Commercial Litigation Claims

STRUCTURING COMMERCIAL LITIGATION CLAIMS

(Paper presented by the Hon Alan Blow OAM, Chief Justice of Tasmania, to the Law Society of Tasmania Litigation Convention at Tarraleah on 21 November 2015)

I have been asked to speak on the structuring of commercial litigation claims, with particular emphasis on claims for loss of a chance or loss of an opportunity.  I also want to say a little about claims for pre-judgment interest.

At the risk of stating the obvious, I would like to begin by emphasising the need to identify the species of claim or claims that your client can pursue.  Judges often see statements of claim that reflect a failure to distinguish different types of claims.  The most common types of claims comprise the following:

• Claims for money payable pursuant to a contract.
• Claims for damages for breach of a contract that remains on foot.
• Claims for damages following the repudiation of a contract and the acceptance of that repudiation.
• Claims for damages in tort.
• Statutory claims for damages for misleading or deceptive conduct: Australian Consumer Law, s 18(1); Trade Practices Act 1974 (Cth), s 52(1); Fair Trading Act 1990, s 14(1).

So, for example, if a builder is claiming money on the basis that the defendant owes him a certain amount pursuant to a building contract, his claim is not for damages for breach of contract.  His claim is for money payable pursuant to the contract.

Another common misconception occurs in cases where a defendant has allegedly made misleading representations as to a financial matter, such as future profits.  If there has been a contractual promise as to the amount of the future profits, the plaintiff is entitled to claim damages for the loss of the profits.  But, if the false representation does not have the status of a contractual promise, the entitlement to damages depends on what the plaintiff would have done if the misleading representation had not been made.

For example, if a false representation is made during negotiations for the sale of a business about the profitability of the business, the assessment of damages depends on what the purchaser would have done if the representation had not been made.

Consider the following example. A business is making a profit of $100,000 per annum before tax. The proprietor negotiates for the sale of the business, and tells a prospective purchaser that the profits are twice that figure. The purchaser buys the business.  If there is a contractual promise that the profits will be at the higher figure, the purchaser is entitled to claim damages based on that higher figure.  But, without a contractual promise to that effect, the purchaser can only claim damages in tort or pursuant to the statutes relating to misleading and deceptive conduct.  In that situation, the plaintiff’s solicitor needs to enquire what the purchaser would have done without the false promise.  Is it a situation where the purchaser would not have bought the business? If so, the purchaser’s damages could comprise the following:

• The difference between the price paid for the business and its true value (if that value were lower than the price actually paid).
• Wasted expenditure in relation to the purchase of the business, and possibly its re-sale.
• Loss of income (if it can be proved that the purchaser would have had a higher income but for the acquisition of the business).

Double dipping must be avoided.  Thus, if wasted expenditure is claimed separately, that expenditure must not be taken into account a second time in calculating the claim for loss of income.

Loss of Opportunity Cases

Chaplin v Hicks [1911] 2 KB 786

There is a long line of cases in which courts have awarded damages for loss of opportunity.  For example there is the English Court of Appeal case of Chaplin v Hicks, which concerned the recruitment of actresses. A theatrical agent invited young ladies to send him applications and photographs, and promised to employ 12 of the applicants, and to follow a particular selection process.  That process involved appointments for him to see 50 finalists.  Miss Chaplin was selected as one of the 50 finalists, but she was sent a letter on a Monday asking her to call at the Aldwych Theatre in London at 4pm on the Wednesday, and she happened to be performing in Dundee that week. The defendant refused to give her another appointment, and she was not employed. She sued for damages.  A jury held that there had been a breach of contract because the agent had failed to give her a reasonable opportunity to attend an appointment. The jury went on to award £100 damages. That is to say, she was awarded damages for the loss of the chance that she might have been employed. The defendant had promised to engage the 12 successful applicants for three years, with remuneration varying between £3 and £5 per week.  The Court of Appeal concluded that the award of damages was unimpeachable.

