Wormald v Maradaca Pty Ltd

1. [1]

   BATHURST CJ: I agree with Bell P.

2. [2]

   BELL P: By judgment delivered on 24 April 2020 (see Barrett v Maradaca Pty Ltd [2020] NSWSC 440), Lindsay J (the primary judge) awarded damages in the aggregate of $1.35 million together with interest in favour of Electroboard Solutions Pty Ltd (ELB), having found a contravention of the Competition and Consumer Act 2010 (Cth), sch 2 – Australian Consumer Law, s 18 (the ACL) by the cross-defendants in relation to a sale of shares in Broadreach Services Pty Ltd (BRS). The primary judge dismissed a claim brought by the first, second and third cross-defendants as plaintiffs for the refund of $200,000 which had been paid into escrow (the Escrow Funds) pursuant to a side letter (the Side Letter) entered into at the time of the share sale transaction.

3. [3]

   The first three cross-defendants, John Leonard Barrett (Mr Barrett), Steven Moran (Mr Moran) and Wirra Wirra Investments Pty Ltd as trustee for the Wormald Trust (Wirra Wirra), were each shareholders in BRS. Their shareholdings respectively comprised 13.48%, 24.5% and 51% of the total shareholding in BRS. They will be collectively referred to as the Majority Shareholders.

4. [4]

   The fourth cross-defendant, Shaun Edmund Wormald (Mr Wormald), was a director of both Wirra Wirra and BRS.

Overview

1. [5]

   BRS was a company which was founded in 2001 and was in the business of providing specialist enterprise video and digital media managed services to a number of large corporate clients. In 2014, it had launched a new product named “MeetSmart” for Enterprise and Government. BRS’s major customer was Optus or, more particularly, Alphawest Services Pty Ltd, a subsidiary in the Optus group of companies, with which BRS had a Master Services Agreement (the MSA).

2. [6]

   The Share Sale and Purchase Agreement (SSA) was between Maradaca Pty Limited (Maradaca) as purchaser and the Majority Shareholders, together with the remaining three shareholders in BRS whose collective shareholding comprised just over 11% of the shareholding in the company. These three shareholders were not party to the proceedings.

3. [7]

   The principal of Maradaca and ELB was Marie Kaliviotis (Ms Kaliviotis). The primary judge described Ms Kaliviotis’ interest in acquisition of BRS in the following terms which were not challenged:

4. [8]

   It should be noted that, at [168], the primary judge referred to Messrs Barrett and Moran as being members of Ms Kaliviotis’ staff. Earlier, at [40] and [41], the primary judge referred to Messrs Barrett and Moran as working as consultants to ELB and Maradaca between February 2014 and November 2015, and June 2014 and December 2015 respectively.

5. [9]

   The SSA was executed on or about 23 January 2015. The total consideration under the SSA for the acquisition of all of the shares was $1.35 million.

6. [10]

   Maradaca had made a number of earlier offers to purchase the shares in BRS including one on 11 November 2014 for $1.35 million but this was rejected by the shareholders on 5 December 2014, with the shareholders instead favouring a sale to Optus. Negotiations with Optus continued but, by 19 January 2015, the Majority Shareholders perceived that no deal would be reached with Optus and lines of communication were re-opened with Ms Kaliviotis and Maradaca.

7. [11]

   The SSA was accompanied by the Side Letter between Maradaca and the Majority Shareholders, also dated 23 January 2015. Clauses 3 and 5 of the Side Letter are of particular relevance to these proceedings and the appeal.

8. [12]

   Clause 3, headed “Set Off”, provided:

9. [13]

   Clause 5, headed “Disclosure”, provided:

10. [14]

    On 28 January 2015, Maradaca in turn assigned its newly acquired shares in BRS to a related entity ELB.

11. [15]

    On 22 February 2016, almost exactly 13 months after execution of the SSA, the Majority Shareholders commenced proceedings against Maradaca in the District Court of New South Wales for release of the Escrow Funds, alleging that no Warranty Claim within the meaning of the Side Letter had been made within 90 days of the SSA. Maradaca in due course brought a cross-claim for misleading or deceptive conduct and the proceedings were transferred to the Supreme Court of New South Wales in 2017. Mr Wormald was joined as a cross-defendant to the cross-claim in February 2018.

12. [16]

    The case was heard over 7 days in early October 2019 and reasons for judgment were delivered on 24 April 2020 with final orders made on 8 May 2020. These were as follows:

13. [17]

    On 24 July 2020, Wirra Wirra and Mr Wormald, who had been and continued to be represented separately from Messrs Barrett and Moran, filed a notice of appeal challenging the whole of the decision at first instance. On the same day, Messrs Barrett and Moran filed what was styled a “notice of cross-appeal” also challenging the whole of the decision at first instance. Other than in respect of two paragraphs in the notice of appeal (relating to apportionment as between cross-defendants), the notice of appeal and notice of cross-appeal were in materially identical terms.

14. [18]

    Maradaca and ELB also filed a notice of contention, seeking to support the conclusion of the primary judge on grounds other than those relied upon in the Court below.

15. [19]

    The specific grounds contained in the notice of appeal, notice of cross-appeal and notice of contention are best considered in the context of a fuller understanding of the background to the dispute and the findings of the primary judge.

Background

1. [20]

   As with many companies heavily dependent on a particular customer, BRS was vulnerable to its relationship with Optus being terminated. It was also vulnerable in terms of its cashflow, as delays in the payment of invoices by its major customer would necessarily have an impact on its own cashflow for obvious reasons. As the primary judge put it at [29], “[t]he ongoing viability of BRS was dependent upon maintenance of competent, skilled staff and its commercial relationship with Optus. Without the continued support of Optus BRS was, at all material times, at risk of insolvency.”

2. [21]

   In 2014, both Optus and companies associated with Ms Kaliviotis manifested an interest in acquiring BRS.

3. [22]

   On 30 May 2014, ELB executed a “Memorandum of Understanding (MOU) and Option”, expressed to be made between it and BRS, which in effect contained an offer to purchase all the issued share capital of BRS for $1.25 million subject to due diligence inquiries. This option was not exercised. The MOU was expressed to be legally binding, contained a confidentiality clause and a clause to the effect that for a period of 30 days from its execution, neither BRS nor its shareholders would engage any other party in discussion or negotiation of terms of acquisition, share transfer or ownership of BRS.

