FEDERAL COURT OF AUSTRALIA

Gartner v Ernst & Young (No 2) [2003] FCA 1436

EQUITY – fiduciary relationship – consideration of circumstances in which fiduciary relationship may exist between professional advisers and client

EQUITY – unconscionable conduct – consideration of circumstances in which conduct of professional advisers in relation to client may be unconscionable

PRACTICE & PROCEDURE – amendment of statement of claim – leave sought to include allegations of breach of fiduciary duty and unconscionable conduct – allegations made against professional advisers of applicants in respect of entering into financing arrangement – consideration of circumstances in which professional advisers may owe fiduciary duties to client – whether professional advisers may owe fiduciary duties to client – whether arguable case made out by allegations – consideration of nature of relationship which may give rise to unconscionable conduct on part of professional advisers

Corporations Act 2001 (Cth)

Trade Practices Act 1974 (Cth)

Gartner v Ernst & Young [2003] FCA 152 referred to

Ernst & Young (Reg) v Tynski Pty Ltd [2003] FCAFC 233 referred to

The State of Queensland v J L Holdings Pty Ltd (1997) 189 CLR 146 cited

Banque Commerciale SA En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 applied

General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125 cited

Murex Diagnostics Australia Pty Ltd v Chiron Corporation (1995) 55 FCR 194 referred to

Pancontinental Mining Ltd v Posgold Investments Pty Ltd (1994) 121 ALR 405 referred to

Jenyns v Public Curator (Q) (1953) 90 CLR 113 referred to

Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 applied

Pilmer v Duke Group Limited (In Liquidation) (2001) 207 CLR 165 applied

Breen v Williams (1996) 186 CLR 71 referred to

Commonwealth Bank of Australia v Smith (1991) 102 ALR 453 cited

United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 referred to

Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd [2003] HCA 18; (2003) 197 ALR 153 applied

Blomley v Ryan (1956) 99 CLR 362 referred to

The Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 cited

Bridgewater v Leahy (1998) 194 CLR 457 cited

Barnes v Addy (1874) LR 9 Ch App 244 referred to

Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373 cited

Selangor United Rubber Estates Ltd v Cradock (No.3) [1968] 2 All ER 1073 cited

Rowlandson v National Westminster Bank Ltd [1978] 1 WLR 798 cited

Delvaux v Sociéte Générale pour Favoriser le Développment du Commerce et de l’Industrie en France SA (1992) 4 All ER 161 referred to

Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 applied

MICHAEL JOHN GARTNER, ALICE WINIFRED GARTNER, TYNSKI PTY LIMITED (ACN 008 162 123), NORSBAY PTY LIMITED (ACN 008 205 687), FRESREND PTY LIMITED (ACN 008 174 990), GARTNER FARMS PTY LIMITED (ACN 086 128 880) (SUBJECT TO A DEED OF COMPANY ARRANGEMENT), AUSVINE VITICULTURAL MANAGEMENT PTY LIMITED (ACN 007 184 901) (SUBJECT TO A DEED OF COMPANY ARRANGEMENT), GARTNERS’ VINICULTURE MANAGEMENT PTY LIMITED (ACN 080 534 989), SKYBAY PTY LIMITED (ACN 008 163 782); VAMTOWN PTY LIMITED (ACN 008 061 407) & M J GARTNER PTY LIMITED (ACN 077 644 181) v ERNST & YOUNG, ERNST & YOUNG CORPORATE FINANCE PTY LIMITED (ACN 003 599 844) & NATIONAL AUSTRALIA BANK LIMITED (ACN 004 044 937)

S 189 of 2002

MANSFIELD J

8 DECEMBER 2003

ADELAIDE

REASONS FOR JUDGMENT

THE ORDERS SOUGHT

1                     On 14 March 2003 I refused an application by the first and second respondents (the accountants) for the proceedings by the third to eleventh applicants to be dismissed.  Essentially, the ground of that application was that the directors of the third to eleventh applicants did not have the authority to have instituted the proceedings, receivers and managers having been appointed to each of those companies a few days before the commencement of the proceedings.  See Gartner v Ernst & Young [2003] FCA 152 (the first Gartner judgment).  It was recognised on that application that the statement of claim would require further amendment.  An appeal from that decision was dismissed on 21 October 2003:  Ernst & Young (Reg) v Tynski Pty Ltd [2003] FCAFC 233.

2                     On 31 March 2003 the applicants filed and delivered a further amended statement of claim (the further amended statement of claim).  At a directions hearing on 1 May 2003, a number of issues were ventilated including the adequacy of the allegations in that further amended statement of claim.  As a consequence, the applicants by motion of 15 May 2003 sought leave to file and serve a further amended statement of claim in terms of a document exhibited to the affidavit of James Michael Cudmore sworn on 15 May 2003.  In the course of submissions, senior counsel for the applicants sought to make further minor variations to the exhibited document.  He handed up a one page sheet of variations.  I will call the exhibited document as amended by the one page sheet of variations ‘the proposed statement of claim’.  The second applicant Alice Winifred Gartner (AWG) has also, by motion of 21 May 2003, sought leave to file and serve a separate statement of claim and a separate application.  At present that motion has been brought on her behalf by the solicitors acting for the applicants generally in the proceeding.  I will call that document ‘the AWG proposed statement of claim’.

3                     The first and second respondents (the accountants) and the third respondent (the bank) resist the proposed amendments in significant respects.  Were the existing further amended statement of claim to stand, they would also seek to have significant parts of it struck out.  It is acknowledged by senior counsel for the applicants that the proposed statement of claim reflects the applicants’ final version of the claim as best it can be pleaded, so that if it is not permitted, the corresponding pleadings in the further statement of claim should also be struck out.  The matter will then proceed on the further statement of claim with those deletions. 

THE PROPOSED STATEMENT OF CLAIM

4                     It is convenient first to record a broad overview of the allegations in the proposed statement of claim, leaving aside those parts of it which are contentious.

5                     The first and second applicants carried on a partnership farming business on a property at Coonawarra in the south-east of South Australia.  In 1996, the farming activities were extended to viticulture.  The third to eleventh applicants (the Gartner companies) are all part of what is defined as the “Gartner Family Group” including the first and second applicants and a company called Gartner Wines Pty Ltd (Gartner Wines).  They are all in a general sense under the control of the first applicant.  Each of the Gartner companies are somehow involved in the viticulture industry, again in a general sense for the Gartner Family Group.

6                     By early 2001, the first applicant, on behalf of the Gartner Family Group, was considering the development of a winery.  The proposed vehicle for the project was Gartner Wines.  One option was to acquire an existing winery through a developer, which would then lease it back to Gartner Wines.  It has since May 2001 been the proprietor of certain winery land at Coonawarra, and since June 2000 a separate piece of land called the Bains block.  As a result of contact from an officer of the accountants (the proposed statement of claim treats the first and second respondents in substance as acting together), the accountants were retained by the Gartner Family Group and Gartner Wines to advise about how best to proceed to develop the winery.  The sequence of what occurred between the accountants and the Gartner Family Group is set out in considerable detail. 

7                     The dealings between the accountants and the Gartner Family Group commenced on 15 February 2001.  As a result of contact then made, there were a series of communications which gave rise to representations specified in the proposed statement of claim.  They related generally to the quality and nature of the services which the accountants could and would provide to the Gartner Family Group.  It is not necessary for present purposes to recite in detail the nature of those representations.  They are specified and defined in the statement of claim to include:

·        ‘The first representations’ made at a meeting on 19 February 2001.

·        ‘The second representations’ made in a letter dated 12 March 2001 (following which a retainer as identified in the letter was agreed upon for ‘stage one’).

·        ‘The third representations’ made at a meeting on 3 or 4 May 2001 (including in a document dated 4 May 2001 entitled ‘Business Review of Financing Options’).

·        ‘The fourth representations’ made orally at the same meeting.

·        ‘The fifth representations’ made by letter dated 7 May 2001 (upon which instructions were given to undertake the work identified in that letter in relation to the raising of capital, for the fee specified and with a success fee).

·        ‘The sixth representations’ made by the preparation and distribution (including to the applicants) of a document entitled ‘Finance Submission’ provided to lending institutions including the bank.

8                     In about May 2001, in reliance upon the advice of the accountants, the applicants and Gartner Wines decided that Gartner Wines would not pursue the acquisition of an existing winery, but would itself construct a winery and would secure the necessary finance (including refinance of the existing indebtedness of the first, second and third applicants) for construction of the winery and for working capital through a bank, and would offer as security the assets of the Gartner Family Group.  The decision to expose the assets of the Gartner Family Group by offering them as security for the proposed finance for the winery was made and maintained relying on the advice of the accountants given between May and November 2001 about the best way to move forward with the development of the winery. 

9                     There was then extensive communication over the period June to December 2001 during which the accountants are alleged to have repeated and maintained the first to sixth representations, and to have provided ongoing assurance to the Gartner Family Group as to the feasibility of the proposed financing and the capacity of the Gartner Family Group to accommodate it.

10                  On about 11 October 2001, apparently as a result of consideration of the Finance Submission (and perhaps other communications), the bank presented to the Gartner Family Group a letter of offer to provide certain lending facilities for the purpose of the construction of a winery, for working capital, and to refinance existing facilities available to the partnership of the first and second applicants and to the third applicant.  The finance offered was to be secured by guarantees from each of the members of the Gartner Family Group and by cross-interlocking mortgages and debentures.  I shall call the bank’s offer ‘the Finance Offer’.

