Federal Court of Australia

O’Mara Holdings Pty Ltd v The Patch Australia Pty Ltd [2022] FCA 366

ORDERS

THE COURT ORDERS THAT:

1.    The proceeding be dismissed with costs.

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

REASONS FOR JUDGMENT

STEWART J:

Introduction

1    The applicant, O’Mara Holdings Pty Ltd, and the first respondent, The Patch Australia Pty Ltd, were the nominees of Douglas John O’Mara and Mark Andrew Williams (the second respondent), respectively, in a joint venture to develop a media and real estate internet portal specifically for the Canberra market. The nominee companies caused to be incorporated and became the principal shareholders in a corporation, The Canberra Portal Pty Ltd, as the vehicle of their joint venture. In an effort to avoid confusion, I will refer to that company as the JV company. The basic idea was that Mr O’Mara through O’Mara Holdings would contribute $200,000 to the venture and Mr Williams through The Patch or other companies associated with him would contribute skill and expertise in developing the portal.

2    O’Mara Holdings had contributed $150,000 in three instalments of $50,000 when Mr O’Mara became discouraged and discontent with how long The Patch was taking to develop the portal for the JV company. Mr O’Mara caused O’Mara Holdings to withdraw from the venture and demand repayment of the $150,000 paid by it. It has framed its claim as being against The Patch for damages for a misrepresentation amounting to misleading and deceptive conduct contrary to s 18 of the Australian Consumer Law (ACL). It also claims against Mr Williams as an accessory on the basis that he was “involved” in making the representations as contemplated by s 2 of the ACL, such liability being provided for in s 236(1) of the ACL.

3    I have concluded that the applicant has not made out its claims. My reasons are as follows.

The pleaded case

4    It is necessary to identify the pleaded claim with some specificity.

5    The applicant pleads that in the course of discussions and related correspondence in late 2016 and early 2017 between Mr Williams and Mr O’Mara about establishing the portal, Mr Williams stated that The Patch had the capacity and knowledge to provide web design and technical services towards the capacity of the portal and that such services could be provided such that the portal would be ready for launch on 1 May 2017. The particulars given in respect of this representation are an email from Mr Williams to Mr O’Mara dated 22 November 2016 and oral conversations between Mr Williams and Mr O’Mara.

6    The applicant pleads that at the conclusion of these discussions, it was agreed between Mr Williams and Mr O’Mara that: (a) a company would be incorporated; (b) that company would own the portal; (c) Mr Williams would cause The Patch to provide web-design and technical services to the newly incorporated company for the purpose of establishing the portal; and (d) Mr O’Mara would provide real estate data and money to the newly incorporated company for the purpose of establishing the portal.

7    It is common ground on the pleadings that the JV company was incorporated on 9 May 2017. I interpolate that the issued shares in the JV company were held as follows: O’Mara Holdings held 30 class A shares, The Patch held 60 class A shares, and RECON OZ Pty Ltd and The Real Estate Institute of Australia Ltd were each issued 5 class B shares.

8    It is also common ground that on 11 May 2017, the JV company and its shareholders concluded a written shareholders agreement. Pursuant to cl 10.1(a) of the shareholders agreement, it was acknowledged and agreed that as at the date of the agreement the JV company had received initial funding of $400,000 by way of an interest-free, non-recourse shareholder loan from The Patch and $200,000 by way of an interest-free, non-recourse shareholder loan from O’Mara Holdings. By cl 10.1(b) the initial funding could be provided in instalments, and by cl 10.1(c) The Patch’s initial shareholder loan could be advanced in the form of financial and professional contributions of equivalent market value.

9    I interpolate to observe that the expression of cl 10.1(a) as the JV company having already received the initial funding from the class A shareholders is inconsistent with the expression of cll 10.1(b) and (c) as providing for how that funding might be furnished in the future. As will be seen, the fact of the matter is that as at the date of the shareholders agreement, only $100,000 from O’Mara Holdings had already been provided. There is no dispute about this.

10    Paragraph 13 of the amended statement of claim (ASOC) states the following:

By virtue of Mr Williams’ statements prior to the incorporation of [the JV company], both written and orally, and by entering into the Shareholders Agreement, The Patch represented to O’Mara [Holdings] that it had, as at May 2017, and would continue to have, the capacity to comply with and fulfil the terms of the Shareholders Agreement within the space of approximately six months, including a readiness, willingness and ability to provide the services contemplated in clause 10.1(c) as and from the date of the Shareholders Agreement (the Representations).

[Emphasis added.]

11    The applicant pleads that Mr Williams, “as the principal, representative and agent” of The Patch, made the representations on behalf of The Patch and was, as a result, “involved” in the making of the representations as that term is defined in s 2 of the ACL. It obviously makes no sense to plead that Mr Williams was both the principal and the representative and agent of The Patch. I take this pleading to mean that he made the representations on behalf of The Patch. That reading is consistent with paragraph 13 of the ASOC that pleads that the statements that were made by Mr Williams amounted to representations by The Patch, not by Mr Williams.

12    The applicant pleads that in reliance on the representations, O’Mara Holdings entered into the shareholders agreement and advanced the JV company the sum of $150,000, which is defined as the “Loan”, in three separately identified transfers. The respondents admit that the sum of $150,000 was paid by O’Mara Holdings to the JV company by way of those transfers as payments made under cl 10.1(a)(i) of the shareholders agreement. As will be seen, the payments were in fact made to an associated company of The Patch, but because of the position on the pleadings they are to be taken to have been made to the JV company. Presumably there was an accounting entry between the JV company and the recipient to record this.

13    In paragraph 18 of the ASOC, the applicant pleads, which the respondents deny, that the representations were misleading and deceptive because The Patch:

(1)    was not ready, willing and able to provide the services it, through Mr Williams, represented that it would provide;

(2)    has yet to provide any, or any valuable, services to the JV company justifying its initial shareholder contribution;

(3)    has failed, without explanation, to progress the development of the portal contrary to its representations leading up to and in the shareholders agreement; and

(4)    has refused to provide or has otherwise neglected to provide the professional contributions.

