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Misleading and deceptive conduct and a lost chance

A statutory corporation has been held to have engaged in misleading and deceptive conduct in its negotiations with its tenant over the possible surrender of a lease.

On 25 July 2012, the New South Wales Court of Appeal handed down its decision in Jacfun Pty Limited v Sydney Harbour Foreshore Authority [2012] NSWCA 218, overturning the decision of the primary judge and ordering the Sydney Harbour Foreshore Authority (SHFA) to pay $1.2 million for the loss of its tenant's opportunity to negotiate a higher price for the surrender of the lease. 

Key points to consider:

  • an available remedy for misleading or deceptive conduct includes damages for the value of the loss of a chance of negotiating for a higher price
  • where the transaction would have been entered into without the misleading conduct, the Court will seek to determine the real operative effect of the impugned conduct and compensate the induced party accordingly
  • in determining reliance, it is not necessary that all of the directors of the board of the induced party share the same understanding of the misleading and deceptive conduct. It is enough that the impugned conduct contributed in a material way to the decision that the board of directors made. 

Facts 

Since 1997, Jacfun had leased the Darling Walk site from SHFA. Jacfun had initially subleased the premises to SEGA Enterprises Australia which operated an entertainment complex known as SEGA World. After SEGA World closed in 2000, Jacfun began exploring how it might derive value from the lease. Only SHFA, or a person with SHFA's consent, could apply for development approval of the site. The site was not commercially viable unless the permitted use was changed to include commercial office space.

In 2002, following lengthy negotiations regarding the potential future of the site, the parties negotiated a proposal involving three towers. However, the SHFA Board later rejected the proposal. Consequently, Jacfun sought to either sell or sublease the site to other interested parties. 

On 11 October 2002, during a meeting between representatives of Jacfun and SHFA, Mr Bowen, of SHFA, allegedly made the following misleading or deceptive statement:

"They do not foresee an office development ever being permitted and at best the only additional rights could be a low-rise hotel."

The Jacfun board accepted SHFA's proposal made during that meeting to purchase the site from Jacfun for $10 million. 

SHFA's true position, as stated by Mr Bowen in the proceedings, was that there may have been office development on the site, but not in the next few years, and that the master plan for Darling Harbour could well contain office development. 

Appeal decision 

The Court of Appeal disagreed with the primary judge's conclusion that the conduct was not misleading or deceptive. The representation that there would not ever be office development in the foreseeable future was clearly different from SHFA's true position and found to be "inaccurate and exaggerated". The representation was more negative and categorical than Mr Bowen and SHFA's understanding of the true position and was intended to bring about the lowering of expectations. Accordingly, the representation was found to be misleading or deceptive.

In regard to reliance, the Court accepted that each director of Jacfun had a different view or understanding of the representation. However, it was not necessary for the misleading or deceptive conduct to have the same effect on each member of a decision-making group. It was enough that the impugned conduct affected the group's decision in some way by reference to the loss or damage suffered. As Barrett JA explained in his short judgment, the question was whether Jacfun suffered loss or damage "by" the conduct of SHFA. i.e. whether it was an inducing factor. It was sufficient, therefore, that the conduct contributed in a material way to the decision that the board of directors made, even though its precise implications and significance may have been appreciated in different ways by individual board members who joined in the collective decision.

When assessing Jacfun's loss, it was relevant that the commercial reality was that Jacfun, through its board, clearly wanted to dispose of the lease as it was a significant drain on its finances. The evidence showed that Jacfun would have surrendered the lease despite the misleading or deceptive conduct. The only effect of the representation was to make Jacfun's expectations in the negotiation for the surrender more negative. Accordingly, in determining loss, the Court held that the real operative effect of the misleading conduct was on price and negotiating stance.

The Court concluded that there was a reasonable prospect that without the representation, Jacfun would have been able to negotiate a modest, but material, increase to the $10 million offered by SHFA. The lost chance was assessed at $1.25 million. 

Among other things, this case reinforces the need for parties that have been misled to convince the court that they have been left materially worse off because of the misleading conduct. Courts will carefully and critically examine what misled parties claim they would have done if they were not misled.

Further information

If you would like any further information, or if we can be of any assistance regarding any of the above issues, please contact us.

Kind regards

Peter Keel | Partner
Tel 61 2 8223 4101
peter.keel@maddocks.com.au

Norman Lucas | Partner
Tel 61 2 8223 4177
norman.lucas@maddocks.com.au

Peter Meades | Partner
Tel 61 2 9225 6202
peter.meades@maddocks.com.au

Simonetta Astolfi | Partner
Tel 61 2 6163 1001
simonetta.astolfi@maddocks.com.au

Michelle Dixon | Partner
Tel 61 3 9288 0620
michelle.dixon@maddocks.com.au

David Laidlaw | Partner
Tel 61 3 9288 0534
david.laidlaw@maddocks.com.au

Laura Gotlieb | Lawyer
Tel 61 2 9225 6307
laura.gotlieb@maddocks.com.au

A statutory corporation has been held to have engaged in misleading and deceptive conduct in its negotiations with its tenant over the possible surrender of a lease.

