Misleading and Deceptive Conduct during the Due Diligence Period

The recent decision in Davis & Anor v Perry O’Brien Engineering Pty Ltd & Ors [2023] QSC 243 involved misrepresentations made during the contract – in due diligence – rather than the usual pre-contractual period. Liability was found against the seller of a business.

Applegarth J said when considering reliance and causation (at [213] – [224]), and then the general principles relating to causation and contravening conduct at [225] – [237]:

[222] In short, unlike the simple case of a misleading pre-contractual representation, this case concerns misleading conduct constituted by the making of representations coupled with silence or a failure to disclose the truth.

[223] In this case, the misleading and deceptive conduct concerns more than one representation that is said to have caused the Buyers to proceed with the contract and to not terminate it. Still, despite these complexities compared to the case of a single pre-contractual representation, the reliance issue involves the same general principle.

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Causation and contravening conduct – general principles

[225] Many statutes allow a claimant to be compensated for loss or damage caused by, by reason of, because of, or as a result of contravening conduct. Such a statutory term telescopes “what to the common law would be issues of causation, remoteness and measure of damages”.3 The statute requires a causal connection between the contravening conduct and the alleged loss or damage. Loss or damage that was, as a matter of fact, caused by the contravention may be the subject of an order for compensation.

[226] When lawyers use the term “causation” one of two different inquiries may be involved. The first concerns the role a defendant’s breach of contract, negligence or contravention played, along with other conditions or “causes”, in bringing about the loss. It concerns factual causes.

[227] The second inquires whether legal responsibility should be attributed to the defendant for such a loss. It proceeds on the basis of an understanding of factual causes. This scope of responsibility inquiry is whether to attribute legal responsibility for an occurrence, namely a loss, for which the defendant’s conduct was a cause.4 The claimant need not prove that the contravening conduct was the sole cause of the claimed loss or damage. It is sufficient if it was a cause of the loss, in the sense of materially contributing to it.5 The relevant factual inquiry is whether the particular contravention caused or materially contributed to the loss. Material contribution requires only that the defendant’s act or omission played some part in contributing to the loss.6

[228] Simply put, loss or damage may be the result of contravening conduct even though other factors contributed to its occurrence.7

[229] In a case in which the claimed loss arises from the claimant’s entry into a transaction, a claimant may seek to prove that, if aware of the true position, it would not have entered into the transaction, but would have entered into a different transaction or no transaction at all.8 The label “no transaction” may be used to describe a case where the claimant asserts that it would not have entered into the transaction and so should be compensated so as to restore it to the position that would have existed if there had not been any transaction. The label “different transaction” describes a case in which the claimant asserts that it would have acted differently if the true position had been revealed. The claimant does not seek to be restored to its original position “but to a hypothetical one based on the postulated difference”.9

[230] The label “no transaction” has the potential to mislead because it may be used simply to describe a case where, absent the breach, “the transaction which actually happened would not have happened”.10

[231] In such a “no transaction” case the claimant is not necessarily required to identify alternative transactions and address what alternative transaction would or would not have been entered into. Jamieson stated:11 “It may be sufficient for the plaintiff to simply prove that he or she would not have entered into the subject transaction. Policy or pragmatic considerations suggest that a plaintiff should not necessarily be required to prove what else he or she would have done. A requirement for such proof increases the complexity and costs of litigation by exploring alternative transactions, including investments, which were not seriously considered.”

[232] The position may be different in a case in which it is apparent that, absent the breach of duty or other contravening conduct, the claimant would have entered into a different transaction, either with the defendant or another party. In Jamieson I gave the example of a plaintiff who was induced to buy shares in Company A and, absent the negligent advice, would have bought shares in Company B. I observed:12 “It is hard to see why, in point of principle, a court in assessing the appropriate measure of compensation for loss caused by the negligent and misleading advice should be required to ignore the fact that, absent the negligent advice about Company A, the plaintiff would have bought shares in Company B, and suffered loss on that investment in a declining share market.”

[233] Proof of factual causation in a case about a commercial transaction typically involves the claimant proving that “but for” the contravention it would not have entered into the loss-making transaction. The “but for” test may not be an exclusive test of factual causation.13

[234] In this case, the Buyers seek to prove that “but for” the contravening conduct they would not have proceeded with the SSA and settled the transaction on 23 December 2015. The label “no transaction” must be applied with care in a case like this that concerns parties who already were in a contractual relationship when the contravening conduct occurred. To do otherwise risks disregarding the reality of the situation and conflating it with a case where parties were brought into contractual relations because of the contravening conduct.14

[235] The factual causation issue is whether the contravening conduct caused the claimant to remain in the contractual relationship and conclude the transaction when, absent the contravening conduct, it would not have done so, because it would have elected to not proceed with the transaction, or terminated the contract.

