Continuing Professional Development
Current Issues in Professional Liability
Damages for Breach of Duty:
The Limits of Responsibility and The Extent of the Remedy
1.
The purpose of this evening’s discussion is to highlight some aspects of claims
for damages against professionals which are often overlooked by those who
promote such claims. This failure is not unique to claims against professionals;
but it is in relation to such claims that these problems seem to be particularly
acute.
2.
There is a powerful tendency on the part of those involved in the formulation
and prosecution of claims for professional liability to focus all their attention
and effort on the proof of a breach of professional duty or a contravention of the
Trade Practices Act to the neglect of a sufficiently rigorous consideration of
what might be recovered by way of remedy.
3.
A failure to pay close regard to the need to analyse a case in terms of the causal
nexus between the breach complained of and the precise loss caused by the
breach, so as to establish the true measure of the loss recoverable by the
wronged party can lead, at best for that party, to the wasted expense and
2
inconvenience of litigation unnecessarily prolonged when it could reasonably
have been settled; and, at worst, to the dogged pursuit of a hopeless case.
4.
Moreover, at a time in our legal history when there is a growing unease about
the proliferation of litigation, in general, and the extent to which professionals
are held liable for economic losses of those to whom professional services are
provided, in particular, close attention to this issue is apt to provide a break
upon excessive claims.
5.
It can be suggested that, in recent times, the Courts have not taken a consistent
approach to these issues of fact and principle, and that these issues have been
somewhat blurred by the verbal formulae which are applied. This may be
changing.
The Rule in Potts v Miller
6.
My starting point is the statement in Potts v Miller (1940) 64 CLR 282 at 296298, where Sir Owen Dixon stated the rule as to the measure of damages in
cases of deceit as follows:
“The measure of damages in an action of deceit consists of the
loss or expenditure incurred by the plaintiff in consequence of
the inducement on which he relied, diminished by any
corresponding advantage in money or money’s worth obtained
by him on the other side.”
7.
His Honour, in this passage, went on to affirm that:
“… if, after the date of purchase, the thing which the plaintiff
was induced to buy loses in value owing to accidental or
3
extrinsic causes, that loss is not the reasonable consequence of
the inducement.”
8.
In recent times, the authority of Potts v Miller as a general statement of
principle seems to have been reduced by a couple of related developments:
(a)
first, judges are now astute to treat it as only a prima facie rule, or even to
describe it as a second order rule1, ie a guide, but no more, to the true
measure of compensation which is to put the plaintiff in the position it
would have been in had the errant professional not failed in his duty2;
(b)
secondly, the courts have become more concerned by the difficulty of
applying the test which requires the characterization of the causes of loss
in value as “accidental” or “extrinsic”3.
9.
There are two, once again related, problems which have provided the dynamic
for these developments:
(a)
first, there is the problem of deciding what advantages received by the
wronged client are to be taken into account in deciding the extent to
which the client has been harmed by the breach of professional duty; and
(b)
secondly, there is the problem of adverse movements in the market after
the wrong and before trial.
1
2
3
Smith New Court Ltd v Citibank NA (1997) AC 254 at 266-268.
Gould v Vaggelas (1985) 157 CLR 215 at 220-221; Haines v Bendall (1991) 172 CLR 60 at
63; Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 535.
Kizbeau Pty Ltd v WG&B Pty Ltd (1995) 184 CLR 281 at 291.
4
Advantages and Disadvantages
10.
An example of the first kind of problem to which I referred above is afforded by
the decision in the Court of Appeal in Manwelland Pty Ltd v Dames & Moore
(2001) ATPR 41-845.
11.
In that case, the plaintiff, a property development company, was interested in
acquiring a parcel of land for sale in the business district of Mackay. The land
was contaminated land within the meaning of the Contaminated Land Act 1991
under which governmental approval was required before the land could be
developed.
12.
The plaintiff sought advice as to the cost of remedial works on the land. On the
basis of advice that this could be done at a maximum of $300,000, it agreed to
buy the land for $810,000.