11                  At the time of considering the Finance Offer, the Gartner Family Group recognised that the Finance Offer involved a shortfall of $3.3 million on the amount required for the construction of a winery by Gartner Wines and to meet working capital and like needs.  That led to further communications with the accountants.  It is alleged that:

• ‘The seventh representations’ were made by the accountants in late October or early November to the Gartner Family Group that it should not seek to increase the proposed lending by the amount of the shortfall, and that the accountants were confident as a result of communications with the bank that the shortfall would be accommodated by a further lending facility from the bank in early 2002, and the accountants advised the Gartner Family Group to accept the Finance Offer.

12                  It is at this point that the first allegations against the bank are made.  It is alleged that at a meeting in October 2001 the bank also made representations to the Gartner Family Group as to the wisdom of it accepting the Finance Offer, notwithstanding the shortfall.  It was upon those representations, and the representations by the accountants, that it is alleged the Finance Offer was accepted, the financing facilities undertaken, and the guarantees and securities granted, and of course the success fee to the accountants was paid.

13                  On 23 November 2001, Gartner Wines and the Gartner Family Group entered into and then drew down the financing facility with the bank.  The finance provided was in various ways made available to the first, second, third and eleventh applicants, and to Gartner Wines, and was guaranteed by the Gartner companies.  In support of the finance, guarantees were given by each of the applicants and supported by security given to the bank, in the case of the Gartner companies (other than the eleventh applicant) by a debenture granted on 23 November 2001 duly registered pursuant to ss 263 and 265 of the Corporations Act 2001 (Cth) on 3 January 2002.  The eleventh applicant had, for the purpose of its activities as trustee of the MJ Gartner Family Trust pursuant to a trust deed dated 25 July 1997, already granted a debenture to the bank on 31 July 1997, and that debenture became the vehicle by which it supported its guarantee of the financing facility.

14                  The statement of claim next deals with the history of events after November 2001.  The construction of the proposed winery was undertaken with facilities available through the bank, and at the same time the existing liabilities were paid off again through the availability of fresh facilities from the bank.  However, it is alleged, in January 2002 the bank indicated that it would not increase the facility beyond its then current level.  It is alleged that at all times the bank was not prepared to do so, and had withheld from its Melbourne office the fact that there was a shortfall and that there would be a further need for finance.  Consequently, it is alleged that the representations by the bank in the latter part of 2001 were false or misleading, and that the bank acted unconscionably towards the Gartner Family Group.  It is also alleged that, but for that conduct and the bank representations, the Gartner Family Group would not have accepted the Finance Offer and would have proceeded with an alternative proposal.  In February 2002 the bank prevented the further draw-down on the Gartner Wines Farm Management Account to meet winery construction costs.  It is alleged that its conduct was in breach of the terms of the Finance Offer and contrary to its representations.  The bank then proposed alternative financing arrangements to the Gartner Family Group.  In the circumstances, the Gartner Family Group was obliged to accept them.  The variation proposal as accepted was, it is alleged, disadvantageous to the Gartner Family Group compared to the initial Finance Offer. 

15                  The applicants allege that they engaged the accountants to advise them about the proposed winery development, and that they participated in the ‘group financing option’, that is by borrowing from the bank secured by mutual guarantees and by the debentures given by each of the Gartner companies, only by reason of representations made and advice given by the accountants. 

16                  The advice was given negligently, including in advising the Gartner Family Group about dealings with the bank, in assessing critically the accuracy and reliability of information provided to the bank, and in ensuring that the bank was not mislead or under any misunderstanding about the actual and proposed financial situation of Gartner Wines or of the Gartner Family Group.  One allegation is that the duty owed by the accountants to the applicants included the accountants not allowing their own interests in receiving the success fee (in the order of $500,000) in the event of the Finance Offer being accepted conflicting with the best interests of the Gartner Family Group, or conflicting with the performance of the duties of care which are specified.  An alternative plea is that there was implied into the terms of the retainers with the accountants the contractual obligation to take all reasonable care on the part of the accountants towards the Gartner Family Group in the advice given to, and the action taken on behalf of, the Gartner Family Group. 

17                  The applicants further allege that they accepted the Finance Offer proposed by the bank, being aware of the shortfall on projected funding needs, only by reason of representations made and advice given by the accountants and by the bank.  They allege that the representations made were misleading and deceptive, and that the advice given was negligent and in breach of the retainer with the accountants, so the loss they have suffered is recoverable from each.  In addition, as noted, they seek to set aside the various security instruments.  It is not necessary to refer in detail to the representations alleged, or the advice allegedly given.  What is clear is that, if the finance facility agreement as comprised in the Finance Offer or as varied in February 2002 and the various security documents were validly rescinded on 8 August 2002 as claimed, the appointment by the bank of receivers and managers to the Gartner companies on 9 August 2002 was itself without proper foundation and so was invalid. 

18                  The next step in the statement of claim involves the claimed recission.  It is alleged that on 8 August 2002, the first to fifth applicants rescinded the financing facilities and on the subsequent day 9 August 2002 the sixth to eleventh applicants also rescinded those facilities and the guarantees and the security documents.  The respective applicants also on 9 August 2002 lodged a caveat upon each of the secured mortgages and secured titles claiming an interest in equity in the land the subject of each mortgage unencumbered by the mortgage, and an order having the mortgage discharged or set aside.

19                  Thus far the allegations, as pleadings, do not attract particular concern on the part of the accountants or on the part of the bank.  It is the subsequent allegations which give rise to present issues.  Under the heading ‘Relationship between EY/EYCF and the Gartner Family Group’ appear pars 64A to 64F.  Some such allegations appear in the further statement of claim, but they have been substantially amended or supplemented in the proposed statement of claim.

20                  They are in the following terms:

‘64A    In all of their dealings with EY/EYCF as pleaded herein, each of the applicants in their individual capacities and as members of the Gartner Family Group:

64A.1     was inexperienced in understanding and assessing the financial implications of the transactions recommended and proposed by EY/EYCF;

64A.2     was unable to assess the merits of the transactions with NAB as proposed and recommended by EY/EYCF;

64A.3     was, with the exception of M Gartner, wholly uninformed about the implications of the transactions with NAB as proposed and recommended by EY/EYCF;

64A.4     lacked the experience, training and learning to understand and, or, appreciate the risks of the transaction involving the construction upon the winery land of the Winery;

64A.5     was not informed at all, and did not know of the complex and inherently high risk nature of the transaction proposed and recommended by EY/EYCF in relation to the construction of the Winery;

64A.6     in the case of M Gartner and Alice Gartner, had no need to refinance their existing finance facilities;

64A.7     in the case of Tynski, had no need to refinance its existing finance facilities;

64A.8     in the case of each of the applicants, had no need to grant security of their respective assets in favour of NAB to secure the financing of the construction of the Winery.

64A.9     in the case of each of the applicants, did not stand to benefit from the guarantees to be granted in favour of NAB as part of the transactions recommended and proposed by EY/EYCF;

64A.10   in the case of M Gartner, Alice Gartner, the Partnership, Tynski, Norsbay and Fresrend, was the proprietor of interest in the land which was valuable and not at risk of being lost;

64A.11   in the case of Gartner Farms, Ausvine, Gartner Viniculture, Skybay and Vamtown was the owner of profitable, solvent business interests;

64A.12   was, in relation to the transactions recommended and proposed by EY/EYCF with NAB, unable properly to protect and conserve their respective commercial, family and land interests;

64A.13   was unable objectively to assess the merit and, or, level of risk involved in their entering into the transactions with NAB, as proposed and recommended by EY/EYCF, unassisted by the specialised knowledge skill and expertise of EY/EYCF.

64B.     In all of their dealings with the Gartner Family Group as pleaded herein, EY/EYCF were aware of, or had reason to know, the matters pleaded in paragraph 64A.

