Misleading and Deceptive Conduct: Establishing Representations and Quantifying Loss

Canon Finance Australia Limited v Reliance Medical Practice Pty Ltd & Ors (No 7) [2020] NSWSC 554 is a recent case concerning the law of misleading and deceptive conduct at section 18 of the Australian Consumer Law.

The judgment examined issues including evidential difficulty in establishing that a representation made was, in fact, misleading and quantification of the loss flowing from a misleading representation for the purpose of assessing damages.

Key Facts of the Matter

In mid-2015 Reliance Medical Practice Pty Ltd (RMP) (the first defendant and first cross claimant) sought to upgrade IT systems at its medical practice.  This upgrade was pursued in part in response to inadequacies in RMP’s existing systems.  To this end, officers of RMP engaged in discussions with an IT service provider, Voice Print & Data Australia Pty Ltd (VPD) (the first cross defendant).  RMP ultimately agreed to acquire IT equipment and services from VPD.  New IT systems were to be installed by VPD for the benefit of RMP in early 2016.

To finance the acquisition of new IT equipment and services, RMP entered into a commercial lease agreement with BHD Leasing Pty Ltd (BHD) (the sixth cross defendant).  Under the terms of that agreement, the cost of the products and services supplied by VPD to RMP was capitalised and paid by Canon Finance Australia Limited (Canon) to VPD (Canon and BHD having their own agency relationship).  RMP thereafter entered into an agreement with BHD for lease of the equipment and services to be provided by VPD for a fixed monthly amount over a three year term.  The director of RMP, a Dr Beckwith (the second defendant and second cross claimant) guaranteed RMP’s obligations to BHD.  BHD later assigned RMP’s lease agreement and Dr Beckwith’s guarantee to Canon.

In early January 2016, prior to the new IT system being installed at RMP’s premises, the directing minds behind RMP became aware of a significant cash flow problem in the business.  Following this, RMP sought to “cancel” the supply of the new IT system and denied VPD access to the RMP premises for the purpose of installing the new system.  This amounted to repudiation of the contract by RMP.  At the time of repudiation, VPD had already completed “back end” work for the new IT system at its premises and remained ready and willing to complete the agreed works and provide ongoing services pursuant to its original agreement with RMP.  Notwithstanding this, RMP never allowed VPD to complete the works.

Ultimately, RMP defaulted on its payments under the commercial lease agreement, resulting in Canon initiating proceedings against RMP and Dr Beckwith as guarantor of RMP’s obligations.  RMP and Dr Beckwith settled the proceedings with Canon by entry into consent judgment in favour of Canon for $1,116,880.92.  RMP and Dr Beckwith, by way of their cross claims, sought (in effect) indemnification of the amount of the consent judgment by way of damages flowing from allegedly misleading and deceptive conduct on the part of VPD, BHD and two individuals involved in the negotiations for the new IT system.

Evidential Matters in Misleading and Deceptive Conduct Claims

RMP and Dr Beckwith alleged that the equipment and services to be provided by VPD was represented to be suitable to address inefficiencies in RMP’s then current IT system, in circumstances where those representations were untrue or inaccurate.  RMP and Dr Beckwith claimed that this amounted to actionable misleading and deceptive conduct in breach of s 18 of the Australian Consumer Law, entitling them to damages in the amount of the consent judgment in favour of Canon.  Campbell J approached the question of misleading or deceptive conduct as a two-step process; first being to establish whether the alleged representations were in fact made and second being to assess whether such representations were in fact misleading or deceptive.

After careful examination of the evidence of witnesses to the meetings between representatives of RMP and VPD (including the evidence of those alleged to have made the impugned representations), Campbell J concluded, on the balance of probabilities, that the representations had been made.  Having so decided, His Honour then turned his attention to whether those representations were misleading or deceptive within the meaning of s 18.  It was here that His Honour identified a significant evidential difficulty with the cross claimants’ case.

It will be recalled that RMP barred VPD from access to its premises to complete installation of the new IT system.  This meant that no evidence existed as to the actual performance of the new IT system, including any comparison of its performance to RMP’s existing IT system.  In circumstances where the alleged misleading or deceptive representations related to the purported performance of the new IT system, a difficulty in assessing the truth or otherwise of this representation arose where that system never, in fact, began performing due to the repudiatory conduct of the cross claimants.  Campbell J acknowledged as much at [270], noting the ‘repudiation of [the relevant agreements] and [RMP’s] associated refusal to allow VPD to perform its side of the bargain erects a significant barrier in the way of proof of RMP’s case.  This is not a case where the purported performance of the supplier’s side of the contract establishes the inadequacy of the goods and services provided by demonstrating performance which falls short of the representations made.  There is simply no evidence that VPD’s equipment, software and services would not have performed in accordance with the representations made had RMP not repudiated the contract.’

