FEDERAL COURT OF AUSTRALIA

North East Equity Pty Ltd v Proud Nominees Pty Ltd [2012] FCAFC 1

THE COURT ORDERS THAT:

1.    The appeal is dismissed.

2.    The appellant pay the respondents’ costs of and incidental to the appeal.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011

REASONS FOR JUDGMENT

THE COURT

Background

The Principal Proceeding and the Principal Judgment

1    On 18 October 2002, the appellant (described in these reasons either as the appellant or “North East Equity”) and the first respondent (described as “Proud Machinery”) entered into a contract by which the appellant agreed to pay Proud Machinery $3 million for the purchase and installation of new equipment so as to modernise the appellant’s carrot processing plant at Wattleup, south of Fremantle in Western Australia. The carrot processing plant had been purchased by the appellant in September 1998. It had previously been operated by the Sumich Group. Receivers, however, had been appointed to the companies in that Group.

2    The contract comprised the letters and other documents described at [59] of the reasons in support of the primary judge’s first decision (the “principal judgment”) in North East Equity Pty Ltd v Proud Nominees Pty Ltd (No. 2) [2008] FCA 1189. The new equipment to be supplied by Proud Machinery was to include nine chilling “tanks” or “bunkers” manufactured by a Belgium company, Bruynooghe, which had developed a processing system using tanks for the water movement of carrots as a processing method (see [39] of the principal judgment). The new line was to operate so as to be reasonably fit to achieve the ability to sort and grade carrots into eight distinct streams of size by width (or girth) and length with each stream being conveyed into one of nine hydro-cooling (chilling) tanks (with one of the nine operating as a spare tank) to be chilled before being packed at a core temperature of not more than 5°C. Some equipment was to be provided by a German company, Gillenkirch, a manufacturer of packing equipment and Newtec, a manufacturer of weighing equipment. The new equipment was installed in March 2003. Disputes arose as to the performance characteristics of the plant in operation.

3    In the principal proceeding arising out of those disputes, the appellant contended that the various performance failures reflected breaches of terms of the contract. In addition, the appellant contended that it had been induced to enter into the contract in reliance upon representations made on behalf of Proud Machinery as to, in the main, particular future matters and those representations were made in circumstances which gave rise to contraventions of s 52 and s 53(c) of the Trade Practices Act 1974 (Cth). The appellant contended that but for reliance upon the representations it would not have entered into the contract and thus no transaction with Proud Machinery would have arisen. The appellant claimed damages against the first respondent for breach of contract and sought relief against Proud Machinery and its principal, Mr David Proud, arising out of the contended contraventions of ss 52 and 53(c). Claims were also made against both respondents on the footing of contended negligent misstatement.

4    The primary judge dismissed the appellant’s claims.

5    The primary judge made findings as to the terms of the contract and found that none of those terms had been breached. The primary judge also found that any economic loss said to have been suffered by the appellant, was not caused by reason of any alleged deficiency in the equipment supplied and installed under the contract.

6    As to the representations relied upon by the appellant, the primary judge at [343] observed that the terms of the contract agreed between the parties (as found) provided a sound basis upon which to assess “what representations were conveyed by Proud Machinery and Mr Proud, on which [the appellant] relied”. At [344], the primary judge observed:

Where experienced business people have concluded an agreement, that contract will normally provide a very good starting point, and often an equally good finish, in ascertaining what terms and representations were made which caused the parties to proceed as they did. That is the approach I consider to [be] appropriate here, having considered all of the evidence. In other words, I am satisfied that [the appellant], through Mr Tana [the Managing Director of the appellant], proceeded in its relationship with Proud Machinery, and Mr Proud, as if there were a contract on foot between them and that Mr Tana understood that its terms were, in effect, representations; as did Proud Machinery and Mr Proud.

                                [emphasis added]

The findings of the primary judge

7    At [345], the primary judge set out a summary of the findings on the pleaded contractual terms, and the representations said to engage ss 52 and 53(c) of the Trade Practices Act. At [87] of the principal judgment, the primary judge found that at the time of entry into the contract:

… there was a term or a representation that the new line would have the capacity to process and pack at a rate of production per operating hour of 18.75 tonnes in terms of final pack out on the pallet. This later reduced to 17.55 tonnes, once Mr Tana deleted the handline.

8    As to that finding at [87] concerning the “pack out rate per hour”, the primary judge at [345] said:

… I am not satisfied that this was incorrect or misleading or deceptive. The new line had that capacity. And, by operating a split shift, the new line had the capacity to achieve a pack out in excess of 150 or, later (after the handline was deleted), 140.4 tonnes in eight working hour.

                                [emphasis added]

9    The references at [87] and [345] to a handline is a reference to a part of the former equipment making up the carrot processing plant which was retained and relocated as part of the new processing plant. The removal of the handline in early 2003 had the effect of reducing production capacity from 18.75 tonnes for each operating hour to 17.55 tonnes.

10    As to the terms and representations relating to “temperature”, the primary judge set out the pleading of those matters at [66](b) and (c); [67](h); and, [102](iii) and (v) of the principal judgment. At [345](2), the primary judge, as to those matters so pleaded, found representations (also terms of the contract) that:

… the new line would, first, be designed so as to be reasonably fit to achieve:

(b)    the ability to process farm fresh carrots at field temperatures; and

(c)    the core temperature of packed carrots to be not more than 5°C;

and secondly,

(h)    achieve a guaranteed maximum 5°C core temperature for [the appellant’s] carrots;

(iii)    have hydro-cooling tanks capable of producing constant product output; and

(v)    be capable of controlling the temperature of the carrots.

11    See also [95] and [121] of the principal judgment.

12    As to the temperature representations, the primary judge found at [345](2), “I am not satisfied that the new line did not have these capacities if operated correctly” [emphasis added].

