FEDERAL COURT OF AUSTRALIA

McGrath v HNSW Pty Limited [2014] FCA 165

THE COURT ORDERS THAT:

1.    The applicants be granted leave to file an amended statement of claim in accordance with the reasons for judgment delivered on 4 March 2014.

2.    The applicants’ interlocutory application filed 24 September 2013 (‘the interlocutory application’) be otherwise dismissed.

3.    The costs of the interlocutory application be reserved until the final hearing.

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

REASONS FOR JUDGMENT

1    This judgment concerns an interlocutory application filed on 24 September 2013 by the applicants seeking leave to file an amended statement of claim. Such application is made pursuant to r 16.53 of the Federal Court Rules 2011 (Cth) (‘the Rules’), as considered later in this decision. The application is opposed by the respondents in part.

2    A summary of the substantive claim of the applicants is as follows. Prior to 20 November 2006, the first applicant, John McGrath (‘John’), and John’s brother (‘Robert’) owned and controlled a group of motor dealerships and properties (‘the McGrath Group’) directly and through companies in which they held substantial majority shareholdings. Several of the operating entities within the McGrath Group were wholly owned subsidiaries of A C McGrath & Co Pty Ltd (‘AC McGrath’). Both John and Robert were directors of AC McGrath.

3    Another company (‘Suveli’) controlled by John held a 50% interest in AC McGrath. The remaining 50% interest in AC McGrath was held by a separate company (‘Tahuvo’), which was controlled by Robert.

4    During 2006, John and Robert, or alternatively AC McGrath, retained the first and second respondents (‘the corporate respondents’) to provide advice in relation to a proposed restructure of the McGrath Group. Such advice was provided on a number of separate occasions by the third, fourth and fifth respondents (‘the individual respondents’), each of whom were directors of both of the corporate respondents. Advice in relation to the proposed restructure was also provided to Vicky McGrath, being the second applicant and also the wife of John. Put broadly, the advice provided by the respondents concerned the value of the McGrath Group prior to the restructure, and the projected value of the cash, assets and shares to be received by the applicants and Robert after the restructure.

5    On 20 November 2006, the applicants entered into an agreement with Suveli and Tahuvo to restructure the McGrath Group in reliance on the advice received from the respondents. The effect of the agreement was that John sold 20% of his interest in the group to Robert in order to reduce John’s stake in the group to 30%, with Robert’s stake being increased to 70%.

6    The crux of the applicants’ claim is that in providing the advice, the respondents were negligent in failing to properly account for the amount of a notional cash allocation to John. The effect of this alleged accounting error was that the value of John’s shareholding after the restructure was significantly less than what the respondents advised it would be. Further, the applicants claim that in making representations based upon that error, the respondents engaged in misleading or deceptive conduct.

7    The applicant commenced proceedings by the filing of an originating application on 19 November 2012, seeking from the respondents damages for negligence, damages pursuant to s 82 of the Trade Practices Act 1974 (Cth) (‘the TPA’) as it was then in force, damages against the individual respondents pursuant to s 68 of the Fair Trading Act 1987 (NSW), interest and costs. The requisite statement of claim was filed on the same day.

8    The applicants now seek to rely upon an amended statement of claim. The majority of the amendments are not contested. The respondents do however contest amendments at [50A], [50B] and [50C] of the proposed statement of claim which relate to new claims that the individual respondents were accessories to the misleading or deceptive conduct of the corporate respondents for the purposes of s 75B of the TPA (‘the accessorial liability amendments’). They also contest amendments at [30A], [30B], and [30C] which allege that the fifth respondent, Mr Papadatos, provided representations that were misleading or deceptive by way of an email to John dated 1 November 2006 (‘the Papadatos amendments’).

9    The respondents challenge the accessorial liability amendments on two bases. First, the respondents contend that the contested amendments are embarrassing because they fail to plead the material facts that must be relied upon to establish that the individual respondents were ‘involved in’ the alleged misleading or deceptive conduct. The material fact that is said to be absent is that the individual respondents had actual knowledge of the elements of the contravention.

