the Defendant and Swaeder Sales Pty Ltd were not as there represented but rather entitled Swaeder Sales Pty Ltd to rent-free occupation of the said premises for the first three months of its term and to receipt from the Defendant of the sum of $156,000; being an amount equivalent to the first years' rent.

The particulars of falsity were set out with more specificity in an amended statement of claim:

In consideration for Swaeder Sales Pty Ltd entering into the said lease, the Defendant agreed:

(i)

to allow it to occupy the said premises for a rent-free period of three months from 11 September 1989; and

(ii)

to pay to it the sum of $156,000 on the condition that Swaeder Sales Pty Ltd commenced business manufacturing and retailing furniture from the said premises. Swaeder Sales Pty Ltd duly commenced the said business from the said premises and was paid the said sum of $156,000 by the Defendant.

The purchasers pleaded that the alleged misrepresentations were made fraudulently.

Further, by para 8A of their amended statement of claim, the purchasers pleaded that, by the answers given to the requisitions on title, Eurolynx represented to them "that there were no agreements relating to the tenancy or occupation of the ... premises other than the ... lease". This representation was not pleaded as an element in fraud. It was pleaded as false or misleading conduct in contravention of s 52 of the Trade Practices Act and s 11(1) of the Fair Trading Act and as a false and misleading representation in connection with the sale of an interest in land in contravention of s 53A of the Trade Practices Act and s 13(1) of the Fair Trading Act. The purchasers claimed, inter alia, a declaration that the contract of sale had been rescinded by them on 7 December 1990 and an order for restitution consequent on the rescission together with damages.

Eurolynx admitted in its defence that it had entered into the separate agreement with Swaeder but, apart from admitting the contents of the lease, the s 32 statement, the contract of sale and the answers to requisitions on title, it denied that any representation had been made to the purchasers to induce them to enter into the contract of sale and it denied that any representations were false or were fraudulently made. Eurolynx gave Mallesons a third party notice alleging breach of Mallesons' retainer or professional negligence in the work Mallesons had done in relation to the leasing and sale of unit 12 and claiming damages and an indemnity if Eurolynx should be found liable to the purchasers.

The cause of action in deceit

As between the purchasers and Eurolynx, there were three issues of fact that fell for determination: first, what was the representation made by Eurolynx; secondly, was that representation false to the knowledge of Eurolynx; and, thirdly, did that representation induce the purchasers to enter into the contract of sale?

It has frequently been said that fraud must be pleaded distinctly and with particularity ^[4] and clearly proved. ^[5] Eurolynx was therefore entitled to hold the purchasers to the representations pleaded in para 4 of the amended statement of claim on which the purchasers based their case in fraud. The documents containing the representations were (i) the copy of the instrument of lease attached to the s 32 statement including the clause by which it was agreed that the terms of the lease "cover and comprise the entire understanding and the whole agreement between the parties" and (ii) the contract which, by cl 19.4, made the commencement rental of $156,000 pa a "fundamental condition of this contract".

The meaning assigned by the pleading to the representations can be gleaned from the particulars of falsity, namely, that the instrument of lease represented the contractual arrangements between Eurolynx and Swaeder. It is clear enough on the pleadings, notwithstanding protestations to the contrary from counsel for Eurolynx at the trial and on subsequent appeals, that the representation alleged by the purchasers was that the instrument of lease constituted the whole contractual arrangement between Eurolynx and Swaeder. The case was so conducted by counsel for the purchasers at the trial. Before evidence was called, counsel submitted that "deception arose in so far as [Mallesons] is concerned by the preparation of contractual documents, including the s 32 statement with the lease and other documents annexed which did not disclose the true position and secondly, by the answering of specific requisition which did not disclose the correct position". Of course, the answers to requisitions did not induce the purchasers to enter into the contract -- a factor which distinguished the representation pleaded in para 4 from the representation pleaded in para 8A. Counsel for Eurolynx submitted that the amended statement of claim did not make clear whether the purchasers were alleging that the solicitor was "deliberately concealing or recklessly indifferent ... to the truth" or was merely negligent. But, in response to a submission by counsel for Mallesons that the pleading of fraud was defective because it was not alleged that non-disclosure of the separate agreement was deliberate, the learned trial judge (O'Bryan J) said: "It is going to be said that it can be inferred ..."

