Misleading or deceptive conduct — one bad apple can spoil the bunch

In a recent decision¹, the Supreme Court of Victoria has found that Viterra² and its parent company Glencore³ engaged in misleading or deceptive conduct during their $420 million sale of a malting business, Joe White Maltings Pty Ltd (Joe White), to Cargill⁴.

Elliot J’s decision, which answered some 145 separate questions, upheld Cargill’s claims pursuant to the often-litigated section 18 of the Australian Consumer Law (ACL), as well as the tort of deceit and breach of contract.

Viterra and Glencore unsuccessfully sought to rely upon contractual disclaimers and exclusions to limit or exclude their liability under the ACL as well as bringing unsuccessful third party claims.

Notably, the action and inaction of key employees during the sale process ultimately led to the costly findings against Viterra and Glencore. This article considers how Cargill was able to establish the wrongdoing of key person(s) and attribute it to Viterra and Glencore.

Background and factual findings

Glencore wished to sell Joe White which it owned as a result of its purchase of Viterra.

During the sale process, Cargill was provided with an information memorandum containing financial and operational information about Joe White, was invited to attend a data room that contained further information, and was able to conduct its own due diligence. Subsequently, Cargill purchased Joe White via an ‘Acquisition Agreement’ for $420 million.

A number of key individuals were involved in the sale process. These included Gary Hughes (Hughes), who was a director and executive manager of Joe White and an executive manager of Viterra Malt.

After the sale was concluded, Cargill became aware of a number of business practices engaged in by Joe White, which were not disclosed in due diligence, and included:

1. routinely supplying malt that did not comply with customers’ contractual requirements and specifications;
2. supplying certificates of analysis to customers that misstated the results of analytical testing of malt supplied;
3. different varieties of barley being used that were not approved by the customer; and
4. using gibberellic acid as an additive when some customers prohibited its use.

Cargill contended that, had it been made aware of the above practices, it would not have purchased Joe White or would have terminated the Acquisition Agreement prior to its completion.

Can half disclosures be misleading?

In assessing whether misleading or deceptive conduct had occurred, the Court had to consider what was said, and importantly what was not said, about Joe White’s business practices.

As to the matters left unsaid, the Court had to consider what was known and by whom. Citing Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2000) 104 FCR 564, Elliot J said:

“[2959] Equally, conduct for the purposes of section 18 may be a combination of what was stated as well as what was left unsaid. In objectively assessing whether this combination was conduct that was misleading or deceptive, such conduct that would otherwise be misleading or deceptive does not cease to have that character because the representatives of a company engaged in that conduct did not have knowledge of the undisclosed facts. That said, knowledge may be relevant where something was left unstated, which in the particular circumstances the failure to disclose may have conveyed the implication that what was not stated was not known.”

What did Viterra and Glencore know?

Significantly, the Court accepted that Viterra and Glencore had no direct knowledge of the relevant business practices.

However, the Court then had to consider whether Joe White’s knowledge of its own practices, alternatively Hughes’ knowledge of Joe White’s practices, was attributable to the state of mind of Viterra or Glencore pursuant to principles of agency. In short, it did.

The Court noted that a person’s knowledge can be attributed to a company in each of the following situations:

1. The person is the directing mind or will of the company.
2. The person is under a duty and has an opportunity to communicate this knowledge to another.
3. The knowledge is already held in aggregate form.

In summary, it was found that Viterra presented and treated Joe White’s business as part of its business; when it came to decision making, the two did not act independently. Based on the significant role played by Viterra in the affairs of Joe White, knowledge of Joe White was found to be attributable to Viterra and (by extension) Glencore.

Additionally, Hughes was responsible for and did, settle various documents which Viterra and Glencore provided Cargill in due diligence. Hughes was aware these materials did not disclose the relevant practices and would be relied upon by Cargill. Elliot J therefore concluded:

“[2671] It follows that as a Viterra Ltd employee and Viterra executive, retained and directed in the manner that he was to assist with the sale, Hughes’ state of mind must be attributed to Viterra in determining whether Viterra had knowledge of the Operational Practices before 22 October 2013.”

Was the conduct misleading?

Elliot J then assessed whether the conduct of Viterra and Glencore, knowing of but not disclosing the practices, was misleading or deceptive.

The materials provided to Cargill as part of the due diligence process included Joe White’s financial and operational results and its business policies.

The positive disclosure of those matters, without disclosing the wrongful practices, was held to give rise to positive representations that all relevant practices had been disclosed, and there were no practices in existence that undermined or falsified Joe White’s financial and operational results.

Having been imputed with knowledge that the positive representations were incomplete, Viterra and Glencore were held to have left unsaid matters which were fundamental to the operation of Joe White, giving rise to contraventions of section 18 of the ACL.

Conclusion

The decision highlights the dangers of relying on caveat emptor. Even a vendor who discloses accurate information can still be found to have engaged in misleading conduct if the information provided is materially incomplete. Leaving unsaid particular information which may be central to a contracting party’s choice to enter the transaction can ultimately lead to substantive exposure for damages and even the complete undoing of the entire transaction.

Further, this decision serves as a cautionary reminder to ensure that the conduct of employees or representatives of a business, especially those in management capacities, should be carefully supervised. The wrongful conduct of one or more persons, without the company knowing, can have disastrous consequences — put another way, one bad apple can spoil the bunch.

If you require advice or assistance, please contact a member of our Litigation & Dispute Resolution team.

References
1. Cargill Australia Ltd v Viterra Malt Pty Ltd (No 28) [2022] VSC 13.
2. Viterra Malt Pty Ltd, which is a wholly owned subsidiary of Viterra Operations Ltd, which is a wholly owned by Viterra Ltd.
3. Glencore International AG, who wholly owns Viterra Ltd.
4. Cargill Australia Ltd, which is a wholly owned subsidiary of Cargill Inc.