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16 August 2006

Section 52: the sounds of silence

“Traditional bargaining may be hard, without being in the statutory sense, misleading or deceptive. No-one expects all the cards to be on the table. But the bargaining process is not therefore to be seen as a licence to deceive.”1

Section 52 of the Trade Practices Act 1974 (Cth) (TPA) is one of the better known competition law provisions. The prohibition against engaging in misleading or deceptive conduct usually invokes images of consumers, advertising and the public at large. However, section 52 also applies to representations made in the course of commercial negotiations between parties. This article examines whether failing to disclose information in the course of commercial negotiations can be misleading or deceptive conduct in breach of section 52 of the TPA.

Misleading or deceptive conduct - a refresher

Section 52 of the TPA provides that:

“A corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.”

Case law has broadly established that conduct will be misleading or deceptive in breach of section 52 if it leads, or has the potential to lead, persons into error or to believe something which is false.

Whether particular conduct is misleading or deceptive is a question of fact to be determined in the context of the evidence and the relevant surrounding facts or circumstances. Misleading or deceptive conduct can occur even if there is no intention to mislead or deceive and even where a corporation has acted honestly and reasonably.

What is silence?

There are three recognised categories of “silence” at common law and under section 52, namely:

  • “Half-truths”, where something is said or done which, without more, communicates only part of the whole picture. An example would be failing to mention a qualification to an otherwise absolute statement.
  • A failure to correct a previous representation that was correct when made, but which the person making the representation later discovers to be false.
  • A deliberate concealment of facts where the other party may draw an incorrect inference or incorrectly assume particular matters based on the absence of those facts.

Silence alone cannot amount to misleading or deceptive conduct

The courts have confirmed that the general principles applying to misleading or deceptive conduct cases also apply to cases regarding silence. The courts have also confirmed that “mere silence” cannot, of itself, constitute misleading conduct. In Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, Black CJ stated (at p 32) that:

“Silence is to be assessed as a circumstance like any other. To say this is certainly not to impose any general duty of disclosure; the question is simply whether, having regard to all the relevant circumstances, there has been conduct that is misleading or deceptive or that is likely to mislead or deceive. To speak of ‘mere silence’ or of a duty of disclosure can divert attention from that primary question. Although ‘mere silence’ is a convenient way of describing some fact situations, there is in truth no such thing as ‘mere silence’ because the significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist they will be disclosed.”

No general duty to disclose information

It is generally accepted that, in the context of commercial negotiations, there is no general duty to disclose information. In Lamb v Ausintel Investments Australia Pty Ltd & Ors (1990) ATPR 40-990 the New South Wales Court of Appeal stated:

“Where parties are dealing at arm’s length in a commercial situation in which they have conflicting interests it will often be the case that one party will be aware of information which, if known to the other, would or might cause that other party to take a different negotiating stance. This does not in itself impose any obligation on the first party to bring the information to the attention of the other party, and failure to do so would not, without more, ordinarily be regarded as dishonesty or even sharp practice.”

Context is all important - the reasonable expectation test

Case law has established that silence may amount to misleading conduct where:

  • the nature of the relationship between the parties is such that there arises a duty to reveal relevant facts; or
  • in all the circumstances, a party had a “reasonable expectation” that information known to the other party would be disclosed.

Arm’s length commercial negotiations do not usually give rise to a duty to disclose based on any special relationship between the parties. The kinds of relationships that have been considered to impose a duty of disclosure include insured and insurer, trustee and beneficiary, principal and agent and guardian and ward.

However, the Courts have cautioned against categorising cases into those in which a duty to disclose is evident and those in which there is not, preferring instead to emphasise that the existence or otherwise of such a duty will depend solely on the circumstances of each case. In Kimberley NZI Finance Ltd v Torero Pty Ltd (1989) ASC 55-943 French J stated:

“If in a particular case silence would, as a matter of fact, constitute misleading or deceptive conduct, s. 52 by virtue of its prohibition of such conduct imposes its own statutory duty to make disclosure. The cases in which silence may be so characterised are no doubt many and various and it would be dangerous to essay any principle by which they might be exhaustively defined. However, unless the circumstances are such as to give rise to the reasonable expectation that if some relevant fact exists it would be disclosed, it is difficult to see how mere silence could support the inference that that fact does not exist.”

The cases concerning silence in the context of commercial negotiations have not established any definitive criteria for determining whether, based on a given set of circumstances, disclosure may be reasonably expected. Commentators have suggested that the relevant criteria may be:

  • the nature of the relationship between the parties
  • whether there was knowledge that the undisclosed information was relevant to the transaction
  • whether the undisclosed information was material, and
  • whether the failure to disclose was intentional.

An example - the Smash Repairs case

The “reasonable expectation” test was satisfied in Hai Quan Global Smash Repairs v Ledabow Pty Ltd (2004) ATPR 42-025. The applicants purchased a panel beating and spray painting business from the defendant. During the pre-contractual negotiations, the defendant told the applicants that the business did some lucrative work for two insurance companies, however he did not inform them that they would have to re-apply to retain this work. The applicants purchased the business with the belief that the insurance companies would continue to give them work, provided that they maintained the same standards of service as the previous owner. Following the loss of the insurance work, the applicants claimed that the defendant had engaged in misleading or deceptive conduct in breach of section 52 of the TPA by remaining silent and by knowingly allowing them to purchase the business in the mistaken belief that the insurance work would automatically continue.

The Court began with the general principle that mere silence is not misleading or deceptive conduct, unless the circumstances give rise to a reasonable expectation that a relevant fact would be disclosed. In this case, the Court observed that the defendant had made a representation to the applicants about the profitability of the business, knowing that the profitability depended upon continuation of the insurance work. The defendant was also aware of the applicants’ belief that they would have no difficulties in ensuring continuation of the insurance work. In these circumstances, there was a reasonable expectation that the defendant would reveal the fragility of the continuation of the insurance work to the applicants. By remaining silent, the defendant had caused his representation about the profitability of the business to become misleading.

Mallesons has considerable experience and expertise in advising on section 52 issues. If you would like more information about the issues raised in this article, or section 52 generally, please contact one of our Competition group specialists listed above.

1Poseidon Limited & Anor v Adelaide Petroleum NL & Ors (1991) 105 ALR 25.