13.
It turned out that the remedial works cost $500,000-$963,000.
14.
It sued for damages claiming $510,000 being the difference between the
purchase price of $810,000 and the market value of the land at the date of
acquisition.
15.
The trial judge held that the measure of damages could be ascertained only by
taking into account the proceeds of sale of the land which the plaintiff
developed and sold minus the expense of bringing it into a saleable condition.
5
16.
This decision was upheld by the Court of Appeal; and an application for special
leave was refused by the High Court.
17.
The plaintiff argued that, in assessing its loss, the Court should not take into
account the benefits that accrued to it through its own efforts after it had
acquired the land. These benefits were, it argued, “extrinsic” or “accidental”;
and should not be taken into account in the assessment of damages.
In
upholding the decision of the trial judge, the Court of Appeal disapproved of the
decision of the English Court of Appeal in Hussey v Eels (1990) 2 QB 227.
18.
In that case, the plaintiffs had bought a house on the faith of a representation
that it had suffered no subsidence. The plaintiffs discovered that there had been
a degree of subsidence, and thereupon obtaining planning permission to
demolish the house and to build two new houses. As a result, the plaintiffs
made a profit; but they were not obliged to bring the proceeds of the
development into account because it could not be said that the negligence which
caused the damage to the plaintiffs had also caused whatever profit they made
on resale.
19.
In Manwelland at 43,464, McPherson JA, with whom Douglas J agreed, said:
“In Australia, the weight of authority now favours the view that
the damages are to be determined by ascertaining the net loss
sustained as a result of acting on the inducement. One would
expect that, in arriving at the “true” or market value, account
would in a case like Hussey v Eels be taken of the potential of
the property to be dealt with in exactly the way it was in that
instance; that is, by demolishing the bungalow and obtaining
planning permission to erect two new buildings on it. The
6
potential for redevelopment, at least if foreseeable, is similar to
fluctuations in market value, which as McHugh J has said (in
Kenny & Good Pty Limited v MGICA (1992) Limited (1999) 199
CLR 413 at 436, will ordinarily be factored into the assessment
of the true value of the property as at the date of valuation. In
that way, the two methods of ascertaining the amount of
damages ought in theory to produce the same or much the same
result.”
20.
With great respect to his Honour, there is some difficulty with the last sentence
in this passage. There is likely always to be a significant difference between a
valuation made at a time when it reflects the value of the property at that time in
the light of all the risk factors that may affect its value, and its value at a later
time when those factors are no longer matters of risk and potential, but have
become matters of historical fact and certainty.
21.
Having said that, overall, the approach in Manwelland is to be welcomed. Why
should a plaintiff recover a loss which it has not, in fact, suffered.
22.
I commend to you the study of this issue by Lehane J in Flemington Properties
Pty Ltd v Raine & Horne Commercial Pty Ltd (1997) 148 ALR 271 at 309-318.
23.
His Honour’s observations were obiter, and when the case went on appeal to the
Full Court of the Federal Court, the Full Court did not express a concluded view
as to whether his Honour’s analysis was correct.
It is, however, a
comprehensive discussion of the principles and authorities relating to the first
problem by a very great lawyer.
7
Movements in the Market
24.
An example of the second of the problems I referred to earlier, that is, who
bears the burden of adverse market movements which occur after the
wrongfully induced acquisition, is due to come before the High Court next week
in Astonland Pty Ltd v HTW Valuers (Central Queensland) Pty Ltd (2002) QCA
302.
25.
In that case, a client agreed to purchase a small shopping centre in Sarina for
$485,000. The contract was made in April 1997, and completed in July 1997.
On the evidence of the plaintiff’s valuer, the fair market value of the property
was $400,000 at the time of contract and $375,000 at the time the contract was
settled.
26.
If the rule in Potts v Miller had been applied, the measure of damages would
have been either $85,000 or $110,000, depending on whether one took the true
value at the date of the contract or the date of completion of the contract.
27.
