Can Informal Discussions Constitute Misleading Conduct?

A recent decision in the Supreme Court of NSW of Schieb v Burnheim [2020] NSWSC 1254 has found that a representation as to a future matter, made in an informal context, constituted misleading or deceptive conduct, pursuant to the Australian Consumer Law 2011 (Cth) (ACL). Additionally, the Court found that on a proper construction, a contractual obligation to “do all things necessary and sign all appropriate documentation” created an unconditional obligation to bring about a specific result, in this instance, membership in a bore water scheme.

In the Coonamble Shire, NSW, the owners of several properties can draw bore water at no cost from the Great Artesian Basin as members of a bore water scheme (the Scheme), established under contract. Each member of the Scheme is a party to the contract and new members can only be admitted to the Scheme by vote of the existing members, provided that not more than two members dissent.

At an auction in 2011, Mr and Mrs Schieb and Mr and Mrs Burnheim agreed to purchase a property in the Coonamble Shire. The Schiebs were already members of the Scheme by virtue of another property they owned.

The parties entered into a Deed of Partition to subdivide the property, which included a promise in clause 12.3 that the Schiebs would “… do all things necessary and sign all appropriate documentation to enable Burnheim’s water rights to the … Scheme“. Additional oral statements were made by Mr Schieb to Mr Burnheim, in an informal setting, prior to purchasing the property to the effect of “Don’t worry about water, because I can get you onto the … Scheme, and in the meantime, you can have access to water on [my property]” (the Alleged Representation).

In 2014 and again in 2017, the members of the Scheme voted to reject the Burnheims’ application to become members, and instead voted to sell bore water to the Burnheims under a non-renewable license for 10 years.

The Burnheims pursued claims against the Schiebs in the Supreme Court of NSW on the grounds that:

•   clause 12.3 of the Deed, properly construed, amounted to an unconditional promise by the Schiebs to bring about their membership of the Scheme; and alternatively
•   the Alleged Representation was a representation as to a future matter made without reasonable grounds pursuant to s 4(1) and (2) of the ACL, and as such, Mr Schieb’s actions amounted to misleading or deceptive conduct under s 18 of the ACL.

Kunc J held in favour of the Burnheims’ interpretation of clause 12.3, finding that:

•   the phrase “to enable Burnheim’s water rights” in the context of clause 12.3 meant enabling the Burnheims to obtain a permanent legal entitlement to use the bore water, as opposed to obtaining a licence to enable the Burnheims to draw water at a price, and for a term with no enforceable legal right of renewal; and
•   a promise to “do all things necessary” is a promise to achieve a specified result which, in this instance, amounted to a promise to make the Burnheims members of the Scheme. This promise was unaffected by the fact that the Schiebs could not control how the other Scheme members may vote.

In relation to the Burnheims’ claim of misleading or deceptive conduct under the ACL, Kunc J found that:

•   the Schiebs failed to rebut the statutory presumption, established under s 4(2) of the ACL, that they lacked reasonable grounds for making the Alleged Representation;
•   the Burnheims relied on this Alleged Representation when purchasing the property; and
•   the Burnheims were entitled to damages for the loss of value to their half of the property due to the lack of a permanent legal entitlement to draw water from the bore. This damage was suffered in September 2014 when the members of the Scheme rejected the Burnheims’ application for membership.

This case is a key reminder that words exchanged informally can amount to a misleading or deceptive representation for the purposes of s 18 of the ACL, if relied upon by another. Further, this case highlights that a contractual obligation to “do all things necessary” can, in certain circumstances, amount to an unconditional promise to bring about a specified result.

The full decision of Schieb v Burnheim [2020] NSWSC 1254 can be found here.