64C.    In all of the dealings with the Gartner Family Group, and each of the applicants, and as part of the Initial EY/EYCF Retainer and the Further EY/EYCF Retainer, EY and EYCF undertook to the applicants that EY and EYCF would, or alternatively held out to the applicants that EY/EYCF could and would:

64C.1         provide to the Gartner Family Group valuable services with respect to Gartner Wines’ proposal to own and/or operate the Winery;

64C.2         bring a high level of expertise and experience to bear in the performance by them of the due diligence the subject of the Initial EY/EYCF Retainer;

64C.3         ‘ensure the most economically beneficial option is pursued’ by the Gartner Family Group in relation to the development by Gartner Wines of the Winery;

64C.4         fully and properly advise the Gartner Family Group as to whether debt or equity was the most appropriate means of raising capital for the development by Gartner Wines of the Winery;

64C.5         ensure that ‘the funds to be raised will be the most appropriate form of capital’ for the Winery;

64C.6         arrange for Mr Phillip Pledge to lead, in a substantive and not merely nominal sense, the performance by them of their work;

64C.7         advise the Gartner Family Group as to ‘the most effective way to finance the construction’ of the Winery;

64C.8         ‘ensure that Gartner Wines can economically manage its required debt levels’;

64C.9         provide financing options to the Gartner Family Group which were the ‘most beneficial to Gartner Wines’ and ‘designed to help ensure future healthy cash flows’;

64C.10       assess ‘the economic viability of Gartner Wines’;

64C.11       complete ‘a high level analysis of the financial viability of’ the Gartner Family Group;

64C.12       research the wine industry and identify the impact which trends in the industry were likely to have on Gartner Wines into the future;

64C.13       conduct a ‘financial sensitivity analysis’ to determine ‘which variables have the greatest impact on profitability’;

64C.14       establish a ‘worst case’ scenario;

64C.15       determine ‘which financing option meets the needs of M J and A W Gartner and which option offers appropriate levels of risk’;

64C.16       ‘check all the numbers’ and ‘benchmark’ them against another winery for which they acted;

64C.17       ‘look after’ asset protection for entities within the Gartner Family Group;

64C.18       prepare ‘a robust and meritable finance proposal’;

64C.19       exercise all reasonable care, skill and diligence, to the standard to be expected of chartered accountants within a worldwide accounting firm, in respect of the matters in paragraphs 63.1 to paragraph 63.13 hereof;

64C.20       fully and properly advise the Gartner Family Group and, if appropriate, warn the Gartner Family Group of the risks in relation to all their dealings with NAB; and

64C.21       assess critically the accuracy and reliability of all information provided by either EY or EYCF on behalf of the Gartner Family Group.

64D.    Further, as part of, and in furtherance of, the Further EY/EYCF Retainer, EY and EYCF:

64D.1         undertook, on behalf of the Gartner Family Group ‘to proceed with a program to procure Bank financing …’;

64D.2         undertook to pursue funding through Bank financing, on behalf of the Gartner Family Group;

64D.3         agreed to represent the Gartner Family Group exclusively to pursue funding on their behalf;

64D.4         acted, in all dealings with NAB, as the representative and agent of the Gartner Family Group.

64E.    By reason of the matters pleaded in paragraphs 64A-64D EY and EYCF occupied a position and were, and each of them was, in a relationship with the Gartner Family Group;

64E.1         in which EY and EYCF were the agents of the Gartner Family Group in their dealings with NAB;

64E.2         in which the members of the Gartner Family Group reposed their complete trust and confidence in EY/EYCF to act in the best interests of the Gartner Family Group;

64E.3         in which the members of the Gartner Family Group, and each of them, depended upon EY/EYCF acting in their best interest in all their dealings with NAB’

64E.4         in which the members of the Gartner Family Group and each of them placed their complete reliance on the expertise, sophistication and integrity of EY/EYCF;

64E.5         in which EY and EYCF could, and did, guide and influence the decisions and deliberations of the Gartner Family Group in relation to their dealings with NAB;

64E.6         in which EY and EYCF had a special opportunity to exercise a power or discretion to the detriment of the members of the Gartner Family Group;

64E.7         in which the members of the Gartner Family Group were, and each of them was, vulnerable to abuse by EY/EYCF of their position.

64F.    By reason of the matters pleaded in paragraphs 64A-64D EY and EYCF were, and each of them was, under an obligation and owed a duty to the members of the Gartner Family Group:

64F.1         not to allow their interest in receiving the EY success Fee to detract from or affect in a manner disadvantageous to members of the Gartner Family Group the duties and undertakings pleaded in paragraph 64C;

64F.2         not to allow their self interest in maintaining and developing a business relationship with NAB wherby NAB would favour EY/EYCF with business opportunities in consideration of EY/EYCF referring business clients to NAB for banking services to detract from or affect in a manner disadvantageous to members of the Gartner Family Group the duties and undertakings pleaded in paragraph 64C.’

21                  The next section of the statement of claim contains details of the breaches alleged against the accountants in their duties of care.  It is not for present purposes contentious.  Nor is the following section alleging breaches by the accountants of their contractual duties.

22                  There is then under the heading ‘Breach of Fiduciary Duties’ pars 66A to 66D which are challenged.  They read as follows:

‘66A    The EY/EYCF Success Fee which was payable pursuant to the Further EY/EYCF Retainer (as pleaded in paragraph 45):

66A.1         was only payable in the event that the Gartner Family Group accepted the NAB offer and granted the Guarantees, Securities, Mortgages and Debentures;

66A.2         conferred on EY/EYCF a substantial interest which gave rise to a real or substantial possibility that the commercial interest of EY/EYCF would conflict with their duties as pleaded in paragraph 64C;

66A.3         was subject to an implied limitation that the entitlements of EY/EYCF to receive the EY/EYCF Success Fee was conditional on compliance by EY/EYCF of the duties pleaded in paragraph 64C.

66B      At the times when EY/EYCF had their dealings with the Gartner Family Group, EY/EYCF had a relationship with NAB:

66B.1          which involved a business relationship whereby NAB would favour EY/EYCF with business opportunities in consideration of EY/EYCF referring business clients to NAB for banking services;

66B.2          which represented a significant portion of the actual and prospective fees derived by EY/EYCF in the conduct of their business in South Australia;

66B.3          which arose, in part, because Burfield had been recruited by EY/EYCF from NAB;

66B.4          which conferred on EY/EYCF a substantial interest which gave rise to a real or substantial possibility that the commercial interest of EY/EYCF would conflict with their duties as pleaded in paragraph 64C.

66C     Each of EY and EYCF, by making the First to Seventh Representations, by engaging in the Course of Conduct of EY/EYCF and in recommending, or permitting the Gartner Family Group:

(a)                             to accept the NAB Offer;

(b)                             to enter into the Facilities (including the Guarantees and, as the case may be, the Mortgages and Debentures; and

(c)                             receiving the EY/EYCF success fee.

66C.1         were motivated by the fact that they would receive the EY/EYCF Success Fee in the order of $500,000 upon entry by the Gartner Family Group into the transactions of NAB when they would not receive the EY/EYCF Success Fee if the Gartner Family Group did not enter into those transactions;

66C.2         were motivated by the wider business interest in maintaining a business relationship with NAB whereby NAB would favour EY/EYCF with business opportunities in consideration of EY/EYCF referring business clients to NAB for banking services;

66C.3         knew that there was a real and substantial risk to the Gartner Family Group in entering into the transactions with NAB in circumstances where there was a shortfall in the funding necessary to complete the construction of the Winery and that further funding from NAB was not assured;

66C.4         were not motivated by the best interests of the Gartner Family Group;

66C.5         were in breach of the duties pleaded in paragraph 64C which they owed to the Gartner Family Group by reason of the matters pleaded in paragraphs 65 and 66;

66C.6         disregarded the duties pleaded in paragraph 64C which they owed to the Gartner Family Group but instead promoted their self interest in ensuring that they would receive the EY/EYCF Success Fee and in maintaining and developing their business relationship with NAB;

66C.7         failed to inform the Gartner Family Group that EY/EYCF had disregarded the best interests of the Gartner Family Group but were motivated by serving their self interest in circumstances where EY/EYCF knew the Gartner Family Group did not know or believe that EY/EYCF had so disregarded their best interests.

66C.8         Permitted their self-interest in obtaining the EY/EYCF Success Fee and in their ongoing relationship with NAB to override their proper judgment as to what was in the best interests of the Gartner Family Group.

66D.    By reason of the matters pleaded in paragraph 64C, and by reason of the matters pleaded in paragraph 64A-64F (inclusive), paragraphs 65 and 66 EY/EYCF has:

66D.1         acted in breach of fiduciary duties pleaded in paragraph 64F;

66D.2         acted unconscionably.”

23                  The next section of the proposed statement of claim is entirely new.  It is contained in pars 66E to 66L.  It is under the heading of ‘Notice of NAB of breach of fiduciary duties and unconscionable conduct by EY/EYCF’.  It is not necessary to set out those paragraphs in detail.  It is accepted that they will stand or fall with the challenge to pars 64A to 64F and 66A to 66D.  By reason of that knowledge, it is alleged ultimately that the bank in accepting the guarantees, the mortgages and the securities and the debentures engaged in unconscionable conduct.

24                  The next few sections of the statement of claim are under the headings:  Falsity of the First to Seventh Representations and the Course of Conduct of EY/EYCF; Insolvency of Gartner Wines; and Appointment by NAB of receivers managers and administrators.  It is not necessary to refer to those sections. 

25                  Finally, there is a series of allegations of loss and damage.  It is alleged that the Gartner Family Group, which prior to its exposure to the proposed undertaking had net assets exceeding $22 million in value, upon realisation of the various securities by the bank would now have insufficient to fully discharge the amount outstanding to the bank.  The Gartner Family Group would therefore have lost entirely the value of those assets.  It is further alleged that each of the members of the Gartner Family Group has suffered loss and damage by reason of the Sixth to Seventh Representations, the conduct of the accountants, and the bank representations.  Particulars are set out.  They include the loss of certain livestock which have been sold by the bank from the farm property to the detriment of the first and second applicants, and loss by virtue of the appointment of the receivers and managers by the bank as at February 2003 limited only to the costs of receivership.  The respondents’ complaint is that that allegation is vague and embarrassing, because the receivership costs are the only loss suffered.  Thirdly it is alleged that there has been a loss as a result of the granting of the various mortgages and securities, but there is no specificity provided with respect to it.  It is then alleged:

‘Further, the applicants, and each of them have suffered loss by reason of the breach of fiduciary duties and unconscionable conduct of EY/EYCF (as pleaded in paragraph 66D) and the unconscionable conduct of NAB (as pleaded in paragraph 66L) and the Respondents are obliged to account for that loss by provision of equitable compensation.’ 