10    Secondly, the respondents contend that the contested amendments introduce new causes of action. Given that the applicants plead that their loss was incurred on 20 November 2006, being the date that the restructure agreement was entered into, the alleged new causes of action against the individual respondents are beyond the six year limitation period imposed by s 82(2) of the TPA and s 14 of the Limitation Act 1969 (NSW). If it is accepted that the accessorial liability amendments constitute new causes of action, a further issue arises, namely whether the Court has the power under the Rules to allow a new cause of action to be added to a statement of claim that would otherwise be statute barred. This issue also applies to the Papadatos amendments, given that the relevant advice is said to have been provided on 1 November 2006, that date being outside of the six year limitation period.

REQUISITE KNOWLEDGE OF AN ACCESSORY

11    Pursuant to s 75B of the TPA, a person will be involved in a contravention, including the making of misleading or deceptive representations, where that person:

a)    has aided, abetted, counselled or procured the contravention;

b)    has induced, whether by threats or promises or otherwise, the contravention;

c)    has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention; or

d)    has conspired with others to effect the contravention.

12    Although the applicants did not abandon an argument that the independent respondents are accessorily liable by virtue of s 75B(a), it is clear that they primarily rely upon s 75B(c). To be ‘knowingly concerned’ in misleading or deceptive conduct, as the applicants endeavour to allege against the individual respondents in the present matter, an accessory must have actual knowledge of the essential facts that constitute the conduct: Yorke v Lucas (1985) 158 CLR 661 (‘Yorke v Lucas’) at 670. As is referred to hereunder, where the alleged contravention is a misleading or deceptive representation, there exists a conflict of authority as to whether an accessory must also have actual knowledge of either the falsity of the representation or the fact that there were no reasonable grounds for making the representation.

13    In Medical Benefits Fund of Australia Ltd v Cassidy (2003) 135 FCR 1 (‘MBF’), it was held at [15] by Moore J, with whom Mansfield J agreed at [17], that it is not necessary for an alleged accessory to a misleading or deceptive representation to have actual knowledge of the falsity of the representation. His Honour stated as follows:

…in my opinion, liability as an accessory (in circumstances where the contravening conduct of the principal was making false or misleading representations) does not depend on an affirmative answer to the question whether the alleged accessory knew the representations were false or misleading. All that would be necessary would be for the accessory to know of the matters that enabled the representations to be characterised in that way.

14    Stone J disagreed with Moore and Mansfield JJ on this point. Her Honour stated at [82]:

This is not to say that to be liable as an accessory to a strict liability breach of s 52 it is necessary to know that the conduct of the principal is unlawful, or indeed to have any knowledge of the provisions of the TPA or the ASIC Act. But it is necessary to know the essential elements of the contravention, by which I understand that one must know that which makes the conduct a contravention; in this case, its misleading and deceptive character. Only then can one form the intention to participate in conduct of that character.

15    Her Honour continued at [85]:

… [the] proposition that an accessory does not need to know that “the conduct has the capacity to mislead” is inconsistent with Yorke v Lucas. The High Court interpreted the accessory liability provisions not as requiring that the accessory know the essential elements of the contravening conduct but that he or she know the essential elements of the contravention. As stated earlier this involves knowing, in addition to what happened, the fact that the relevant conduct is misleading or deceptive or likely to mislead or deceive.

[Emphasis in original]

16    In Propell National Valuers (WA) Pty Ltd v Australian Executor Trustees Ltd (2012) 202 FCR 158 (‘Propell’), Collier J, with whom Stone J agreed at [1], followed Moore and Mansfield JJ in MBF. Their Honours held that it was unnecessary to prove that an alleged accessory to a misleading or deceptive representation knew that the conduct giving rise to the representation was misleading or deceptive. Gilmour J did not decide this issue. Collier J said at [121]:

If the appellants’ submission is that Mr Coleman could only be liable in this respect if he actually knew that the valuation was misleading or deceptive, the authorities do not support this submission. As explained by the Full Court in Wheeler Grace v Pierucci Pty Ltd (1989) 16 IPR 189 at 209:

The knowledge required is not knowledge or awareness that the conduct has the capacity to mislead nor knowledge that it may be a contravention of s 52 of the Act. What must be shown to be possessed is knowledge of the elements of a contravention. See Giorgianni v R (1985) 156 CLR 473 at 481.

(cf Moore J in Medical Benefits Fund of Australia Limited v Cassidy (2003) 135 FCR 1 at [15])

17    In passing, the Court is unable to reconcile the approach of Stone J in MBF with her Honour’s approval of the reasons of Collier J in Propell.