14    The applicant then pleads that because of the matters in paragraphs 13 and 18 of the ASOC (i.e., referred to in [10] and [13] above), and because the representations were made in trade and commerce, The Patch and Mr Williams engaged in conduct in breach of s 18 of the ACL. This is denied by the respondents.

15    The applicant pleads that pursuant to the terms of the shareholders agreement, the JV company is not obliged to repay the loan to O’Mara Holdings until the precondition in cl 10.1(d) is met. That clause provides, in effect, that repayment of each initial shareholder loan in response to any request for repayment is subject to the company having appropriate excess free cash flow after taking into account current and future commitments under the business plan, and the request for repayment not being made within the first 24 month period from the date of the agreement (i.e., not before 11 May 2019). The respondents admit these averments. That is to say, it is common ground that the JV company was not (yet) obliged to repay the loan as at the time of the pleading.

16    The applicant pleads that as a result of The Patch’s failure to comply with its obligations under the shareholders agreement, the precondition on repayment of the loan in cl 10.1(d) cannot be satisfied, making the loan unrecoverable. It is also pleaded that the JV company has insufficient assets from which to repay or refund the loan.

17    The applicant pleads that as a result of its contribution of the loan in circumstances where the loan cannot and will not be repaid, it has suffered loss and damage.

Issues to be decided

18    The parties identified the following as being the issues requiring determination at trial:

(1)    Whether The Patch made the representation pleaded at paragraph 13 of the ASOC.

(2)    If yes to (1), whether the representation made on behalf of The Patch was misleading or deceptive within the meaning of s 18 of the ACL.

(3)    If yes to (1) and (2), whether the applicant relied on the representation (in concluding the shareholders agreement and advancing the sum of $150,000). This issue should be framed as whether the misrepresentation caused the loss, rather than as reliance, because of the wording of s 236(1) of the ACL.

(4)    If yes to (1), whether Mr Williams was “involved in” the making of the alleged representation on behalf of The Patch within the meaning of ss 2 and 236(1) of the ACL.

19    At one time it was said that questions of waiver and apportionment of loss arose, but it was ultimately accepted by counsel for the respondents that because those matters had not been pleaded, they did not arise for decision.

20    In opening, the applicant firmly eschewed reliance on, or the operation of, s 4 of the ACL, which concerns and provides rules for representations as to future matters. It says the representations that it pleads and relies on are only in relation to present matters. The representation pleaded in paragraph 13 of the ASOC, and quoted at [10] above, must therefore be understood strictly as a representation only as to present (i.e., non-future) matters.

21    The result is that there was no evidentiary burden on the respondents with respect to them having reasonable grounds for making the representation relied on by the applicant.

The witnesses

22    Only Mr O’Mara and Mr Williams gave evidence. Expert evidence was filed by both parties but not relied on. Mr O’Mara’s cross-examination did not add much to his written evidence and he otherwise appeared to be a neutral if not particularly expansive witness.

23    Mr Williams, on the other hand, was a loquacious witness; he problematized the often simple questions asked of him or found a way to give circuitous or embellished answers. The simple or precise truth was often not Mr Williams’s first choice in answering the questions put to him.

24    There is nevertheless little, if any, material conflict between Mr O’Mara and Mr Williams’s evidence, and almost all of the material evidence is in the documents.

The course of events and the representation

Events prior to the execution of the shareholders agreement

25    Mr O’Mara has been involved in the property industry for over 25 years. He is and has been involved with entities that provide strata management and commercial and residential property services in the ACT, NSW, Vic and Qld. Mr O’Mara considers himself an experienced businessperson.

26    Mr Williams has also been involved in the property industry for many years. He is also involved in media and publishing with his business partner, Morris Schwartz. Mr Schwartz and Mr Williams founded SchwartzWilliams Pty Ltd to undertake media and publishing business ventures. SchwartzWilliams was registered as a company in August 2014, and in February 2018 the company’s name was changed to W Media Holdings Pty Ltd. SchwartzWilliams is part of a group of media publishing companies. The group publishes The Saturday Paper newspaper and The Monthly periodical, amongst others.

27    In 2004, Mr O’Mara and Mr Williams met each other when they were both working for Ray White Real Estate. For around five years, Mr O’Mara and Mr Williams worked together and formed a close relationship.

28    Some years later, in mid-November 2016, Mr Williams and Mr O’Mara had a discussion in which Mr Williams raised the possibility of Mr O’Mara investing in a new real estate portal focussed on Canberra, namely an interactive website where real estate that is for sale or for lease is displayed, and searches and enquiries from buyers can be made. The evidence of Mr O’Mara and Mr Williams was not materially inconsistent on this point, and gave no more detail of the discussion other than that Mr Williams said that a summary of what was discussed was outlined by him in a follow-up email to Mr O’Mara on 22 November 2016.

29    That discussion is the basis of the oral statements on which the applicant relies as giving rise to the representation on which it sues. I find that no material statement was made by Mr Williams in that discussion giving rise to that representation, other than anything in any event independently stated in the follow-up email. The discussion is merely a precursor to what followed.

30    The email of 22 November 2016 is said to contain the first set of written statements made by Mr Williams on behalf of The Patch (noting at this point that The Patch was not yet registered) that give rise to the representation.

31    The subject line of the email is “Canberra super-portal and The Canberra Voice media site”. In the email, Mr Williams explained that the core idea was to combine “classifieds” with media, and focus on a “single, local, market”. He went on to say the following (as written):

The media piece will be called The Canberra Voice. It will be a daily, afternoon, weekday, online newspaper, focussing on local Canberra and ACT issues – Territory politics, business, the courts, planning, sport, education, crime, etc., etc, …

SchwartzWilliams will provide the technology for The Canberra Voice and the 5 listing portals, based on existing SW platforms that SW will provide to our new venture under licence in perpetuity for $1

SW will design, build and upload content into all platforms ready for launch.

SW will also be responsible for all the ongoing day to day management, including, editorial, technology support, help desk, listing curation, etc

SW will create the design and functionality of all the elements, and build the operational platforms with all media and listing content, starting December 1, 2016, and ready during April 2017. …

The whole suite will be ready for launch to market on May 4, 2017

The shareholdings will be as follows:

-    Morry and Mark 60%

-    Doug 30% …

[Emphasis added.]