The basis for the plaintiff’s claim against its valuer was that the plaintiff would
not have bought the property had it not been alerted by the defendant valuer to
the possibility that current rental levels at the shopping centre might not be
maintainable because of competition from another group of shops then under
construction.
8
28.
Rents were not maintainable, or maintained, and the trial judge assessed the
proper measure of damage as being $355,000, being the difference between the
contract price and the value of the property nearly two years after the date of
contract. His decision was upheld by the Court of Appeal. The High Court has
granted special leave to appeal from that decision.
29.
The arguments that were advanced in favour of the valuer were:
(a)
first, that the valuer’s obligation was to exercise reasonable care in giving
its advice. The valuer did not warrant that rents would not fall. To
measure the plaintiff’s damage by reference to the value of the property
after rents had fallen was to hold the valuer to a measure of liability
appropriate to a warranty that rents would not fall; and
(b)
secondly, that the true measure of the harm done by the valuer’s
negligence was reflected in the difference between what the client paid for
the asset and the fair market value of that asset; that is to say extent to
which the bad bargain which it was induced to make was, indeed, a bad
bargain. The extent to which a bargain is a bad bargain can be established
at that time. That the marker thereafter falls or improves is irrelevant to
the measure of the harm caused by the breach of duty.
30.
On behalf of the valuer it was said, as McHugh J said in Kenny & Good Pty Ltd
v MGICA (1992) Limited (1999) 199 CLR 413 at 431:
“In the absence of a contrary undertaking or special
circumstances, the aggrieved party cannot recover any part of the
difference between the true value of the property and the price
recovered at the time of (subsequent) sale.”
9
31.
The trial judge and Court of Appeal rejected these arguments on a number of
grounds:
(a)
the first ground was that this was not “a true valuation case” but a case of
a “predictive opinion” as to how rents would hold up. This does not
seem a particularly compelling basis to hold the valuer liable as if he had
warranted his prediction as opposed to being obliged to exercise
reasonable care and skill in expressing his opinion about a matter central
to valuation. The working out of value is a mathematical exercise once it
was assumed that rents were maintainable;
(b)
the second ground was that the client’s loss was not reasonably
ascertainable until the impact of the competition was felt. This ground
was not particularly compelling when one recalls that the plaintiffs had
called a valuer who proved the fair market value at the date of contract
and settlement, and thereby neatly established that the extent of the
plaintiff’s loss was ascertainable and, indeed ascertained, at those times.
32.
A further possible basis to justify holding the valuer liable for the total loss
suffered by reason of events subsequent to purchase and prior to trial is that the
client has been induced, not only to buy, but also to retain the asset by the
continuing influence of the breach of duty.
33.
There has been a tendency, in cases such as Doyle v Olby Ironmongers (1969) 2
QB at 167 to resolve this issue by the ready inference that the buyer was
“locked into” the loss making business.
10
34.
Doyle v Olley Ironmongers, supra, was, of course, a case of fraud, and it may be
that there are good reasons of policy why a fraudster should bear any loss
flowing from his misconduct. In Banque Bruxelles Lambert SA v Eagle Star
Insurance Co Ltd4, the House of Lords treated deceit as an exception to the
principle there propounded “that a person providing information upon which
another will rely in choosing a course of action is responsible only for the
consequences of the information being wrong”. Lord Hoffman, with whom all
the other law lords agreed, said of Lord Denning’s proposition that “I would not
have entered into this bargain at all but for your misrepresentation …”:
“Such an exception, by which the whole risk of loss which
would not have been suffered if the plaintiff had not been
fraudulently induced to enter into the transaction is transferred to
the defendant, would be justifiable both as a deterrent against
fraud and on the ground that damages for fraud are frequently a
restitutionary remedy.”
35.
Of course, in cases of breach of professional duty, the policy of requiring the
defendant to restore a benefit obtained by him or her from the loss-making
transaction induced by his or her advice will be rare, and, when it occurs, will
usually be vindicated by rules about fiduciary duty.
36.