18    The decision of Fernandez v Glev Pty Ltd [2000] FCA 1859 (‘Fernandez’) stands in stark contrast to the decisions of the majorities in MBF and Propel. Upon a motion to strike out an application and the related statement of claim, Hely J in Fernandez considered a pleading relating to the accessorial liability of respondents in the context of an alleged contravention of s 52 of the TPA. His Honour stated at [18]:

Paragraph 25 simply alleges that the second to fifth respondents "have been involved in the said contraventions contrary to s 75B of the TPA". Leaving aside the infelicitous reference to s 75B (which is definitional, rather than the source of a liability) the pleading is deficient. The facts necessary to sustain a conclusion that the individuals were involved in the contravention of s 52 should be pleaded. That includes whatever involvement in, or knowledge of, the making of the representations is relied upon and knowledge of the falsity of the representations in question.

19    Hely J did not cite any authorities in support of these findings. Nonetheless, the Full Court of this Court in Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1 (‘Quinlivan’) made it plain that an accessory must have actual knowledge of the falsity of the representations. Heerey, Sundberg and Dowsett JJ said at [10]:

… s 51A does not detract from the Yorke principle that actual knowledge of the essential elements of the contravention is required if s 75B or s 80 is to apply. Where the contravening conduct involves misrepresentation, whether as to a future matter or not, this principle requires actual knowledge by the accessorial respondent of the falsity of the representation. This is an essential matter which must be alleged and proved: Su v Direct Flights International Pty Ltd [1999] FCA 78 at [38], Fernandez v Glev Pty Ltd [2000] FCA 1859 at [18].

20    MBF was decided in the preceding year to Quinlivan but was not referred to in Quinlivan.

21    Logan J followed Quinlivan in Australian Competition and Consumer Commission v TF Woollam & Son Pty Ltd (2011) 196 FCR 212. His Honour stated at [120]:

Having regard to Quinlivan v Australian Competition and Consumer Commission (2004) 160 FCR 1 at [15], the ACCC must show as against Mr Bogiatzis, in respect of each of the representations that he had actual knowledge that:

•    the representation was made and

•    it was misleading or

•    Woollam had no reasonable grounds for making it.

22    It is clear that the findings of the Court in Quinlivan cannot be reconciled with the decisions of the majorities in both MBF and Propel. Further analysis of the seminal authority on s 75B of the TPA, namely Yorke v Lucas, does not resolve the discrepancy. Mason ACJ and Wilson, Deane and Dawson JJ stated clearly at 667–678 that to be an accessory to misleading or deceptive representations under s 75B(a), that is to have ‘aided, abetted, counselled or procured the contravention’, one must have knowledge of the falsity of the representations. However, their Honours did not directly address whether actual knowledge of the falsity of the representations was necessary to prove a person to be liable as an accessory under s 75B(c). In respect of such subsection, their Honours stated at 669–670:

So far we have dealt only with par. (a) of s 75 b which refers to involvement of persons who are accessories. The appellants also rely upon par. (c) of the same section which extends the definition of a person involved to a person who has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention. There can be no question that a person cannot be knowingly concerned in a contravention unless he has knowledge of the essential facts constituting the contravention. It cannot, therefore, be suggested that Lucas falls within the first limb of par. (c). It might be thought possible to construe the express requirement of knowledge as extending not only to being “concerned in” but also to being “party to” a contravention. However, there are two reasons, in our view, why it is inappropriate to do so.

First, the natural construction of par. (c) is to regard the word “knowingly” as qualifying only the words “concerned in” which immediately follow it. The punctuation strongly suggests such a construction. Secondly, the word “knowingly” would be an unnecessary qualification of the words “party to”. In the context of the paragraph, a person could only properly be said to be “party to” a “contravention” if his participation was in the context of knowledge of the essential facts constituting the particular contravention in question. Whilst it is not a contradiction in terms to speak of a person being “party to” something of which he is unaware, some indication is needed to convey such a meaning. There is nothing in the paragraph itself which would point to any conclusion other than that the words “party to” are used to refer to a participant in the nature of an accessory. Moreover, the wider context of the whole section leads to the same conclusion. We have already indicated why par. (a) requires knowledge. Paragraph (b), which speaks of inducing a contravention by threats, promises or otherwise, and para (d), which speaks of conspiring with others to effect a contravention, both clearly require intent based upon knowledge and there is force, we think, in the observation made in the judgment of the Full Court below that there is: -

“… no reason why Parliament would have intended that a section which renders natural persons liable for a contravention by a corporation should require some mental element or absence of innocence in every case to which it refers except one which itself requires in its first limb that the person was ‘knowingly’ concerned in the contravention”.