There seems to have been no misunderstanding about the gist of the alleged misrepresentation, namely, that the annexing of the instrument of lease to the s 32 statement and the inclusion of those documents in the proffered contract of sale misrepresented the true contractual arrangement between Eurolynx and Swaeder. The purchasers' case was that Eurolynx knew that they were interested in acquiring a property let to a strong tenant paying a rent that would return 10% on the sum invested and that it was fraudulent to advance the instrument of lease as the document relevant to the purchasers' return on their investment without disclosing the existence and terms of the separate agreement.

Counsel for Eurolynx have submitted at all stages of this action that the only relevant representation pleaded was that the instrument of lease contained a covenant for the payment of a rental of $156,000 for each of the initial two years of the term. That is the allegation made in para 4(b) of the amended statement of claim if it is construed literally and in isolation. Of course, the instrument of lease does contain a covenant in those terms. But reading that paragraph in the context of the amended statement of claim as a whole, it is clear that that was not the representation on which the purchasers founded their cause of action in deceit. It is regrettable that the pleading was not more precisely framed, for the courts below in rejecting the submission of Eurolynx have had to formulate the terms of the representation pleaded and each of the formulations is open to challenge.

In his reasons for judgment, the learned trial judge treated the essence of the purchasers' allegation as misrepresentation by Mallesons "in concealing the 'collateral agreement' ". His Honour decided the case on the footing that "[i]f there was fraud by the solicitor the defendant as principal would be responsible for the fraud of its agent". However, he acquitted Eurolynx and Mallesons of fraud because he held that there was no duty to disclose the inducement given to Swaeder. The cause of action based on deceit failed at first instance.

In the Full Court, however, their Honours saw the case differently. They treated the case not as one of concealment of a fact that Eurolynx or Mallesons were under a duty to disclose, but as a case of positive misrepresentation. Their Honours cited what Higinbotham CJ said in Curwen v Yan Yean Land Co Ltd : ^[6]

concealment of a fact may cause the true representation of another fact to be misleading, and may thus become a substantive misrepresentation ... A true representation, coupled with concealment, thus became a positive misrepresentation calculated to deceive.

Referring to the provisions of cl 9.8 of the lease, their Honours said:

That term, when taken with the surrounding circumstances, including the manner in which the property was offered to the plaintiffs by the defendant's estate agent, amounted in our judgment to a positive representation that no collateral agreement had been made between the defendant and the tenant. Such a representation inevitably deterred the plaintiffs -- and Mermelstein on their behalf -- from making their own inquiries into the questions whether the rent reserved by the lease was a market rent and whether, accordingly, a purchase price of $1.56 million was a fair reflex of it ... The materiality of the collateral agreement to the question which concerned the plaintiffs -- whether $1.56 million was a fair reflex of the rent reserved by the lease -- is evident.

This was not a case in which a defendant had simply not disclosed a fact; it was a case in which negotiations for sale of unit 12 had taken place on the footing that a lessee for the property on offer had been found who was willing to pay a rent of $156,000 for a lease of that property. By its s 32 statement and by the proffered contract of sale, Eurolynx had disclosed that the lease affected unit 12 and the question was whether that statement carried the representation that the terms of the instrument of lease contained the contractual arrangement between lessor and lessee or, putting the representation in another but identical way, whether the terms of the instrument of lease were unaffected by any other agreement between the lessor and lessee. In Tapp v Lee , ^[7] Chambre J said:

Fraud may consist as well in the suppression of what is true, as in the representation of what is false. If a man, professing to answer a question, select those facts only which are likely to give a credit to the person of whom he speaks, and keep back the rest, he is a more artful knave than he who tells a direct falsehood.

In the Full Court, their Honours said:

the question was whether what had been communicated was untrue or was rendered untrue because of what was not communicated. But the question remains whether, even approaching the case upon that altered footing, the judge was correct in concluding that the plaintiffs did not make out their case.

The conclusion of the Full Court as to the effect of the evidence adduced at the trial within the scope of the pleadings was that:

the plaintiffs were induced to enter into the contract of sale by a material representation of fact that was false. The representation was that the lease contained the whole of the agreement between the defendant and the tenant . In all the particular circumstances, that amounted to a representation to the effect that the rent reserved by the lease annexed to the contract of sale was a market rent [emphasis added].