4. [23]

   On 18 September 2014, ELB and BRS signed another legally binding “Memorandum of Understanding (MOU) and Option” which in effect increased the offer to $1.5 million, subject to “satisfactory legal and taxation due diligence” inquiries. This MOU also contained a confidentiality clause.

5. [24]

   Due diligence was undertaken and access was given to the “Due Diligence Materials” listed in Sch 6 of the SSA from 1 October 2014.

6. [25]

   In mid-October 2014, Ms Kaliviotis advised BRS that she was no longer prepared to offer $1.5 million because, as she said in her affidavit dated 30 January 2017, she was concerned about the accuracy of cashflow projections, the extent of the employer liabilities and the overdraft. It was shortly after this, on or around 21 October 2014, that Mr Brownlow, who worked in the financial section of Ms Kaliviotis’ companies and had prepared his own cashflow on the basis of information supplied by BRS, informed Ms Kaliviotis that “come November the company would exceed its overdraft of one million dollars” and “that the company was going to continue to exceed its overdraft until at least March 2015”: trial tp. at 106.

7. [26]

   On 17 October 2014, Mr Wormald provided Ms Kaliviotis a document headed “Marie and Shaun Discussion Points” (the Discussion Points) which was essentially a marketing document which contained a financial overview of the company including information in relation to current sales revenue, EBITDA profit and loss information for the financial years 2012-Points contained the following discussion in relation to Optus and cashflow:

8. [27]

   The Cashflow statement for the company showed a negative cashflow of $855,537 for the financial year ending 2013 and negative $537,465 for the financial year ending 2014. It was and is to be inferred that this negative cashflow was funded or to be funded by the company’s overdraft facility to which reference had been made in the Discussion Points. Employee entitlements of some $264,392 as at September 2014 were also disclosed.

9. [28]

   After reading the Discussion Points, Ms Kaliviotis informed Mr Wormald that she remained “concerned about the liabilities to the staff, the overdraft and the cash flow forecast”, and was not prepared to increase her offer to $1.5 million but maintained her earlier offer of $1.25 million.

10. [29]

    Later, on 11 November 2014, Ms Kaliviotis increased her original offer to $1.35 million and also offered to assume liability for BRS’s overdraft, as recorded at [96] of the primary judgment.

11. [30]

    On 12 November 2014, Joe Boyd (Mr Boyd), an external accountant, wrote to Anthony Harris (Mr Harris), CFO of Azure Group, copied to Mr Wormald, Hugh Wormald, Mr Berriman (Chairman of BRS) and Mr Griffiths (CEO of BRS) as follows:

12. [31]

    Board approval was given and late on the evening of 12 November 2014, Mr Harris forwarded to Simon Brownlow (the Financial Controller of ELB) the forecasts, together with the following email and the earlier email Mr Boyd had sent Mr Harris reproduced at [31] above:

13. [32]

    The two emails and cashflow disclosure referred to above were somewhat surprisingly not referred to by the primary judge in his judgment. They were important documents both in terms of understanding Ms Kaliviotis’ risk appetite and the significance of her renewed offer to acquire the shares in January 2015.

14. [33]

    The primary judge recorded at [97] that on 19 November 2014, the BRS shareholders held an extraordinary general meeting at which, in substance, the shareholders voted to approve Maradaca’s offer to acquire the company.

15. [34]

    On 25 November 2014, Messrs Barrett, Moran and Wormald participated in a telephone conference with John Paitaridis (Mr Paitaridis), a senior executive of Optus, in which, in substance, he threatened that Optus would cancel BRS’s MSA if the BRS shares were sold to Ms Kaliviotis. This led to Ms Kaliviotis being informed of the substance of that telephone conference both orally (by Mr Barrett) and in writing. According to the primary judge (at [100]), Mr Barrett told Ms Kaliviotis that Mr Paitaridis had said that: (a) Optus would cancel the MSA if the BRS shares were sold to her; (b) Optus had said that they would set up a capability internally; (c) Optus had said that they intended to poach BRS staff; and (d) Optus did not acknowledge Ms Kaliviotis’ worth as an existing client of Optus.

16. [35]

    The written communication, made on the same day, was more formal.

17. [36]

    In an email dated 25 November 2014, the solicitors acting for the Majority Shareholders, Marque Lawyers, wrote to Ms Kaliviotis’ solicitor, Mr Diacopoulos, the following email:

18. [37]

    Mr Diacopoulos responded to this email on 27 November 2014 as follows:

19. [38]

    A form of share sale agreement had been prepared which made provision, inter alia, for the purchaser to take over BRS’s $1 million overdraft facility with the Commonwealth Bank of Australia (CBA). This was the overdraft facility which had been referred to in the Discussion Points and which would need to be drawn upon in light of the cash flow forecasts disclosed on 12 November 2014.

20. [39]

    At this point, it is convenient to record a number of unchallenged findings made by the primary judge about Ms Kaliviotis. Reference has already been made at [8] above to the primary judge’s finding as to Ms Kaliviotis’ motivation in contemplating the share acquisition and the reasons for her appetite for risk.

21. [40]

    At [150] of his judgment, the primary judge observed that:

22. [41]

    At [167]-[169] of his judgment, the primary judge observed that ELB and Maradaca:

23. [42]

    One observation that may be made at this point is that the primary judge’s statement at [168] that Ms Kaliviotis was prepared to proceed “notwithstanding a warning that Optus might undermine BRS’ commercial operations should the company be acquired by the cross claimants” appears to underplay or underemphasise what Marque Lawyers had disclosed to Ms Kaliviotis by way of email on 25 November 2014. The warning was not that Optus “might undermine” BRS’s commercial operations, but that Optus “would terminate its Master Services Agreement with BRS upon any such change of control transaction occurring” (emphasis added).

24. [43]

    At [172], the primary judge observed that, at least after 25 November 2014, Ms Kaliviotis “was aware of the company’s weak financial position (requiring her support until at least March 2015) and she was independently aware of the importance to BRS of its skilled employees and its economic dependence upon Optus work.”

25. [44]

    During this period, BRS was also negotiating with Optus as a potential buyer. The threats made by Mr Paitaridis of Optus on 25 November 2014 have already been referred to at [34] above. They evidently did not deter Ms Kaliviotis.