13    See also [101] as to the grading “purpose” communicated to Proud Machinery by the appellant and [112] and [113] as to (d), (ii) and (iv) quoted below at [14]. The specific findings, however, as to the temperature and grading representations are those set out at [10] and [14] of these reasons.

14    As to the terms and representations relating to “grading”, the primary judge set out the pleading of those matters at [66](d) and [102](ii) and (iv) of the principal judgment. At [345](3), the primary judge, as to those matters so pleaded, found representations (also terms) that:

… the new line would, first, be designed so as to be reasonably fit to achieve:

(d)    the ability to sort and grade carrots into eight distinct streams of size and length grades;

and secondly,

(ii)    have nine hydro-cooling tanks which would allow one of those tanks for each length or size grade and provide the opportunity to have a spare tank;

(iv)    provide quality length sizing for three separate lengths.

15    As to the grading representations, the primary judge at [345](3) found:

… I am not satisfied that the length graders (there being no complaint about the width or girth graders) were not reasonably fit for the purpose of providing quality length sizing in accordance with what both parties understood were their inherent limitations. I am not satisfied that the new line was not reasonably fit for the purpose of having the ability to sort and grade carrots into eight different streams of length and size. I am satisfied that the hydrocooling tanks conformed with representation (ii).

                                [emphasis added]

Other findings

16    The primary judge also made findings in relation to pleaded representations that the new line would achieve an increase in efficiency of labour use, and increase production while reducing the man hours required to achieve such production (the “efficiency” representations), and representations that the new line would greatly reduce damage to carrots and wastage (the “reduction in damage” representations). As to the efficiency representations, the primary judge found at [345](4), “I am satisfied that these were correct” and as to the reduction in damage representation, the primary judge found at [345](5), “I am not satisfied that this was incorrect, misleading or deceptive”.

17    As to reliance, the primary judge said this at [146]:

As a matter of common sense, each of the representations that I have found was made in the course of the negotiations for a significant transaction in trade or commerce. Moreover, each representation was calculated to, and I find did, induce Mr Tana to decide, on behalf of [the appellant] to proceed to enter into the contract. There was no serious dispute that [the appellant] relied on any representations which would be found. By entering into a contract to define their legal relationship, [the appellant] and Proud Machinery selected an agreed expression of the promises that one was making to the other in relation to the new plant. The standard of performance of the new plant was a matter of considerable significance in the contractual relationship.

18    And at [147], the primary judge said this:

I find that Mr Tana would not have signed the contractual documents unless he was satisfied that they correctly expressed the standard of performance that he had agreed, with Mr Proud, would be required of the new plant.

19    At [346], the primary judge observed that the appellant had also pleaded that the representations, as pleaded, were made by Proud Machinery and Mr Proud, “(b) as to future matters, thus engaging s 51A of the Trade Practices Act”. At [346], the primary judge further observed in a conclusionary way: “On the findings I have made, it is not necessary to consider these claims”.

The first appeal

20    North East Equity appealed from the orders of the primary judge (the “first appeal”) dismissing the claims, relying ultimately on 11 of the 12 grounds of appeal, ground 4 not being pressed. At [5], [6] and [7] respectively of the reasons for judgment of the Full Court, the Court describes the findings of the primary judge concerning the representations as to the pack out rate per hour, temperature and grading: North East Equity Pty Ltd v Proud Nominees Pty Ltd [2010] FCAFC 60 per Sundberg, Siopis and Greenwood JJ. The appellant accepts that those paragraphs accurately describe the scope of the primary judge’s findings on those matters.

21    It is not necessary to set out in these reasons the content of grounds 1, 2, 3, 5, 6, 8 or 9 of the first appeal. The subject matter, however, of each of the pressed 11 grounds concerned, respectively, these matters:

1.    representations that the new line would have the capacity to perform each of the identified represented separate functions together in any combination;

2.    (including ground 8), an attack upon the primary judge’s finding as to the content of the respondents’ representation as to the packing capacity of the new line;

3.    an attack upon the primary judge’s finding that the capacity of the existing brush washes was only 15 tonnes per hour thereby limiting the ability of the new line to achieve the represented capacity within a single eight hour period;

4.    (not pressed);

5.    a contention that the primary judge erred in failing to find that the respondents’ representation that the new line would achieve and guarantee a pack out temperature of less than 5°C at the represented capacity was misleading or deceptive;

6.    an attack upon the primary judge’s finding that Mr Tana had seen length graders in operation in Belgium prior to purchasing the new line and that the limitations of length graders would have been apparent to Mr Tana;

7.    issues in relation to the operation of s 51A of the Trade Practices Act;

8.    (see 2 above);

9.    an attack upon the primary judge’s finding that tests conducted in November 2003 demonstrated that the new line was capable of achieving the represented capacity;

10.    a failure to give adequate reasons for the decision;

11.    (including ground 12) the primary judge’s assessment of damages.

22    As to the matters the subject of grounds 1, 2, 3, 5, 6, 8 and 9, the Full Court dismissed each ground of appeal. Grounds 7 and 10 and grounds 11 and 12 require further examination in order to place the present appeal in context. Having regard to those four grounds, the Full Court allowed the appeal; set aside the Orders of the primary judge as to dismissal of the proceeding and costs and remitted the proceeding to the primary judge for:

(a)    the formulation of reasons for his conclusion that s 51A of the Trade Practices Act 1974 (Cth) did not assist the appellant; and

(b)    further consideration of the question of damages in the light of the Court’s reasons.