[236] A claimant seeking compensation for loss in a so-called “no transaction” case such as this may contend that, had the contravening conduct not occurred, it would have become aware of the true financial position, and would not have completed the transaction that actually happened. Its case may be that there would have been no other transaction or there may have been a different transaction. In either case, the loss-making transaction that actually happened would not have occurred.

[237] The claimant’s counterfactual depends on the circumstances of the case, including its pleading. In some cases the counterfactual simply may be the hypothetical situation had a statement not been made. In other cases the relevant inquiry is what probably would have occurred if, instead of omitting to disclose something, there had been disclosure. For example, a counterfactual may be what would have occurred if the truth had been disclosed so as to correct an earlier statement that had ceased to be accurate and therefore misled the party to whom an obligation of disclosure was owed in the circumstances.

3. Elna Australia Pty Ltd v International Computers (Australia) Pty Ltd [No 2] (1987) 16 FCR 410 at 419.
4. Westpac Banking Corporation v Jamieson [2016] 1 Qd R 495 at 533 [99]-[106]; [2015] QCA 50 [99]-[106] (“Jamieson”).
5. I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 at [33], [84]-[93], [210]; Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613 at [45] (“Hunt & Hunt”).
6. Hunt & Hunt at [45].
7. Henville v Walker (2001) 206 CLR 459; [2001] HCA 52 at [97] (“Henville”).
8. Wyzenbeek v Australian Marine Imports Pty Ltd (2019) 272 FCR 373 at 396 [89]; [2019] FCAFC 167 at [89] (“Wyzenbeek”).
9. Wyzenbeek at [89].
10. Jamieson at 544 [146] citing Banque Bruxelles Lambert SA v Eagle Start Insurance Co Ltd [1997] AC 191, 218.
11. Jamieson at 544 [146].
12. At [148].
13. Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] 2 WLR 123; [2021] UKSC1 at [182]- [185]; Lewis v Australian Capital Territory (2020) 271 CLR 192 at 247 [151]; J Stapleton, ‘Unnecessary Causes’ (2013) 129 Law Quarterly Review 39; J Stapleton, ‘Unnecessary and Insufficient Factual Causes’ (2023) Torts Law Journal (forthcoming), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4569957.
14. DSHE Holdings Ltd v Potts (2022) 405 ALR 70 at 135 [316]; [2022] NSWCA 165 at [316] (“DSHE”).

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After considering onus of proof (at [238] – [252], Applegarth J said :

Pleading a counterfactual

[253] In Berry30 Gageler and Edelman JJ stated:

“A plaintiff should be expected to plead all material facts on which the plaintiff relies to constitute the statutory cause of action, including any counterfactual on which that plaintiff relies to establish the requisite causal link between identified loss or damage and identified misleading or deceptive conduct. In the same way, a defendant resisting the statutory action should be expected to plead any different counterfactual on which that party might rely to deny the causal link. Unless and to the extent that the parties choose to depart from the pleadings in the way they go on to conduct the trial, choice between the competing pleaded counterfactuals on the balance of probabilities should then exhaust the fact-finding that is required to be undertaken by the court on the issue of causation.”

[254] In DSHE31 Leeming and Kirk JJA and Basten AJA stated that there is no rule of law that requires the approach proposed by Gageler and Edelman JJ to be adopted in every case of misleading and deceptive conduct. No such obligation was said to be found in the joint reasons of Bell, Keane and Nettle JJ in Berry, and nothing in the reasons of Gageler and Edelman JJ was said to lend support to the proposition that they were enunciating “a fixed rule to be applied invariably”.

[255] In DSHE the relevant circumstances, including the attitude of the claimant HSBC when it was confronted with information about the financial position of its customer, were examined in detail at the trial. This permitted the trial judge to conclude that, based on the objective evidence, including what HSBC actually did when it learned the truth of DSH’s financial position, it would not have walked away from providing additional funding to it.32 Importantly, HSBC already had lent $60 million, DSH needed more money, and DSH was in contractual relations with a banker whose business was to lend money.33 The best evidence of what would have happened had HSBC not been misled was what actually happened after it was told the truth.34 Given those circumstances, HSBC failed to explain why it would not have advanced money on some terms if it had known the true position.35 The trial judge’s inquiries into that counterfactual was “not inverting the onus or subverting the beneficial purposes of the statutory prohibitions against misleading and deceptive conduct”.36 Nor did the decision turn on any pleaded or articulated case by HSBC at trial.37

[256] In Jamieson38 Morrison JA stated that policy and pragmatic considerations dictate that a defendant cannot invoke the principle stated by Leggatt J in Yam Seng “outside the confines of a properly pleaded case”. This aligns with the view subsequently adopted by Gageler and Edelman JJ in Berry. In Jamieson I concluded that the primary judge was correct to reject the claimant’s proposition that it was irrelevant to have regard to what Mr Jamieson would have done instead of investing in the MQ Gateway Trust. McMurdo P and Morrison JA agreed with my reasons. In the circumstances of that case it was open to the defendant bank to seek a finding that Mr Jamieson “would have entered into an alternative investment by borrowing substantial amounts of money and suffered loss”.39 Incidentally, and contrary to an apparent misunderstanding in Wyzenbeek,40 I did not rule that it was open to the defendant or a court to speculate about what the claimant might have done and to award compensation based on an evaluation of a chance that the claimant may have engaged in some other hypothetical transaction.