The respondents’ contention is that the paragraph is vague and embarrassing and cannot stand with the striking out of the earlier paragraphs.

THE CONTENTIONS

26                  Generally, leave to amend a pleading should be permitted provided it can be done without significant prejudice to another party:  The State of Queensland v J L Holdings Pty Ltd (1997) 189 CLR 146.  It is desirable that the pleadings do enable all the issues to be identified and to be determined in the proceeding.

27                  The starting point, therefore, is that the amendment in terms of the proposed statement of claim should be permitted, provided it is adequate in form and content.  The measure of adequacy is by reference to the function of pleadings.  Mason CJ and Gaudron J in Banque Commerciale SA En Liquidation v Akhil Holdings Ltd (1990) 169 CLR 279 at 286 said:

‘The function of pleadings is to state with sufficient clarity the case that must be met … In this way, pleadings serve to ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her and, incidentally, to define the issues for decision.’

28                  The objections to pars 77.1, 77.2 and 77.3 are to be assessed in that context. 

29                  The fundamental opposition of the accountants to pars 64A to 64F and 66A to 66D of the proposed statement of claim is that they do not give rise to a reasonably arguable cause of action on the part of any of the applicants.  It is contended that the test to be applied is less stringent than that to be applied where there is an application to strike out a pleading under O 11 r 16 of the Rules or to dismiss an action or part of an action under O 20 r 2 of the Rules.  I do not accept that.  In my judgment, the test to be applied in deciding whether to permit an amendment where the issue is whether an arguable cause of action is disclosed should be in substance the same as the test applied when determining, under O 11 r 16(a) whether a pleading discloses no reasonable cause of action.  Indeed, the accountants’ written contention uses the very words which appear in O 11 r 16.

30                  As to those words in O 11 r 16, it has been held that the Court should strike out a pleading only in the clearest of cases:  see e.g. General Steel Industries Inc v Commissioner for Railways (NSW) (1964) 112 CLR 125.  In Murex Diagnostics Australia Pty Ltd v Chiron Corporation (1995) 55 FCR 194 at 203, Burchett J said that portions of a statement of claim should be struck out only if they were unarguable, and in ‘plain and obvious’ cases. 

31                  Senior counsel for the applicants said, in relation to complaints about the adequacy of the allegations made, that it is an impossible task to attempt to bring into a pleading every consideration that ultimately will bear upon not only the facts found but the way in which the facts are to be treated for the purposes of determining the adequacy of pleadings.  In particular, he noted that Beaumont J in Pancontinental Mining Ltd v Posgold Investments Pty Ltd (1994) 121 ALR 405 at 414 said:

‘… under the modern system of pleading, the question is not whether the facts pleaded are in themselves sufficient to give rise to a cause of action.  Rather, the question is whether it would be open to the applicant upon the pleadings to prove facts at the trial which would constitute a cause of action.’

32                  It is unclear to me precisely what significance that reference bears to the course of argument.  I think, for present purposes, it is necessary that the pleadings indicate a set of allegations of material facts which, if made out, would arguably be sufficient to result in the cause of action which the applicants allege being made out.  It is a separate and subsequent step to determine whether, if that be the case, the material facts (and particulars) are sufficiently detailed to ensure that the basic requirements of procedural fairness are met so that each of the respondents has the opportunity of knowing the case which is to be presented against it.

33                  In determining whether a reasonably arguable case is pleaded, I bear in mind that the application of equitable principles affecting the conscience of a particular actor requires a precise examination of the particular facts, a scrutiny of the exact relations established between the parties, and the consideration of the mental capacities, processes and idiosyncrasies of the parties.  Legal categories are not necessarily susceptible of clear definition, and the identification of issues of fact is not readily formulated which automatically lead to the adequacy or validity of the claims:  cf Jenyns v Public Curator (Qld) (1953) 90 CLR 113 at 118-119 (Dixon CJ, McTiernan and Kitto JJ).

34                  The content and numbering of relevant paragraphs in the further statement of claim sufficiently corresponds with the content and numbering of the relevant paragraphs in the proposed statement of claim.  It is therefore convenient in the main simply to refer to numbered paragraphs.  The accountants and the bank assert that the following paragraphs of the proposed statement of claim should not be permitted:

1.                Paragraphs 64A to 64F and 66A to 66D as they fail to disclose a reasonably arguable cause of action based upon:

1.1                the existence of a fiduciary duty;

1.2                breach of any relevant fiduciary duty;

1.3                the existence of a special disability and/or knowledge of that disability;

1.4                any unconscionable taking of advantage on the part of EY or EYCF.

3.                  Further, and alternatively, each of pars 64A to 64F and 66A to 66D as they are defective both in form and in substance.

4.                  Paragraphs 66E to 66L as they cannot stand if pars 64A to 64F and 66A to 66D are not permitted. 

5.                  Paragraph 77.1 as it fails to plead any loss.

6.                  Paragraph 77.2 as it is vague and embarrassing in that receivership costs are the only loss pleaded.

7.                  Paragraph 77.3 as it pleads loss was suffered as a result of the granting of securities, and the purported enforcement of the securities by bank, but fails to plead any material facts capable of sustaining that allegation.

8.                  Paragraph 78 as it is vague and embarrassing, and further cannot stand if 64A to 64F and 66A to 66L are not permitted. 

If pars 64A to 64F and 66A to 66D are not permitted, it is contended that pars 2 and 6 of the amended application filed on 31 March 2003 should also be struck out.  Those paragraphs seek against the accountants a declaration that, in making the first representations to the seventh representations, and in their conduct as set out in the further statement of claim, the accountants acted unconscionably towards the applicants and each of them in contravention of s 51A of the Trade Practices Act 1974 (Cth) and secondly that the accountants are liable to pay equitable compensation to the applicants. 

CONSIDERATION

35                  Paragraph 64A of the proposed statement of claim asserts that each of the applicants was inexperienced in understanding and assessing the financial implications of the proposed winery construction and of entering into the finance package with the bank, including the risky nature of the enterprise.  They variously were operating profitable businesses.  In the case of the first, second and third applicants, they had existing financial facilities and in those instances they had no need to refinance those facilities.  In the case of the first, second, third, fourth and fifth respondents, they owned valuable land that was not at risk.  Each is said not to have stood to benefit from the proposed guarantees to the bank, and each had no need to offer security to the bank to secure the financing of the winery.  It alleges they were each unable to ‘properly protect’ their respective interests, or to assess the merit and the risk of entering into or becoming part of the finance facility with the bank under the Finance Offer, without the advice of the accountants.

36                  Paragraph 64B alleges the accountants knew each of those matters, or had reason to know each of those matters.

37                  Paragraph 64C refers to what (it is claimed) the accountants were to do.  The specific subparagraphs express in various emphatic ways the nature and extent of the accountants’ responsibilities.  It is difficult to discern express functions of, or obligations imposed upon, the accountants which would not be the subject of consideration in determining the practical content of the obligation imposed upon the accountants by reason of the contractual duties and the duty of care in tort imposed upon them in relation to the applicants by reason of the pleaded relationship between the applicants and the accountants.  Paragraph 64D also does not go beyond what, in the circumstances earlier alleged in the proposed statement of claim, the accountants were to do for the applicants.  The accountants are said to have been the agents of the Gartner Family Group in the dealings with the bank.

38                  Paragraph 64E attempts to define the relationship between the Gartner Family Group and the accountants beyond that arising in contract or in tort.  Apart from the agency of the accountants in the dealings with the bank, it asserts the reliance upon, and the trust reposed in, the accountants and the exercise of their expertise in the dealings with the bank.  It further alleges that the accountants had ‘a special opportunity to exercise a power or discretion to the detriment of’ the Gartner Family Group and that each member of the Gartner Family Group was ‘vulnerable to’ the accountants abusing their position.

39                  The nub, or conclusion, of that series of pleadings is contained in par 64F.  Apart from the already pleaded contractual and tortious duties and their alleged breach, the claim is that the accountants were obliged not to allow their self interest in receiving the success fee in respect of the financing proposal of the bank, or in securing and enhancing an ongoing relationship with the bank, to detract from the performance of the duties and obligations which (it is claimed) they owed to the Gartner Family Group members.

40                  Apart from par 64F, pars 64A to 64E of the proposed statement of claim might be taken as pleading facts relevant to, and identifying fully, the contractual and tortious duties and obligations owed by the accountants to the applicants. 

41                  However, pars 66A to 66L seem to take the foundation for the liability of the accountants further, and also then to add to a foundation for the liability of the bank.

42                  Paragraph 66A refers to the accountants’ success fee as involving the possibility that the accountants’ commercial interest would conflict with their duties and obligations to the applicants.  I do not think par 66A.3 really adds to the pleading:  if the accountants have breached their duties to the applicants as alleged, and if the Gartner Family Group would not have entered into the Finance Offer but for those breaches of duty, the success fee paid would clearly be recoverable as part of the damages suffered by the applicants.  Paragraph 66B refers to the existing relationship between the accountants and the bank, involving mutual referral of business opportunities, and which also resulted in there being the possibility of the accountants’ commercial interests conflicting with the duties owed to the applicants.