Where do we get the idea that we should, or even can, presume that investors
are “locked in” to their investments or that markets are inefficient so that the
investor cannot turn his investment back into cast at the market value? In the
usual run of cases of professional negligence, where loss is suffered as a result
of a particular transaction made in reliance on advice sought for that particular
purpose, one may wonder whether it is satisfactory for the Court to act upon an
4
(1997) AC 191 at 215-216.
11
assumption of fact or a presumption of law that the plaintiff is locked into the
ownership of an asset in the absence of proof by the plaintiff that there was, in
fact, no market in which the asset could be realized or that a decision to refrain
from selling the asset was, in fact, influenced by the original advice.
37.
In England, it is clear, following the decision of the House of Lords in Banque
Bruxelles, supra, that a negligent professional will not be liable for loss which
would have been a consequence of the transaction even if the representation had
been true; and that the measure of damages is the loss attributable to the
inaccuracy of the information which the plaintiff has suffered by entering into
the transaction on the assumption that the information was correct.
38.
There is a more ready acceptance of the view that, because of the defendant’s
negligence, the plaintiff became the owner of an asset and paid more for it than
it was worth to do so. But its ownership of the asset did not cause its loss of
value when the market moved against the plaintiff.
39.
In Banque Bruxelles5, Lord Hoffman said:
“Rules which make the wrongdoers liable for all the
consequences of his wrongful conduct are exceptional and need
to be justified by some special policy. Normally the law limits
liability to those consequences which are attributable to that
which made the conduct wrongful. In the case of liability in
negligence for providing inaccurate information, this would
mean liability for the consequences of the information being
inaccurate. …
The calculation of loss must of course involve comparing what
the plaintiff has lost as a result of making the loan with what his
position would have been if he had not made it.”
5
Supra, at 213, 217.
12
40.
In the Astonland Case, this would mean that the consequences of the valuer’s
advice being wrong were that the purchaser had agreed to buy an asset which
was worth $85,000 less than it had agreed to pay for it.
41.
We have been talking about adverse movements in the market post acquisition.
What about improvements in the market?
42.
What happens if the purchaser is induced to buy an asset for $100,000 at a time
when it is worth $50,000 but by the date of trial, it is worth $150,000?
43.
If the purchaser must bear the loss involved in a fall in the market, does
symmetry demand that the adviser should not get the benefit of the post
transaction increase?
44.
The judgment in Banque Bruxelles6 suggests that this does not follow. To
paraphrase Lord Hoffman, whether the buyer has suffered a loss is not the same
as the question of how one defines the kind of loss which falls within the scope
of the duty of care:
“If the market moves upwards, it reduces or eliminates the loss
which the (buyer) would otherwise have suffered. If it moves,
downwards, it may result in more loss than is attributable to the
valuer’s error. There is no contradiction in the asymmetry. A
plaintiff has to prove both that he has suffered loss and that the
loss fell within the scope of the duty. The fact that he cannot
recover for loss which he has not suffered does not entitle him to
an award of damages for loss which he has suffered but which
does not fall within the scope of the valuer’s duty of care.”
13
45.
Having regard to the less than enthusiastic treatment of Banque Bruxelles
(supra) by the High Court in Kenny & Good, supra, one must be circumspect in
adopting Lord Hoffman’s approach as reflecting a firm and general rule. But
even on a much less ambitious level, one may venture the suggestion that actual
proof of the factual basis for holding the professional advisor liable for the
consequences of business decisions on which he was not asked to advise does
not seem an unduly harsh burden to impose on those who would hold the
professional liable for the consequences of such decisions.
46.
If the market is falling, the advisor might urge a sale – or he might not – but it is
not obviously a just result to hold him liable for the consequences of a decision
to hold on where he has not been consulted about that decision.
47.
And it is even more of an affront to hold a professional liable to a measure of
loss which effectively makes him an underwriter of the investment decisions of
the client.
The client has not paid the premium usually payable for the
assumption of risk and the professional’s services will become much more
expensive for everyone if they respond in an economically rational way to the
new risk.
6
Supra.