In our view, the proper construction of par. (c) requires a party to a contravention to be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention.

[Reference removed]

23    In light of the conflicting authorities, it is apparent that the issue of whether to be ‘knowingly concerned’ in misleading or deceptive conduct an accessory must also have actual knowledge of either the falsity of the representation or the fact that there were no reasonable grounds for making the representation is not settled. I consider the approach adopted in Quinlivan, also being the approach of Stone J in MBF, to be correct. Similarly to the settled understanding of accessorial liability under s 75B(a), mere knowledge by a person that a statement was made, without more, cannot constitute that that person was ‘knowingly concerned’ in a breach of the TPA. Actual knowledge of the falsity or baselessness of the representation is a necessary element to prove accessorial liability to a contravention of s 52. It follows that I respectfully disagree with the reasons referred to above of the majority in MBF and Propell.

24    The accessorial liability amendments are therefore inadequate to raise the allegations necessary to found an entitlement to relief under s 75B. The pleadings contained in [50A], [50B] and [50C] of the proposed amended statement of claim must include the allegations that the individual respondents actually knew that either the statements relied upon were misleading or deceptive, or were made without reasonable grounds.

NEW CAUSES OF ACTION & POWER TO AMEND

25    Given the finding that the accessorial liability amendments are inadequate, it is not strictly necessary to consider such amendments further. However, the second contention of the respondents, namely that the accessorial liability amendments constitute new causes of action and that such new causes of action are time barred, is important. This is because, should I find that the accessorial amendments do constitute new causes of action, the issue then arises as to whether the Rules allow for the inclusion of new causes of action that would otherwise be statute barred to a statement of claim. The consideration of this issue will also form the basis for my findings in relation to the Papadatos amendments.

Accessorial liability amendments

New causes of action

26    The applicants submit that the accessorial liability amendments do not constitute new causes of action. They submit that it is already alleged that the individual respondents are liable for damages pursuant to s 82 of the TPA. The applicants submit that s 75B is merely a facilitative provision and rely on the observations of Toohey J in Nella v Kingia Pty Ltd (1986) ATPR 40-723 (‘Nella’). Before considering his Honour’s decision, it is convenient to set out the relevant provisions of s 82 of the TPA. Section 82(1) states:

… a person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV, IVA, IVB or V or section 51AC may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.

[Emphasis added]

27    Section 82(2) of the TPA provides that ‘an action under subsection (1) may be commenced at any time within 6 years after the day on which the cause of action that relates to the conduct accrued’.

28    The decision of Nella concerned in part a claim for damages against individual respondents on the basis that they aided, abetted, counselled or procured a contravention of s 52 of the TPA or alternatively were knowingly involved in that contravention. The individual respondents applied to the Court to have such claims struck out on the basis that they were statute barred under s 82. An argument advanced by the applicant in Nella to rebut the limitation submission of the individual respondents was referred to by Toohey J at 47,920. His Honour summarised the submission as follows:

… since subsec. 82(1) creates a cause of action for conduct done in contravention of Pt IV or V, and sec. 75B finds its place in Pt VI, not in those parts, the limitation in subsec. 82(2) does not apply to persons whose liability dervies from sec. 75B.

29    Toohey J rejected such argument at 47,920-47,921, stating as follows:

The limitation in subsec. 82(2) is related to an action under subsec. (1). An action under subsec. (1) is an action against a person whose conduct was in contravention of a provision of Pt IV or V “or against any person involved in the contravention”. The only function of sec. 75B is to define who is a person involved in a contravention of Pt IV or V. It is misleading to speak of sec. 75B as a source of liability and (although it is commonly done) to claim damages under that section. A claim which needs to rely upon sec. 75B is nevertheless a claim under sec. 82 and should be so pleaded. The statement of claim should also plead facts to make it clear on what basis the person is said to have been involved in the contravention.