32    On 1 December 2016, The Patch was registered (as a company named SchwartzWilliams No. 4 Pty Ltd – the company name was later changed to The Patch). The Patch was owned and controlled in the SchwartzWilliams group of companies.

33    The second set of written statements said to give rise to the representation are said to have been made on 11 December 2016 when Mr Williams emailed Mr O’Mara and attached heads of agreement. Mr Williams said the following in the covering email (as written):

Please find attached the HOA [i.e., heads of agreement] for Canberra media portal and real estate super portals.

We have briefed our developers and design teams and pushed back the start date to 1 January 2017. The HOA reflects the new dates. …

… All of the day to day SW will look after. …

34    The email also refers to “the first 4 months of bills” being from 1 January to 30 April, and that Mr O’Mara’s help and input would be needed in May, June and July “into the launch phases”.

35    The draft heads of agreement attached to the email contemplated an agreement being concluded between SchwartzWilliams or an entity nominated by it, referred to as SW, and Mr O’Mara or an entity nominated by him, referred to as DOM, as well as a company to be formed. It contained the following relevant statements under the heading “Commercial terms” and next to the section “Description of portal/business” (as written):

The Business will create a super-portal for real estate and a media business portal in Canberra, ACT, Australia. The intention of the Business is to launch each portal as determined by the board and growth will be dependent upon Business financial ability. It is proposed that the Voice, the real estate media portal, e-newsletter, and the luxury and residential portal will be launched on 01 June 2017. The new projects, commercial and rural portals will be launched progressively between 01 July 2017 and 30 November 2017.

The portals intended to be created are:

•    The Canberra Voice (community media portal and e-newsletter)

•    a real estate media portal;

•    Canberra / ACT residential portal;

•    Canberra / ACT luxury portal;

•    Canberra / ACT new projects portal;

•    Canberra / ACT commercial portal;

•    Canberra / ACT rural portal; and

•    e-newsletter covering the above real estate portals.

[Emphasis added.]

36    The commercial terms included a section headed “SW contribution” which listed, amongst other things, that “SW” would be fully responsible for the establishment, delivery and ongoing operation of the company to be incorporated and provide all listing and agent data feeds for ACT from the “SW” portal thehomepage.com.au.

37    The heads of agreement were never executed. However, since there was no disagreement about them, they reflect a record of the common understanding of the parties at that time as to what was contemplated.

38    The third set of written statements said to give rise to the representation are contained in an email from Mr Williams to Mr O’Mara on 3 January 2017. The email is in part a response to an email forwarded by Mr O’Mara which contained comments by his lawyer, John Irvine of Trinity Law, on the heads of agreement. Mr Williams’s email contained the following relevant statements by Mr Williams (“SW” refers to the yet to be confirmed entity nominated by SchwartzWilliams) (as written):

….

To keep momentum flowing to the proposed May/June launch we propose the following next steps,

1. Sign the HOA and attached Development SLA in principal prior to 9 January 2017.

2. SW commence development on 9 January 2017.

3. The first 25% of development loan by shareholders to be paid to SW by 9 January 2017.

4. Engage Minters to prepare the Company entity and draft shareholders agreement, SLA and IP licence in draft and distribute to Doug Morry and Mark and lawyers by 20 January 2017. Ambition for these documents to be agreed and signed by 9 February 2017. SW continue with development in good faith and no further loan payments to be made until all the above documents have be agreed by all parties and signed.

…

DOUG ISSUED 30% SHAREHOLDING IN NEW CO.

MARK & MORRY ISSUED 60% SH IN NEW CO

RECON AND REIA ISSUED 10% SH IN NEW CO

$200 K LOAN FROM DOUG TO NEW CO TO FUND 1/3 OF DEVELOPMENT AND LAUNCH BUDGET.

$400 K LOAN FORM MARK AND MORRY TO NEW CO TO. FUND 2/3 OF DEVELOPMENT AND LAUNCH BUDGET.

SW IS CONTRACTED BY NEW CO TO DEVELOP AND LAUNCH PLATFORM INCLUDING CONTENT, LEGALS, IT, DESIGN ETC SW IS CONTRACTED BY NEW CO TO OPERATE AND MAINTAIN PLATFORM IN ALL ASPECTS.

[Emphasis in italics added.]

39    Attached to Mr Williams’ email of 3 January 2017 was a 15 page document outlining ideas and plans for the development of the portal. The document included a detailed “Process and Timeline” which concludes on 29 May with “Deploy to hosting and publishing”, which I understand to be the launch of the portal, and a “Creation, Development & launch Pricing” cost estimate. The latter concludes with a “fully inclusive IT, branding, creation, testing and delivery for launch” price of $692,450 inclusive of GST, but includes a comment that “SW have rounded the contract fee down to $600,000 incl GST”. That is to say, that would be the development cost which would then be split with one third to be contributed by Mr O’Mara’s nominee and the remainder to be contributed in kind by the SchwartzWilliams nominee. There was also an estimated operational cost of $573,000 per annum plus GST.

40    On 18 January 2017, DS Residential Pty Ltd, a company controlled by Mr O’Mara, advanced $50,000 to SchwartzWilliams at the request of Mr Williams. This was the first of three payments made by Mr O’Mara or entities associated with him.

41    The fourth set of written statements said to give rise to the representation are said to have been made on 3 February 2017 in a draft copy of an “Intellectual property licence” emailed by James Hutton of Minter Ellison, lawyer for Mr Williams and his interests, to Mr O’Mara. The draft copy of the intellectual property licence names SchwartzWilliams as the licensor and contains a schedule headed “Agreement Details” and a section within the schedule headed “The Platform”. The following is then set out:

SchwartzWilliams (“SW”) has prepared a proposed strategy for a new entity of Doug O’Mara, Morry Schwartz and Mark Williams (“DMM”), to create, develop and operate Canberra news media portals, a real estate super listing portal and news media platform. This platform will include both an e-newsletter and local new media communication as well as a new real estate media and super portal platform. The new media platform will be based upon existing SW digital platforms under the terms of this licence.

The platform will be based upon SW portals and digital components whilst supported under a total service arrangement and agreement with and by the SW for media content, curation, digital IT, help desk, hosting, Admin, invoicing, marketing, managing advertising, database, management, compliance management, plus the creation and distribution of regular e newsletters.