23    Other consequential orders were made by the Court.

Ground 7 of the first appeal concerning s 51A of the Trade Practices Act

24    The Full Court at [25] observed that ground 7 was at the forefront of the first appeal. The Court noted that it was common ground between the parties that each of the pleaded representations (apart from a pleaded representation that Proud Machinery and Mr Proud were possessed of sufficient relevant knowledge, skill and experience to design, procure and install the new line – para 9(a) of the Further Re-Amended Statement of Claim (FRSOC)) were representations as to future matters. At para 14 of the FRSOC the appellant pleaded the character of the representations as going to future matters and pleaded that “North East Equity will rely upon s 51A of the [Trade Practice Act]”.

25    At para 17 of the FRSOC, the appellant pleaded that the representations were false (a contention the appellant failed to make good before the primary judge) and at para 18, the appellant pleaded that the conduct of Proud Machinery in making the representations was misleading or deceptive conduct or conduct likely to mislead or deceive in contravention of s 52.

26    At para 14 of the FRSOC, the appellant pleaded reliance on s 51A in a “rolled-up” way. The appellant did not plead an absence of reasonable grounds on the part of Proud Machinery in making the representations. Nor did the respondents plead that they had reasonable grounds for making the representations. However, the respondents were given leave consequent upon an interlocutory ruling (after the appellant’s opening at trial) to answer the rolled-up pleading of s 51A by relying upon a document described as “Respondents’ Reasonable Grounds” to support a contention that they had reasonable grounds “for the purposes of s 51A(2)”. That document identifies ten factors said to demonstrate reasonable grounds.

The accepted “lacuna”

27    In the first appeal, the Full Court noted at [27] the correctness of the appellant’s contention that the primary judge did not address whether the respondents had reasonable grounds for making the representations. The primary judge found it unnecessary (at [346]) to do so having regard to the findings his Honour had made and thus the primary judge did not address each of the factors recited in the respondents’ “Reasonable Grounds” document. The Full Court at [37] noted that the respondents, in the first appeal, accepted that the primary judge’s failure to deal with the evidence going to reasonable grounds (and the appellant’s reliance on s 51A) gave rise to the following “lacuna”.

28    Section 51A(2) imposes an evidential burden on the respondents to adduce evidence on the issue of whether there were reasonable grounds for making the representations. No persuasive burden (onus) falls upon the respondents to prove that they had reasonable grounds: Australian Competition and Consumer Commission v Universal Sports Challenge [2002] FCA 1276; Fubilian Catering Services Ltd v Compass Group (Australia) Pty Ltd [2007] FCA 1205; McGrath v Australian Naturalcare Products Pty Ltd (2008) 165 FCR 230.

29    At [33], the Full Court observed that the relationship between the burden cast upon the respondents to adduce evidence of reasonable grounds, and the dispositive burden upon the appellant, once the respondents had adduced evidence of reasonable grounds, was important in the present case. When relying upon s 51A(1), taken alone, to establish a contravention of s 52, two integers must be satisfied by an applicant. The first is that the representation relied upon must be a representation with respect to a future matter, and the second is that the representor did not have reasonable grounds for making the representation.

30    However, the question of whether a respondent had, at the time of making the representation as to the future matter, reasonable grounds for making it, is particularly illuminated by the knowledge, understanding, or reasoning of the respondent. Section 51A(2) therefore casts an evidential burden on the respondent to adduce evidence on that issue, that is, some evidence ([33], first Full Court decision) of reasonable grounds for making the representation, failing which the deeming effect of s 51A(2) is engaged thus making it unnecessary for the applicant to prove the second integer under s 51A(1) in order to establish a contravention of s 52. Once evidence is adduced by a respondent in discharge of the evidential burden, the applicant must satisfy the dispositive burden of showing that the respondent did not have reasonable grounds for making the representation.

The examination required by s 51A

31    Accordingly, the primary judge was required to start with each future matter representation, as found, and then examine (and find) whether the respondents had adduced evidence in discharge of the evidential burden under s 51A(2). If they had done so, the primary judge was then required to find whether the appellant had established the second integer of s 51A(1). If the respondents had not adduced evidence to the contrary (thus failing to discharge the evidential burden) the primary judge would not then be required to make findings concerning evidence going to the second integer under s 51A(1), as the deeming effect of s 51A(2) is then engaged.

32    It is no answer to the stepped analysis required in that part of the appellant’s case reliant on s 51A to say that because the representations also constituted terms of the relevant contract and a finding of no breach is made, or the representations either were found to have come true, or the Court could not be satisfied that the new line did not have the relevant capacities as represented, it then becomes unnecessary to even consider a claim reliant upon s 51A as a pathway to misleading conduct and thus a contravention of s 52.

33    The lacuna accepted by the respondents in the first appeal was that the primary judge did not expressly consider as part of his Honour’s exposed reasons, the stepped analysis made necessary by s 51A. Because the primary judge’s interlocutory ruling revealed a correct understanding of the analysis required by s 51A, the conclusion that it became unnecessary to consider s 51A in light of the earlier findings might have suggested an implicit conclusion that the respondents had discharged the evidential burden and the appellant had failed to discharge the ultimate dispositive burden. However, the respondents accepted in the first appeal that the exposed reasons of the primary judge did not reveal such an inferential explanation, thus contributing to the lacuna in the reasoning.

34    Two further things can be said about a case (in part at least) based on reliance upon representations as to future matters which are found to have come to pass (and thus found not to be false) or not shown not to have come to pass (and thus not shown to be false). First, such findings concerning the later events might give rise to an inference (if properly addressed in the reasons in the context of the evidence) that the representor had reasonable grounds at the time of making the representations, for making them. Second, in light of such findings, the appellant may not have suffered any loss by conduct in contravention of s 52.

35    In the first appeal, the respondents contended that the answer to the conceded lacuna in the primary judge’s reasoning was the finding that the appellant had not established loss or damage.