26. [45]

    On 28 November 2014, the BRS board of directors gave notice of an extraordinary general meeting of the company to permit the company’s shareholders to reconsider their approval of the first cross-claimant’s offer to acquire the company, in light of a fresh offer from Optus. The meeting was called for 5 December 2014.

27. [46]

    In an email sent on 4 December 2014 to Mr Wormald, Mr Paitaridis wrote as follows:

28. [47]

    By a Term Sheet dated 4 December 2014 (the Optus Term Sheet), Optus Networks Pty Ltd made an offer, subject to due diligence, to acquire 100% of the shareholding in BRS for $1.6 million. Some but not all of the clauses of this Term Sheet were intended to be legally binding. Included in the legally binding clauses was cl 15, headed “Confidentiality”, which provided that:

29. [48]

    On 5 December 2014, a Memorandum of Understanding between Optus Administration Pty Ltd and BRS was executed (the Optus MOU). The Term Sheet and the Optus MOU provided for Optus to have exclusivity and confidentiality in its ongoing negotiations to acquire BRS, to speak directly to BRS employees and to provide BRS with a prepayment for services of $236,000.

30. [49]

    Clause 12 of the Optus Term Sheet, headed “Completion”, provided that if Completion of the Proposed Transaction:

31. [50]

    Key terms of the Optus MOU were as follows:

32. [51]

    On 5 December 2014, an extraordinary general meeting of the shareholders of BRS was held in which, over Mr Barrett’s sole dissent, all shareholders rejected a motion for reconfirmation of the proposed sale to Maradaca and instead agreed to accept Optus’ offer. On the same day, Ms Kaliviotis was advised that the shareholders had resolved to sell the shares to Optus. After 5 December 2014, no further due diligence enquiries were made by Ms Kaliviotis or anyone on her behalf.

33. [52]

    Between the period 5 December 2014 and 19 January 2015, the following events, as summarised by the primary judge at [114] took place:

34. [53]

    BRS announced the sale to Optus to its staff, and Optus began interviewing staff between 9 December 2014 and 16 January 2015. The purpose of these interviews was in part to seek to convince the staff to enter into retention agreements with BRS and/or Optus which contained non-compete and non-solicitation clauses.

35. [54]

    On 16 January 2015, Mr Wormald emailed Mr Griffiths with the following two questions:

36. [55]

    Around 45 minutes later, Mr Griffiths responded to Mr Wormald’s questions by email, set out as follows:

37. [56]

    In response to this email, Mr Wormald instructed Mr Griffiths as follows:

38. [57]

    At 4.41 pm on the same day, Mr Griffiths emailed Mr Wormald as follows:

39. [58]

    On 19 January 2015, the Majority Shareholders met with BRS management and the company’s solicitor. The draft agenda for the meeting was distributed by Mr Griffiths by email on that day, which provided as follows:

40. [59]

    As the primary judge outlined, there was consensus that the meeting discussed BRS’s dire financial circumstances, including the probability that if BRS was not taken over with external financial support on or before 28 January 2015, it would, upon that date, become insolvent: at [121].

41. [60]

    At the meeting, the Majority Shareholders agreed to move towards abandoning the Optus deal, and Messrs Wormald, Moran and Barrett agreed that the latter would speak to Ms Kaliviotis about reinstating the $1.35m offer she had made in November 2014. The primary judge’s holding at [122] was that:

42. [61]

    On 19 January 2015, Mr Barrett telephoned Ms Kaliviotis who was holidaying overseas at the time, to inquire if she was still interested in acquiring BRS. Ms Kaliviotis’ version of that conversation, which the primary judge accepted at [129] to be correct, was as follows:

43. [62]

    The primary judge accepted as substantially correct the following telephone conversation said to have occurred between Mr Barrett and Ms Kaliviotis on 20 January 2015:

44. [63]

    On or about 20 January 2015, Mr Tiller had a telephone conversation with Ms Kaliviotis about whether further due diligence should be conducted, in terms to the following effect:

45. [64]

    On 23 January 2015, the shareholders of BRS and Maradaca proceeded to formalise the SSA with Ms Kaliviotis for a total price of $1.35 million, subject to adjustments.

46. [65]

    The expression “Due Diligence Materials” was defined by cl 1.1 of the SSA to mean:

47. [66]

    Clause 5.2 of the SSA provided for the proceeds of sale to be allocated to the sellers in proportion to the number of shares held in BRS by them. Its terms also included, inter alia, warranties given by the sellers to the buyer (cl 8); limitations on the liability of the seller arising from disclosures made by the sellers (cl 9); a “no reliance” clause (cl 9.3); an “entire agreement” clause (cl 16.8); and a qualified covenant against assignments of rights and interests under the agreement (cl 16.3).

48. [67]

    Clause 8 of the SSA contained the following “Warranties and Indemnities”:

49. [68]

    Clause 9.1 of the SSA contained the following on “Limitations of liability”:

50. [69]

    Clause 9.3 of the SSA provided that:

51. [70]

    Clause 9.4 of the SSA provided that:

52. [71]

    Clause 9.5 of the SSA put a cap on maximum exposure for breach of warranty. Clause 9.5(b) provided that:

53. [72]

    On or about 23 January 2015, the Majority Shareholders entered in the Side Letter, by which they provided the solicitors for Maradaca with the Escrow Funds totalling $200,000 for the purpose of satisfying any claim for breach of warranty under the SSA.

54. [73]

    On completion of the SSA on 28 January 2015, Maradaca funded BRS to pay out its overdraft, by a loan of $886,067.45 made to BRS by ELB. Two days later, Mr Tiller had a telephone conversation with Mr Reddie (in the latter’s capacity as a representative of Optus), in which Mr Tiller endeavoured to assure Optus that, under ELB’s management, BRS’s capabilities would be maintained, with Mr Reddie expressing concerning that BRS would not be able to maintain its skilled staff.

55. [74]

    In that telephone conversation and in subsequent correspondence on 1 February 2015, Mr Tiller endeavoured to assure Optus that ELB would use its best endeavours to ensure that BRS would maintain the continuity of services previously provided by the company, and that BRS would endeavour to retain its skilled employees.