This conclusion as to the nature of the representation did not draw on the answers to requisitions. Those answers were not included among the particulars given by the purchasers of the representations founding the claim in deceit.

The trial judge was in error in perceiving the purchasers' allegation to be merely one of non-disclosure of the separate agreement rather than an allegation that the disclosed instrument of lease was not the exhaustive contractual arrangement between Eurolynx and Swaeder. The Full Court perceived the true gist of the allegation but added the rider, perhaps unnecessarily, that the representation on which the purchasers relied amounted to a representation that the rent reserved was the market rent. The representation pleaded and contended for in the case was correctly stated by the Full Court in the sentence emphasised above. The significance of that representation was that the rent of $156,000 reserved by the lease was represented to be the true rent, that is to say, the actual and genuine quid pro quo for the lease uninfluenced by any side agreement.

When fraud is alleged against a defendant, it is not enough to prove that the representation as pleaded was false. The words or conduct by which a representation is made may be understood in different senses. The words or conduct may be understood by a reasonable person in the position of the representee in one sense, by the representee in a second sense and by the representor in a third sense. Or the representee may understand the words or conduct in a sense which the representor knew the representee might understand them, albeit not in the sense in which a reasonable bystander would understand them. The differing senses in which words or conduct are understood must be borne in mind in determining whether the several elements of deceit are proved.

The sense in which a representation would be understood by a reasonable person in the position of the representee is prima facie the sense relevant to the question whether the representation is false. ^[8] The sense in which a representation is understood by the representee is relevant to the question whether the representation induced the representee to act upon it. ^[9] And the sense in which the representor intended the representation to be understood is relevant to the question whether the representation was made fraudulently. ^[10]

Falsity of the representation

There is no doubt but that the instrument of lease did not contain the whole of the agreement between Eurolynx and Swaeder. Although a distinction can be drawn between the lessee's covenants in the lease that run with the reversion ^[11] and obligations contained in a contract that does not affect the term demised, ^[12] the separate agreement varied the covenant for payment of rent contained in the instrument of lease. It is not necessary to decide whether this amounted to a surrender and new demise. ^[13] The separate agreement affected the lessee's covenant to pay rent in a period that ran until 10 December 1989. Moreover, the execution of the instrument of lease by Swaeder was the trigger for Eurolynx' contractual obligation under the separate agreement to pay out the $156,000 to which Swaeder would become entitled at the latest when it commenced business. Once the representation is understood in the sense of a statement of the whole contractual arrangement between Eurolynx and Swaeder, its falsity is clearly established.

At trial, O'Bryan J acquitted Eurolynx and its solicitor of fraud because, in his Honour's view, there was no legal duty to disclose the separate agreement. His Honour did not find that Eurolynx or its solicitor had made a representation that the instrument of lease contained all the contractual arrangements between Eurolynx and Swaeder. Had he found that such a representation had been made, he would have been satisfied that it was false, for he found that the solicitor and Eurolynx knew of the separate agreement -- a fact which was not contested.

Inducement

As O'Bryan J did not find that a representation had been made, he had no occasion to determine whether the element of inducement was established. In the Full Court, however, their Honours found that a representation had been made in the sense in which Mr Krakowski understood it, namely, that there was no other agreement made by Eurolynx to confer on Swaeder some benefit not disclosed in the instrument of lease. Their Honours cited the evidence of Mr Krakowski that a prospective tenant who might not otherwise be financially capable of paying the rent reserved would be tempted by the separate agreement to go into occupation. They referred to valuation evidence that showed the rent reserved to be 25% above market rate and the inducements contained in the separate agreement affected the assessment of the risk of non-payment of the inflated rental. The financial inducements for Swaeder to take the lease were, as we have seen, a credit for three months' rent ($39,000) and payment of a further sum of $156,000. If those benefits be apportioned over the six-year term of the lease and be regarded as part of the consideration for the covenant to pay the rent reserved, the net rent attributable solely to the value of the premises is reduced by more than $30,000 per annum. ^[14] Given that the price for the purchase of the premises was fixed at 10 times the annual rental, the financial inducements given to Swaeder by the separate agreement inflated the price by a sum well in excess of $300,000.