36    That finding was said to be correct and ought not to be disturbed.

The Full Court’s consideration of the primary judge’s assessment of damages

37    In the first appeal, the Full Court then considered whether the primary judge’s reasons exposed any error in the assessment of loss and damage. Since the reasons revealed error in failing to address the merits of the alternative approach to the date for determining the true value of the new line in the hands of the appellant; a failure to bring to account the additional power costs in the damages calculation; and inappropriate treatment of notional benefits and notional expenses, the orders of the primary judge dismissing the application were set aside and the matter remitted to the primary judge to formulate reasons for the conclusion that s 51A did not assist the appellant and for further consideration of the question of damages in light of the Full Court’s reasons: (see [23] of these reasons).

38    In analysing the question of whether the primary judge erred in fact or in law in assessing whether the appellant had suffered loss or damage by conduct of the respondents in contravention of s 52 for the purposes of s 82, the Full Court simply assumed (for the sake of the damages analysis as to contended error) that each representation, as found, constituted a contravention of s 52 having regard to the lacuna in the reasons. At [122] the Full Court said that the question “should be answered on the footing that each of the representations as found constitutes a contravention of s 52, having regard to the lacuna described earlier” [emphasis added].

39    The Full Court did not “find” that each representation as found by the primary judge constituted a contravention of s 52. The examination of the contended errors in the damages assessment recognised: the primary judge’s finding that the representations induced the appellant to enter the contract; the appellant relied upon the representations; and, the appellant would not have signed the contract and entered into the related arrangements but for the representations, thus giving rise to the “no transaction” methodology in the approach to the loss and damage calculation.

40    In the result, the Full Court in the first appeal accepted (as did the respondents) that the primary judge had failed to address the s 51A case in terms of the required stepped analysis, and the exposed reasons did not reveal the reasoning for the conclusion at [346] that it was not necessary to do so (grounds 7 and 10).

The present appeal

41    On 6 July 2010 the primary judge, on remitter, dismissed the appellant’s claim (order 2) and made consequential orders as to costs (orders 3 and 4). The appellant appeals from orders 2, 3 and 4 and relies upon three grounds:

(1)    the primary judge is said to have erred in fact and in law in finding that the respondents had adduced “evidence to the contrary” for the purposes of s 51A(2) and erred in failing to find that the respondents had failed to do so;

(2)    the primary judge is said to have erred in fact and in law in finding that the appellant had failed to prove that the respondents did not have reasonable grounds for making the representations for the purposes of s 51A(1);

(3)    by reason of the errors reflected in grounds 1 and 2, the primary judge erred, it is said, in failing to address the issue of damages the subject of the remitter and ought to have found loss and damage suffered by the appellant in particular alternative amounts.

42    Counsel for the appellant describes the “heart of the appeal” (T 24, ln 46; T 25, ln 3) in the following terms: in determining whether the respondents adduced evidence of reasonable grounds for making the temperature and grading representations in discharge of the evidential burden, and, if they had, whether the appellant had discharged the persuasive onus, the primary judge essentially relied, impermissibly, on two factors. First, the extent to which the events the subject matter of the representations came to pass, as evidence of reasonable grounds held at the time of the making of the representations. Second, the general experience of Mr Proud disconnected from any relationship between Mr Proud’s particular experience of relevantly comparable processing equipment and the content of the representations made as to temperature and grading, as found.

The relevance of the outcome

43    The appellant accepts (T 14, ln 15) that the outcome (evidence of events as they came to pass, as found) can be relevant as to whether there were reasonable grounds held by the representor for making the representations. However, two things are said to be important in this case. First, an important distinction must be kept in mind concerning the findings as to whether the temperature and grading representations “came to pass”. The appellant says that no affirmative finding to that effect was made. Unlike the “pack out rate” finding which was the subject of an affirmative finding that the new line “had that capacity” (see [7] and [8] of these reasons), the findings concerning the temperature and grading representations were made in the less affirmative terms of the primary judge not being satisfied that the new line did not have the temperature control capacity as represented; not being satisfied that the length graders were not reasonably fit for the purpose of providing quality length sizing; and, not being satisfied that the new line was not reasonably fit for sorting and grading carrots into eight different streams of length and size.

44    It follows, it is said, that in determining whether any inference arises that a representor had reasonable grounds for making the representations as to the future matters (when made) no such inference should be drawn when the finding as to the later events is something less than an affirmative finding that the events came to pass, irrespective of whether, in any event, an affirmative finding supports such an inference (a proposition which the appellant contests). The appellant says that the primary judge, while continuing to recognise the importance of the distinction, gave further voice to the error which gave rise to the orders in the first appeal, by maintaining as a frame of reference for determining the first matter remitted for further consideration, the notion that “the proof of the pudding was in the eating” (see [4] of the remitter reasons North East Equity Pty Ltd v Proud Nominees Pty Ltd (No 4) [2010] FCA 700). At [10] of the remitter reasons, the primary judge noted his earlier view that “the claim under s 51A was hopeless on my findings because the new line performed (or was not shown not to have performed) to the standard of the representations I have found”.

The relevance of Mr Proud’s experience

45    The appellant says that the important second factor to be recognised in this case is the “connection point”. In other words, the appellant says that it is not enough for Mr Proud to say: “I’m a very experienced person and although I can’t say how any of my experience bears on my particular predictions, the fact is they came true and that means I have reasonable grounds for making them, when I made them” (see T 14, lns 19-21). The appellant says the findings are not to the effect that the predictions came true and thus no inference arises. Secondly, the appellant says that the evidence of Mr Proud’s experience is too abstracted or too disconnected to discharge the evidential burden.