56. [75]

    By two separate letters dated 4 March 2015 signed by Mr Paitaridis addressed to BRS, which were in substantially similar terms, Optus terminated the Term Sheet and the MOU dated 4-5 December 2014 and, upon termination of the MOU, demanded that BRS repay the prepaid $236,000.

57. [76]

    On or about 17 March 2015, three BRS employees simultaneously resigned from BRS and commenced employment with Optus.

58. [77]

    On 19 April 2015, Optus issued to BRS an invoice for repayment of the sum of $236,000 plus GST.

59. [78]

    On 20 April 2015, the solicitors for ELB/Maradaca delivered to the solicitors for the cross-defendant a letter, which relevantly included the following:

60. [79]

    By a letter dated 4 May 2015, the solicitor for Maradaca/ELB articulated the first cross-claimant’s core complaint about the sale of the BRS shareholding as follows:

61. [80]

    In late June 2015, Optus terminated its MSA with BRS. On or about 29 June 2015, a further five BRS employees simultaneously resigned to go to Optus, and it took BRS approximately two months to replace them.

62. [81]

    In the months following ELB’s acquisition of BRS, a total of 10 BRS employees resigned to instead work with Optus.

The case as pleaded

1. [82]

   The case as pleaded was based upon representations sought to be spelled out from the “Discussion Points” document of 17 October 2014, non-disclosure of a series of matters which occurred between March 2012 and 31 October 2014, non-disclosure of the terms of the Optus Term Sheet and Optus MOU, and various matters which had been said by BRS’s CEO, Mr Griffiths, in two emails to Mr Wormald of 16 January 2015. In para 32 of the Further Amended Statement of Cross-Claim (FASCC), particular focus was placed upon the following matters which were alleged not to have been disclosed to the cross-claimants:

2. [83]

   The FASCC made no reference at all to the telephone call of 19 January 2015 between Mr Barrett and Ms Kaliviotis. No representations were pleaded as arising from it, nor was anything said in the telephone conversation alleged to have been misleading or deceptive. The significance of this observation lies in the fact that what was said in this conversation assumed critical importance in the reasoning of the primary judge, as shall be seen below.

3. [84]

   The proceedings at first instance seem, in this regard, to have departed significantly from the pleaded case. This is not an unknown phenomenon in litigation and where both sides have acquiesced in this, neither party can be heard to complain on an appeal that the case departed from the pleadings: see Banque Commerciale SA en Liquidation v Akhil Holdings Limited (1990) 169 CLR 279 at 288; [1990] HCA 11; Dare v Pulham (1982) 148 CLR 658 at 664; [1982] HCA 70.

4. [85]

   Thus, under the subheading “Competing Narratives”, the primary judge described Maradaca/ELB’s case as that the cross-defendants “engaged in misleading and deceptive conduct by silence”: at [160]. His Honour noted that Maradaca/ELB placed heavy reliance on Gummow J’s decision, when a member of the Federal Court, in Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 32 and 41; [1992] FCA 557 (Demagogue) and on this Court’s decision in Fabcot Pty Ltd v Port Macquarie-Hastings Council [2011] NSWCA 167 at 209.

5. [86]

   The primary judge noted at [161] that “[t]he cross defendants accepted this statement of the law, but emphasised authoritative statements about the need to take into account the commercial sophistication of Ms Kaliviotis … her preparedness to take a risk in acquisition of BRS in light of the disclosures made in the centrally important email of 25 November 2014”. His Honour also noted the cross-claimants’ particular reliance upon Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Limited (2010) 241 CLR 357; [2010] HCA 31 at [20], [22], [91] and [96] (Miller) and the important observation of Gleeson CJ in Lam v Ausintel Investments Australia Pty Ltd (1989) 97 FLR 458 at 475 (Lam):

6. [87]

   No point was taken on appeal that the appeal should be upheld because the primary judge’s analysis and the way Maradaca/ELB put their case departed from the pleadings. The converse of this is that the appeal must be assessed by reference to the primary judge’s findings in light of the way the case was put and argued at first instance.

7. [88]

   In this context, the primary judge’s finding at [65] is of much significance. His Honour there recorded that:

8. [89]

   To similar effect, the primary judge held at [170] that:

9. [90]

   This acceptance meant that, as the primary judge pointed out, the case in effect became one of non-disclosure of matters that had occurred to or within BRS from 5 December 2014 to 23 January 2015 when the SSA was executed. Accordingly, the focus of the proceedings at first instance was primarily upon whether or not Ms Kaliviotis and her interests had a “reasonable expectation” that certain matters would be disclosed. It will be necessary to return to the ambit of that concept in a commercial context when the relevant authorities are considered in further detail.

The primary judgment

1. [91]

   At [173]-[176] of his judgment, the primary judge said:

2. [92]

   The last paragraph of this extract characterised the statement made by Mr Barrett to Ms Kaliviotis in the 19 January 2015 conversation as involving an “implicit assurance” to Ms Kaliviotis. His Honour in this and later paragraphs of his reasons expressed the assurance in a number of different ways:

3. [93]

   The essence of the primary judge’s reasoning leading to the conclusion that there had been misleading or deceptive conduct by reason of non-disclosure was contained in [183]-[187] of the judgment as follows:

4. [94]

   In addition to this basal finding, the primary judge also rejected the cross-defendants’ submission to the effect that, even if these non-disclosed matters had been disclosed, Maradaca would still have gone through with the transaction. That was to reject a submission that, even if there had been misleading or deceptive conduct, such conduct was not causal of any loss or damage.

5. [95]

   The primary judge’s conclusion in this regard was also influenced by his Honour’s characterisation of the 19 January 2015 conversation as an assurance. Thus, the passages extracted at [93] above from [191] and [196] of the primary judgment fell within that section of the judgment which dealt with causation.

6. [96]

   The essence of the primary judge’s reasoning on the question of causation was contained in [191]-[192] as follows:

7. [97]

   On the question of damages, the primary judge accepted the expert opinion of Mr Samuel, a forensic accountant, that at the time it was acquired by Maradaca, the BRS shareholding had a value of “nil”: at [215]. This assessment, however, was based upon assumptions that were not made good by the evidence, namely that Ms Kaliviotis would not have proceeded at all had she known of certain non-disclosed matters (evidence she had originally given by affidavit but which was partly abandoned in evidence in chief and to the extent it remained her evidence she was skilfully but fairly cross-examined out of it) such that there was no willing but not anxious buyer of the shares in BRS as at the transaction date. The assessment was also based upon an assumption the Maradaca/ELB was not aware of Optus’ threats to cancel the Master Services Agreement if there was a change in control. This assumption, too, was contrary to the facts.

