Commercial negotiations – when is silence a problem? Part 1

This is Part 1 of a two-part series on non-disclosure during commercial negotiations. Courts have consistently confirmed that Section 18 of the Australian Consumer Law (ACL), which prohibits misleading and deceptive conduct, does not require parties to volunteer information during commercial negotiations.

That position has been recently confirmed by the High Court in Miller and Associates Insurance Broking Pty Ltd v BMW Australia Finance [(2010) 270 ALR 204).

However, the issue of non-disclosure is not straightforward and there are several cases that demonstrate that commercial parties can engage in misleading or deceptive conduct by failing to disclose information during negotiations.

Parties to commercial arrangements should therefore exercise caution during all negotiations.

Misleading and deceptive conduct

Section 18 of the ACL states that a person must not, in trade or commerce, engage in misleading or deceptive conduct.

Conduct will be misleading if, when viewed in all the surrounding circumstances, it has a tendency to lead a reasonable member of the target audience into error [Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191].

The prohibition on misleading and deceptive conduct is not limited to consumer transactions and parties can rely on section 18 for protection in their commercial dealings.

Silence as misleading conduct

There are broadly two categories of non-disclosure or silence:

• ‘half-truths’ where silence forms part of a wider context involving positive representations or conduct
• ‘mere silence’, which is silence without any positive representations or other conduct.

As a general proposition, it is more likely that a half-truth will be misleading.

The landmark case in relation to silence as misleading conduct is Demagogue Pty Ltd v Ramensky & Anor [(1992) 110 ALR 608]. In that case, the Federal Court adopted the ‘reasonable expectations test’, which states that silence will only be misleading if the circumstances give rise to a reasonable expectation that, if a relevant fact exists, it will be disclosed.

Set out below are a selection of case summaries that provide examples of circumstances where the court found that non-disclosure did not breach section 18 of the ACL. In Part 2 of this series, we will set out case summaries that provide examples of situations where non-disclosure did amount to misleading or deceptive conduct.

General Newspapers Pty Ltd & Ors v Telstra Corporation (1993) 117 ALR 629

In this case, Telstra had indicated to General Newspapers that it was “on the tender list” for the engagement of a contractor for printing of telephone directories, but subsequently negotiated with its existing printers for new
contracts without informing General Newspapers.

The court held that the facts did not give rise to any reasonable expectation on the part of General Newspapers that Telstra would disclose the procedures it proposed to implement in relation to its new printing contracts. Therefore, its silence on those matters was not misleading.

The court also acknowledged that:

• arm’s length negotiations do not need to be completely open
• a certain degree of “puffing” or exaggeration is to be expected
• a certain degree of “put-off” evasion or obfuscation by commercial people seeking to resist disclosing information which is confidential is also to be expected.

Here, Telstra was justified in keeping its own deliberations and negotiations about its printing contracts to itself. Importantly, General Newspapers had not notified Telstra of any matter that would indicate an expectation that disclosure would be made, for example, that General Newspapers was acquiring equipment on the basis that it was being considered as a potential supplier.

Miller & Associates Insurance Broking Pty Ltd (2010) ALR 204

Consolidated Timber, with the assistance of its insurance broker (Miller), applied to BMW Finance for an insurance premium funding loan. The insurance policy for which funding was sought was a non-cancellable cost of production insurance policy that had been issued by HIH to other parties.

BMW provided the funding, but it was never repaid or recovered. BMW brought an action against Miller alleging, among other things, that he had engaged in misleading or deceptive conduct by failing to disclose to BMW the fact that the policy was non-cancellable, non-transferrable and not a property insurance policy. BMW had been provided with a full copy of the policy before it made its decision about the finance application.

The High Court unanimously held that Miller’s failure to provide the information was not misleading or deceptive conduct. Particular emphasis was placed on the fact that BMW had been given a copy of the policy and could have discovered the facts itself simply by reading the policy. It did not have sufficient regard for its own interests when it failed to do so.

Two of the judges identified factors that will be relevant in the context of commercial dealings, including silence, the knowledge of the person to whom the conduct is directed and the existence of common assumptions and practices established between the parties or prevailing in the particular profession or trade in which they carry on business. They concluded that the reasonable expectation test does no more than direct attention to the effect or likely effect of non-disclosure. In essence, it is simply a practical approach to the application of section 18 of the ACL.

The remaining three judges applied the reasonable expectation test and paid particular regard to the fact that the parties were commercially sophisticated and experienced in their respective fields. In these circumstances, there
could be no reasonable expectation that Miller would disclose that the policy was not cancellable.

^{The information in this publication is provided for general purposes only. It is not to be relied on as a substitute for legal advice. Crown Law and the Department of Justice and Attorney-General accept no liability for losses caused by reliance on the material in this publication. Formal legal advice should be obtained for particular matters.}