The appellant’s risk analysis approach to s 51A in conjunction with s 52

46    Before examining the primary judge’s consideration of the remitted matters, the appellant’s contention, based upon first principles, as to the proper approach to s 51A ought to be noted.

47    The appellant contends that s 51A (taken together with s 52) engages a “risk analysis” in this sense. When a person makes a representation as to a future matter so as to induce another to rely upon it to act in a particular way (in this case, to enter into a transaction that would not otherwise have been entered into) a properly understood part of the representation is that there are reasonable grounds for what was represented which has the effect (at the time of making the representation) of reducing the addressee’s risk of reliance or the risk of investing in the transaction because the addressee is induced to believe, put simply, that the person “knows what they are talking about”. It therefore remains misleading, it is said, for a person to make such a risk mitigation representation in circumstances where they do not have reasonable grounds for so making the representation irrespective of whether ultimately the predicted matter comes to pass.

48    Later events revealing the accuracy of the statements can not dilute, it is said, the making of an implied misleading representation that reasonable grounds subsisted for making the predictions (in this case as to the temperature and grading capacities of the new line). The addressee suffers loss, it is said, by entering the transaction in a false view of the risks which would not have been assumed had the addressee not relied upon the implied representation as to reasonable grounds. The essence of these propositions is that the addressee is induced to act in reliance on the reasonable grounds representation before the outcome is known. More often than not the absence of reasonable grounds means that the prediction does not come to pass. However, a party is also entitled, it is said, “not to be exposed to the risk inherent in the absence of reasonable grounds (T 18, lns 46-47) … even if that which is promised happens” (T 19, ln 3).

The difficulties with such an approach

49    There are four problems with such an approach.

50    First, as conceded, there is no authority for such a construction.

51    Second, so far as this case is concerned, such a proposition was not the case advanced at trial. The case was not grounded upon reliance on a representation (implied or otherwise) as to Mr Proud’s reasonable belief in making the temperature and grading representations (inducing a false assumption in the appellant of the risks associated with investing in the transaction) but rather, based on reliance upon the temperature and grading capacity representations for the new line which were said to be false and did not eventuate thus causing loss by reason of that conduct. The appellant was not able to make that case good at trial.

52    Thirdly, while in a particular context (according to the evidence) the making of a representation as to a future matter may carry with it a representation as to a present fact concerning the representor’s reasonable grounds for making a representation, ordinarily s 51A, once relied upon in relation to a representation as to a future matter, engages in a particular way so as to require proof by the applicant of no reasonable grounds in the representor and aids the proof of that fact by effecting a deeming of the fact should the representor fail to adduce some evidence to the contrary. In the face of such evidence, the dispositive burden required by s 51A(1) must be discharged by the applicant.

53    Fourthly, in circumstances where the future matter is shown to have come to pass or the applicant has failed to satisfy the Court that the representation has not come to pass, the passage of the later events is relevant, taken in context in determining whether, on the balance of probabilities, having regard to all the evidence, the representor, when making the representations, had reasonable grounds for making them.

The primary judge’s consideration of the remitted matters

The formulation of reasons for his conclusion that s 51A of the Trade Practices Act 1974 (Cth) did not assist the appellant

54    At [3] of the remitter reasons (North East Equity Pty Ltd v Proud Nominees Pty Ltd No 4) [2010] FCA 700) the primary judge observes that the representations, as found, were either correct or not proved to have been misleading, in fact, in contravention of s 52; and, the new line worked or was not proved not to have worked as represented. At [4] in a conclusionary way, the primary judge explained the connection between that outcome, as found, and the evidence adduced by the respondents. The primary judge observed that, “Proud Machinery and Mr Proud had successfully used their knowledge, skill and experience to procure and supervise the installation of the new line so that it performed as they had represented it would (or which [the appellant] had failed to prove did not so perform)”.

55    In doing so, the primary judge rightly regarded the actual performance of the new line (which was found to be a function of the successful deployment of the respondents’ knowledge, skill and experience), in a manner consistent with the representations as to its future performance, as found, as a matter that suggested the respondents had reasonable grounds for making the representations. The “outcome” was not treated as a self-executing answer to the question of whether the respondents had discharged the evidential burden or whether, dispositively, on the ultimate question, the appellant had shown that the respondents did not have reasonable grounds for making the representations at the time. The outcome was rightly taken into account in examining the source and basis for the predicted outcome. At [4] the primary judge observed that Mr Proud was the “controlling mind and principal” of the first respondent when the representations were made and by that time Mr Proud:

… had had years of experience in recommending equipment of the kind in the new line to his customers and arranging with suppliers to procure and install the equipment so that it would operate, and be reasonably fit for, the purpose for which it was installed. He was familiar with the nature and quality of his suppliers’ products and had recently been involved in procuring and supervising the installation of a similar, but not identical, plant for Kalfresh in Queensland.

                                [emphasis added]

56    These references concern the respondents’ reliance upon evidence of Mr Proud’s education and training (see Mr Proud’s witness statement at AB, Part C, Vol 2, p 925 ff); Mr Proud’s knowledge of previous grading facilities at the Sumich Group’s operation; and, Mr Proud’s experience (by July 2002; see pp 970-973, Proud witness statement) of the new automated carrot processing line installed for Kalfresh including the experience of the Bruynooghe tank system.

57    The primary judge at [4] regarded working conformity of the new line with the representations (as to its capacities), as consistent with the basis for making the representations. It is in this sense only that the primary judge describes the relationship between the working experience of the new line, as found, and the predictions giving rise to the working experience as “the proof of the pudding is in the eating”.

58    In taking account of the outcome and examining the source and basis for the representations giving rise to the outcome, the primary judge did not regard a distinction between a representation shown to have come to pass and a representation not shown not to have come to pass, as giving rise to differential treatment so far as relevant to the discharge of the evidential burden and, if so discharged, the discharge of the persuasive burden.