In the Full Court, their Honours concluded that the representation was material and that it induced the purchasers to enter into the contract of sale. ^[15] This conclusion is amply supported by the evidence and accords with the approach taken by this court in Sibley v Grosvenor . ^[16]

Fraud by Eurolynx

In order to succeed in fraud, a representee must prove, inter alia, that the representor had no honest belief in the truth of the representation in the sense in which the representor intended it to be understood. In Akerhielm v De Mare ^[17] the Privy Council said:

The question is not whether the defendant in any given case honestly believed the representation to be true in the sense assigned to it by the court on an objective consideration of its truth or falsity, but whether he honestly believed the representation to be true in the sense in which he understood it albeit erroneously when it was made. This general proposition is no doubt subject to limitations. For instance, the meaning placed by the defendant on the representation made may be so far removed from the sense in which it would be understood by any reasonable person as to make it impossible to hold that the defendant honestly understood the representation to bear the meaning claimed by him and honestly believed it in that sense to be true ... (For the general proposition that regard must be had to the sense in which a representation is understood by the person making it, see Derry v Peek ; ^[18] Angus v Clifford ; ^[19] Lees v Tod , ^[20] which authorities must, in their Lordships' view, be preferred to Arnison v Smith ^[21] so far as inconsistent with them.)

The Full Court upheld the trial judge's conclusion that the purchasers' claim in deceit failed. Their Honours appear to have formed this opinion because the purchasers failed to prove that Eurolynx or Mallesons "set out deliberately to induce the plaintiffs to enter into the contract of sale" by inducing in the plaintiffs a "misapprehension that the lessee had no collateral agreement with the defendant". The standard of proof applied in reaching this conclusion was that guilty inferences be drawn when they are "not only open but inevitable". Although a finding of fraud should not be lightly made, ^[22] their Honours' approach was too rigorous. Indeed, that approach seems to apply a standard of proof higher than the balance of probabilities. ^[23] Their Honours observed that the trial judge was entitled to accept Gilbert's evidence that he did not know why the terms of the separate agreement had not been incorporated in the instrument of lease and that Eurolynx "had no idea when a purchaser was going to come along and buy the property". Gilbert's evidence in this respect was tendered to show that he thought that the separate agreement was of no interest or concern to the purchasers. The Full Court concluded that the entry by Eurolynx into the lease and the separate agreement were not efforts "directed only to the plaintiffs". Those efforts, their Honours held, wore "no malign aspect and the inference of fraud falls away". Yet this conclusion, derived largely from Gilbert's evidence, seems to leave out of account "the manner in which the property was offered to the plaintiffs by the defendant's estate agent" -- a factor which their Honours took into account in determining the gist of the representation.

It would have been erroneous for their Honours to have declined to find fraud merely because Eurolynx or its solicitor had not first formed a plan ("set out") to trick the purchasers into buying unit 12. A representation may be made fraudulently without prior planning. Equally, a representation may be made fraudulently without evil motive. Lord Herschell in Derry v Peek ^[24] said:

if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made.

The Full Court found that a representation had been made and the terms of the representation appear in unequivocal terms in cl 9.8 of the instrument of lease:

The terms ... contained in this Lease ... cover and comprise the entire understanding and the whole agreement ... and all previous ... arrangements ... are ... excluded.

A representation that the instrument of lease covered the whole of the agreement between Eurolynx and Swaeder bears only one meaning. If that representation was made consciously by Eurolynx or its solicitor, it must have been made fraudulently. There is no sense in which a representation in those terms could have been honestly made by Eurolynx or by its solicitor. But was Eurolynx or its solicitor conscious of the making of a representation in those terms?

O'Bryan J acquitted Eurolynx and its solicitors of fraud because, on the approach his Honour adopted, the reason why the purchasers were not informed of the separate agreement was the irrelevance of that agreement to the interests of the purchasers. O'Bryan J found that:

Mr Mermelstein made no inquiries into the market value of the property, nor did he investigate the fair market rental of unit 12. He did not inquire of any one whether an inducement had been given to Swaeder, nor did he seek comparable rental information ... Mr Mermelstein did not bargain with the selling agent but simply accepted the price at which the property was offered upon the basis that, if the property could produce an annual rent of $156,000, the value of the property must be $1.56 million. It is important to recall that the purchase was made when the investment property market was still very buoyant.