The DMM platform for Canberra and ACT will comprise:

•    Local new media portal

•    Real estate media portal

•    News media e newsletter

•    Real estate media newsletters

•    Listing hub with CRM capabilities

•    Residential listing portal

•    Commercial and business listing portal

•    New projects listing portal

•    Rural listing portal

•    Luxury listing portal

•    A group home page

…

The Listing Hub will provide appropriate users with the ability to manage listings on the new DMM site.

The Listing Hub provides a number of reports for Listing and Data Room access. SW recommends the initial project launch with these reports.

[Emphasis added.]

42    Mr O’Mara said that he met with Mr Williams on 23 March 2017 and that he recalled at this meeting that Mr Williams said that “the development of the portal is generally on track, except for a bit of slippage of a few weeks”. Mr O’Mara said he was reassured by these comments.

43    On 2 May 2017, Mr O’Mara caused the second payment of $50,000 to be made to SchwartzWilliams at the request of Mr Williams.

44    On 5 May 2017, Mr O’Mara emailed his lawyer, Mr Irvine, to nominate O’Mara Holdings (the applicant) as trustee for the O’Mara Investment Trust as the entity to have the shareholding in the entity to be registered.

45    On 9 May 2017, the JV company was registered with Mr Williams as the sole director and relevantly The Patch and O’Mara Holdings as the class A shareholders with 60/90 and 30/90 shares respectively. As mentioned, certain non-aligned industry interests held the 10 class B shares.

46    Also on 9 May 2017, an execution version of the shareholders agreement was provided by Minter Ellison to Mr Irvine. This document was executed on 11 May 2017.

47    The shareholders agreement is said to contain the fifth set of written statements. The relevant provisions are extracted or summarised below, noting that references to SchwartzWilliams and SW are to The Patch, and references to DOM are to O’Mara Holdings:

(1)    With regard to funding, much of cl 10.1 is relevant:

10.1    Initial Funding

(a)    The parties acknowledge and agree that as at the date of this agreement, [the JV company] received initial funding from Class A Shareholders as follows:

(i)    $400,000 by way of an interest-free, non-recourse shareholder loan from SchwartzWilliams; and

(i)    $200,000 by way of an interest-free, non-recourse shareholder loan from DOM,

(each an Initial Shareholder Loan).

…

(c)    The parties acknowledge and agree that SW’s Initial Shareholder Loan may be advanced to the Company in the form of financial and professional contributions of equivalent market value (as agreed with DOM acting reasonably or by having reference to expenditure summaries provided by SW to DOM prior to the date of this agreement) made by SW or its Affiliates in respect of the Business on or after the date of this agreement.

(d)    Subject to compliance with the Corporations Act, and the Company having appropriate excess free cash flow after taking into account current and future commitments under the Business Plan, the Company will repay each Initial Shareholder Loan upon request by the relevant Shareholder, provided such request will not be made within the first 24 month period from the date of this agreement.

(2)    Schedule 3 set out the shareholder obligations. Those included that “SchwartzWilliams will provide services in accordance with the Services Agreement.”

(3)    Schedule 4 set out the elements of the Canberra Portal Software, including providing that it “is based on SW portals and digital components and supported under a total service arrangement between SW and [the JV company] (including media content, curation, digital IT, help desk, hosting, admin, invoicing, marketing, managing advertising, database management, compliance management, plus the creation and distribution of regular-newsletters).”

48    As contemplated in the preceding emails and other documents that were exchanged between the parties, the result was that the shareholding company nominated by the SchwartzWilliams interests, namely The Patch, would make its shareholder’s contribution, to the value of $400,000, by way of professional contributions in the nature of developing the necessary software, portals, and so on in order to deliver the project. It was explicitly contemplated that this would be done under a services agreement with the JV company.

Events after the execution of the shareholders agreement

49    On 29 May 2017, O’Mara caused the third instalment of $50,000 to be paid to SchwartzWilliams in respect of the portal business venture.

50    Mr Williams in his affidavit deposed that there were a number of conversations which took place between him and Mr O’Mara “sometime after executing the shareholders agreement”, where they discussed Mr O’Mara providing the data to contribute to the project, such as email addresses from Mr O’Mara’s database and listing feeds. Mr Williams said that the listing feeds “can be described as what was required to launch and publish the content for the Portal and The Patch”. It is, however, to be noted that none of the documentation that passed between the parties, including the shareholders agreement, recorded any such obligation on O’Mara Holdings.

51    Between late July and early September 2017, Mr Williams said in his affidavit that work was undertaken on a logo and navigation bar for the “Canberra Patch” and configuration of the “Canberra Patch” production including a link to an operational site.

52    On 6 September 2017, Mr Williams emailed Mr O’Mara saying that the “Canberra Patch environment is up”, that “approx. 40 articles” had been published, that is, online for the public to see, and that “The property portals are currently being tested in prep for branding.” In cross-examination Mr Williams added to this that at this point the property portals had been developed and were being tested within a development site environment.

53    On the same day, Mr O’Mara replied noting that the site “looks great at first glance … I thought it was the Canberra Voice? Looking forward to seeing the portals”.

54    On 25 September 2017, Mr O’Mara emailed Mr Williams following up on progress: “just wanted to check in on where we are up to and when we expect to get this and the portals out in the market place.” Mr Williams replied the next day relevantly saying that the “portals are running a little slow but looking great and the guys have been spending extra time in getting all right … We can be in market with media within a couple of weeks and listing portals progressively over the next 3 leading up to Xmas”.

55    Two months then passed and on 1 December 2017, Mr O’Mara emailed Mr Williams noting that he did not want to proceed with the project. Relevantly:

I just wanted to have a discussion on this and let you know that I won’t be moving forward on this project.

It’s been over 12 months since we first met to discuss this and I am disappointed that we are now at the end 2017 and still nothing is live, the updates on where things are up to are non-existent, my lawyer isn’t getting a response to his follow ups from Minters, and we still don’t have an executed agreement in place.

There no hard feelings from my end at all just don’t wish to proceed any further with it as have other investments wish to focus on.