[Emphasis added]

30    The reasons of Toohey J stand for the proposition that the source of liability as an accessory to a contravention under Part IV, IVA, IVB or V or s 51AC of the TPA (including s 52) accrues under s 82, not s 75B. Section 75B only operates to define who is a ‘person involved in the contravention’ where such words are used in provisions of Part VI of the TPA (including s 82).

31    However this does not answer the determinative issue. The respondents accept that claims of accessorial liability against the individual respondents are claims under s 82 of the TPA. The question is whether such claims form separate causes of action to the extant claims, also under s 82, that each of the individual and corporate respondents are liable for damages because they engaged in misleading or deceptive conduct. The resolution of this question involves consideration of facts upon which the extant claims are based as compared to the proposed claims.

32    The relevant extant claims are contained at [45]–[50] of the statement of claim. Those claims do not assert that the individual respondents, in making the representations as to the value of the relevant notional cash allocation, knew the valuation to be incorrect or that they had no reasonable basis on which to make the representations. This follows from the principle that it is unnecessary to prove that a party who made a representation knew or intended it to be misleading or deceptive in order to establish a contravention of s 52 of the TPA: Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216 at 228. As was found above at [23] however, a claim for accessorial liability against the individual respondents must be supported by a pleading that they had actual knowledge of either the falsity of the representation or the fact that there were no reasonable grounds for making the representation. This factual distinction between the extant and the proposed claims means that the proposed claims constitute new causes of action. It is one thing to allege that a person engaged in misleading or deceptive conduct themselves, but it is quite different to allege that they were knowingly involved in, or otherwise accessorily liable for, the misleading or deceptive conduct of another.

Addition of new causes of action to the statement of claim

33    Whether the Rules allow for the inclusion of new causes of action in existing proceedings that would otherwise be statute barred requires analysis of the development of the relevant principles. Certainly the Rules allow for leave to be granted to an applicant to amend an originating application to include, inter alia, a new claim for relief arising out of the same facts, or substantially the same facts, as those already pleaded to support an existing claim even if it is time barred: r 8.21(2). Curiously, the rule relating to the amendments to statements of claims which require leave of the Court, namely r 16.53, is silent as to the date on which an amendment will take effect. I will return to this matter below.

Traditional rule

34    In Weldon v Neal (1887) 19 QBD 394 (‘Weldon v Neal’), the plaintiff was not permitted to amend a statement of claim to include a claim that would not have been time barred when the proceeding was commenced, but had become time barred in the intervening period. Such rule resulted from the fact that an amendment took effect from the date of the document which was amended, rather than the date of the amendment itself: Baldry v Jackson [1976] 2 NSWLR 415 at 419.

35    The decision of Wardley Australia Limited v The State of Western Australia (1992) 175 CLR 514 (‘Wardley’) concerned an application to amend a statement of claim to include a cause of action barred by virtue of s 82(2) of the TPA. The Full Court of the Federal Court had found that the relevant cause of action was not barred by s 82(2). On appeal to the High Court, such finding was upheld per curiam. Toohey J (although not required to do so) also considered the power of the Federal Court to grant leave to amend a statement of claim to introduce a time barred cause of action. The extant rule governing the amendment of documents in the Federal Court was O 13 r 2(1) of the Federal Court Rules 1979 (Cth) (‘the 1979 Rules’). Such rule provided:

The Court may, at any stage of any proceeding, on application by any party or of its own motion, order that any document in the proceeding be amended, or that any party have leave to amend any document in the proceeding, in either case in such manner as the Court thinks fit.

36    Having considered the scope of the jurisdiction exercised by the Federal Court (see 559–561), Toohey J found that O 13 r 2(1) was not sufficiently broad to permit amendments to statements of claim that would add a new and otherwise time barred cause of action. His Honour noted that any incidental or necessary powers invested in the Federal Court by virtue of its jurisdiction could not overcome a clear statutory prohibition such as that contained in s 82(2) of the TPA. His Honour stated at 561–562:

When the Federal Court is faced with an application to amend a statement of claim by introducing allegations that, though they may relate to a time after the relevant limitation period has expired, do no more than expand a cause of action already pleaded, there is no difficulty in treating O.13 r.2 as wide enough to permit such an amendment. But when, as here, the proposed amendment introduces an admittedly new cause of action, the position is quite different. Section 82(2) presents a statutory barrier to any new cause of action; to this barrier, reference to express, implied or incidental powers provides no answer.