It is common ground that the selling agent made no representation as to the financial strength of the tenant.

Later in his judgment, his Honour said:

I am not satisfied that the failure to inform Mermelstein about the "collateral agreement" resulted from a conscious or deliberate decision not to supply information about the "collateral agreement" or its terms. Rather, I consider that neither the defendant nor its agents adverted to the possibility that the "collateral agreement" might be relevant to the sale of the property. At highest, the omission to inform Mermelstein resulted from inadvertence, which is the same thing as being unintentional.

The finding that Eurolynx and its solicitor thought that the separate agreement was irrelevant to the purchase of unit 12 and the finding of the Full Court that neither Eurolynx nor Mallesons "set out to induce" the purchasers to believe that there was no separate agreement, found an argument that neither Eurolynx nor the solicitor intended to make or was conscious of making such a representation.

If this were the correct inference to be drawn from the evidence, the courts below would have been right to acquit Eurolynx of fraud. In Smith v Chadwick , ^[25] Lord Blackburn postulated the case where:

a man may make a statement which he intended to mean one thing only, but which negligently and stupidly he sends out in such a shape as to bear another meaning, and the plaintiff acts upon that meaning.

He commented:

On that I need only say that the defendant, in such a case, would have great difficulty in establishing that it was only honest blundering; but if he did, as for instance, by shewing that his manuscript sent to the printer, contained the word "not", which by some printer's error was omitted in the published prospectus, or that 10,000 was by a printer's error printed 100,000, which escaped notice in revising the proofs, I should say it was not a fraud, though perhaps gross negligence.

His Lordship thought that such a case "is not likely ever to arise"; but it would arise if a representor, honestly believing a topic to be irrelevant to the particular transaction, does not advert to the representation conveyed to the representee by the words or conduct of the representor. Eurolynx' argument, building on the findings made by O'Bryan J and by the Full Court, would state the facts in this way: Eurolynx and its solicitor believed, rightly or wrongly, that the contents of the separate agreement were immaterial to the transaction of purchase of unit 12. The instrument of lease was furnished in order to show a prospective purchaser the terms of the covenants binding on the lessee of the property, not to create any belief as to the non-existence of the separate agreement. Clauses such as cl 9.8 are commonplace in leases and a failure to appreciate the significance of such a clause to a purchaser to whom a copy of the lease is produced is explicable by sheer incompetence on the part of the solicitor concerned. Gilbert, the Eurolynx officer responsible for the giving of instructions to Mallesons for the drawing of the lease, the separate agreement and the contract of sale, gave evidence that he relied on the advice of the solicitor dealing with these transactions and that, as he did not believe that the separate agreement "was anything to do with the purchase", he did not advert to it. He was quite familiar with the terms of the separate agreement, though he did not realise "until we came to settlement" that the rent-free period had not then expired. Clearly enough, his evidence shows a belief that inducements given to prospective tenants to secure their entry into a lease of property to be sold by Eurolynx were immaterial to a subsequent sale of the property leased, though the sale price would reflect the rent reserved by the lease.

This view, although productive of sharp practice, could possibly account for his claimed failure to advert to the separate agreement in connection with the sale of unit 12. He might have regarded the separate agreement as no more than an item in the cost of development of unit 12 as a going concern, leaving it to Mallesons to advise of any legal duty arising from dealings with the tenant. Though Gilbert's explanation as to why he did not advert to the separate agreement when he was supervising the sale of unit 12 be accepted, the question is not whether Gilbert's mind adverted to the making of the representation but whether Eurolynx' mind should be held to have adverted to the making of that representation.