8. [98]

   The primary judge assessed damages at [226] as follows:

9. [99]

   The primary judge apportioned this verdict severally between the cross-defendants as reflected in the orders set out at [17] above. His Honour rejected a claim by Mr Wormald and Wirra Wirra to the effect that responsibility for the loss should be borne by Messrs Barrett and Moran on the basis that they had taken a more active role in negotiations with Ms Kaliviotis. The reasoning on the apportionment question was in essence contained in [232]-[235] of the primary judgment as follows:

10. [100]

    It should also be noted that the primary judge rejected the submission that Maradaca/ELB’s damages should be reduced to nil for contributory negligence under s 236(1) of the Australian Consumer Law.

11. [101]

    Although in light of his Honour’s conclusions on misleading or deceptive conduct, it was not strictly necessary to deal with a breach of warranty claim under the SSA, the primary judge held at [237(k)-(n)] that:

12. [102]

    His Honour said at [239] that the “essential point is that the plaintiffs’ failure to disclose the existence, terms, implementation and currency of the Optus Term Sheet and MOU rendered information in the Due Diligence Material inaccurate in material respects, and misleading, in the context of the Share Sale Agreement entered on 23 January 2015.”

Grounds of appeal

1. [103]

   Wirra Wirra and Mr Wormald challenged the primary judge’s conclusions on misleading or deceptive conduct, causation, contribution, loss and damage and apportionment between the cross-defendants, and the conclusions on the breach of warranty claim. The core attack on the central finding of misleading or deceptive conduct was contained in appeal grounds 2-5 as follows:

2. [104]

   The “cross-appeal” of Messrs Barrett and Moran (see [18] above) materially replicated the grounds in Wirra Wirra and Mr Wormald’s appeal other than those concerned with apportionment as between the cross-defendants.

3. [105]

   Maradaca/ELB also filed a Notice of Contention, with ground 1 relevantly as follows:

4. [106]

   Maradaca/ELB contended that, had one or more of the matters referred to in (b)-(e) above been disclosed, they would not have entered into the contractual arrangements on 23 and 28 January 2015 to acquire the shares in BRS.

Consideration

1. [107]

   In Fraser v NRMA Holdings Limited (1995) 55 FCR 452 at 467 (Fraser v NRMA), the Full Court of the Federal Court said in the context of s 52 of the Trade Practices Act 1974 (Cth), that:

2. [108]

   Whilst this proposition is elementary, in a case such as the present where the way it was ultimately put changed quite significantly from the way it was originally pleaded, the evidence led may be deficient or inadequate to demonstrate a case that has developed or been refined as a trial progresses. In this context, the well-known dictum of Handley JA in Commercial Union Assurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418 (Ferrcom) may come into play, acknowledging always that hypothetical, counterfactual evidence given after the event must be closely scrutinised: see, for example, Permanent Trustee Australia Ltd v FAI General Insurance Company Ltd (in liq) (2003) 214 CLR 514; [2003] HCA 25 at [29]; Rosenberg v Percival (2001) 205 CLR 434; [2001] HCA 18 at [155] and [214]; and Ellis v Wallsend District Hospital (1989) 17 NSWLR 553 at 560, 581.

3. [109]

   In Ferrcom, Handley JA expressed the view that the Court should not draw inferences favourable to a party when no attempt was made to prove them by direct evidence and, in particular, when no relevant questions were asked of the witness. His Honour continued (at 418) by saying that he could see no reason why the principles in Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8:

4. [110]

   The failure to lead evidence as to why non-disclosed evidence was material (and the failure to ask questions in relation to the subject matter of the non-disclosed matters at the time) was treated as significant in DCT Projects Pty Limited v Champion Homes Sales Pty Limited [2016] NSWCA 117 at [136].

5. [111]

   Key propositions to emerge from the High Court’s important decision in Miller include the following:

6. [112]

   None of these propositions is inconsistent with the observations of Gleeson CJ in Lam set out at [87] above, which remains an important authority in this context. Lam has been regularly followed and applied: see, for example, Street v Luna Park Sydney Pty Ltd (2009) 223 FLR 245; [2009] NSWSC 1 at [179]; G&M Borg P/L v New South Wales Dairy Corp [2003] NSWSC 382 at [34]; Williams v Commonwealth Bank of Australia [1999] NSWCA 345 at [119]; Oscty Pty Ltd v Ufford Holdings Pty Ltd (1989) NSW ConvR 55-494; BHP Billiton Olympic Dam Corporation Pty Ltd v Bluestone Apartments Pty Ltd (No 2) [2013] SASC 133 at [21]; Donne Place Pty Ltd v Conan Pty Ltd [2005] QCA 481 at [43]; First Mineral Resources Pty Ltd v WMC Resources Ltd [2000] WASC 309 at [17]; Hayle Holdings Pty Ltd v Australian Technology Group Ltd [2000] FCA 1242 at [327] and [370]; Australia & New Zealand Banking Group Ltd v Pham [1999] VSC 503 at [87] and [176]; Australian Competition and Consumer Commission v CC (NSW) Pty Ltd (No 8) (1999) 92 FCR 375; [1999] FCA 954 at [208]; and Des Forges v Wright [1996] 2 NZLR 758 at 764.