The suggestion of reasonable grounds

59    The proper approach is that every case, including this case, turns on its own facts.

60    A representation shown to have come true concerning the performance capacities of an integrated $3M carrot processing plant (with the particular complexities described in the evidence), logically suggests (absent a coincidence) that making the representation as to those future working capacities was soundly based, that is to say, based on reasonable grounds. A representation not shown not to be true concerning such capacities (that is, not shown to be incorrect) also logically suggests that making the representation as to those future working capacities was soundly based. The logical suggestion of a sound basis for the prediction implicit in the actual working experience of the temperature and grading capacities of the new line, was tested by the primary judge against the evidence of the experience of Mr Proud over many years in recommending like equipment; making arrangements with suppliers of like equipment to ensure operational performance consistent with the supply purpose; and, Mr Proud’s experience in connection with the installation of the Kalfresh plant in Queensland.

The relevance of Mr Proud’s experience

61    The primary judge did not regard Mr Proud’s experience as disconnected from the new line requirements. The findings as to the working operation of the new line, based on Mr Proud’s predictions, suggested that Mr Proud’s experience was directly relevant. In any event, the primary judge accepted the evidence that the knowledge, skill and experience of the respondents provided a sound basis for the representations, strengthening or supporting, a basis for an inference of reasonable grounds since the findings (that the representations were either shown to have come to pass or not shown not to have come to pass) were consistent with the pleaded factors relied upon by the respondents and recited at [6] of the primary judge’s reasons.

62    Although ground 1 of the appeal addresses contended error in the primary judge’s reasoning that the respondents had discharged the evidential burden, and ground 2 addresses contended error in the reasoning that the appellant had failed to discharge the persuasive burden, the appellant relies upon the same particulars (a) to (g) for both grounds.

63    By particular (a), the appellant says that the primary judge wrongly regarded the fact that the operation of the new line had not been shown to depart from the representations, as evidence of, or as establishing, the existence of reasonable grounds for making the representations. As already indicated, the primary judge did not regard the findings concerning the representations (relevantly now the temperature and grading representations) as determinative of the discharge of the evidential burden or the ultimate persuasive burden. The findings were a relevant consideration in the sense already described.

The particulars of grounds 1 and 2

64    At [11] of the remitter reasons, the primary judge makes plain that he proposed to explain why the respondents had adduced evidence to the contrary and why the appellant had failed to discharge the dispositive onus of proof. The primary judge did not simply turn to the outcome as found. In particulars (b) to (g), the appellant says the primary judge erred in these respects: (b) the experience of Mr Proud did not provide a reasonable ground nor a basis for an inference of a reasonable ground and, in any event, Mr Proud disclaimed any relevant expertise in the design of the new line; (c) each of the matters recited in the respondents’ Reasonable Grounds document were at too high a level of generality; (d) the Bruynooghe system installed at the Kalfresh plant in Queensland had a capacity that was substantially different from the requirements for the new line with the result that the respondents’ knowledge and experience of that system would not provide reasonable grounds for making the temperature and grading representations concerning the new line; (e) there was no evidence of how the respondents took into account the capacity differences between the Bruynooghe Kalfresh processing system and the new line; (f) no evidence was adduced of the basis for the 5°C temperature representation and the representation went beyond Mr North’s advice as the evidence demonstrated; and (g) the proposed installation of nine hydro-cooler tanks did not provide a reasonable basis for representing that one tank for each length or size of carrots to be graded would be available; such a conclusion was against the weight of evidence; and, no basis was shown as to how the respondents took into account the different requirements of the Kalfresh installation and the new line.

65    These contentions are supported by the submissions of the appellant referred to at [75] of these reasons.

The reasonable grounds relied upon by the respondents

66    The facts as recited in the respondents’ document said to give rise to reasonable grounds were these (see [6] of remitter reasons):

(1)    Mr Proud's statement of his education and training.

(2)    Previous dealings between Proud Machinery and Mr Proud on the one hand, and North East Equity and Mr Tana on the other.

(3)    Mr Proud’s knowledge of previous grading facilities at North East Equity’s Sumich operation.

(4)    Mr Proud’s knowledge and experience of a Bruynooghe system installed at the Kalfresh plant in Queensland.

(5)    Mr Proud’s dealings with the Bruynooghe factory in Belgium.

(6)    Mr Proud’s knowledge of the equipment at Sumich to be incorporated in the new production line.

(7)    Mr Proud’s activities as agent for Bruynooghe and another manufacturer of packaging equipment used in the new production line, Gillenkirch, and his knowledge of the capacities of the equipment supplied by each of those manufacturers.

(8)    Matter disclosed in the two letters said to contain the representations sued on, namely, his and Proud Machinery’s letters of 29 July 2002 and 30 September 2002.

(9)    The respondents also rely on the contents of one paragraph in Mr Tana’s evidence in which he said:

I agree that these machines may have this capacity in isolation, however when incorporated into a complex system they are not necessarily able to run at these capacities all of the time. The key to the actual operating capacity of each machine in the new line is the feed to it. The maximum design capacity is irrelevant unless the line can provide sufficient feed to the machine.

(10)    Lastly, the respondents relied on the responsive statement of an expert called by the North East Equity, Mr David Harris, in the sense that he was asked to review Mr Proud’s statement, and to ‘provide any comment that he may have as to the matters raised’.”

67    The primary judge well understood that the respondents were relying on all of these matters recited at [6] of the remitter reasons.