[257] In Jamieson I did not address any pleading issue since none was raised. I did, however, follow Leggatt J in Yam Seng41 who stated that:

“Unless the defendant can demonstrate with a reasonable degree of certainty, therefore, both the fact that the claimant would probably have suffered a loss from entering into an alternative transaction and the amount of that loss, the damages will not be reduced on that account.”            

[258] This position tends to support the view that a defendant wishing to invoke the principle stated in Yam Seng and Jamieson in a case in which it is applicable should plead the counterfactual on which it relies to deny the causal connection pleaded by the claimant. The position may be different where, from the way they conduct the trial, it is clear that the parties depart from the pleadings and their competing counterfactuals are apparent and explored in the evidence. Any other course has the potential to undermine the purpose of pleadings which is to:42

“ensure the basic requirement of procedural fairness that a party should have the opportunity of meeting the case against him or her and … to define the issues for decision.”

[259] Not defining the issues by pleadings encourages parties to invite findings of fact based on speculative hypotheses that are not explored in the evidence. An inference that the claimant would have entered into a different transaction to the subject transaction in the absence of the contravening conduct should not be based on speculation or an inadequate foundation in proven facts. The different transaction should be defined in the pleadings. If the defendant contends that such a different transaction would have been entered, it should plead it. This is a basic requirement of fairness so that the claimant has the opportunity of meeting that case and discharging its onus of proving that the contravention caused the loss or damage it claims.

30. Berry [Berry v CCL Secure Pty Ltd (2020) 271 CLR 151] at 190 [72].
31. DSHE [DSHE Holdings Ltd v Potts (2022) 405 ALR 70; [2022] NSWCA 165] at 135 [313].
32. DSHE at 132 [305].
33. DSHE at 131 [302], [314].
34. DSHE at 137 [322].
35. DSHE at 137 [324].
36. DSHE at 137 [325].
37. DSHE at 137 [325].
38. Jamieson [Westpac Banking Corporation v Jamieson [2016] 1 Qd R 495] at 515 [22].
39. Jamieson at 546 [155].
40. At 397 [92].
41. Yam Seng [Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] 1 CLC 662] at 717 [217] (6).
42. Berry at 72 [122], quoting Banque Commerciale SA v Akhil Holdings Ltd (1990) 169 CLR 279, 286.

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Further as to causation, Applegarth J said:

Summary – proof of causation

[260] If the claimant’s case that, absent the contravening conduct, it would not have entered into or proceeded with the relevant transaction is proven on the balance of probabilities by reference to objective factors and proof by inferences, drawn from the whole of the evidence, then it will discharge its onus of proof on causation. Its claim is not defeated by conjecture or speculation that it may have entered into an alternative transaction.

[261] The parties’ competing hypotheses or counterfactuals, like any other conclusion, depend on inferences drawn from reliable evidence that is accepted. The Court must be satisfied that the evidence enables it to draw a reasonable and definite inference from the circumstances.

[262] The inference urged by the claimant that it would not have entered into or proceeded with the relevant transaction in the absence of the contravening conduct must be more probable than not.

[263] Any competing hypothesis that the claimant would have completed the transaction or would have entered a different transaction that resulted in its suffering loss must also be a reasonable inference, rather than mere conjecture, guesswork or surmise.

[264] To adopt what was said by Leggatt J in Yam Seng and approved in Jamieson, unless the defendant “can demonstrate with a reasonable degree of certainty … both the fact that the claimant would probably have suffered a loss from entering into an alternative transaction and the amount of that loss, the damages will not be reduced”. 43 This is not to reverse the legal onus of proof on causation which remains on the claimant. It simply recognises that proof of causation based on all of the evidence does not require the claimant to exclude unproven competing hypotheses. In such a case the defendant has a so-called “evidentiary onus” or practical burden to adduce evidence in circumstances in which the claimant will have otherwise discharged the legal onus of proof.

[265] Any competing counterfactuals about what would have happened in the absence of the contravening conduct should be pleaded and the subject of proof. The principles in Jamieson should be applied including its statement that:44

“No principle or policy justifies parties and courts simply speculating about what might have been.”

42. Yam Seng at 717 [217] (6).
43. Jamieson at 544 [147].

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A link to the decision is: Davis & Anor v Perry O’Brien Engineering Pty Ltd & Ors [2023] QSC 243 (sclqld.org.au)

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