7. [113]

   Of similar effect to Gleeson CJ’s observations in Lam are those of Macfarlan JA, with whom Beazley ACJ and Payne JA agreed, in Jewelsnloo Pty Ltd v Sengos [2016] NSWCA 309 at [86] (Jewelsnloo):

8. [114]

   More recently, in Nadinic v Cheryl Drinkwater as trustee for the Cheryl Drinkwater Trust [2020] NSWCA 2, Barrett AJA, with whom Meagher and Leeming JJA agreed, observed at [40] that:

9. [115]

   As to commercial context, the sage observations of McDougall J in Watpac Constructions (NSW) Pty Limited v Charter Hall Funds Management Limited [2017] NSWSC 865 at [173] are also of relevance:

10. [116]

    Reference should also be made to the decision of the Full Court of the Federal Court in Poulet Frais Pty Ltd v The Silver Fox Company Pty Ltd (as trustee for the Baker Family Trust) (2005) 220 ALR 211; [2005] FCAFC 131 where it was observed, in the context of a discussion of causation, that:

11. [117]

    Although these observations were made in the context of a consideration of causation and reliance, the existence of clauses such as cll 9.3 and 9.4 of the SSA (see [70]-[71] above) may provide important context, especially in a commercial setting, against which a question as to whether silence amounts to misleading or deceptive conduct may be assessed: see Butcher v Lachlan Elder Realty Pty Limited (2004) 218 CLR 592; [2004] HCA 60 at [150]- [153]; Jewelsnloo at [63].

12. [118]

    On the question of causation in the context of misleading or deceptive conduct, the following statement by Santow JA in Havyn Pty Ltd v Webster [2005] NSWCA 182 at [116(c)] (Havyn) remains a valuable summary:

13. [119]

    In the same case, Santow JA observed at [116(i)] that an unreasonable failure to take care for one’s own interests is relevant only insofar as it is the operative cause of a severable part of the loss to which the contravention did not materially contribute. In that sense, a plaintiff’s conduct must be so dominant in the causal chain as to be properly regarded as the real or effective cause of the loss claimed: see Argy v Blunts & Lane Cove Real Estate Pty Ltd (t/as Blunts of Lane Cove) (1990) 26 FCR 112 at 138; Havyn at [116(f)].

14. [120]

    In considering the primary judge’s findings, although his Honour accepted Ms Kaliviotis’ account of the 19 January 2015 conversation, this is not a case in my opinion where the “glaringly improbable” standard of appellate review is engaged: cf White Constructions Pty Ltd v PBS Holdings Pty Ltd [2020] NSWCA 277 at [103], [138] and [155]. The terms of the primary judge’s findings as to what was said in that conversation are not under challenge. Rather, the challenge is as to whether or not the conversation, as found by the primary judge, had the character of supplying an assurance or assurances to Ms Kaliviotis of the various kinds described at [93] above.

15. [121]

    The inquiry prompted by this matter, at least as concerns the objective characterisation of conduct as misleading or deceptive, turns on an analysis of the words used. In this context, the standard of review is more akin to that set out in Lee v Lee (2019) 266 CLR 129; [2019] HCA 28 and Warren v Coombes (1979) 142 CLR 531 at 551; [1979] HCA 9. In other words, this Court, in reviewing the primary judge’s characterisation of conduct, including his Honour’s interpretation as to what emerged from the 19 January 2015 telephone conversation, is in as good a position as the primary judge to decide on the proper inference to be drawn from facts which are undisputed or which, having been disputed, are established by the primary judge’s findings.

16. [122]

    I take as a starting point the question of the proper characterisation of the 19 January 2015 telephone conversation between Mr Barrett and Ms Kaliviotis and, in particular, whether it involved any of the varying assurances which the primary judge said it gave rise to, whether expressly or implicitly: see [93] above. I do not consider that it did and that the primary judge, with the greatest of respect, erred in his conclusion to the contrary. This conclusion coloured the balance of his analysis, and warrants appellate intervention. My reasons for this are as follows.

17. [123]

    First, no express assurances were given. Rather, there was an air of desperation to Mr Barrett’s overture – “The sale to Optus is falling through. They were meant to pay us money but are mucking us around and haven’t done so … We need to finalise it quickly … We don’t really have the time. I don’t want Optus to know that the sale is going through.” The statement that $200,000 would be set aside from the sale price “to deal with any problems” was neither a statement that there were no problems nor that there were problems having a value of $200,000 but, rather, was an acknowledgment that there could be problems, and $200,000 was what the Majority Shareholders would be prepared to set aside to deal with any such problems. As submitted in reply on Mr Wormald’s behalf, the conversation proceeded on the assumption that things may well have changed, but the circumstances did not permit inquiry into the materiality of any such changes.

18. [124]

    Secondly, contrary to the primary judge’s observations at [176] and [177] that Ms Kaliviotis was given “comfort” and an “assurance” that “not much had changed” since her first offer was rejected, she had been told that Optus had not paid the company money that it was meant to pay BRS and was “mucking” it around. This statement must be understood in the context of Ms Kaliviotis’ earlier knowledge as to BRS’s heavy reliance on Optus and very poor cashflow/overdraft position, which would and could only have been exacerbated by the company being “mucked around” by Optus: see, for example, [26], [31] and [32] above. Moreover, the urgency to the request and the need for speed, only reinforced by the follow up telephone conversation the following day (see [63] above), suggested a rapidly deteriorating and vulnerable and/or volatile position.

19. [125]

    Thirdly, contrary to [169] of the primary judgment, there was no assurance that “there was no need to do due diligence”; rather, the representation was that there was no time to do so. The reason that there was no time to do so was the urgency of the situation. In light of what Ms Kaliviotis knew from her pre-5 December 2014 due diligence, including in relation to BRS’s cashflow and overdraft, combined with what she had learnt about Optus “mucking [BRS] around” and not making payments, the urgency fairly obviously had to do with the company’s financial position.

20. [126]

    Fourthly, as to the suggestion at [196] and [230] of the primary judgment that there was an assurance that “there had been no material change of circumstances”, there was nothing of the kind. Apart from the fact that the language of the conversation was far removed from this characterisation, no such assurance was sought or given, and the giving of any such assurance would have been quite inconsistent with the offer to pay $200,000 into escrow under what became the Side Letter.

21. [127]

    Fifthly, the SSA did contain cll 9.3 and 9.4 (referred to at [70]-[71] above) which are inconsistent with an assurance having been given and which also provide some context for the case based upon misleading or deceptive conduct by silence. Moreover, and of real significance, was the fact that warranty claims under the SSA were, to Maradaca/ELB’s knowledge, capped at 15% of the purchase price: see cl 9.5(b)(i)(B). This is inconsistent with any subsisting expectation of being informed of matters, the failure to disclose which would generate a liability to pay damages to the value of, or indeed exceeding the purchase price under, the SSA.