43                  Paragraph 66C asserts that the accountants, in providing the services and advice to the Gartner Family Group, ‘were motivated’ by the prospect of the success fee, and by the prospect of further business referrals from the bank, and ‘were not instructed’ by the best interests of the Gartner Family Group.  The accountants are alleged not simply to have breached their contractual and tortious duties, but to have disregarded those duties by promoting their own self interest and (presumably alternatively) by permitting their self-interest to override their proper professional judgment about what was in the best interests of the Gartner Family Group.  It pleads also that the accountants knew of the real risk to the Gartner Family Group by entering into the financing arrangement despite the shortfall in funding needed to complete the winery, and that the accountants knew the necessary further funding was not assured.  And it pleads the accountants did not inform the Gartner Family Group that the accountants had disregarded their best interests to pursue the selfish commercial interests of the accountants.

44                  Those are serious allegations to make.  It is not, at this stage in the proceedings, the function of the Court to adjudicate upon them.  The parties accept that for present purposes the Court should proceed on the basis that those allegations may be made out.  In doing so, the Court should not be taken in any sense as indicating that the applicants can or may prove those allegations.

45                  Paragraph 66C is at the heart of the fresh allegations in the proposed statement of claim.  It leads to the assertion in par 66D that, by reason of those matters pleaded, the accountants:

(1)        acted in breach of the fiduciary duties alleged in par 64F;  and

(2)        acted unconscionably.

46                  The balance of the substantively fresh allegations (pars 66E to 66L) concern the claim that the bank too, in all the circumstances, acted unconscionably.  Consideration of that aspect of the proposed statement of claim can be deferred until it is determined if the fresh allegations against the accountants are to be permitted. 

(a)        Is the existence of a fiduciary duty on the part of the accountants reasonably arguable?

47                  In Hospital Products Limited v United States Surgical Corporation (1984) 156 CLR 41 (Hospital Products) at 96 – 97 Mason J (as he then was) said:

‘The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf Phipps v Boardman [1967] 2 AC 46 at 127), viz., trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners.  The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense.  The relationship between the parties is therefore one which gives the fiduciary a special opportunity to exercise the power or discretion to the detriment of that other person who is accordingly vulnerable to abuse by the fiduciary of his position.  The expressions “for”, “on behalf of”, and “in the interests of” signify that the fiduciary acts in a “representative” character in the exercise of his responsibility, to adopt an expression used by the Court of Appeal.’

48                  The accountants contend that par 64E of the proposed statement of claim is no more than a mere paraphrase of that passage, and does not allege facts which can give rise to the existence of a fiduciary relationship between the accountants and the Gartner Group of Companies, or to a fiduciary duty as alleged in par 64F.

49                  I do not think it can be said with confidence that the relationship between the accountants and the Gartner Group of Companies, as well as being a contractual one and one where the common law imposed on the accountants a duty to take reasonable care, was not a fiduciary one.  The existence of fiduciary obligations is not confined to established relationships:  Pilmer v Duke Group Limited (In Liquidation) (2001) 207 CLR 165 (Pilmer) per Kirby J at 217 [136].   There may clearly exist a fiduciary duty alongside a contractual one:  Breen v Williams (1996) 186 CLR 71 at 132 per Gummow J;  Pilmer per McHugh, Gummow, Hayne and Callinan JJ at 197 [72].  In my view, the ‘adviser/information provider’ or ‘information professional’ (a description used or adopted by Glover, Commercial Equity – Fiduciary Relationships, Butterworths 1995, at 155 [5.36] and elsewhere) may in certain circumstances owe a fiduciary duty to the client or person being advised.  A fiduciary relationship may arise when a relationship of trust or confidence arises.  The proposed statement of claim, on the passages identified, pleads matters which (if proved) I consider are arguably capable of making out such a relationship between the accountants and the Gartner Family Group.  On such an application as the present, it is not the function of the Court to determine whether such facts will be made out, or whether the conclusions which they are said to lead to will be drawn.  It is sufficient if the facts, assuming them to be true, are arguably capable in law of supporting the claims made and the conclusions asserted. 

50                  In Pilmer, Kirby J at 219 [136] adopted the suggestion by Professor Finn (as he then was) that:

‘… the unifying principle of fiduciary obligations arises from the existence of a duty of loyalty that, reflecting “higher community standards or values”, gives rise to a “legitimate expectation that the other party will act in the interests of the first party or at least in the joint interests of the parties and not solely self-interestedly.”’

See Finn, ‘The Fiduciary Principle’ in Youdan (ed), Equity, Fiduciaries and Trusts (1989) at 27 – 28.  Kirby J described that approach as offering a useful description to assist in ‘the practical application of basic doctrine to varying facts and relationships’.

51                  In Breen at 107 (as Kirby J pointed out in Pilmer at 220 [136]), Gaudron and McHugh JJ identified features which are commonly found where fiduciary obligations have been found to exist as including:

‘… the existence of a relation of confidence;  inequality of bargaining power;  an undertaking by one party to perform a task or fulfil a duty in the interests of another party;  the scope for one party to unilaterally exercise a discretion or power which may affect the rights or interests of another;  and a dependency or vulnerability on the part of one party that causes that party to rely on another.’ 

52                  Kirby J dissented in the result in Pilmer, but it appears his Honour’s dissent was a consequence of taking a different view of the facts rather than on a matter of principle:  see per McHugh, Gummow, Hayne and Callinan JJ at [72] – [75], 197 – 198, and cf per Kirby J at [138] – [141], 221 – 222.

53                  The majority in Pilmer pointed out at [75], 198 by way of summary of the factual conclusions of the trial Judge, which they upheld:

‘It was to be expected that Kia Ora relied upon the appellants to do their work competently and independently but they were not guiding or influencing Kia Ora in the sense discussed in the cases dealing with fiduciary relationships.’

54                  McHugh, Gummow, Hayne and Callinan JJ in Pilmer  at [82], 200 described the facts in that case as falling short of demonstrating ‘the real or substantial possibility of conflict spoken of in the authorities’.  Their Honours said that past dealings, nor generally the hope or expectation of future dealings, will of themselves be sufficient to demonstrate the real or substantial possibility of conflict necessary to give rise to a fiduciary obligation.

55                  In this matter, I do not think the proposed statement of claim falls so far short of asserting the real or substantial possibility of conflict between the accountants’ duties to the applicants and the interests of the accountants’ themselves as to lead to the claimed fiduciary duty owed by them to the applicants not being reasonably arguable.  That is not to decide that the facts as alleged, if made out, will necessarily result in such a conclusion.  It is not necessary for the Court to take that step.  But the allegations in the proposed statement of claim do involve pleading the interests of the accountants in receiving the substantial success fee if the Finance Offer were accepted as conflicting with the duty of the accountants in relation to the applicants, the reliance of the applicants upon the accountants’ advice, and in a general way the complexity of the matters under consideration and the lack of experience of the applicants (in essence, the first applicant on behalf of the applicants) exposing the applicants to reliance and trust upon the accountants on the advice they gave.  Moreover, the proposed statement of claim alleges that the accountants were motivated by their interest in securing the success fee when advising the applicants to enter into and accept the Finance Offer when proper advice would have been to the contrary. 

56                  I am less persuaded that the allegations concerning the alternative interest of the accountants, namely the preservation and enhancement of ongoing mutual referral of business between them and the bank, is a sufficient interest to arguably demonstrate a real conflict of interest and duty.  The relationship of the accountants and the applicants is not one of those routinely accepted as one of trust and confidence:  cf per Mason J in Hospital Products at 96.  However, commercial advisers such as the accountants may be in a similar position of trust and confidence.  The fact that such professional advisers enter into the relationship with an acknowledged personal incentive, namely the earning of fees, does not itself necessarily involve the conflict of duty and interest upon which the contravention of a fiduciary relationship exists.  Pilmer is an example where the fiduciary relationship was not found to exist.  But even where it exists, commercial reality demands that the professional adviser as fiduciary must generally be entitled to pursue legitimate financial interests.  It must be for the circumstances of each case to determine whether a fiduciary relationship exists, and if so whether the duty it imposed was broken by conduct of the fiduciary.  It is in each case a matter for evidence whether the commercial interest of the putative professional fiduciary is such as to give rise to a real or substantial possibility of conflict between the professional’s personal interests and those interests which the professional is bound to protect.  Commonwealth Bank of Australia v Smith (1991) 102 ALR 453 provides an illustration of a professional adviser owing fiduciary duties to a client. 

57                  In Finn, ‘The Fiduciary Principle’, Youdan op cit 54, the learned author says that a person will be: 

‘… a fiduciary in his relationship with another when and insofar as the other is entitled to expect that he will act in that other’s or in their joint interest to the exclusion of his own several interests.’