Doolan v Renkon Pty Ltd (2011) 21 Tas R 156

A century later, we have had a number of cases in the Full Court recently that involved claims for damages for loss of opportunity.  The first was Doolan v Renkon Pty Ltd. That case concerned negligent advice by a solicitor.  The client, Renkon Pty Ltd, had purchased a hotel business and leased the hotel premises. The solicitor had acted for Renkon on the purchase and the lease.  Nearly two years after settlement, one of the directors of Renkon phoned the solicitor and asked whether there was anything she could do to avoid complying with orders she had received from the Licensing Board.  The solicitor neglected to tell her about a possible course of action which, if taken, could have resulted in the surrender of the lease, the return of the business to the vendor, and the refund of nearly all the purchase money.

The circumstances were unusual.  Part of the land on which the hotel stood was burdened by a restrictive covenant that required the land not to be used for the sale of intoxicating liquor to the public. That covenant came to the attention of the solicitors for the vendor and purchaser before settlement. To get it removed, it was necessary to petition the Recorder of Titles to amend a sealed plan. It became apparent that the amendment could not be arranged prior to the agreed settlement date.  The parties therefore agreed that the vendor would take the necessary steps after settlement, and would have two years to get the covenant removed.  It was agreed that, if the covenant was still there two years after settlement, Renkon would be entitled to surrender the lease, give back the business, and get back the purchase money ($1 million), subject to an adjustment relating to plant, equipment and stock.

The enquiry to the solicitor was made less than two months before the two years expired.  The vendor’s solicitors had not followed up the petition for the removal of the covenant.  The two years expired and the covenant remained in place. The Full Court held that Renkon’s solicitor should have advised that, if the two years expired without the removal of the covenant, Renkon would be entitled to surrender the lease and get nearly all the $1 million back. The Full Court also concluded that Renkon would have pursued the opportunity afforded by the right to surrender the lease, either by surrendering it or by negotiating a more favourable deal.

Renkon could not have succeeded without a finding, on the balance of probabilities, that it would have taken advantage of the opportunity afforded by the right to surrender the lease. The relevant principle was stated by the Full Court at [60] as follows:

“… where the realisation of an opportunity depends on a plaintiff’s own decision to take it up, it must be proved on the balance of probabilities that it would have been taken up.  Unless it is proved that a plaintiff would have acted on an opportunity, it cannot be said that the breach has caused any loss.”

The authorities that establish that proposition are listed in the judgment.

Loss of opportunity claims involve first a causation issue, and then an evaluation issue.  In this case, the Full Court awarded damages equal to 75% of the refund that Renkon would have been entitled to receive.  The following matters were taken into account in arriving at that figure of 75%:

• The principal director of Renkon wanted to get out of the business because of the condition of the premises and the expense of repairs.
• Once Renkon learned of the possibility of surrendering the lease, it attempted to surrender it. (It was too late. The attempt was made some 15 months after the two-year period expired. At an earlier stage in the litigation, it was held that the right to call upon the landlord to accept the surrender could only be exercised within a reasonable time after the triggering event, and that the attempt had been made too late: Ross Ambrose Group Pty Ltd v Renkon Pty Ltd [1998] TASSC 72 at [6].)
• One possibility was that, rather than surrendering the lease, Renkon would have used its capacity to surrender the lease as a bargaining tool, and that might have achieved a result less favourable than a surrender and a refund.
• Renkon might have incurred legal costs, not recoverable from anyone, in exercising and enforcing its right to surrender, or in trying to negotiate a more favourable deal.

As one can see from an analysis of what happened in that case, the main points that should be made in a loss of opportunity case, first in the particulars of damages, and subsequently in counsel’s opening speech, are:

• The nature of the opportunity that should have been available to the plaintiff.
• The alleged or estimated financial consequences if that opportunity had been taken.
• An assertion that, but for the defendant’s breach of duty, advantage would have been taken of that opportunity.
• Information that the plaintiff claims damages on the basis that he or she lost the chance of taking up the opportunity.

Kronenberg v Bridge [2014] TASFC 10

This was the next case in our Full Court that concerned a loss of chance.  Mr and Mrs Kronenberg sued their builder, and failed at first instance.  On appeal to the Full Court, they pursued claims for damages for breach of contract, and in respect of misleading and deceptive conduct.  The contract claim failed again, but they succeeded in obtaining damages pursuant to the Fair Trading Act in respect of misleading and deceptive conduct.  This case provides a useful illustration of ways in which such claims can be framed.