68    The question to be addressed in determining the merits of grounds 1 and 2 is whether the primary judge’s reliance upon findings made in the principal reasons (which are not the subject of challenge by reason of the first appeal decision) or reliance upon evidence adduced at trial (the subject of findings in the second reasons) provides a basis for concluding that the respondents had discharged the evidential burden and the appellant had failed to discharge the ultimate onus of proof.

The matters considered by the primary judge in addition to those described at [54] to [58] of these reasons

69    The primary judge reached his conclusions on those issues having regard to these additional matters. At [15], the primary judge noted that Mr Proud and Mr North had worked together in providing the new refrigeration system to Kalfresh. In the principal reasons, the primary judge found that Mr Proud had worked with Mr North in circumstances where Mr North had been responsible for the design of the refrigeration system for the Kalfresh plant and its control software. That plant also had nine cooling tanks. The primary judge recognised, and thus took into account, the evidence that the Kalfresh plant was different from the new line and would operate in different circumstances to the new line. At [16], the primary judge concluded that at the time the representations were made,

… Mr Proud’s past experience with Mr North and Kalfresh in the design and provision of a refrigeration system in a carrot processing plant, as well as Mr Proud’s general experience, his awareness of the old line, the characteristics of the equipment to be used in the new line and competence of its suppliers, including Bruynooghe, were sufficient evidence to cast the onus imposed by s 51A(1) on North East Equity.

70    The primary judge therefore was satisfied that the conjunction of Mr Proud’s particular experience with Mr North and Kalfresh in the design and delivery of a refrigeration system in a carrot processing plant, together with Mr Proud’s general experience (as earlier described) and his awareness of both the old line and the particular characteristics of the equipment to be used in the new line (and Mr Proud’s understanding of the “competence” of the suppliers of the equipment) provided sufficient evidence to discharge the evidentiary burden of adducing evidence to the contrary. These factors identified by the primary judge represent applied knowledge and experience of Mr Proud directly relevant to a refrigeration system in another carrot processing plant (in conjunction with Mr North); applied knowledge of the old line; and, applied knowledge of the particular characteristics of the equipment to be utilised. The primary judge recognised that the Kalfresh plant was not the same as the proposed new line, and that the operational circumstances would be different including as to the capacity of the new line as compared with the Kalfresh plant.

71    The primary judge was expressly conscious of the extent of Mr North’s evidence (see [143], [144] and [145] of the principal reasons concerning Mr North’s role in the Kalfresh plant; the visit to Wattleup; and Mr North’s design of the refrigeration components for the Wattleup site; and [15] of the reasons on remitter, cross-referenced to the principal reasons).

72    However, these differential factors did not render Mr Proud’s experience disconnected or too abstracted from the representations as found. The applied experience of old and new equipment, Mr Proud’s general experience, his knowledge of suppliers’ past reliability, and direct experience of another carrot processing facility (although conformed to its particular capacity requirements) gave Mr Proud a basis for representing that the new line was reasonably capable of processing carrots consistent with the temperature representation. These conclusions were plainly open on the evidence. The primary judge did not err in coming to the conclusion that he reached.

73    The primary judge at [17] noted that the finding as to the working capacity of the plant (that is, that he was not satisfied that the refrigeration system did not operate in accordance with the 5°C temperature representation) “suggested” that the skill and judgment Mr Proud “had exercised” in recommending the particular equipment to be used in the new line and in making the temperature representations, had a reasonable basis when made. The primary judge used that “suggestion” in the context of Mr Proud’s applied experience, skill and judgment to conclude at [17] that Mr Proud had a reasonable basis for making the temperature representation when made.

74    The primary judge noted at [18] that “in [the] context” of the relationship between the finding as to the working capacity of the new plant and the finding of a consistency of that outcome with the skill and judgment Mr Proud had exercised in making the temperature representation, the new line confronted operational constraints materially different from those anticipated at the time the representations were made. At [19], the primary judge noted that, after the test of 18 November 2003, Mr Tana (on behalf of the appellant) identified four substantive complaints, none of which concerned refrigeration issues. Having regard to the preceding matters, and the lack of any criticism arising out of the test concerning refrigeration issues, the primary judge concluded that the appellant had failed to prove, on the balance of probabilities, that the respondents did not have reasonable grounds for making the temperature representation when made. That conclusion was open and was supported by the evidence.

75    However, the appellant says the primary judge’s findings fail to have regard to the following matters arising on the evidence: the experience of Mr Proud is too general to constitute reasonable grounds; Mr Proud was found to have no particular expertise regarding refrigeration; nothing learnt by Mr Proud from inspecting the Bruyooghe tank system relevant to the new line was identified; the refrigeration equipment was ultimately designed by Mr North (the first repondent’s refrigeration contractor); the Bruyooghe bunker system was adapted for Australian conditions and the first such system was installed at Kalfresh; the Kalfresh processing system, according to the evidence of Mr Schubring, Mr Hunter and Mr North exhibited many differences from the new line (nine differences of which are identified) such that experience of that carrot processing system could not provide reasonable grounds for the temperature prediction and Mr Proud did not give evidence that he was astute to the differences; Mr Proud’s production projections do not contain a calculation or basis for the temperature representation; nor did Mr Proud’s awareness of the old line provide reasonable grounds for the temperature representation; nothing in any of these factors could constitute reasonable grounds for the temperature representation; and, inferences that Mr Proud had exercised skill and judgment when making the temperature representation could not be drawn from the fact, as found, that the Court was not satisfied that the refrigeration system did not operate to its represented capacity.

76    As to these matters, Mr Proud’s experience was both applied experience directly related to the requirements (including refrigeration and grading) for an automated carrot processing facility, and general experience of relevant matters. At [94] of the principal reasons, the primary judge observes that while Mr Proud “was not a refrigeration engineer and had no particular expertise in that regard”, the appellant “understood” that Mr Proud was “relying on others, particularly Mr North” in making the representation in the letter of 30 September 2002 [the temperature representation].