I have transferred $150k so far in good faith but would like to discuss how to exit this and get my money back.

56    On the same day, Mr Williams replied with the following:

Understand, I’ll give you a call to update you on some news. All good but consumed me for past 2 months.

Very happy to refund and to arrange process when we chat.

Also great to have you still with us in the project as shareholder.

57    In cross-examination, Mr Williams said that it was not correct that he was agreeing to refund Mr O’Mara’s money because he knew there had been no progress on the listing portals or because there were delays in the developments of the website. Mr Williams rather put the emphasis on “arrange the process” because Mr O’Mara was an integral part of the distribution and building of a base audience and “without him, we would have wasted a hell of a lot of money, which we have”.

58    Mr Williams deposed that around this time, his understanding of why Mr O’Mara did not want to continue with the project is that he had lost interest in the project and no longer wanted to contribute to its development.

59    The next year, in late February 2018, Mr O’Mara met with Mr Williams and Mr Schwartz. Mr O’Mara in his affidavit recalled that Mr Williams and Mr Schwartz apologised for the delay, asked Mr O’Mara to stay on and said that they would have the Canberra Portal “up and running by March 2018” and that the final $50,000 investment was not required; Mr O’Mara said he agreed to “see how you go”. In cross-examination, Mr O’Mara described the March 2018 completion date as an “undertaking”, presumably made by Mr Williams or Mr Schwartz or both. Mr Williams could not recall making such an undertaking and “would have remembered if I had have said a statement like that”.

60    Mr Williams recalled this meeting in his affidavit, except he does not mention the March 2018 completion deadline, and recalls that he and Mr Shwartz said that they would change the branding from the “Canberra Patch” to the “Canberra Voice”. Mr Williams in oral evidence said that this branding change was an involved and not a simple exercise.

61    Mr Williams said that in early March to May 2018, work was undertaken on a draft logo for the Canberra Voice. Also in mid-May 2018, consideration was given to developing a job advertisement for assistance with the development of the Canberra Voice.

62    On 9 April 2018, Mr O’Mara emailed Mr Williams and relevantly said “I think its best we just call it day and you return my $150k. No hard feelings”.

63    The next day, on 10 April 2018, Mr Williams replied relevantly saying, “I’m really sorry with this. Please hang in there with us.”

64    A week later on 17 April 2018, Mr O’Mara replied to Mr Williams:

Another week without hearing a thing. This all started in November 2016 and we are now 18 months down the track and i have no faith whatsoever in the project now. I have also been without $150k now for over 12 months.

I want out of this and wish both yourself and Morry all the best with it.

Please return my money to:

[Account details]

65    In cross-examination, Mr O’Mara agreed that he withdrew from the project before it had the opportunity to come to fruition. He also later said that he did not contribute any data to the project because the website, or portal, to his knowledge and in his view, was never such that it was ready to take active property portal listings.

66    On 2 July 2018, Mr Williams sent a text message to Mr O’Mara saying:    

Hi Doug, hope well. I’m wanting to finalise an arrangement with Morry, that Morry and I buy your shares. I can then pay the $150 k and the voice can pay me back later as cash flow allows, I would also like you to retain some share holding like 10% as a free carry for you. Hopefully I can finalise and document all soon, so we can help you exit and also we can [not] start trading or publishing voice until this is done.

67    No repayment was forthcoming so, on 5 September 2018, Trinity Law on behalf of O’Mara Holdings demanded repayment of the $150,000 already advanced to the JV company.

68    On 2 October 2018, Minter Ellison replied to the notice on behalf of the JV company and The Patch. They rejected repayment and referred to cl 10.1(d) of the shareholders agreement that provided that the JV company would only repay the initial shareholder loan subject to it having excess free cash flow and, among other matters, that no request for repayment be made within 24 months.

69    After this, the lawyers for the parties exchanged further correspondence in relation to the repayment of the $150,000, as did Mr O’Mara and Mr Williams. This included a 3 October 2018 email from Mr Schwartz to Mr O’Mara saying that the Canberra Voice was ready to be launched.

70    Mr O’Mara replied on 5 October 2018, noting that he had referred the matter to his lawyers.

71    On 22 February 2019, Mr O’Mara made an application separate to this proceeding for access to inspect the records of the JV company. Consent orders were agreed to and access was granted.

72    On 19 March 2018, Mr Williams’s bookkeeper generated and provided to him a copy of an invoice in the sum of $600,000 inclusive of GST for the services said to have been provided by SchwartzWilliams for the work done on the Canberra Portal/Voice.

Consideration

Issue 1 – whether The Patch made the representation

The pre-incorporation statements

73    As mentioned, The Patch was incorporated on 1 December 2016. Two of the sets of statements relied on by the applicant as constituting, or contributing to the making of, the pleaded representation by The Patch were made before that date. They are oral statements made by Mr Williams in conversation with Mr O’Mara in mid-November 2016 and the email of 22 November 2016 (see [28] above). The first question that therefore arises is whether such statements can amount to representations by The Patch, a corporation not yet incorporated.

74    The statutory prohibition in s 18 of the ACL is that “a person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive”. The respondents submit that, as a matter of logic, conduct that was engaged in prior to the incorporation of a company is not and cannot be the conduct of the company. Reference was made to NL Investment Group Pty Ltd v Parc Vue Project Botanic Pty Ltd (Trustee) [2020] FCA 711 at [29]-[30] where it was held that a company cannot be “involved” in conduct that is in contravention of s 1041H of the Corporations Act 2001 (Cth) (being a prohibition against engaging in misleading or deceptive conduct in relation to a financial product or a financial service) where the conduct occurred prior to the company’s incorporation. The concept of being “involved” in conduct – which includes aiding, abetting, counselling or procuring the conduct – is broader than being engaged in the conduct. A fortiori, it is submitted by the respondents, a company cannot itself have engaged in conduct before it was incorporated.

