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Effem Foods Pty Limited v Lake Cumbeline Pty Limited

High Court [1999] HCA 15 (14 April 1999)

Overview

On 30 March 1987 the respondents invested $2m (unsuccessfully) in Trawl Industries (TIA) and acquired a 50% interest in the company. Just over two years later TIA went into receivership and was subsequently wound up, resulting in substantial losses to the respondent.

The appellant was the largest pet food manufacturer in Australia. TIA acquired, processed and sold fish, which the the appellant used in manufacturing its pet food.

The respondents sued the appellant, alleging that at the time of their investment the appellant had engaged in misleading or deceptive conduct contrary to s 52 of the Trade Practices Act 1974.

The trial judge found no misleading or deceptive conduct.

An appeal to the Full Federal Court was partly successful.

Facts

On 30 March 1987 the respondents invested $2m (unsuccessfully) in Trawl Industries (TIA) and acquired a 50% interest in the company. Just over two years later TIA went into receivership and was subsequently wound up, resulting in substantial losses to the respondent.

The appellant was the largest pet food manufacturer in Australia. TIA acquired, processed and sold fish, which the the appellant used in manufacturing its pet food.

The respondents sued the appellant, alleging that at the time of their investment the appellant had engaged in misleading or deceptive conduct contrary to s 52 of the Trade Practices Act 1974. The High Court (majority) summarised the respondents' claims as follows:

[para 3] ... The appellant, it was said, had an interest in encouraging persons to invest in TIA. Such investment would strengthen the financial position of TIA, and provide it with funds which would enhance its capacity and efficiency as a supplier. Knowing that TIA was seeking to attract investors, and knowing that potential investors would be interested in TIA's supply arrangements with the appellant, the appellant put out false or misleading material and information about those arrangements, knowing it would be relied upon by potential investors, for the purpose of making the business of TIA appear more profitable and attractive than it was. In particular, a six-month contract for the supply of fish by TIA to the appellant, entered into on 11 February 1987 ... was alleged to have been a sham. That contract ... provided for the supply by TIA to the appellant of a total of 6,250 tonnes of fish, having a value of more than $4 million. Additionally, certain Heads of Agreement between TIA and the appellant, signed on 26 March 1987, were said, in effect, to constitute window-dressing calculated to mislead and deceive persons such as the respondents as to the relationship between TIA and the appellant.

...

[5] The individual respondents were experienced commercial people. They made investigations of the business of TIA. The appellant and TIA were at arm's length. So far as the appellant was aware, there was no limit upon the enquiries about TIA and its business which the respondents were free to make before they decided to invest. Clearly, the question of what motivation the appellant might have had to set out to mislead or deceive the respondents about TIA, or to enter into sham contracts with TIA, was a matter that required close examination.

 

Trial Judge (Tamberlin J)

Dismissed the respondents' case holding that most of the alleged representations were not made, none were proven to be false and non were relied upon by the respondents when deciding to invest.

Full Court of the Federal Court

An appeal to the Full Court was partially successful - it was allowed in relation to three of the representations in which the Full Court found that Justice Tamberlin had misdirected himself.

Held (High Court)

Gleeson CJ, Gaudron, Kirby and Hayne JJ

Forthcoming

Callinan J

Agreed with the reasons of the majority and added that he considered the respondents' case involved the following 'unlikely propositions':

... that if A has a contract with B and knows that C may be minded to invest in or lend money to B, A comes under an obligation to inform C of its assessment of B's capacity to perform the contract; that A is under an obligation to inform C whether, in the event of non-performance of the contract by B, A will take advantage of that non-performance by looking to its own commercial interests; and that to fail to inform C accordingly of these matters is to engage in misleading or deceptive conduct ...

His Honour did not consider that this was consistent with the intention of the prohibitin:

To give effect to propositions of these kinds in this type of case would be to distort the intention and the meaning of that Act, and the obligations which s 52 imposes, and would involve the imposition upon arm's length third parties of an oppressive obligation to protect another party against his or her own imprudence or negligence in entering into a transaction. In this case such an obligation can be seen to be even more onerous and unreasonable in light of the facts that the respondents here were sophisticated, commercial people, they undertook their own investigation into the affairs of Trawl Industries of Australia Pty Ltd, and, as the trial judge correctly held, they allowed themselves to be dazzled by the lure of almost fantastic profits of which they themselves had made their own independent projections.

[emphasis added]