22. [128]

    There is force in the submission advanced on behalf of Mr Wormald that Mr Barrett:

23. [129]

    For these reasons, the primary judge was, with respect, wrong to characterise the 19 January 2015 telephone conversation between Mr Barrett and Ms Kaliviotis as involving the varying assurances he ascribed to it. There is no doubt that that characterisation influenced and pervaded his Honour’s reasoning process.

24. [130]

    Moreover, far from any “reasonable expectation” arising that Ms Kaliviotis would be informed of matters, to use the non-statutory language associated with Demagogue, the refusal to allow or entertain further due diligence operated as a negativing of any expectation that may otherwise have existed, reasonable or otherwise. With the request for further due diligence declined, it was “buyer-beware”, subject to the $200,000 that had been proffered by Mr Barrett in the 19 January 2015 telephone conversation “to deal with any problems”.

25. [131]

    As noted at [86] above, as ultimately advanced, Maradaca/ELB’s case was one of misleading or deceptive conduct by silence although, as I have observed, there is no doubt that the primary judge’s ultimate conclusions were influenced by his take on the 19 January 2015 conversation. Focussing, however, on the case of misleading or deceptive conduct by silence, a number of important points must be made.

26. [132]

    First, as the authorities surveyed disclose, context is extremely important. The context included the sophistication and risk appetite of the purchaser, here represented by Ms Kaliviotis, and the commercial context of the arrangement. The context was a commercial negotiation between sophisticated arms-length parties. Ms Kaliviotis knew that BRS’ financial position was precarious and depended on its major customer, Optus. Ms Kaliviotis knew that BRS had recently agreed to a sale to Optus, their major customer, but that the sale was falling through and BRS was alleging in that context that Optus had failed to pay BRS a substantial sum due to it. Mr Kaliviotis knew that BRS were anxious for a quick sale. Such was the urgency that the existing sale documents that had been prepared in November 2014 were to be used, even though Ms Kaliviotis had nominated a new purchaser for the BRS shares. In context, Ms Kaliviotis plainly knew that BRS would likely go into liquidation if a sale was not achieved very quickly. Ms Kaliviotis had asked to conduct further due diligence but was told on 19 January 2015 that there would be no due diligence afforded in respect of the period since the earlier offer was rejected on 5 December 2014.

27. [133]

    Secondly, as also noted above, as at 5 December 2014, Ms Kaliviotis and Maradaca/ELB had been told that:

28. [134]

    In this context, the primary judge’s statement at [212] that:

29. [135]

    Thirdly, Ms Kaliviotis and Maradaca/ELB had been prepared to invest $1.35 million and assume BRS’s liability under its CBA facility, notwithstanding this knowledge as at 5 December 2014. She had also been advised on or around 21 October 2014 that that “come November the company would exceed its overdraft of one million dollars” and “that the company was going to continue to exceed its overdraft until at least March 2015”: see [26] above.

30. [136]

    Fourthly, by the time of execution of the SSA, Ms Kaliviotis and Maradaca/ELB must be taken to have known that:

31. [137]

    Fifthly, Ms Kaliviotis was an experienced businesswoman who had formed a strong view as to the value to her companies of the transaction and, notwithstanding the unqualified warnings she had been given on 25 November 2014, nonetheless, as the primary judge held at [30], had such confidence in her ability to work constructively with Optus that, in December 2014, she accepted a risk that, if her group acquired BRS, “Optus might terminate the MSA and entice BRS employees to join its staff.”

32. [138]

    Sixthly, irrespective of whether or not the 19 January 2015 telephone conversation is characterised as involving an assurance or not, Maradaca/ELB had secured what was effectively a $200,000 buffer to its acquisition. That amounted to almost 15% of the purchase price which incidentally in effect gave Maradaca/ELB a fund to substantially secure the maximum cap for breach of warranties under cl 9.3 of the SSA.

33. [139]

    Contrary to the primary judge’s conclusion, I am not satisfied that Maradaca/ELB established that there was misleading or deceptive conduct by silence, or by a combination of silence and some assurance given to Ms Kaliviotis in the 19 January 2015 telephone conversation. Nor am I satisfied that Maradaca/ELB established that any loss or damage sustained by them was caused by any misleading or deceptive conduct for which either the Majority Shareholders or Wirra Wirra were responsible.

34. [140]

    The primary judge focussed on the matters set out in [183]-[187] of his judgment, reproduced at [94] above, to reach his conclusion that there had been misleading or deceptive conduct by silence. The “reasonable expectation” identified by the primary judge at [183] as arising from the specific disclosures on 25 November 2014 was that:

35. [141]

    As to (a), Maradaca had the benefit of an express warranty under cl 2.1(a) of Sch 2 to the SSA that the execution, delivery and performance by each seller of his or its obligations under the SSA would not constitute a breach of any obligation or cause or result in a default under any agreement. Why, with the benefit of such an explicit warranty, there would be an expectation of being informed of a matter inconsistent with this warranty, is not apparent. There would be no such expectation because the risk had already been addressed in the specific terms of the parties’ contract.

36. [142]

    As to what the primary judge described at [184] as the non-disclosure of the risk that Optus might seek to enforce by injunctive relief its contractual entitlement to exclusivity in ongoing negotiations for acquisition of BRS, any such negotiations ex hypothesi would not have been ongoing had the transaction with Maradaca been consummated.

37. [143]

    Ms Kaliviotis, moreover, did not give evidence to the effect that, had she known that Optus had an exclusivity clause in the Term Sheet or as part of its negotiating arrangements with BRS, she would not have gone ahead with the acquisition or gone ahead with it but at a lower price. This raises at least two possibilities: first, that she did in fact know of the matters on which the primary judge fastened as amounting to non-disclosures or that, even if she did not know some or all of these matters, that would not have made a difference to her decision to go ahead with the acquisition. Certainly, in line with Ferrcom, no favourable inference should be drawn in Ms Kaliviotis’ favour in this regard.

38. [144]

    As to (b), the supposed reasonable expectation that any development after 5 December 2014 which would materially change the nature of, or increase, the risks disclosed in paragraphs 1 and 2 of the email dated 25 November 2014 would be disclosed, it is equally difficult to understand how or why any such expectation would have arisen, especially in circumstances where a request for further due diligence was expressly rebuffed. This point also provides an answer to the matters sought to be raised under the notice of contention.