75    The applicant, however, refers to Rafferty v Madgwicks [2012] FCAFC 37; 203 FCR 1. An issue in the case was whether certain statements which were said to be misleading and deceptive could be attributed to a company that had not yet been incorporated at the time the statements were made. It was held that conduct by a person in respect of a company that had yet to be incorporated, and where that person was to become a director of that company, could be taken to be conduct of that company upon incorporation where the representations were made for the benefit the company: at [103], [216]-[221] per Kenny, Stone and Logan JJ. That was on the basis that s 84(2) of the Trade Practices Act 1974 (Cth) (TPA) provided that conduct engaged in on behalf of a body corporate by a director within the scope of their actual or apparent authority shall be deemed to have been engaged in also by the body corporate, and, as found by the trial judge, upon its incorporation, the company had an obligation to correct the misrepresentation.

76    The trial judge in that case held that the misleading or deceptive conduct was a continuing course of conduct and there was a duty to correct it once incorporated: Rafferty v Time 2000 West Pty Ltd (No 4) [2010] FCA 725 at [211] per Besanko J. With v O’Flanagan [1936] 1 Ch 575 and Rhone-Poulenc Agrochimie SA and Anor v UIM Chemical Services Pty Ltd [1986] FCA 218; 12 FCR 477 were cited as authority.

77    It is to be noted that Rafferty v Madgwicks does not appear to have been brought to the attention of the Court in NL Investment Group. Chapter 7 of the Corporations Act, in which the provisions dealing with misleading or deceptive conduct in relation to financial products and financial services which were the subject matter of NL Investment Group are to be found, has a provision equivalent to that on which the relevant conclusion in Rafferty v Madgwicks was based, namely s 769B. That section also appears not to have been brought to the attention of the Court in NL Investment Group. It appears that NL Investment Group is inconsistent with Rafferty v Madgwicks.

78    The statutory prohibition in s 18 of the ACL has an equivalent provision to s 84(2) of the TPA, namely s 139B of the Competition and Consumer Act 2010 (Cth). In the circumstances, Rafferty v Madgwicks appears to be on all fours with the present case, and NL Investment Group is not authority against a finding that the conduct of Mr Williams prior to the incorporation of The Patch could be conduct of The Patch.

79    It follows that it is possible for Mr Williams’s statements prior to the incorporation of The Patch to amount to conduct of The Patch as at the date of the shareholders agreement, namely 11 May 2017. That will depend on whether, in all the circumstances, the statements can be said to have been made by Mr Williams as a future director on behalf of and for the benefit of the company still to be incorporated, and whether there was a duty on the company, once incorporated, to correct any misrepresentation or deception in such statements. It is therefore necessary to look at the statements.

Future matters?

80    I turn now to the statements which are said together to amount to a representation by The Patch that as at May 2017 it had and would continue to have the capacity to comply with and fulfil the terms of the shareholders agreement within the space of approximately six months, including a readiness, willingness and ability to provide the services contemplated in clause 10.1(c) as and from the date of the agreement. The essential question that arises is to what extent, by entering into a contract, a contracting party can be said to have represented that it is ready, willing and able to fulfil the contract including within a timeframe that is not a term of the contract but which was represented to be the intended timeframe.

81    Because, as indicated, the applicant put its case only on the basis that the representation was not as to a future matter, the representation must be understood as being that The Patch was, “as at May 2017”, ready, willing and able to provide the services contemplated by the shareholders agreement within approximately six months. That is to say, the representation that is relied on is not a representation that The Patch would in the future be ready, willing and able to provide the services contemplated by the shareholders agreement.

82    For at least two reasons, that is a curious way of putting the case. First, by not characterising the representation as a representation as to future matters, the applicant has lost the advantage of s 4 of the ACL, in particular the shifting of the evidential burden in respect of a representation as to a future matter onto the respondents to show that they had reasonable grounds for making the representation at the time that it was made. Given the unequivocal way in which the case was put on opening, and accordingly the way in which the trial was conducted, i.e., as not being a case in reliance on any representation as to a future matter, the case must be decided on that basis; the respondents were not forewarned of any need on their part to discharge any evidential burden as to there being reasonable grounds for any representation as to a future matter, so it would be unfair on them to decide the case on the basis of such a representation.

83    Secondly, the authorities which find that the conclusion of a contract gives rise to representations as to willingness and ability to perform the contract generally characterise such representations as representations as to future matters.

84    For example, in Bill Acceptance Corporation Ltd v GWA Ltd [1983] FCA 280; 50 ALR 242, the relevant pleading was that on a particular date the respondent represented that it would pay the applicant a fee calculated on a specified basis if a particular event occurred (at 244). Counsel for the applicant sought to characterise that representation as misleading or deceptive because when the event occurred the respondent did not pay (at 246). Lockhart J characterised the relevant allegations as being that the respondent made certain promises as to its future conduct, that the applicant acted on the face of them and that those promises did not come to pass (at 247). It was held that whether statements or representations of this type are misleading or deceptive must be determined at the time they were made, although this may be determined by reference to later events (at 250). They will be held to be misleading or deceptive if it is established that they were made with knowledge of their falsity or with reckless indifference to their accuracy (at 250).

85    Bill Acceptance Corporation was decided prior to the introduction of s 51A of the TPA which is the precursor to s 4 of the ACL. That is to say, s  51A introduced the notion of a representation as to a future matter that may be misleading or deceptive contrary to s 52 of the TPA (the precursor to s 18 of the ACL) if the representor “does not have reasonable grounds for making the representation” and placing on the representor the evidentiary burden of adducing evidence to show that it had reasonable grounds for making the representation. Thus, the language of “knowledge of falsity or reckless indifference” in Bill Acceptance Corporation was not carried through to the legislation.

86    In Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217, Ormiston J said (at 239) that:

a contractual promise would amount to an implied representation that the promisor then had an intention to carry out that promise. If it can be shown that he had no such intention, he would be guilty of misleading or deceptive conduct. Likewise it would seem that such a representation connotes a present ability to fulfil that promise which, if shown to be untrue at the time of making, would likewise characterise the implied representation as misleading or deceptive.

87    That was approved in Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd [1993] FCA 358; 42 FCR 470 at 506 by Lockhart and Gummow JJ and Serrata Invest Pty Ltd v Rajane Pty Ltd (1991) 6 WAR 419 at 434 by Owen J.