His Honour considered the possibility that RMP could establish its case if it were to show that the specifications of the equipment to be installed were such that the new system would be inherently inferior to the existing system.  That is, if it could be established by means other than evidence of the actual function of the fully operational system that the new system would inevitably underperform relative to the existing system, the cross claimants could succeed on their claim for misleading and deceptive conduct.  Unfortunately for RMP and Dr Beckwith, their evidence did not rise to this level.  The limited evidence on this point led by RMP was in the form of an expert witness (in fact, the principle of RMP’s existing IT service provider) who was unable to state in evidence whether or not the proposed new system would be superior or inferior to the existing IT system.  Having failed to establish the new IT system was inferior to the existing system the Court could not be satisfied that the representations, although made, were misleading.  It followed that RMP and Dr Beckwith’s cross claims failed.

What is the lesson here for the plaintiff who thinks they have been mislead in the supply of goods or services as to the function of those goods or services?  On one hand, where a plaintiff becomes suspicious that a mooted supply of goods or services will not perform in the way they were led to believe, termination of the contract for supply may leave the plaintiff at a distinct evidential disadvantage if action for damages for misleading and deceptive conduct is contemplated.  On the other hand, the plaintiff may keep the contract alive, take delivery of the goods or allow performance of the services and use the resulting underperformance as evidence of the misleading nature of representations made.  Taking this approach, however, leaves the plaintiff vulnerable to attack for failure to mitigate their loss if the contract could lawfully have been terminated prior to the supplier’s performance when the alleged shortcoming became apparent.  At worst, a decision by the plaintiff to keep the contract alive after being put on notice that the goods or services may not perform in the manner represented may lead to an inference that the misleading representation was not the cause of the plaintiff’s loss.  That is, a Court may infer that the plaintiff would have entered into the contract notwithstanding inaccuracy of an impugned statement, and hence that statement is not the cause of later loss, due to the plaintiff’s election to keep the agreement on foot after the relevant information came to light.

It would seem the sensible approach for the plaintiff who, after entering into an agreement, becomes concerned that the performance of that agreement will not lead to an outcome they were led to believe would follow, would be to engage in proactive and open correspondence with the supplier noting their expectation of performance, enquiring as to whether the supply will meet that expectation and specifying that the contract is kept on foot pending those answers for the purpose of making such enquiry.  Such correspondence (and any reply) may then be used in evidence of the plaintiff’s steps to protect its interest in the performance it was led to believe it would receive as well as the plaintiff’s reasonable actions to mitigate potential loss arising from potentially misleading conduct of another party.

Issues in Quantification of Loss

By way of their cross claims, RMP and Dr Beckwith sought damages pursuant to s 236 of the Australian Consumer Law for the alleged misleading and deceptive conduct.  The cross claimants sought the amount of $1,116,880.92, being the amount of the consent judgment in favour of Canon in settlement of proceedings brought by Canon.  While strictly obiter, as the Court determined the cross claimants had not established the representations in question were misleading or deceptive, Campbell J nonetheless went about examining the amount claimed for damages.

The Court identified the objective of damages pursuant to s 236 of the Australian Consumer Law to be the “tort principle”, that is, to put the plaintiff in the position they would have been in had the wrong not occurred.  The cross claimants’ argument went that the amount payable to settle Canon’s claims was the loss flowing from the cross defendants’ allegedly misleading conduct.  Campbell J disagreed.  His Honour concluded that, even if the representations had been misleading or deceptive, and those representations had not been made during negotiations over the new IT system, RMP would likely have acquired a new IT system from a supplier other than VPD at a similar cost to the VPD system.  RMP would then have found itself in a similar financial predicament with respect to the alternative supplier as it found itself in with respect to VPD, BHD and Canon, most likely resulting in a similar outcome to the one that actually transpired.  His Honour went further to note that RMP continues trading today using a (possibly modified or upgraded) version of its existing IT system.  His Honour found that the cross claimants made no attempt to demonstrate loss on the basis of the difference in running cost of the existing IT system and the judgment in favour of Canon as being a value over the amount of IT costs actually paid by RMP.  For this reason, the Court concluded that no loss had actually been proven.

The takeaway here for the plaintiff in misleading and deceptive conduct action is that the evidence must establish, to the balance of probabilities, the position the plaintiff would have been in but for reliance on the misleading or deceptive conduct.  Care must then be taken to compare the plaintiff’s actual position as a consequence of the misleading representation with the plaintiff’s probable position had the misleading representation not been given.  It will be the difference between these two positions that will be the plaintiff’s measure of damages and not simply the total of all costs, losses or outgoings following from the misrepresentation being made.

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