Previous statutory framework

37    Following the Wardley decision, the Federal Court of Australia Act 1976 (Cth) (‘the Federal Court Act’) was amended to insert s 59(2B): s 44 of the Law and Justice Legislation Amendment Act 1994 (Cth). Such subsection provides:

(2B)    The Rules of Court may make provision for:

    (a)    the amendment of a document in a proceeding; or

    (b)    leave to amend a document in a proceeding;

    even if the effect of the amendment would be to allow a person to seek a remedy in respect of a legal or equitable claim that would have been barred because of the expiry of a period of limitation if the remedy had originally been sought at the time of the amendment.

38    The explanatory memorandum to the Law and Justice Legislation Amendment Bill 1994 (Cth) explains, inter alia, the broad purpose of s 59(2B) of the Federal Court Act as follows:

113.     New subsection 59(2B) will enable the Rules of Court to make provision for –

    the amendment of a document in a proceeding; or

    leave to amend a document in a proceeding,

even if the effect of the amendment would be to allow a person to seek a remedy in respect of a claim that is out of time at the time of the amendment.

114.     The proposed amendment is necessary to overcome the operation of the rule in Weldon v Neal (1887) 19 QBD 394. That case held that leave to amend will not be granted to enable a plaintiff to raise a new cause of action if that cause would, if proceedings in relation to it were then started for the first time, be barred by the expiry of a period of limitation. The amendment would not enable Rules to be made to allow a person to amend a claim so as to seek relief which was not available at the time the action was commenced because the action was commenced out of time.

115.     Comments made by the Hon. Justice Toohey of the High Court in Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 have raised some doubts whether the Federal Court currently has the power to make such rules. This amendment will overcome that doubt.

39    Order 13 r 2 of the 1979 Rules was amended by the Federal Court Rules (Amendment) 1994 (No. 279) to expand the scope for amendments of pleadings. Rule 2 stated as follows:

2 General

(1)    Subject to the following provisions of this rule, the Court may, at any stage of any proceeding, order that any document in the proceeding be amended, or that any party have leave to amend any document in the proceeding, in either case in such manner as the Court thinks fit.

(2)    All necessary amendments shall be made for the purpose of determining the real questions raised by or otherwise depending on the proceeding, or of correcting any defect or error in any proceeding, or of avoiding multiplicity of proceedings.

(3)    Where an application to the Court for leave to make the amendment mentioned in subrules (4), (5) or (6) or paragraph (7) (a) is made after any relevant period of limitation current at the date of commencement of the proceeding has expired, the Court may, nevertheless, grant such leave in the circumstances mentioned in that subrule if it thinks it is just to do so.

…

(7)     An amendment may be made notwithstanding that the effect of the amendment will be to add or substitute a new claim for relief or another foundation in law for a claim for relief if the new claim for relief or foundation in law for that claim arises out of the same facts or substantially the same facts as those already pleaded to support existing claims for relief by the party applying for leave to make the amendment.

[Emphasis added]

40    The necessary distinction was drawn between a cause of action which was statute barred when a proceeding was commenced, and a proposed cause of action which would not have been statute barred at that time, but which was statute barred by the time the requisite amendments were sought to be made to the existing documents in an action. In the former circumstances, the cause of action could not be raised; in the latter, the amendments to the Federal Court Act and the Rules permitted such types of claims to be included with leave of the Court.

41    Further amendments to O 13 of the 1979 Rules were made subsequently. Those changes are not of direct relevance to the present proceeding as they related to amendments to documents based on facts or matters that arose after the commencement of a proceeding.

42    In summary, since the amendments in 1994 and prior to the Rules coming into effect in 2011, the Court could grant leave to an applicant to amend a statement of claim to add a new cause of action or a new basis for a claim where the amendment would otherwise be time barred provided that the amendment arose out of the same facts, or substantially the same facts, as those pleaded in the extant statement of claim.