39. [145]

    Furthermore, I respectfully disagree with the primary judge’s assessment at [187] that, between 5 December 2014 and 23 January 2015 when the SSA was executed, there was a material change in the nature of, and increase in, the risks disclosed in paragraphs 1 and 2 of the email dated 25 November 2014. Those risks, it will be recalled, were unqualified and profound, namely that:

40. [146]

    As to causation, the SSA was a transaction which carried significant risks which Ms Kaliviotis was confident could be negotiated and managed. The risk which she was prepared to take in early December 2014 was not materially different to that which she was prepared to assume 6 weeks later in circumstances where she had been told that negotiations with Optus were failing and she was offered a $200,000 form of insurance. She accepted this risk in the course of a telephone conversation which, on her own account, could only have taken less than a minute. She did not ask any specific questions as to the level of the overdraft she was to assume liability for, or the amount of cash at hand. She did not ask why matters had become so urgent and pressing. That was either because the answer to that question must have been obvious to her based upon her previous knowledge and understanding of BRS and its finances, or because she was prepared to take the risk she did.

41. [147]

    It is also to be observed that the risks of the transaction she was prepared to take did not materialise for a considerable period of time. BRS continued to interact with Optus for a reasonable period of time, BRS continued to trade and not insignificant tax benefits were secured. The level of overdraft at the time of the SSA, moreover, was $880,000, rather less than had been projected in earlier and disclosed cashflow forecasts.

42. [148]

    The primary judge’s finding on causation and reliance was underpinned by his Honour’s conclusion that an assurance had been given in the 19 January 2015 telephone conversation. For the reasons given above, I would reject that characterisation and also reject the primary judge’s finding of causation.

43. [149]

    The claim of misleading or deceptive conduct was in some respects advanced defensively after the Majority Shareholders had sought to recover the Escrow Funds. Had Maradaca/ELB and Ms Kaliviotis in truth been misled when control was assumed of BRS, one might have expected a claim of misleading or deceptive conduct far more quickly than it emerged. One might also have expected the 19 January 2015 conversation to form a centrepiece in the pleading had it been understood and relied upon by Ms Kaliviotis as some form of assurance. Although it obviously formed part of her affidavit evidence, it did not feature in the cross-claim which she verified.

44. [150]

    At the end of the day, I accept the submission advanced on behalf of Mr Wormald that was amply supported by evidentiary references to the cross-examination of Ms Kaliviotis that:

45. [151]

    Any loss that was sustained was sustained, as a matter of common sense causation, not by any misleading or deceptive conduct, but by a calculated risk undertaken by an experienced commercial participant.

46. [152]

    Ground 17 of the notice of appeal complained that the finding of the primary judge that the failure of the appellants to disclose the existence, terms, implementation and currency of the Optus Term Sheet and MOU rendered the Due Diligence Material inaccurate in material respects, and misleading, such as to constitute a breach of warranty pursuant to cl. 15.2 of Sch. 2 and cl. 8.1 of the SSA. At the trial, Maradaca/ELB accepted that if they did not succeed on the misleading and deceptive conduct claim they were likely to fail on the warranty claim.

47. [153]

    Ground 18 of the notice of appeal, which dealt with the timing of the making of the warranty claim, was not pressed.

48. [154]

    In this Court, virtually no attention was paid to the breach of warranty claim. In the respondent’s written submissions, no doubt reflecting the approach taken at trial, ground 17 of the notice of appeal and the warranty claim was not specifically mentioned. Whilst a proposed cross-appeal addressing a new breach of warranty claim was circulated on 30 October 2020 (together with written submissions in support of filing that proposed cross-appeal out of time), the application was abandoned on 2 November 2020, the morning of the hearing of the appeal.

49. [155]

    On the hearing of the appeal, Mr Free SC for the first and second appellants submitted that:

50. [156]

    Other than to indicate that the breach of warranty case which succeeded below was not abandoned, Mr Pike SC, for Maradaca/ELB did not address the separate warranty claim at all in his oral address on the appeal.

51. [157]

    In these circumstances and given the way the matter was run at first instance and on appeal where the success of the claim depended on establishing non-disclosure, it is not necessary to deal any further with the breach of warranty claim.

52. [158]

    These reasons are sufficient to dispose of the appeals and the notice of contention. Given the conclusions reached I have considered whether in accordance with Kuru v State of New South Wales (2008) 236 CLR 1; [2008] HCA 26 at [12] I should deal on a contingent basis with the issues of contributory negligence, damages and apportionment of damages. I have concluded that I should not. It is neither necessary nor efficient to do so: see Boensch v Pascoe (2019) 94 ALJR 112; [2019] HCA 49 at [7]-[8]

53. [159]

    The detailed attack made upon the primary judge’s assessment that the company had a nil value at the time of the acquisition, a conclusion that was driven by incorrect assumptions that the forensic accountant, Mr Samuel, called on behalf of Maradaca/ELB, was asked to make (see [98] above), raises issues about which detailed findings would need to be made, contrary to my principal conclusion that causation was not established. There are also issues about the value of BRS in the years after its acquisition by Maradaca/ELB where a substantial profit was achieved and the extent to which that evidence should be taken into account: Kizbeau Pty Ltd v W.G. and B. Pty Ltd (1995) 184 CLR 28; [1995] HCA 4. Findings about apportionment of damages are even more problematic as they depend upon both findings about causation and damages, contrary to my principal conclusions.

Orders

1. [160]

   I propose the following orders:

   1. (1)

      Appeal and cross-appeal allowed.

   2. (2)

      Judgments of 24 April 2020 and 8 May 2020 and the orders made on 8 May 2020 of the Court below be set aside.

   3. (3)

      An order that the first respondent pay the second appellant $114,639.00 and interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW).

   4. (4)

      An order that the first respondent pay the first cross-appellant $30,289.00 and interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW).

   5. (5)

      An order that the first respondent pay the second cross-appellant $55,072.00 and interest pursuant to s 100 of the Civil Procedure Act 2005 (NSW).

   6. (6)

      An order that the Further Amended Statement of Cross-Claim be dismissed with costs.

   7. (7)

      The first and second respondents pay the appellants’ and cross-appellants’ costs.

2. [161]

   PAYNE JA: I agree with Bell P.