The Full Court held that the appellants’ contract with their builder was not a fixed price contract but a “cost plus contract”.  That is to say, it was a “do and charge” contract.  The builder was entitled to charge by the hour for his work and the work of his employees, and to pass on all expenses, in relation to sub-contractors and materials, as well as adding a profit margin in relation to those expenses.

The Full Court held that he had made a misleading representation to the effect that the final cost of the building work would be about $340,000 plus GST.  The final cost, after the sacking of that first builder and completion of the work by a second builder, was $691,175 inclusive of GST.

As we have already seen, the damages cannot always be measured simply by subtracting the represented cost from the actual cost.  The Full Court held that there was no contractual promise that the work would cost $340,000 plus GST, or approximately $340,000 plus GST.

In a case like this, one possible approach is to compare the price paid by the claimants with the value of what they got.  Thus, if people relying on a false representation enter into a contract and spend $690,000 on improvements to their real estate, but the result is that the value of the real estate increases by much less than that amount, then, depending on the factual circumstances, it might be appropriate to claim the difference as damages on the basis that that was the loss resulting from the misleading representation.

However, at the trial of the Kronenberg case, no evidence was led as to the increase in the value of the property that resulted from the building works.  It appears that a strategic decision was made not to claim damages under the Fair Trading Act on that basis.  The trial judge concluded that, without evidence as to the impact of the building work on the value of the real estate, it was not possible for the plaintiffs to prove that they had suffered any loss or damage as a result of reliance on the misleading representation: Kronenberg v Bridge [2013] TASSC 57 at [141].

The Full Court accepted that, without valuation evidence, it was not open to the trial judge to award damages on the basis of the difference between the increase in value and the expenditure incurred to produce that increase.

However the Full Court concluded that damages were recoverable under the Fair Trading Act in respect of the misleading representation on another basis.  At [61], the Full Court said that, but for the misleading conduct of the builder, the Kronenbergs would sooner or later have entered into a fixed price contract with another builder for the construction of the same house, or perhaps a cheaper modified version of it. The Full Court then proceeded to assess damages for the loss of the chance of entering into a more advantageous contract. Damages were assessed on the basis that the Kronenbergs lost an 80% chance of entering into a contract that would have resulted in the same work costing about $430,000 instead of about $690,000.

At [58], the Full Court repeated a statement of the relevant principles made by Martin CJ in Doepel & Associates Architects Pty Ltd v Hodgkinson [2008] WASCA 262 at [48]:

“… a party who has been subjected to misleading and deceptive conduct or negligent misrepresentation is entitled to be put in the position in which he or she would have been but for the breach of statutory or common law duty …

So, where it is established as a fact that a different course of action would have been taken but for the breach of statutory and/or common law duty, the measure of damages is the sum required to put the innocent party … in the position in which he would have been but for the relevant breach of duty.

… if a claimant establishes that but for the relevant breach or duty, he or she would have entered into a different contract upon which he or she would have made a profit, that profit may be recovered on the basis that it is part of the loss which has been suffered in consequence of the relevant breach …”.

Those words were written in a case about the loss of an opportunity to make a profit.  The Kronenberg case concerned the loss of an opportunity to enter into a more advantageous building contract.  The underlying approach is the same.  An estimate has to be made of the amount of money required to put the innocent party in the position that he or she would have been in but for the relevant breach of duty.  Then there has to be a discounting, usually on a percentage basis, to allow for the possibility that the opportunity might not have been taken up, and to allow for contingencies.  Of course damages in this sort of situation cannot be assessed with precision, but only on the basis of estimates – perhaps extremely imprecise estimates.  At [62] the Full Court relied on a comment made by Kiefel J in Tabet v Gett (2010) 240 CLR 537 at [136]:

“… the courts must do the best they can in estimating damages; mere difficulty in that regard is not permitted to render an award uncertain or impossible”.

As these two Full Court cases illustrate, when a client has a claim for damages based on negligent advice or misleading or deceptive conduct, it is important to take instructions as to what the client would or might have done if the breach of common law or statutory duty had not occurred.  If there can be certainty that the client would have taken a particular course, then damages must be claimed on the basis of the amount of money required to put the client in the position that he or she would have been in but for the breach of duty.  If it is likely, but not certain, that a particular course would have been followed, the appropriate course is usually to quantify the claim by reference to the financial results of taking that particular course, and then to concede that there should be some discounting to allow for contingencies.