88    In Concrete Constructions Group Ltd v Lightvale Pty Ltd [2002] NSWSC 670; 170 FLR 290, Mason P reasoned as follows:

167     I readily accept that it will be comparatively easy to establish that a contracting party is implicitly representing a present intention to perform it according to its tenor. If the other party can establish causation and loss then damages should ensue, although there is usually little point in addressing such a claim because the law of contract will compensate the innocent party for the consequences of non-performance without even having to prove misleading intent from the inception.

168     But when one turns to an alleged implicit representation as to capacity to perform things are not so simple, nor should they be. There are policy reasons for restraint. The law arms the parties to a contract with rights to damages and other forms of relief if breach occurs or is threatened. A complex set of common law, equitable and statutory rights are superimposed on the terms of the bargain chosen by the parties. That bargain may have the simplicity as a contract to sell a loaf of bread or the complexity of a building agreement such as the one in question in this case.

89    In McGrath; in the matter of Pan Pharmaceuticals Ltd (in liq) v Australian Naturalcare Products Pty Ltd [2008] FCAFC 2; 165 FCR 230 at [138], Allsop J explained (Stone J agreeing) that “the divining of representations from the making of contractual promises and the entry into contracts is a task to be approached with caution and with an eye to all the facts and not by reference to implying representations mechanistically from equivalent promises: see Concrete Constructions … at [156]-[168] per Mason P.”

90    It is now necessary to turn to the statements that are relied on.

The statements relied on

91    As explained (at [29] above), the evidence does not support there being anything said at the meeting in mid-November 2016 that was not subsequently recorded in an email that might give rise to or support the representation relied on. The oral statements at that meeting can therefore be disregarded.

92    As to the first set of written statements (referred to at [30]-[31] above), the applicant draws particular attention to the statement in the email from Mr Williams dated 22 November 2016 that “[i]t is proposed that the Voice, the real estate media portal, e-newsletter, and the luxury and residential portal will be launched on 01 June 2017.” That statement is obviously relevant to the contemplated timeframe for realisation of the project. Since the email was in late November 2016, that a six-month timeframe was contemplated was communicated by that statement in the email.

93    Insofar as an implied representation may have been made by Mr Williams as to the “Voice, the real estate media portal, e-newsletter, and the luxury and residential portal” being ready to be launched on 1 June 2017, the representations falls outside of the pleaded case – no primary case is pleaded against Mr Williams and, insofar as the timing is concerned, that is a representation as to a future matter which is specifically eschewed.

94    The email also states that “SchwartzWilliams will provide the technology” and it will “design, build and upload content into all platforms ready for launch”. It is not identified in the email who SchwartzWilliams was, although it was known to the parties that there were many SchwartzWilliams companies. It could have been a reference to any one or more of them. There is a reference to the shareholding of, impliedly, a new company being Mr O’Mara as to 30% and “Morry and Mark 60%”. There is no suggestion that the latter shareholding would be through a company still to be incorporated as opposed to by Messrs Schwartz and Williams personally. In those circumstances, it is hard to see how the email, which states that SchwartzWilliams would carry out a number of activities, can constitute a representation that a company still to be incorporated, which became The Patch, would have any particular capacity or that any representation was on behalf of such a company.

95    The second set of written statements (referred to at [33]-[37] above) is in the email from Mr Williams of 11 December 2016 and the attached draft heads of agreement. As noted above, the company which would become The Patch was registered shortly prior to this correspondence, on 1 December 2016. Taken together, the email and the draft heads of agreement constitute representations by Mr Williams that at that time he envisaged that The Voice, the real estate media portal, e-newsletter, and the luxury and residential portal would be launched on 1 June 2017 and that the commercial and rural portals would be launched progressively between 1 July 2017 and 30 November 2017. I consider that there is also an implied representation by Mr Williams that at that time he intended and anticipated that the SchwartzWilliams group or the company nominated by it (i.e., the now-incorporated The Patch) would have the capacity to perform the matters contemplated to be performed by “SW”. As I stated above in relation to the first set of written statements, the representation as to when the project would be realised falls outside of the pleaded case.

96    In the result, the second set of written statements do not on their own, or in concert with anything that preceded them, give rise to the representation relied on. That is because they speak only to the intention of the proposal and nothing about capacity. They nevertheless confirm that the contemplated timeframe of the project at that time was still approximately six months. It is therefore not necessary to decide whether (a) the statements could be considered as being made on behalf of The Patch once it was nominated and (b) whether The Patch, once nominated, failed to correct or eschew them.

97    The third set of written statements (referred to at [38]-[39] above) is in an email from Mr Williams to Mr O’Mara on 3 January 2017. The applicant drew attention to the statement “[t]o keep momentum flowing to the proposed May/June [2017] launch.” Also relevant is the statement that “SW is contracted by new co to develop and launch platform including content, legals, IT, design etc SW is contracted by new co to operate and maintain platform in all aspects.”

98    These statements also confirm the contemplated timeframe for the project, and they impliedly represent that the entity to be nominated by SchwartzWilliams, i.e., The Patch, would be willing to undertake the work contemplated to be done by it. Since Mr Williams, who was a director of The Patch, was speaking on behalf of and for the benefit of the company to be nominated, once The Patch was nominated as that company it had the knowledge of Mr Williams gained within the scope of his directorship. The Patch therefore knew that the representation had been made and had a duty to correct it if it was misleading. In those circumstances, the statements are properly ascribed to The Patch. However, for reasons that will become apparent, it is not necessary to my decision to make that finding. I prefer to decide the case on the question of whether any part of the pleaded representation was made at all and, if so, whether it was misleading or deceptive.

99    The fourth set of written statements (referred to at [41] above) is in a draft copy of the intellectual property licence emailed by James Hutton of Minter Ellison, lawyer for Mr Williams and his interests, to Mr O’Mara on 3 February 2017. The statements go no further than to represent that at the time they were made Mr Williams intended and anticipated that SchwartzWilliams would have the capacity to perform the matters contemplated to be performed by it when those matters were required to be performed. There is no mention of another company to be the vehicle for SchwartzWilliams’s interest in the new venture so the statements cannot be taken to be statements by The Patch. If they are statements by The Patch, they go no further than what was represented by The Patch in concluding the shareholders agreement, which I will come to below.