Federal Court Rules 2011 (Cth)

43    Rule 8.21 of the Rules states:

Amendment generally

(1)    An applicant may apply to the Court for leave to amend an originating application for any reason, including:

…

(g)     to add or substitute a new claim for relief, or a new foundation in law for a claim for relief, that arises:

(i)    out of the same facts or substantially the same facts as those already pleaded to support an existing claim for relief by the applicant; or

(ii)     in whole or in part, out of facts or matters that have occurred or arisen since the start of the proceeding.

Note For paragraph (1) (b) and the avoidance of multiplicity of proceedings, see section 22 of the Act.

(2)    An applicant may apply to the Court for leave to amend an originating application in accordance with paragraph (1) (c), (d), (e) or subparagraph (g) (i) even if the application is made after the end of any relevant period of limitation applying at the date the proceeding was started.

(3)    However, an applicant must not apply to amend an originating application in accordance with subparagraph (1) (g) (ii) after the time within which any statute that limits the time within which a proceeding may be started has expired.

44    As referred to above at [33], such rule allows for leave to be granted to an applicant to amend an originating application to include, inter alia, a new claim for relief out of the same facts, or substantially the same facts, as those already pleaded to support an existing claim even if it is time barred. Gordon J in Environinvest Ltd (in liq) v Former Partnership of Webster, White, Gridley, Nairn, Newman, Peters and Miller (2012) 208 FCR 376 considered the effect of r 8.21 to be ‘not surprising’. Her Honour continued at [29] as follows:

It is not surprising because, consistent with the earlier analysis of “mistake”, such an amendment does not change or alter the substantive basis on which the proceeding was commenced. There was a change in name but that is all — at all relevant times Environinvest intended to commence proceedings against its auditor for the 2005 year. There has been no substantive change in the purpose of the proceedings, the identity of the party intended to be sued, the subject matter of the proceedings or the causes of action pleaded.

45    The power to amend pleadings is contained in Div 16.5. Rule 16.51 expressly permits a party to amend a pleading once at any time before the pleadings close without the leave of the Court (r 16.51(1)); or after close of pleadings, where each other party consents to the amendment (r 16.51(3)). A party may not amend without the leave of the Court if that pleading has already been amended in accordance with the Court’s leave (r 16.51(2)).

46    Rule 16.53 provides that where a party is not permitted to amend a pleading under r 16.51, such party must apply for leave of the Court to amend the pleading. In contrast to the versions of the Rules in between 1994 and 2011, the current Rules do not refer to amendments to a statement of claim that would otherwise be time barred. The respondents therefore submit that the rule in Weldon v Neal has been revived. It follows that should this submission be accepted, the power of the Court to grant leave to amend pleadings is the same as when Wardley came before the High Court.

47     A similar issue, namely the question of the date on which amendments to a statement of claim should operate from, was considered by Murphy J in Australian Securities and Investments Commission v Australian Property Custodian Holdings Ltd (No 2) (2013) 213 FCR 289 (‘APC Holdings’). In that decision, the applicant sought leave to amend a statement of claim to include new facts in support of an existing cause of action. The defendants submitted that the amendments would take effect from the date on which they were made, and that because the facts occurred outside of the relevant limitation period, they would be time barred.

48    Having referred to the traditional rule in Weldon v Neal, Murphy J went on to consider the power of the Court under s 59(2B) of the Federal Court Act. At [17], his Honour concluded that a pleading which operates to support an originating process could be amended under r 16.53 ‘even if the effect would be to allow a person to seek a remedy in respect of a legal or equitable claim that would have been barred because of the expiry of a period of limitation if the remedy had originally been sought at the time of the amendment’. His Honour said at [18]:

Nothing in the Explanatory Statement to the Rules indicates any intent to alter the existing practice that amendment of a pleading may operate from the commencement of the proceeding, even if it is otherwise statute barred. It says that Pt 16 “adopts, simplifies and streamlines the process and procedures which operated under the former Rules and does not substantially alter existing practice.”: Explanatory Statement, Federal Court Rules 2011, 13-14. I do not consider that the new rules made any change of significance in relation to this question. Should the new rules be seen to operate to alter this practice I would rely upon my broad discretionary powers in rr 1.32, 1.33 and 1.35 to take the same approach as I set out below.