Calvert v Badenach [2015] TASFC 8

This is the most recent case in which the Full Court has considered the availability of damages for loss of a chance.  It concerned a will.  The testator made a will leaving the whole of his estate to the appellant, Mr Calvert. The testator had a daughter, but he had had very little to do with her, and he left her nothing.  She made an application under the Testator’s Family Maintenance Act 1912, took her case to trial, and ended up with about a third of the estate, as well as an order for costs.  That situation could have been avoided.  The testator’s principal assets were his interests in two properties.  He and the appellant, Mr Calvert, had held those properties as tenants in common in equal shares.  Because they were tenants in common, the testator’s half shares formed part of his estate. If he and Mr Calvert had converted the tenancies in common to joint tenancies before his death, Mr Calvert would have taken both properties as the surviving joint tenant, and the TFM claim would have been almost worthless.

Mr Calvert sued the testator’s solicitor, contending as follows:

• That the solicitor owed him, the sole beneficiary, a duty of care.
• That that duty required him to ascertain the existence of the testator’s daughter, warn the testator of the possibility of a TFM claim, and advise the testator of the possibility of circumventing the TFM claim by converting the tenancies in common to joint tenancies.
• That, if the solicitor had done all those things, the testator would have arranged to hold the properties with Mr Calvert as joint tenants, and the impact of the TFM claim would have been far, far less.

I was the trial judge. The solicitors for the plaintiff – the unhappy beneficiary – did not frame the claim as a claim for damages for loss of a chance.  I concluded that I was not satisfied on the balance of probabilities that the testator, if advised about a possible TFM claim and how to circumvent it, would have joined in creating joint tenancies.  I dismissed the action on that basis, without reaching any conclusions as to the scope of a solicitor’s duty to a non-client in such a situation.

The Full Court allowed the appeal. All three members of the Court concluded that the testator’s solicitor owed the non-client a duty to find out about the disinherited daughter and advise the testator about creating joint tenancies in order to circumvent a TFM claim.  The Full Court ordered a new trial, on the basis that the beneficiary’s claim must be regarded as a claim for damages for loss of a chance.

The High Court has granted special leave to appeal: Badenach v Calvert [2015] HCATrans 279 (26 October 2015).  The principal focus of the appeal is likely to be the scope of the solicitor’s duty to a non-client.  However the High Court might also have to address the question whether the plaintiff needed to establish on the balance of probabilities that he and the testator would have taken up the opportunity to create joint tenancies. Two of the judges on the Full Court took the view that this was not a case where such a finding needed to be made in order for the plaintiff to succeed: Estcourt J at [134]; Porter J agreeing at [93].  One of the grounds of appeal in the High Court proceedings asserts that their Honours got that wrong.

Civil Liability Act 2002, s 13(3)

This subsection has applied as from 4 July 2003.  It reads as follows:

“(3) If it is relevant to deciding factual causation to decide what the person who suffered harm would have done if the person who was in breach of the duty had not been so in breach —

(a)  the matter is to be decided subjectively in the light of all relevant circumstances, subject to paragraph (b); and

(b) any statement made by the person after suffering the harm about what he or she would have done is inadmissible except to the extent (if any) that the statement is against his or her interest.”

Evidence from a plaintiff as to what he or she would have done in a particular situation is inadmissible under s 13(3)(b).  However, evidence of the circumstances that would have led the plaintiff to take a particular course of action is relevant and admissible, and should be led, with a view to the trial judge drawing inferences as to what the individual would or might have done, and as to the strength of the chance of each particular course of action being taken.

Pre-judgment interest

The Kronenberg case involved a claim for compound interest in accordance with Hungerfords v Walker (1971) 175 CLR 125.  That compound interest claim is the subject of a separate Full Court judgment: Kronenberg v Bridge (No 2) [2015] TASFC 9.