The mind of Eurolynx does not depend upon the acceptance of the evidence of Gilbert alone as to his appreciation of the significance of the separate agreement. Account must be taken of the evidence that Eurolynx' agent (Cini) and Eurolynx' officer (Ryan) who had first procured the agreement of Mermelstein (as agent for the purchasers) to buy unit 12 knew that the purchasers were willing to buy on the footing that the rent reserved by the lease was what the tenant had been and was willing to pay for a lease of the property offered to them. In other words, they were willing to buy at a price 10 times the amount of the rent which the property itself would yield. Their knowledge was the knowledge of Eurolynx, for they were the persons who were responsible for the initial negotiations and who had set the scene in which the representation had been made by the s 32 statement and the proffered contract of sale. As Bright J said in Brambles Holdings Ltd v Carey : ^[26]

Always, when beliefs or opinions or states of mind are attributed to a company it is necessary to specify some person or persons so closely and relevantly connected with the company that the state of mind of that person or those persons can be treated as being identified with the company so that their state of mind can be treated as being the state of mind of the company. This process is often necessary in cases in which companies are charged with offences such as conspiracy to defraud.

A division of function among officers of a corporation responsible for different aspects of the one transaction does not relieve the corporation from responsibility determined by reference to the knowledge possessed by each of them. ^[27] Neither Cini nor Ryan was called to give evidence. It is erroneous to make a finding as to the company's intention or willingness to misrepresent the contractual arrangements with Swaeder without reference to the knowledge of Cini and Ryan.

So to approach the question of Eurolynx' liability is not to regard the negotiations with Cini and Ryan as containing the actionable misrepresentation. If Eurolynx be treated as knowing that the purchasers were buying on the faith of the rent which the property itself would yield, it must have known that the purchasers would believe that the rent reserved according to the copy of the instrument of lease produced represented the commercial rent that the premises the subject of the proposed purchase would yield and that there was no other agreement conferring on the lessee a financial benefit which was reflected in the rent reserved. When the separate agreement secured Swaeder's agreement to execute a lease reserving a rent of $156,000 per annum from 11 September 1989, Eurolynx' production of a copy of the instrument of lease without reference to the separate agreement cannot be explained as a failure to advert to the possibility that the rent was what the property would yield without supplement from financial assistance contractually conferred on the lessee. Even if Gilbert, not knowing of the prior conversations between Mermelstein and Cini and Ryan, did not perceive that the s 32 statement would be taken to represent that the lease contained the whole agreement, an inference that Eurolynx intended or was willing that that representation be conveyed should be drawn against Eurolynx. In the absence of evidence from Cini or Ryan deposing to their knowledge of the basis on which the purchasers were buying unit 12, this court is as able to draw inferences from the primary facts as are the courts below. ^[28] Although Lord Blackburn's dictum about a representor's difficulty in establishing mere honest blundering must be taken to refer only to an evidential burden, not an ultimate burden, of proof, the purchasers' burden of proving fraud in the present circumstances is more easily discharged when Eurolynx called neither those who represented it in the early negotiations with the purchasers nor their solicitor.

There is no evidence that Eurolynx' solicitor knew of the basis on which the purchasers had agreed to buy. So far as the evidence goes, the solicitor may have been entirely unaware of the earlier discussions which Mermelstein had had with Cini and Ryan. But the evidence of events in which Mallesons were involved does nothing to throw doubt on the inference that should be drawn against Eurolynx. First, cl 9.8 of the copy instrument of lease contained the express representation that the terms of the lease cover "the entire understanding and the whole agreement". Next, the s 32 statement annexed a copy of the instrument of lease in order to satisfy a statutory requirement (with which Eurolynx, as a developer, must have been familiar) to disclose to the purchaser "any easement, covenant or other similar restriction affecting the land". If the terms of the lease were thought to answer that description, the terms of an agreement modifying and adding to the terms of the lease must equally have been required to be disclosed. Then, the proffered contract of sale included the s 32 statement and, although it provided for the entitlement of the purchasers to the "rents and profits" of unit 12 upon settlement, it made no provision to cover the rent-free period expiring on 10 December 1989. Subsequently, requisition 8(c) specifically directed attention to all agreements "relating to the tenancy or occupation". ^[29] Eurolynx' answer referred only to the "copy of the Lease ... included in the Contract". The answers to requisitions are not themselves relevant representations but they are evidence from which to draw an inference as to the state of mind of Eurolynx. When the time for settlement was approaching, the existence of the rent-free period was concealed by accepting Mermelstein's claim for an adjustment of the "rent" for 11 days from 20 to 30 November inclusive. Mallesons' letter to Eurolynx noted the adjustment for rent "on the basis it has been paid". Later, on 8 December 1989 when Mermelstein enquired of Collings Real Estate as to the reason for the receiving only $4144.47 rent at that time when the month's rent of $13,000 was payable under the terms of the lease on the first day of the month, he was told "this was an internal matter, it was just an adjustment problem". Again, this event suggests that the arrangements made to cover the non-rent period after settlement were being deliberately concealed from Mermelstein and the purchasers.