58                  In my view, the proposed statement of claim does contain allegations which, if made out, arguably would establish the existence of a fiduciary relationship between the accountants and the applicants, and the breach of the accountants’ fiduciary duty.  It is arguable that, on the facts alleged, the accountants have undertaken to act in the interests of the applicants:  see e.g. the formulations of Gibbs CJ in Hospital Products at 72 (accepting the formulation in the New South Wales Court of Appeal:  United States Surgical Corporation v Hospital Products International Pty Ltd [1983] 2 NSWLR 157 at 205 – 206), and per Mason J at 96 – 97.

59                  The proposed statement of claim alleges that the accountants allowed their personal interests to overcome their fiduciary duty to the applicants.  In relation to the success fee, the allegation is clear.  If it were proven, I consider it arguable that a breach of the fiduciary duty would also have been made out.  I consider the proposed statement of claim also alleges the accountants allowed their more general professional interests to subvert their (arguable) duty to act in the interests of the applicant.  If a professional adviser, who has undertaken to act in the interests of another, acts only in the interests of the professional adviser and does not act in the interests of that other, then I think it is arguable that the fiduciary duty which exists or may exist may also have been broken.  The proposed statement of claim asserts those facts, and attributes the breach of the duty of confidence by reason of the undertaking of responsibility both to the pursuance of the success fee and to the pursuance of the other commercial opportunities which an ongoing relationship with the bank might engender.  Whatever the reason, proof of one or both of those alleged reasons could arguably serve to support a finding that the accountants did not act for proper purposes in the applicants’ interests. 

60                  I have therefore reached the view that (subject to considering its form and content) the proposed statement of claim does plead facts which, if established, might arguably establish the existence of a fiduciary relationship between the accountants and the applicants, and the breach of the fiduciary duty owed by the accountants to the applicants. 

(b)        The Unconscionability claim against the accountants

61                  This claim is based upon s 51AA of the Trade Practices Act 1974 (Cth) (the TP Act).  Section 51AA(1) provides that a corporation must not, in trade or commerce, engage in conduct that is unconscionable within the meaning of the unwritten law of the States and Territories.  Hence, its effect is to extend the remedies of the TP Act to conduct that, at common law, would be regarded as unconscionable.  It does not create a new cause of action for unconscionable conduct.  Reliance is not placed on s 51AB or s 51AC of the TP Act which do, at least at first sight, seem to extend the ambit of the common law concept of unconscionable conduct.  The applicants’ submissions make that clear.

62                  Australian Competition and Consumer Commission v C G Berbatis Holdings Pty Ltd [2003] HCA 18;  (2003) 197 ALR 153 (Berbatis) was a case concerning the alleged knowing exploitation by one party of the special disadvantage of another.  The special disadvantage alleged was the ‘disabling circumstance seriously affecting the ability of the innocent party to make a judgment’ in that party’s best interests:  see eg per Gummow and Hayne JJ at [46].  The applicants in this matter put their case based on unconscionability on the same basis, thus invoking principles the High Court has developed in Blomley v Ryan (1956) 99 CLR 362; The Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 (Amadio); and Bridgewater v Leahy (1998) 194 CLR 457.  Gleeson CJ in Berbatis at [8], 156 identified the common characteristic of ‘one party’ being at a serious disadvantage in dealing with the other, but emphasised at [11] that such a disadvantage does not arise simply because of inequality of bargaining power.  That is to be contrasted with the unconscientious exploitation of another’s inability, or diminished ability, to conserve that other person’s own interests.  Gummow and Hayne JJ at [55] referred with approval to the observations of Mason J in Amadio at 462 – 463 that a special disadvantage is one ‘seriously affecting the ability of the innocent party to make a judgment as to that party’s own best interests’.  The disadvantage of the appellants in Berbatis was found to be commercial only. 

63                  It is also necessary for the alleged contravenor to have taken advantage of the alleged special disadvantage:  see e.g. per Mason J in Amadio at 462.  In Berbatis, it was further held that the extraction by a lessor of a concession in commercial dealings which is not directly relevant to the terms and conditions of a proposed new lease did not amount to taking advantage of the alleged special disadvantage of the appellants.

64                  The proposed statement of claim, and the contentions, accept that it is the first applicant who must be shown to have laboured under a special disadvantage.  He effectively dealt with the accountants and the bank on behalf of the other applicants.  The special disadvantage, as noted above, is said to be his lack of technical financial acumen.  It is also pleaded that the accountants (and the bank) knew of that ‘disability’ and unconscientiously took advantage of it. 

65                  Inexperience of the subtle refinements of accounting expertise, financial advice, financial modelling and the like is of course not uncommon.  The assistance of professional advisers, be they lawyers, accountants, financial advisers or others, is generally sought because of the expertise which the professional adviser is perceived to offer.  It is not alleged that the first applicant (or indeed any of the applicants) did not, by reason of some disability, understand the terms of the Finance Offer, or that it involved very substantial borrowing, or that it required the Gartner Family Group to proffer guarantees and interlocking security instruments.  It is not alleged that the first applicant (or indeed any of the applicants) did not, by reason of some disability, understand that the proposed borrowing was both substantial and insufficient for the purposes for which it was intended.

66                  In my judgment, what is alleged in substance amounts to no more than that the accountants enjoyed considerably greater financial analytical skills than the applicants (through the first applicant), so that the applicants relied upon the accountants in the giving of advice.  Such relativity of relevant technical capacity will exist almost invariably in any relationship between a client and a professional adviser.  If that were the only feature of the relationship, in the light of the High Court decision in Berbatis, I do not consider that the giving of advice (which I assume for the purpose of this application to have been erroneous) arguably amounted to unconscionable conduct in contravention of s 51AA of the TP Act.  But if the professional adviser in that relationship takes advantage of the relative technical superiority which the professional adviser enjoys, by inducing the client into a course of action which the professional adviser appreciates is not in the best interests of the client, in my judgment the conduct may arguably fall within the category of unconscionable conduct within the rubric of s 51AA.  Such is the allegation made against the accountants in this matter.  Some financial instruments are becoming increasingly more complex.  Resort to proper professional advice is in many respects now a necessity, rather than an option, when taking significant commercial or financial decisions.  In this matter, the advice of the accountants was central to the decision to accept the Finance Offer.  The Finance Offer, in turn, was apparently a consequence of the bank’s consideration of the ‘Finance Submission’ prepared by the accountants.

67                  In those circumstances, I do not think it is possible to conclude that it is not reasonably arguable that the relationship between the applicants and the accountants was such that the inexperience of the applicants (through the first applicant) placed them at a ‘serious disadvantage’ (an expression used by Fullagar J in Blomley v Ryan at 405) vis-à-vis the accountants.  There is the possibility, depending upon the whole of the evidence, that the applicants (through the first applicant), whilst not being deprived of an independent and voluntary will, were unable to make a worthwhile judgment as to what is in their best interests.  See Amadio per Mason J at 461 and per Deane J at 474. 

68                  Finally, on this point, it was argued by the accountants that, as a matter of law, the third to eleventh applicants as corporations cannot be under a special disadvantage so as to claim the benefit of the remedies for unconscionable conduct under s 51AA of the TP Act.  The proposition may well be correct, but it is not so obviously correct that the proposed statement of claim should be disallowed on that basis.  I observe that in Berbatis, that issue was not apparently raised and it proceeded to hearing and determination on an implicit assumption to the contrary.  I note the decision in Anozira Pty Ltd v Hunt [2002] ACTSC 76 at [19]-[20] seems to support the accountants’ contention.

(c)        The claims against the bank

69                  The allegations against the bank in the proposed statement of claim extend beyond the allegations about the bank’s representations said to be made in October 2001, and their falsity and the subsequent conduct of the bank in February 2002 which were made in earlier versions of the statement of claim.  Those allegations are broadly described in [12], [17] and [18] above.  The bank is prepared to confront those earlier allegations.

70                  Following the allegations of breach of fiduciary duty and of unconscionable conduct on the part of the accountants, it is alleged in par 66E of the proposed statement of claim that the bank knew of the potential for the accountants to secure the substantial success fee if the Finance Offer were accepted.  Paragraph 66F alleges that the bank was also aware that the accountants were ‘keen to conclude’ the Finance Offer between the Gartner Family Group and the bank because the accountants were motivated by their interest in securing further business opportunities with the bank and maintaining their relationship with the bank.  It is further alleged in par 66G that the bank knew that the accountants enjoyed a special relationship of confidence with the Gartner Group of Companies as alleged in par 64E of the proposed statement of claim.  Fourthly, it is alleged in par 66H that the bank knew that there was a shortfall in the funding required for the construction of the proposed winery, when the Finance Offer was accepted, so that the Gartner Family Group would require further funding to complete its construction.  The final allegation of knowledge of primary facts alleged against the bank is in par 66I of the proposed statement of claim.  It is that the bank knew that only some members of the Gartner Family Group would ‘derive any benefit’ from granting the mortgages and securities and guarantees to support the finance provided under the Finance Offer, and that it knew of the inability of the Gartner Family Group (through the first applicant) through inexperience to objectively assess the risks involved in entering into the Finance Offer.  The consequence of that knowledge is asserted in par 66J.  It is that the bank ‘knew or had reason to know’ the accountants advice to the Gartner Family Group was motivated by the potential success fee and their desire to secure longer term personal benefits through an ongoing relationship with the bank, and of the risks to the Gartner Family Group of accepting the Finance Offer and understanding the financing restructuring which followed.  Paragraph 66J is expressed as being based upon the matters alleged in pars 66E to 66I.  It does not contain independent primary factual allegations about the state of knowledge of the bank procured directly from another person or persons.