100    The fifth set of written statements is in the shareholders agreement itself, which was concluded on 11 May 2017 (see [47] above). Consistent with the authorities, the conclusion of the shareholders agreement by The Patch amounted to an implied representation by it that it intended, and anticipated being able, to perform its obligations under the agreement when they were required to be performed. However, I do not consider that the conclusion of the shareholders agreement amounted to any representation by The Patch as to its readiness or ability to perform those obligations as at the time of the conclusion of the agreement, or indeed to have them performed on its behalf by some other SchwartzWilliams entity. That is because it was known to the parties that The Patch was only recently incorporated, it had no staff or resources of its own and its obligations were not to be performed immediately, but only over a period of time into the future. Conceivably, conclusion of the shareholders agreement conveyed a representation as to The Patch’s capacity in the future to perform its obligations, but that need not be decided in view of such a representation being beyond the scope of the representation contended for by the applicant.

101    There is nothing in the shareholders agreement about the timing of the project, which is presumably why the applicant relies on the prior statements by Mr Williams.

102    In the circumstances, no representation was made by The Patch as to any present matter (as opposed to a future matter as contemplated by s 4 of the ACL) other than its intention at that time to perform its obligations under the shareholders agreement. That could be expressed as The Patch representing that as at the date of the shareholders agreement it was “willing” (to use the word used by the applicant) to perform the shareholders agreement. No other part of the representation pleaded by the applicant was made by The Patch, which is to say that there was no representation as to The Patch’s readiness or ability to provide the services as at the date of the agreement.

103    In the circumstances, issue 1 must be decided against the applicant. That is to say, no representation was made by The Patch that it “had, as at May 2017, … the capacity to comply with and fulfil the terms of the shareholders agreement within the space of approximately six months, including a readiness … and ability to provide the services contemplated in clause 10.1(c) as and from the date of the shareholders agreement” – “willingness” having been omitted from the pleaded representation for the reasons explained in the previous paragraph. The words “and would continue to have” are also omitted because they are expressly in relation to future matters, which were eschewed.

Issue 2 – whether the representation was misleading or deceptive

104    As dealt with above, the only part of the pleaded representation that is established is that The Patch was as at the date of the shareholders agreement willing to perform the agreement. None of the evidence was directed at establishing that that representation was misleading or deceptive. Indeed, it was not put to Mr Williams that he or The Patch were not willing to perform the agreement at the time that it was concluded. I therefore find that the representation that was made was not misleading or deceptive.

105    The case that was sought to be advanced in evidence was that The Patch lacked the capacity to perform the agreement, i.e., it was not ready and able to perform it. In view of my finding that no representation was made as to The Patch’s capacity as at May 2017 to perform the shareholders agreement, it is not strictly necessary to deal with this aspect so it can be dealt with briefly.

106    There was no evidence directed at the relevant time, being the time that the agreement was concluded. All the evidence was directed at later times, from which it is submitted on behalf of the applicant that the inference should be drawn that as at the time of the agreement The Patch lacked the capacity to perform it.

107    The applicant submits that a lack of readiness and ability should be inferred from the fact that no listing portals were ever launched or created, and that only one news media website was ever created or launched. However, when Mr Williams was asked why the initial expectation with regard to the project being delivered within six months turned out to be different from the reality, which was that the project was significantly delayed, he said that from the time when they thought that it could be done within six months:

the concept went from a Cortina or a Holden Commodore to a Ferrari. It got bigger, grander. There was more things that were added on. We learnt more about the market. We had input from Doug as a new partner to add to the scheme. So it became a bigger project than what was initially the initial idea back in November. So from there, it was always going to be a staged rollout of the platform. First is to get the media site, the news site, out, build an audience, leverage Doug’s contacts, get them – get the volume to the transactions going with residential listings and then move to commercial. He then expanded into that concept, went to – said, “Okay, well, Doug does not have all the listings, e.g. rural listings, and some other certain markets and sectors,” and didn’t cover all the market, so we had an idea of recruiting C-class shareholders who were – would be agents – and our concept is around agents, map communities--- …

… there was some other delays along the way because when you’re building with tech, all tech developments, like developing anything – I remember someone used the analogy yesterday it’s like building a house. You start a house. Do you want a pool? Do you want a deck? Do you make it bigger? Do you build a rumpus room? You start adding to it. So when you’re in the middle of developing, the developers come to you and you can see problems and sometimes the way of solving the problem is to do something a bit more complicated or add extra features for not much extra time or money, and then that all adds to the complexity. So there were some challenges along the way for sure, and then when we had the Patch, as the original idea, Doug then didn’t like the Patch. We changed to the Voice. So it just - - - …

It was a better idea, and so with Doug’s feedback, it became grander and bigger. And so that contributed to having a bigger scope of works and more work to do, and that’s why it cost us more than what we had quoted and we absorbed that and it took us a longer time to do, which is, unfortunately, whether you’re developing software or a home, it always takes longer and costs more than it – it wouldn’t be the first IT project to take longer and cost more; it won’t be the last, but it was some good reasons why the delays were there and it was sort of, I think, an understanding that we all had from the original concept to grand concept that we ended up going with as to why there was delays.

108    There is no basis to reject those answers. The events canvassed at [50]-[53] above show that some work was being done, that there were some changes along the way, and that Mr O’Mara liked what he saw, at least initially.

109    It may be that there should have been better foresight, or even that insufficient resources were committed to the project, but that does not address the capacity to deliver as at the time that the project commenced when the shareholders agreement was entered into. The bare fact of the project suffering delays does not give rise to an inference that there was a lack of capacity at inception; there could be a number of other reasons for delays, and in this case it would appear that there were.

110    In the light of there being a conspicuous absence of any contractual commitment to a particular timeframe, it would be a surprising result if the applicant could come home on a misleading and deceptive conduct case based solely on the contemplated timeframe not being realised. One would expect there to be more, and in this case there is not.

111    In the circumstances the applicant’s case fails, and there is no need to go into the remaining issues. To do so would be unduly burdensome.

Disposition

112    For the reasons given, the claim against The Patch fails. As the claim against Mr Williams is made only on a derivative basis, it also fails.

113    The proceeding should accordingly be dismissed with costs.

Associate:

Dated:    8 April 2022