Judges of the Supreme Court of Tasmania do not have a general power to award pre-judgment interest. No such power exists at common law. The common law has been reformed so as to confer a general power to award pre-judgment interest in other jurisdictions, and in relation to Tasmanian magistrates and arbitrators, but not in relation to the Supreme Court.

Section 34 of the Supreme Court Civil Procedure Act 1932 confers a power to award pre-judgment interest, if properly demanded, but only in relation to “debts or sums certain”.  That section does not apply to damages: In re Australian Metal Company Ltd (1923) 33 CLR 329.

Our Court has statutory powers to award pre-judgment interest in damages cases only in relation to cases of conversion and trespass, and insurance claims: Supreme Court Civil Procedure Act, s 35(1)(a); Insurance Contracts Act 1984 (Cth), s 57.

Interest claims in commercial litigation will therefore usually have to be framed as claims for damages in the nature of interest in accordance with Hungerfords v Walker. That case concerned a claim for interest in respect of a precise sum of money. The claimants were taxpayers who had paid too much tax as a result of negligence on the part of their accountants.  It was possible for the courts to be precise as to the amounts by which they were out of pocket as a result of overpaying tax, and the periods during which they were out of pocket.  They were paying compound interest at high rates on some loans. They were also operating a business. When the case was before the Full Court of the Supreme Court of South Australia, damages representing 20% compound interest were awarded on the basis that claimants (a) would have paid off the loans bearing the highest interest, and (b) would have devoted the remaining funds to their business and thereby earned no less than what they were paying on the highest interest loans.

In State of Tasmania v Shaw (No 2) (2002) 12 Tas R 1, our Full Court held that Hungerfords v Walker damages could be recovered in relation to a claim that was incapable of precise calculation. The claimant’s damages were assessed at $106,161 excluding interest. At all material times he had compound interest loans for amounts totalling at least $157,000.  The Full Court held that he was entitled to recover Hungerfords v Walker damages on a compound interest basis.

In Kronenberg, the Full Court went one step further, and awarded Hungerfords v Walker damages on a compound interest basis to claimants who had not been paying compound interest at any material time.  In the Full Court’s first decision, their damages were assessed at $208,860 plus interest.  In Kronenberg (No 2), at [9], the Full Court explained the reasons for awarding them Hungerfords v Walker damages on a compound interest basis:

“… the appellants’ borrowings from their bank substantially exceeded the sum of $208,860 which they were entitled to recover, with interest, by way of damages.  The appellants were out of pocket as a result of the respondent’s contravention of the Fair Trading Act.  If they had not been out of pocket, they would not have owed their bank as much money as they did. Their monthly interest payments would have been smaller, but that would not have been the only consequence. If they had paid less interest each month, they would have had a little money available each month which could have been paid to the bank to reduce the principal sum.  There is no reason why the appellants would have taken any other course. The reduction of the principal sum by a little each month would have had a cumulative or compounding effect by way of reducing the interest that would otherwise have been payable. It must follow that an award of simple interest would have been inadequate to compensate the appellants for the losses that they incurred in consequence of the respondent’s contraventions of the Fair Trading Act, and that they could only be properly compensated by an award of compound interest.”

In that sort of situation, it remains open to the Court to choose an appropriate interest rate, by way of doing the best it can. In Kronenberg, the appellants had been maintaining a substantial credit balance in one bank account, and that entitled them to a low interest rate on their loan. The Full Court was content to assess damages on the basis of that low interest rate.

For the purposes of framing a Hungerfords v Walker claim, it is necessary to take instructions from clients as to their financial commitments, and what they would have done with the money that should have been in their hands. What debts did they have? What interest were they paying? Was it simple interest or compound interest? What would they have done with the money that should have been in their hands? Particulars need to be prepared on the basis of such instructions, and evidence as to these matters needs to be adduced at trial. Often that involves producing voluminous quantities of bank statements. The particularisation of compound interest claims might require the engaging of accountants.  In Kronenberg there had to be an adjournment after the Full Court delivered its first set of reasons in order for the accountants to undertake compound interest calculations.

Conclusion

The structuring of commercial litigation claims is an enormous topic, obviously because of the great variety of fact situations and types of claims.  I hope that I have been able to shed some light on a few of the principles recently considered by the Full Court in relation to loss of opportunity claims and interest claims.  I will be happy to answer questions.