In the absence of any evidence from the solicitor who acted for Eurolynx, there is nothing to establish her knowledge of the basis on which the negotiations for sale had been conducted. Her absence from the witness box gives greater confidence in the drawing of inferences against Eurolynx, for Eurolynx was a party to the proceedings and might have called their solicitor to give evidence had it wished to do so. But the solicitor was not a party; nor was her employer, Mallesons, a party to the proceedings as between the purchasers and Eurolynx. In these circumstances, no finding of fraud should be made against the solicitor who, had she been entitled to do so, may have testified and given an innocent explanation of her part in the transaction. If she had given evidence that she had not adverted to the representation made by her conduct -- whether because she thought the separate agreement irrelevant to the purchaser's interests or because of honest blundering or for any other reason -- it might have appeared that she did not intend to make the representation that was in fact made. Had she testified, and the court had found that she had not intended to make the representation which was in fact made, the finding could not have been disturbed on appeal. ^[30]

Counsel for Eurolynx submitted that fraud could not be sheeted home to Eurolynx unless that company, knowing of the falsity of the representation which induced the purchasers to enter into the contract, intended the representation to be made. It may be that a principal who does not authorise an agent to make a particular representation in performing the duties of the agency will not be held personally liable in fraud if the representation is in fact made by an agent who is innocent of fraud, even though the principal knows the facts which make the representation false. ^[31] But it can hardly be open to argument that Eurolynx, by its officer Gilbert, did not authorise Mallesons to furnish the s 32 statement and to proffer the contract of sale in the terms in which Mallesons drew those instruments.

The purchasers' remedy

The Full Court found that a false representation had been made without fraud and therefore held that the purchasers were "confined to such remedies as may be available in equity or by statute". Absent fraud, equity would not order rescission of the contract of sale after conveyance. ^[32] But, as the making of the false representation amounted to misleading conduct for the purposes of s 52 of the Trade Practices Act, the remedies available under s 87 of that Act (including the re-conveyance of property) ^[33] were considered. The Full Court declined to make an order for re-conveyance of the property for reasons which included the absence of fraud. Their Honours concluded that damages, if proved, would be the appropriate remedy and a new trial was ordered limited to a determination of any loss or damage suffered by the purchasers by reason of the misleading conduct. However, the subject of the new trial was referred to mediation pursuant to the Rules of the Supreme Court. ^[34]

Once fraud is found, however, the court must determine whether the purchasers' purported rescission of the contract was effective to avoid the transaction ab initio. ^[35] Rescission is effective if, at the time the writ was issued, equity by the exercise of its powers can restore the parties substantially to the status quo. ^[36] But, as the equitable remedy of an order to restore the parties to the status quo consequent on rescission is discretionary, the remedy will be denied if a purchaser seeking the order acts unconscientiously during the pendency of the action. ^[37]

Those issues have not been explored in the courts below. There was no occasion to do so in the absence of a finding of fraud which might have empowered the purchasers validly to rescind the contract as they purported to do on 7 December 1990. The question whether a rescission order should now be made must be remitted to the Supreme Court of Victoria for determination in accordance with the findings of this court. If no rescission order should be made, the Supreme Court may have to determine the issue of damages for fraud. This is not precisely the issue in respect of which a new trial was ordered. The new trial was for the assessment of damages, if any, recoverable under s 82 of the Trade Practices Act for misleading conduct not amounting to fraud. In order to ensure that, should damages appear to be the only appropriate remedy on the new trial, the trial judge is at liberty to assess them in accordance with the judgment of this court, it will be necessary to vary the order of the Full Court.