On 25 July 2012, the New South Wales Court of Appeal handed down its decision in Jacfun Pty Limited v Sydney Harbour Foreshore Authority [2012] NSWCA 218, overturning the decision of the primary judge and ordering the Sydney Harbour Foreshore Authority (SHFA) to pay $1.2 million for the loss of its tenant's opportunity to negotiate a higher price for the surrender of the lease. 

Key points to consider:

  • an available remedy for misleading or deceptive conduct includes damages for the value of the loss of a chance of negotiating for a higher price
  • where the transaction would have been entered into without the misleading conduct, the Court will seek to determine the real operative effect of the impugned conduct and compensate the induced party accordingly
  • in determining reliance, it is not necessary that all of the directors of the board of the induced party share the same understanding of the misleading and deceptive conduct. It is enough that the impugned conduct contributed in a material way to the decision that the board of directors made. 

Facts 

Since 1997, Jacfun had leased the Darling Walk site from SHFA. Jacfun had initially subleased the premises to SEGA Enterprises Australia which operated an entertainment complex known as SEGA World. After SEGA World closed in 2000, Jacfun began exploring how it might derive value from the lease. Only SHFA, or a person with SHFA's consent, could apply for development approval of the site. The site was not commercially viable unless the permitted use was changed to include commercial office space.

In 2002, following lengthy negotiations regarding the potential future of the site, the parties negotiated a proposal involving three towers. However, the SHFA Board later rejected the proposal. Consequently, Jacfun sought to either sell or sublease the site to other interested parties. 

On 11 October 2002, during a meeting between representatives of Jacfun and SHFA, Mr Bowen, of SHFA, allegedly made the following misleading or deceptive statement:

"They do not foresee an office development ever being permitted and at best the only additional rights could be a low-rise hotel."

The Jacfun board accepted SHFA's proposal made during that meeting to purchase the site from Jacfun for $10 million. 

SHFA's true position, as stated by Mr Bowen in the proceedings, was that there may have been office development on the site, but not in the next few years, and that the master plan for Darling Harbour could well contain office development. 

Appeal decision 

The Court of Appeal disagreed with the primary judge's conclusion that the conduct was not misleading or deceptive. The representation that there would not ever be office development in the foreseeable future was clearly different from SHFA's true position and found to be "inaccurate and exaggerated". The representation was more negative and categorical than Mr Bowen and SHFA's understanding of the true position and was intended to bring about the lowering of expectations. Accordingly, the representation was found to be misleading or deceptive.

In regard to reliance, the Court accepted that each director of Jacfun had a different view or understanding of the representation. However, it was not necessary for the misleading or deceptive conduct to have the same effect on each member of a decision-making group. It was enough that the impugned conduct affected the group's decision in some way by reference to the loss or damage suffered. As Barrett JA explained in his short judgment, the question was whether Jacfun suffered loss or damage "by" the conduct of SHFA. i.e. whether it was an inducing factor. It was sufficient, therefore, that the conduct contributed in a material way to the decision that the board of directors made, even though its precise implications and significance may have been appreciated in different ways by individual board members who joined in the collective decision.

When assessing Jacfun's loss, it was relevant that the commercial reality was that Jacfun, through its board, clearly wanted to dispose of the lease as it was a significant drain on its finances. The evidence showed that Jacfun would have surrendered the lease despite the misleading or deceptive conduct. The only effect of the representation was to make Jacfun's expectations in the negotiation for the surrender more negative. Accordingly, in determining loss, the Court held that the real operative effect of the misleading conduct was on price and negotiating stance.

The Court concluded that there was a reasonable prospect that without the representation, Jacfun would have been able to negotiate a modest, but material, increase to the $10 million offered by SHFA. The lost chance was assessed at $1.25 million. 

Among other things, this case reinforces the need for parties that have been misled to convince the court that they have been left materially worse off because of the misleading conduct. Courts will carefully and critically examine what misled parties claim they would have done if they were not misled.

Further information

If you would like any further information, or if we can be of any assistance regarding any of the above issues, please contact us.

Kind regards

Peter Keel | Partner
Tel 61 2 8223 4101
peter.keel@maddocks.com.au

Norman Lucas | Partner
Tel 61 2 8223 4177
norman.lucas@maddocks.com.au

Peter Meades | Partner
Tel 61 2 9225 6202
peter.meades@maddocks.com.au

Simonetta Astolfi | Partner
Tel 61 2 6163 1001
simonetta.astolfi@maddocks.com.au

Michelle Dixon | Partner
Tel 61 3 9288 0620
michelle.dixon@maddocks.com.au

David Laidlaw | Partner
Tel 61 3 9288 0534
david.laidlaw@maddocks.com.au

Laura Gotlieb | Lawyer
Tel 61 2 9225 6307
laura.gotlieb@maddocks.com.au