71                  Paragraph 66K alleges that the bank entered into the Finance Offer, including accepting the various guarantees and security instruments, and including permitting the payment from the funds available of the fees of the accountants, with notice of the matters pleaded in pars 66E to 66J.

72                  Paragraph 66L contains the final sting in the proposed statement of claim against the bank.  It alleges that, by reason of the allegations in pars 66E to 66K, the bank also engaged in unconscionable conduct and participated in the accountants’ breaches of fiduciary duty, in particular by accepting and in seeking to enforce the guarantees and other security instruments; it is further claimed that, in those circumstances, the Gartner Family Group were entitled to rescind the guarantees and the various security instruments.

73                  I have given careful consideration to whether the allegations of primary knowledge on the part of the bank (pars 66E to 66I) enable the threshold of an arguable case to be stepped over.  The bank’s alleged knowledge does not, in my view, enable that step to be taken.   In Amadio, at 462 Mason J said:

‘It is made plain enough, especially by Fullagar J, that the situations mentioned are no more than particular exemplifications of an underlying general principle which may be invoked whenever one party by reason of some condition of circumstance is placed at a special disadvantage vis-à-viz another and unfair or unconscientious advantage is then taken of the opportunity thereby created.  I qualify the word ‘disadvantage’ by the adjective ‘special’ in order to disavow any suggestion that the principle applies whenever there is some difference in the bargaining power of the parties and in order to emphasize that the disabling condition or circumstance is one which seriously affects the ability of the innocent party to make a judgment as to his own best interests, when the other party knows or ought to know of the existence of that condition or circumstance and of its effect on the innocent party.’

I do not consider it arguable that the bank, even assuming it had the knowledge alleged against it in pars 66E to 66J, took unfair or unconscientious advantage of an opportunity created by possessing knowledge of the pleaded special disadvantage of the Gartner Family Group.

74                  In the first place, it is my view that the allegations in par 66J are not arguable as flowing from the knowledge alleged in pars 66E to 66I.  It is not uncommon, particularly in recent years where complex financial proposals are presented to lending institutions by financial or professional advisers such as the accountants on behalf of their clients, that the professional advisers will be undertaking that work for a success fee.  Success fees are commonplace.  Nor is it uncommon that the financial or professional advisers should have had past dealings with the proposed lending institution, and should be desirous of an ongoing mutually beneficial relationship.  Nor is it uncommon that the nature and complexity of many transactions means that the client is heavily reliant upon the professional expertise of their advisers, and that the client may lack the degree of commercial or financial sophistication to fully comprehend the nuances of the proposal put forward on its behalf.  None of those matters of themselves, whether taken together or individually, could arguably lead to the conclusion without more that the lending institution would therefore know or have reason to know that in fact (as the gravamen of par 66J alleges) the professional advisers were pushing the client into the lending transaction for the benefit of the professional advisers and against the interests of the client.  The additional feature of the allegations (par 66H) is that the bank knew that the finance offered through the Finance Offer was not sufficient to meet fully the funding requirements of the Gartner Family Group and of Gartner Wines to fully construct the proposed winery.  I do not consider that additional allegation is one capable of demonstrating that the bank thereby learnt, or had reason to know, that the accountants were pushing the Gartner Family Group into accepting the Finance Offer in breach of the accountant’s fiduciary obligations and motivated by the accountants own interests at the expense of the interests of the Gartner Family Group.  The fact that the Finance Offer put forward by the bank was for less than the amount sought on behalf of the Gartner Family Group would no doubt drive the Gartner Family Group to consult further with the accountants.  It does not provide an arguable basis for asserting that, when the Finance Offer then came to be accepted, the bank had the knowledge alleged in par 66J on the bases alleged in pars 66E to 66I.

75                  In addition, in my judgment, the alleged conduct of the bank absent the particular knowledge alleged in par 66J, cannot be seen to involve it in taking unfair or unconscientious advantage of any special disadvantage of the Gartner Family Group.

76                  The bank was entitled to look after its own commercial interests.  Senior counsel for the applicants would not gainsay that proposition.  Assuming it was aware of the matters alleged in pars 66E to 66I, its conduct in putting forward and then entering into the Finance Offer, including accepting the guarantees and the security instruments, could not be unconscionable.  Its knowledge was gained in the pleaded context of the Gartner Family Group being advised over some months by the accountants.  The bank’s conduct involved assessing the Finance Submission and responding to it.  But in assessing the Finance Submission, it was entitled to do so looked at from its own interests.  It is no doubt the case that its own interests include considering whether the putative borrower will be able to pay interest on monies advanced and ultimately to repay the sum advanced, as well as considering the quality of the security offered to support the proposed borrowing.  But consideration of such matters is to secure its own interests.  The allegations are not, in my view, capable of supporting the step of placing the bank in the circumstances that its entry into the Finance Offer, and its acceptance of the supporting guarantees and other security instruments, exposed it to the charge of unconscionability as discussed by the High Court in Berbatis.

77                  It is not arguable, on the allegations, that the bank unfairly or unconscionably exploited the alleged inability or restricted ability of the Gartner Family Group (through the first applicant) to attend to its own interests.

78                  Senior counsel for the applicants referred to, and relied upon, both limbs of the well known passage in the judgment of Lord Selbourne LC in Barnes v Addy (1874) LR 9 Ch App 244 at 251-252 to support the claim against the bank.  Those principles, expressed as applying to dealings with trust property, extend to the involvement of third parties in misconduct by fiduciaries who were not trustees:  Consul Development Pty Ltd v DPC Etates Pty Ltd (1975) 132 CLR 373.  I accept it is arguable that they extend to third parties who are not directly agents of the trustees or fiduciaries:  see e.g. Selangor United Rubber Estates Ltd v Cradock No.3) [1968] 2 All ER 1073; Rowlandson v National Westminster Bank Ltd [1978] 1 WLR 798.  I also accept that it is arguable that the two limbs of Barnes v Addy may not contain an exhaustive statement of the circumstances in which a third party may become accountable as a trustee or as an accomplice to a fiduciary:  see the discussion in Jacobs’ Law of Trusts in Australia (6ed, 1997, Butterworths) at 332 [1334].

79                  The real stumbling block to the proposed statement of claim presenting an arguable claim against the bank is, however, the need to allege a sufficient level of knowledge on the part of the bank to make it arguably complicit (using that word only in a general sense) in the alleged breach by the accountants of their fiduciary duties or to make it arguably guilty of unconscionable conduct.  Senior counsel for the Gartner Family Group referred to the five categories of knowledge described by Gibson J in Baden Delvaux v Societe Generale pour Favoriser le Développment du Commerce et de l’Industrie en France SA (1992) 4 All ER 161, described by the learned authors of Jacobs, op cit at [1335], 333 as ‘the zenith of complexity’, and to Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, in which the Privy Council at 382 described the second limb of Barnes v Addy as a form of accessory liability.  The Privy Council at 389 said:

‘ … in the context of the accessory liability principle acting dishonestly, or with a lack of probity, which is synonymous, means simply not acting as an honest person would in the circumstances.  This is an objective standard.  At first sight this may seem surprising.  Honesty has a connotation of subjectivity, as distinct from the objectivity of negligence.  Honesty, indeed, does have a strong subjective element in that it is a description of a type of conduct assessed in the light of what a person actually knew at the time, as distinct from what a reasonable person would have known or appreciated.  Further, honesty and its counterpart dishonesty are mostly concerned with advertent conduct, not inadvertent conduct.  Carelessness is not dishonesty. Thus for the most party dishonesty is to be equated with conscious impropriety.  However, these subjective characteristics of honesty do not mean that individuals are free to set their own standards of honesty in particular circumstances.  The standard of what constitutes honest conduct is not subjective.  Honesty is not an optional scale, with higher or lower values according to the moral standards of each individual.  If a person knowingly appropriates another’s property, he will not escape a finding of dishonesty simply because he sees nothing wrong in such behaviour.’

Later, at 390, it was said:

‘Acting in reckless disregard of others’ rights or possible rights can be a tell-tale sign of dishonesty.  An honest person would have regard to the circumstances known to him, including the nature and importance of the proposed transaction, the nature and importance of his role, the ordinary course of business, the degree of doubt, the practicability of the trustee or the third party proceeding otherwise and the seriousness of the adverse consequences to the beneficiaries.  The circumstances will dictate which one or more of the possible courses should be taken by an honest person.’

80                  In this matter, for the reasons I have given, I do not consider it arguable that in the circumstances alleged, including what is alleged to have been known by the bank, its conduct in entering into the financing transaction including the taking of the guarantees and the security documents, the bank could be said to have offended the normally accepted standards of honest conduct.  The critical step in the proposed statement of claim is that from the state of knowledge alleged in par 66E to 66I to the consequential state of knowledge alleged in par 66K.  As I have noted, par 66K does not allege an independent state of knowledge, but one which is said to have resulted from other information.  I have concluded that the taking of that critical step is not arguable on the basis alleged.