The third party proceedings

Before Eurolynx closed its case at trial, Mallesons made an admission in these terms for the purposes of the third party proceedings:

If the side agreement with the tenant ... is found to be an agreement relating to the tenancy or occupation of the premises, and it is found that it ought to have been disclosed to the purchaser at the time of answers to requisitions on title, or sooner, the Third Party owed a duty of care to advise the Defendant of the need for disclosure and was negligent in the performance of that duty.

Neither Eurolynx nor Mallesons called evidence in the third party proceedings. Apart from Mallesons' admission the only evidence is that given in the principal proceedings. When O'Bryan J gave judgment for Eurolynx in the principal proceedings, he gave judgment in the third party proceedings for Mallesons. But when the Full Court allowed the purchasers' appeal and declared that they were induced to enter into the contract of sale by Eurolynx' misleading conduct, that court without objection set aside the judgment in the third party proceedings. The Full Court ordered a new trial limited to two issues: whether the purchasers had suffered any and what loss or damage by Eurolynx' misleading conduct and the liability of Mallesons to Eurolynx in the third party proceedings. On the new trial the purchasers were to be at liberty to adduce further evidence.

All issues in the trial had been open to determination by O'Bryan J and all evidence that any party wished to adduce on those issues had been led. If, on that body of evidence, it was right for the Full Court to determine that there had been a contravention of s 52 of the Trade Practices Act, the damages (if any) recoverable by the purchasers under s 82 of that Act should be determined on the same body of evidence. The purchasers, who bore the onus of proving damages -- whether for deceit or under s 82 of the Trade Practices Act -- should not have a second opportunity to adduce evidence on that subject. But, as the Full Court gave them that opportunity their Honours held that it would be unjust to leave Mallesons bound by their admission. However, if the order for a limited new trial is varied so that no new evidence is admitted save in respect of events that have occurred since the evidence was tendered before O'Bryan J, there is no injustice in holding Mallesons to their admission. Whether, in the light of the admission of Mallesons' owing a duty of care to Eurolynx, Eurolynx is entitled to indemnity for or contribution towards any loss it might suffer in consequence of a judgment in the principal proceedings on the new trial is a question for determination by the trial judge.

The evidence admissible on the new trial must be limited, however, to evidence of matters which occurred after the evidence at the first trial was closed and which is relevant to an issue to be determined on the new trial. That evidence will not be tendered to prove the issues between the purchasers and Eurolynx determined on this appeal. It may be tendered on the issue of the purchasers' loss of the right to a rescission order by reason of unconscientious conduct on the part of the purchasers occurring after the evidence at the original trial had closed or on the issue of damages where subsequent events have made their existence or quantification less speculative.

The order now to be made should therefore:

(i) Set aside paras 4 and 5 of the order of the Full Court of the Supreme Court of Victoria and, in lieu thereof, provide for orders in the following form:

The court declares that:

4.The appellants, David Krakowski and Henia Krakowski, were induced to enter into the contract of sale referred to in para 3 of the amended statement of claim by conduct of the respondent Eurolynx Properties Ltd that was fraudulent and, in terms of s 52 of the Trade Practices Act 1974, misleading.

The court further orders that:

5.If necessary, following the mediation procedure referred to in para 6, there be a new trial limited to:

(a)

a determination whether by the letter of 7 December 1990, the appellants effectively rescinded the contract of sale as alleged in para 9 of their amended statement of claim;

(b)

if yes to (a), a determination whether an account and inquiry should be ordered to restore the appellants and the respondent Eurolynx Properties Ltd as closely as may be to their respective positions when they entered into the contract;

(c)

a determination whether the appellants should recover any and what damages for loss and damage as a result of the conduct referred to in para 4 of this order;

(d)

the orders which should be made to give effect to the above determinations;

(e)

a determination of the liability of the respondent Mallesons Stephen Jaques to the respondent Eurolynx Properties Ltd in the third party proceedings between them.

5A.The evidence admissible on the new trial in addition to the evidence admitted on the original trial be limited to evidence of matters occurring subsequent to the closing of evidence on the original trial.

(ii) The respondents pay the appellants' costs of this appeal.

(iii) The respondents bear their own costs of the appeal and cross-appeal.

(iv) The action be remitted to the Supreme Court of Victoria to proceed in accordance with the reasons for judgment of this court.