Commercial negotiations – when is silence a problem? Part 2

In Part 1 of this series about non-disclosure in commercial negotiations, Principal Lawyer Catherine Jackson explained the ‘reasonable expectations test’ and provided examples of cases where non-disclosure did not amount to misleading or deceptive conduct. Set out below are case summaries that provide examples of situations where non-disclosure was found to be misleading or deceptive conduct.

Metalcorp Recyclers Pty Ltd v Metal Manufacturers Ltd [2003] NSWCA 213

This case involved a sale of goods transaction. The seller obtained goods from its supplier, which would then be sold to the buyer. The buyer knew that the goods were likely to have been stolen by the supplier but did not communicate that fact to the seller before the seller obtained the goods from its supplier.

The court held that the non-disclosure, in conjunction with other positive statements, was misleading or deceptive. A misrepresentation had been made that the company would pay for the goods when, in fact, that was unlikely since it believed the goods to be stolen.

The court, in applying Demagogue, restated that silence can only be misleading or deceptive against a background of other facts known to the parties that makes what is actually said so incomplete that it is a misrepresentation. Here, the context in which non-disclosure took place included a long-standing business relationship between the parties that had generated a substantial degree of mutual trust.

CCP Australian Airships Ltd v Primus Telecommunications Pty Ltd [2004] VSCA 232

The parties had entered into a contract under which CCP would make an airship available to be used by Primus for promotional purposes. Primus argued that both positive representations and silence by CCP constituted misleading or deceptive conduct. The positive representations were statements to the effect that the airship would be available and, if the deposit was paid by a certain date, delivery was guaranteed by a certain date. The conduct constituted by silence was CCP’s failure to inform Primus that it did not have funds available to purchase the airship and that it had no commitments in place or resources to do so.

CCP argued that the courts have been reluctant to impose liability for mere silence in pre-contractual negotiations and relied on general law principles to assert that it was not obliged to divulge its financial position to Primus. In response, the court stated that one purpose of section 18 is to ensure that the bargaining process is not used as a licence to deceive.

If a party has no intention of contracting on the terms discussed, then its conduct in bargaining may be misleading. Also, if a party that has “no more capacity than a hope and a prayer of providing goods or services” conducts negotiations in a way that creates the impression that it does have the capacity to do so, and extracts payment on that basis, its conduct is also likely to be misleading and deceptive.

The court held that CCP had engaged in misleading conduct.

Hai Quan Global Smash Repair v Ledabow Pty Ltd (2004) ATPR 42-025

A panel-beating business was sold to purchasers who were extremely naïve and did not speak English well. They assumed that the work referred to the business by the NRMA would automatically continue after they took over the business. The vendor did not expressly guarantee that the NRMA work would continue, but it also did not obtain the NRMA’s consent to the arrangement or tell the NRMA of the proposed business sale. The NRMA then terminated its agreement with the business and the purchasers did not receive any further work from the NRMA, which represented approximately 19 per cent of the business. The court held that the vendor had misled the purchasers and focussed heavily on the fact that the vendor was aware of the purchaser’s relatively low level of commercial sophistication. The case demonstrates that a particular characteristic of a party may influence whether a reasonable expectation exists in relation to disclosure of information.

Fleetman Pty Ltd v Cairns Pty Ltd [2005] FCAFC 80

This case involved the sale of a demonstration motor vehicle. The dealer failed to tell the buyer, which was a real estate company, that the car was not the current model, but the previous year’s model. The Federal Court agreed with the trial judge’s conclusion that the buyer had a reasonable expectation that the fact that the vehicle was the previous year’s model would be disclosed, as it reasonably thought that it was purchasing the current model.

Noor Al Houda Islamic College Pty Ltd v Bankstown Airport Ltd [2005] NSWSC 20

In this case, the purchaser of land made it known to the vendor that it intended to use the land as a school. The vendor disclosed many risks and issues about the land but failed to disclose the risk of contamination to the land. Although no positive misleading statements were made, the court concluded that the non-disclosure of the risk of contamination was misleading. Since the purchasers had made the intended use of the premises known to the vendor, the purchasers had a reasonable expectation that the risk of contamination would be disclosed. The vendor’s failure to do so was misleading.

Zuvela v Geiger [2007] WASCA 138

After paying the purchase price and taking delivery, the purchaser of a second-hand backhoe machine discovered that it had a number of serious defects that rendered it non-functional. The seller knew that the purchaser required the backhoe for operations at his rural property and only disclosed limited defects relating to a defective battery and leaking fuel tank. Those limited disclosures gave rise to an implication that the machine was otherwise entirely fit for the purpose required. Therefore, the failure to disclose other serious defects was misleading.

Norcast SarL v Bradken Ltd (No 2) [2013] FCA 235

This case involved the sale of a subsidiary of Norcast. Norcast had specifically determined that Bradken would not be invited to be part of the competitive sale process. However, Bradken persuaded another company, Castle Harlan, to bid for the subsidiary, with the intention that it be on-sold to Bradken. Neither Bradken nor Castle Harlan informed Norcast of their arrangement and they in fact took deliberate steps to conceal their relationship. The case was not one relating to ‘mere silence’ because positive representations were made. However, the judge found in relation to both Bradken and Castle Harlan that their silence was misleading, because it had been represented to Norcast that Bradken was not involved in the acquisition of the subsidiary.

Lessons to be learned

It is clear from these cases that it is possible for a commercial party to breach section 18 of the Australian Consumer Law by failing to disclose information during negotiations. However, that does not mean that commercial parties are obliged to disclose all information that may be of relevance or assistance to the other side. The relevant question is whether that other party would, in the circumstances, have a reasonable expectation that a matter would be disclosed. It is far more likely that such an expectation will arise where a ‘half-truth’ representation has been made, the nature of the parties’ relationship is unique or one party is at a distinct commercial disadvantage.

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.

Published: 26 August 2014

Author: Melinda Pugh