81                  I do not consider that the claim of unconscionable conduct against the bank is sufficiently arguable to permit those allegations to be included in the proposed statement of claim.  If they were in an existing statement of claim, I would strike them out.  In essence, the allegation is that the bank was, by its knowledge, complicit in the unconscionable conduct of the accountants.  The Finance Submission was put forward to the bank by the accountants on behalf of, and with the approval of, the Gartner Family Group.  It was considered by the bank.  The bank responded.  It presented the Finance Offer for consideration.  It is not alleged that its consideration of the Finance Submission, or its proposal contained in the Finance Offer, themselves amounted to unconscionable conduct on the part of the bank.  The Finance Offer included the bank’s requirements for the grant of the guarantees and other security instruments by the Gartner Family Group. 

82                  The contentions on behalf of the Gartner Family Group sought to add that the unconscionable conduct was not merely in accepting the guarantees and other security instruments, but in seeking to enforce them.  But their enforcement, if they were validly entered into without unconscionable conduct on the part of the bank, could not in any view amount to unconscionable conduct.  It would simply be enforcing valid commercial instruments.  The focus must be upon the circumstances in which those commercial instruments came to be executed.

83                  I also do not consider that the allegations against the bank are capable of providing an arguable case that the bank participated in the accountant’s alleged breaches of fiduciary duty.  In my view, to get to that point, it would be necessary to allege (and ultimately to establish) that the bank knew or at least had reason to know that the accountants owed a fiduciary duty to the Gartner Family Group, and that the Gartner Family Group entered or may have entered into the Finance Offer, and that it gave or may have given the guarantees and other security instruments in support of the borrowing by reason of the breach by the accountants of that duty.  Critical to such a claim being maintainable is the capacity to maintain the allegation in par 66J of the proposed statement of claim.  For reasons I have already given, I do not consider those allegations are capable of being maintained or sustained on the basis on which they are put forward.

84                  Consequently, I do not propose to allow the applicants to file and serve the proposed statement of claim to the extent to which it includes pars 66E to 66L.  I do not therefore need to address the other grounds upon which the bank opposed the leave sought to file and serve the proposed statement of claim.  I will also not permit this application to be amended by the addition of the proposed par 8A, in which it was sought to claim a declaration that the bank had participated in, and is liable with the accountants, for the accountant’s alleged breaches of fiduciary duties.

(d)        The Adequacy of the Pleading

85                  In my judgment, the proposed statement of claim adequately puts the parties upon notice as to the case they must meet.  It is correct that, in a sense, the material facts alleged are conclusionary in nature.  Paragraphs 64A.1, .2, .4, .11 and .12 assert that the applicants (to be read, as senior counsel for the applicants accepted, as referring to the first applicant) were ‘inexperienced in understanding and assessing the financial implications’ of the Finance Officer and its implementation, and ‘lacked the experience, training and learning’ to understand and appreciate the risks of the transactions, and were ‘unable to assess the merits’ of the proposed transactions.  Whether those allegations are made out is a matter for evidence.  No allegation is made of a particular illness or intellectual impairment on the part of the first applicant.  The applicants will not be entitled to adduce evidence of any such matter at the trial.  His educational levels, and his experience in dealing with financial matters, will be the subject of evidence.  I do not think it is necessary, in the interests of fairness, for any more explicit pleading on the topic of the first applicants’ relevant experience.  The accountants will be able to explore that through discovery.  As par 64B recognises, the applicants will have to prove the accountants knew of his inability to appreciate and understand the Finance Offer and the potential consequences of its acceptance.

86                  The balance of par 64A contains allegations about the financial status of certain of the applicants, or their activities.  I note in particular par 64A.8, which asserts that the applicants did not have to proffer any security over their assets to obtain financing for the proposed winery construction.  They do not add to the allegations about the special disadvantage of the applicants vis-à-vis the accountants.  They give notice of facts which, if proved, will be said to provide a matrix of facts from which the allegations about the first applicant’s special disadvantage may be determined.  I think they clearly enough put the accountants (and the bank) on notice of those matters.

87                  I do not consider it necessary, in the interests of justice, to strike out pars 77.1, 77.2, 77.3 and 78 of the proposed statement of claim.  The allegations are insufficiently particularised.  Indeed, I anticipate that the nature of the applicants’ claimed losses will become more explicit and particularised with the process of realisation of the ‘secured assets’ (apparently occurring on the basis of some common understanding notwithstanding the challenge to the various security instruments), and by the provision of some expert report.  The losses may depend upon whether the claim against the bank succeeds.  It is likely that the issues arising generally in the proceeding may not be tried together.  There may be a trial separately of the issues on liability.  The bank still has outstanding an application for the disjoinder of the claim against it, or for the separate hearing of the claim against it.  At a later point, clearly, the accountants may require a better pleading of loss so that they may fairly consider and confront the claim against them.  That time may be sooner rather than later.

(e)        Conclusion

88                  For the reasons given, I propose to allow the applicants to further amend the further statement of claim in terms of the proposed statement of claim, as varied by the one page document of further variations, a copy of which is annexed to these reasons for judgment as Annexure A, to avoid any uncertainty but excluding pars 66E to 66L of the proposed statement of claim.

(f)        The AWG Proposed Statement of Claim

89                  The AWG proposed statement of claim pleads a case on behalf of the second applicant Alice Winifred Gartner (AWG) based upon the High Court decision in Amadio.

90                  AWG was born in 1940, and has been married to the first applicant since 1964.  It pleads her limited role in the activities of the Gartner Family Group, and that she habitually relied on the first applicant in relation to matters of money and finances.  It further pleads that AWG at all times placed her trust and reliance upon the first applicant to conduct the business and financial affairs of each member of the Gartner Family Group, and that she did not know of the retainer of the accountants nor of the first to seventh representations made by the accountants nor of the Finance Submission nor of the Finance Offer nor of the funding shortfall which was identified on consideration of the Finance Offer, nor of the bank representations.  In November 2001, AWG was told that some $9 million was to be borrowed to construct the proposed winery (the plan for which she was aware of only in a general way) and on 23 November 2001 she attended a meeting at which the various guarantees and security instruments were signed.  She did not read them, and they were not explained to her.  She received no independent legal, accounting or financial advice.  She had no earlier contact with the bank.  It is then alleged that AWG received no benefit from entering into any of the guarantees or security instruments, but now stands to lose the value of her interest in any of the assets of the Gartner Family Group.

91                  AWG claims it would be unconscionable for the bank to be permitted to enforce as against her the acceptance of the Finance Offer or her guarantees or the security instruments which she executed.  She seeks to invoke the relief for such conduct available under s 51AA of the TP Act.  The AWG proposed statement of claim also asserts reliance upon ss 51AB and 51AC of the TP Act.

92                  There are, as counsel for the bank pointed out, very serious factual hurdles confronting AWG to make out her claims.  They include the fact that, by certificates dated 23 November 2003, AWG certified and confirmed that an officer of the bank:

‘has drawn my attention to the warning printed on the cover of the Guarantee and has recommended that I take independent legal and financial advice on the nature and effect of the Guarantee prior to signing the Guarantee.  I have declined, or have been unable, to do this.  Despite the absence of independent advice, I have read the Guarantee and wish to proceed with the giving of the Guarantee.’

The two certificates related to separate guarantees given by her to support the funding of the third applicant Tynski Pty Ltd of $4.41 million and to Gartner Wines of $18 million.  It also appears that AWG had previously guaranteed indebtedness of the Gartner Family Group to its previous financier of some $13.46 million (as evidenced by the Finance Submission).

93                  I do not consider that those factual matters, which presently are unanswered are of such weight as to lead to the view that the claim by AWG is not reasonably arguable.  Her assertion in the AWG proposed statement of claim is that she did not read or understand what she was signing, and it was not explained to her.  The material referred to by counsel for the bank points to the contrary.  But ultimately such matters are for evidence.  I am not of the view that her claim, expressed in what might now be called conventional Amadio terms, should not be permitted to be made on the basis it is untenable.

94                  The discretionary considerations upon which the bank relied to oppose leave being given to plead the AWG proposed statement of claim do not outweigh the interests of justice in allowing AWG to make such a claim.  Her proposed claim is discrete, and if correct provides her with a basis for avoiding her guarantees and the security instruments she executed which will not otherwise be litigated.  Given the present state of the action, I do not consider that the proposed claim will unduly extend the hearing of the action, however it takes place (the bank presently has outstanding a motion for the separate trial of the issues which directly concern it or for disjoinder of the claims against it).  The matters raised by the AWG proposed statement of claim should be readily capable of being tried in the not too distant future; they involve issues of fact which are unlikely to require extensive independent expert evidence, and orders for discovery of documents relevant to the proposed claim including as to AWG’s previous business activities and experience should ensure her discovery is now given promptly.  Given the time she took to formulate the claim, she cannot expect much tolerance in the period allowed for her to do so.  Her failure to have made the claim at an earlier time, and her failure to explain why she did not do so, are not themselves of such weight as to tilt the scales much against her in the present circumstances.

95                  Accordingly, I propose to give AWG leave to file and serve a separate statement of claim in terms of the AWG proposed statement of claim.  Whether the solicitors acting generally in the action for the applicants can continue to act for AWG is a matter for them.  AWG has had ample opportunity to consider that position, and could not expect any real time indulgences from the Court if now it is necessary for her to change solicitors.

Associate:

Dated:              8 December 2003