77    See also [45] of the principal judgment (as to the reference to temperature of pack out contained in the letter of 30 September 2002 and the reference to Gary North); [47] (Proud Machinery’s order response to the 30 September 2002 letter); [79] and [80] (Mr Proud’s experience in food production plants and the relationship between the pack out rate and chilling time); [125]-[129] (concerning Mr Proud’s co-ordination and project management role and his relationship with suppliers); [92], [93] and [95] (giving context to [94]); [120] and [121] (as to Mr Tana’s knowledge of Mr North’s role); and, [143]-[145] (the design of the refrigeration system).

78    Mr Proud and Mr North had had experience of the adapted tank system installed at Kalfresh, and while that system was different and operated in different circumstances (as the primary judge found), direct recent experience of the demands and dynamics of an automated carrot processing plant incorporating a need for refrigeration and grading components, was plainly relevant and expressly relied upon by Mr Proud as part of the basis on which he represented that the new line, as configured, would have the particular temperature and grading capacity. It should also be remembered that the functions of chilling and grading formed part of a whole, a continuous processing system and, in particular, a system designed to achieve a pack out rate for carrots “graded”, “chilled” and “packed” as represented. It was therefore appropriate for the primary judge to have regard to Mr Proud’s experience overall and the reasonable grounds addressed for the representations as to the functionality or capacities of the system as a whole (see [68] of these reasons) in determining whether the respondents had reasonable grounds for making the chilling and grading representations, specifically.

79    While Mr Proud in his witness statement may not have isolated the nine identified differences between the Kalfresh plant and the new line, Mr Proud did not suggest that the two were the same. The Kalfresh experience was relied upon simply as informative relevant experience in an analogous (though not the same) carrot processing facility. Although the production projections do not isolate an objective basis for the temperature (or grading) representation, the conjunction of the factors isolated by the primary judge suggest a proper basis for concluding that the respondents discharged the evidential burden of adducing “evidence to the contrary”. As to the forensic use of the outcome finding, the primary judge regarded the outcome as suggestive of reasonable grounds and took that matter into account in the context of the evidence of reasonable grounds identified. The primary judge was correct in using that finding, in context, in that way. The primary judge did not simply say, because the prediction came true (or was not shown not to be true) the representor must be taken to have had reasonable grounds. The primary judge treated the finding as to the outcome as suggestive of reasonable grounds and examined the findings and the evidence, and particularly the relevant experience of Mr Proud and the information he relied upon, to apply the stepped analysis required by s 51A of the Trade Practices Act.

The grading representation

80    As to the grading representation, the primary judge observed that Mr Proud’s evidence was that length graders were “inherently inaccurate”. That is so because, as the experts said, the shape of carrots is variable thus impeding consistent grading. Mr Proud was found to be experienced in food production plants ([79] of the principal reasons). Mr Proud had that view of inherent inconsistency and the primary judge found that Mr Tana also knew that equipment dealing with grading of carrots needed to recognise that such grading was inherently variable. The grading component of the new line comprised equipment manufactured by Bruynooghe. Mr Tana had had discussions with Mr Proud about the Bruynooghe processing system and Mr Tana had seen a DVD presentation made by Mr Proud of the Bruynooghe system in operation at the relatively new Kalfresh plant. Mr Tana knew that Mr Proud had knowledge of the Bruynooghe equipment and that Mr Proud had experience of it in another automated carrot processing plant.

81    Moreover, the primary judge found that an inference arose that Mr Tana had seen the Bruynooghe length graders in operation during Mr Tana’s visit to Belgium when he saw a system in operation similar to that described by Mr Proud in his letter of 29 July 2002 (at [44] of principal judgment). The primary judge found that when Mr Tana was in Belgium on his visit to the Bruynooghe factory (and operational plants) he reported enthusiastically to Mr Webster about the operation of the Bruynooghe equipment. The Full Court in the first appeal dismissed the appellant’s challenge to these findings (at [86]).

82    The relevance of these findings and related matters for present purposes is that it demonstrates the engagement of Mr Proud in the discussion process with Mr Tana concerning the use and operation of the Bruynooghe equipment regarded by Mr Proud and Mr Tana as the source of the relevant equipment for the new line. Plainly, Mr Proud was relying on his knowledge of the Bruynooghe equipment in the course of the discussions leading to the representation; his experience of it at Kalfresh; his knowledge of Bruynooghe as a supplier; and, his knowledge of the Bruynooghe personnel such as Mr Parrein, Mr Seldeslacht and others.

83    The primary judge found that Mr Tana had made his own investigations of the Bruynooghe system. He had acquired a “knowledge and understanding” of the Bruynooghe system ([43], [44] and [329] of the principal judgment). That is not to say that Mr Tana did not rely on the representations of the respondents. The primary judge found that he did so rely. Mr Tana seemed content and enthusiastic after his own investigations as to the capacity of the Bruynooghe equipment to function to the performance level suggested by Mr Proud. Mr Proud’s more extensive knowledge and experience of the Bruynooghe system; the tanks in operation; Bruynooghe’s personnel; and, the experience of the Kalfresh operation, provided a basis for the primary judge’s finding that Mr Proud had a reasonable basis for the representation as to grading.

Conclusion

84    The primary judge did not err in finding that the respondents had adduced evidence of reasonable grounds in discharge of the evidential burden concerning the temperature and grading representations and did not err in finding that the appellant had failed to discharge the persuasive onus.

85    It is therefore not necessary to consider the question of damages, the subject of the second matter remitted to the primary judge.

86    It follows that the appeal must be dismissed with costs.

Associate:

Dated:    19 January 2012