49    The application before Murphy J did not seek to add a new cause of action to the statement of claim. However his Honour suggested at [19] that this too would be permissible under the Rules by stating as follows:

I note also that the amendments to the pleadings under consideration are of lesser significance in the proceeding than, for example, an application to add a new cause of action after the limitation period has expired. Yet r 8.21(2) makes it clear that an amendment to add a new cause of action which is otherwise statute barred, is allowable, and the amendment may run from an earlier date.

50    I agree that r 16.53 of the Rules should not be understood to prevent amendments to statements of claim that would have the effect of adding a new cause of action that would otherwise be time barred. To suggest otherwise overlooks not only the changing philosophy and approach of the Court and of the legislature to ensuring that justice is done between the parties on all disputed issues, but also the structure and approach of the current Rules. That approach is to ensure flexibility. Rule 16.53, together with the power provided by s 59(2B) of the Federal Court Act, ensures that the Court will be able to do justice between the parties where amendment to pleadings is sought irrespective of the nature of the amendment or the circumstances in which it has arisen. The only limitation is the discretion of the Court to grant leave. Further, it would be a most unusual result if leave could be granted to amend an originating application to include an otherwise time barred claim, as is contained in r 8 of the Rules, if there were no power to allow consequential amendments to be made to the pleadings. An amendment to the originating application in those circumstances would be a futility.

51    It is not strictly necessary to revert to the broad discretionary powers contained in the Rules given my finding that r 16.53 is sufficient to grant the type of relief sought. If the interpretation of r 16.53 that I have adopted is incorrect though, rr 1.32, 1.33 and 1.35 may plainly be relied upon to produce the same result. Rule 1.32 permits the Court to ‘make any order that the Court considers appropriate in the interests of justice’. Rule 1.33 permits the Court to ‘make an order subject to any conditions the Court considers appropriate’. Rule 1.35 permits the Court to ‘make an order that is inconsistent with these Rules and in that event the order will prevail’. The breadth of such provisions allows the Court to exercise the power explicitly afforded to it following the decision of Wardley in 1994.

52    The next issue is whether leave should be granted to make the accessorial liability amendments. Given my findings that such amendments are inadequate, it would be premature for me to determine whether leave would be granted if the amendments addressed the deficiencies identified above. This can only be decided if the accessorial liability amendments are re-formulated.

The Papadatos amendments

53    The Papadatos amendments do not form a new cause of action. Paragraphs [34]–[36] in the extant statement of claim already allege that Mr Papadatos had made misleading or deceptive representations to John. The Papadatos amendments merely allege that Mr Papadatos had provided to John additional misleading or deceptive representations at an earlier time. Such representations also related to the notional cash allocation to John.

54    As such, the only issue that arises on the Papadatos amendments is whether the amendments would apply from the date they were made or from the date that the statement of claim was filed. This is the same issue that was considered by Murphy J in APC Holdings. For the same reasons that his Honour provided at [17] and [18] of that decision, extracted at [48] above, I also find that the amendment to a pleading under r 16.53 of the Rules may operate from the filing of the statement of claim, even where it would otherwise be statute barred.

55    Turning to whether leave should be granted to make the Papadatos amendments, the discretion of the Court to do so is broad: University of Sydney v ResMed Ltd (No 5) [2012] FCA 232 at [14]. It is odd that the applicants did not explain why the further claim against Mr Papadatos was not made earlier, especially where it may be inferred that John, being the recipient of the email that founds the claim, had access to it at all relevant times. However there are a number of factors that weigh in favour of allowing the amendments. First, the applicants have stated that they do not envisage filing any further evidence should the amendments be allowed. Secondly, the respondents have not yet served or filed any evidence in the proceeding. Thirdly, the respondents did not identify any prejudice that would be suffered should the amendments be allowed.

56    In these circumstances, and considering that the further claim arises out of the series of events between the parties which are the heart of the dispute between them, I grant leave for the inclusion of the Papadatos amendments in the statement of claim.

ORDERS

57    It follows that the applicants are granted leave to file and serve an amended statement of claim which incorporates each of the amendments in the proposed statement of claim, except for the accessorial liability amendments. This does not of course prevent the applicants from seeking leave to file a further amended statement of claim addressing the issues discussed above in respect of the alleged accessorial liability of the individual respondents. The costs of this application will be reserved until the final hearing.

Associate:

Dated:    4 March 2014