Arthur Andersen and Co (A Firm) v GPA Group Plc

[1998] FCA 1493

FEDERAL COURT OF AUSTRALIA

APPEAL - interlocutory order setting aside service of cross-claim outside Australia because of failure of cross-claimant to establish prima facie case within O 8 r 2(2) the Federal Court Rules for contribution or indemnity - entitlement to contribution or indemnity speculative - leave refused.

Corporations Law, s 205
Federal Court Rules, O 9 r 7, O 8 r 2
Wrongs Act 1958 (Vic), s 23B

Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170, followed
Brimaud v Honeysett Instant Print Pty Ltd (McLelland J, New South Wales Supreme Court, 19 September 1988, unreported), applied

ARTHUR ANDERSEN AND CO (A FIRM) v GPA GROUP PLC & ORS

QG 41 of 1998

SPENDER, DRUMMOND AND SUNDBERG JJ
13 NOVEMBER 1998
BRISBANE

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	QG 41 of 1998

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:

ARTHUR ANDERSEN AND CO (A FIRM)
APPLICANT

AND:

GPA GROUP PLC
FIRST RESPONDENT

TYROLEAN LIMITED
SECOND RESPONDENT

IRISH AEROSPACE LIMITED
THIRD RESPONDENT

JUDGES:	SPENDER, DRUMMOND AND SUNDBERG JJ
DATE OF ORDER:	13/11/98
WHERE MADE:	BRISBANE

THE COURT ORDERS THAT:

1. Leave to appeal in each case is refused with costs.

Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY	QG 41 of 1998

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

BETWEEN:

ARTHUR ANDERSEN AND CO (A FIRM)
APPLICANT

AND:

GPA GROUP PLC
FIRST RESPONDENT

TYROLEAN LIMITED
SECOND RESPONDENT

IRISH AEROSPACE LIMITED
THIRD RESPONDENT

JUDGES:	SPENDER, DRUMMOND AND SUNDBERG JJ
DATE:	13/11/98
PLACE:	BRISBANE

REASONS FOR JUDGMENT

THE COURT:

We have before us applications for leave to appeal two judgments of Cooper J. The effect of these judgments is to prevent Arthur Andersen pursuing the three respondents (“GPA”), which are associated companies, for contribution or indemnity pursuant to s 23B the Wrongs Act 1958 (Vic) in respect of claims made against Arthur Andersen by the liquidator of Southern Cross in an action pending in this Court. His Honour ordered after a hearing under O 9 r 7 that leave previously given ex parte under O 8 r 2 to Arthur Andersen to serve its cross-claim on GPA in Ireland be revoked and further ordered that those companies cease to be parties to the proceedings.

In form, his Honour’s orders are all interlocutory, hence the need for leave to appeal.  They do, however, preclude Arthur Andersen from pursuing claims against GPA, at least in the absence of such a change in circumstances (which might, eg, be found in a change by Southern Cross in the claims it is making on Arthur Andersen) as would entitle Arthur Andersen to make another application for leave to serve other proceedings on GPA.  See Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170 at 178 and Brimaud v Honeysett Instant Print Pty Ltd (McLelland J, New South Wales Supreme Court, 19 September 1988, unreported).  We were told that “as a precaution”, Arthur Andersen has issued a writ out of the Supreme Court of Victoria against GPA and has also commenced proceedings against them in Ireland; it is claiming in both actions the same relief claimed in these proceedings.  Notwithstanding these considerations, because of the impact Cooper J’s orders have upon Arthur Andersen’s entitlement to pursue its claims against GPA in these proceedings as presently structured by Southern Cross, the Court heard full argument on the merits of the case Arthur Andersen wished to put for overturning Cooper J’s orders.

In the action, the liquidator of Southern Cross, in an elaborate pleading, makes a number of claims on various bases for large sums against Arthur Andersen.  Arthur Andersen’s claim for contribution or indemnity, however, is on a narrower basis.

At the hearing, Arthur Andersen disclaimed any entitlement to pursue GPA for indemnity in respect of the claim made by Southern Cross against Arthur Andersen for losses said to have been caused to Southern Cross by reason of Arthur Andersen’s involvement in failing to discover and warn the Southern Cross directors of the depletion of Southern Cross’ funds by the $4.4M paid from a Southern Cross overdraft account improperly established by a director, Reid, to GPA, which was used by the latter to acquire shares in Southern Cross pursuant to the latter’s sub-underwriting arrangements with JB Were, the lead underwriter of the float.

Cooper J sets out in his judgment those parts of the Southern Cross pleading against Arthur Andersen that are of present relevance.  It is enough to note that the only claim by Southern Cross against Arthur Andersen in respect of which the latter now seeks to pursue its claim for contribution or indemnity against GPA is the claim which is based on the issues raised in para 35 of Southern Cross’ statement of claim against Arthur Andersen.  Southern Cross’ allegations here are to the effect that, by reason of certain defaults by Arthur Andersen in its capacity as accounting adviser to Southern Cross in respect of the public float of Southern Cross, the directors allowed the float to proceed, with the consequence that Southern Cross traded for a relatively short time during which it incurred large losses.  Southern Cross claims as damages from Arthur Andersen the total amount of the trading losses incurred from the day it commenced trading to the day it went into liquidation measured by the total amount of those losses calculated by taking the excess of liabilities over assets in the liquidation of Southern Cross and deducting the estimated excess of liabilities over assets as at 17 July 1992, the date on which the share allotment proceeded.  This claim is for in excess of $75M.

Cooper J concluded that it was not permissible for Arthur Andersen to pursue its claim for contribution or indemnity against GPA in respect of this particular claim made by Southern Cross because it could not show that it had a prima facie case for contribution or indemnity, as required by O 8 r 2(2) the Federal Court Rules.  How his Honour reached this conclusion appears from the following passages in the judgment:

Arthur Andersen put the case against the cross-respondents on the basis that, but for the conduct of the cross-respondents in contravention of s 205 of the Corporations Law, Tyrolean [GPA] would not have met its sub-underwriting obligations and subscribed for the requisite amount of shares, JB Were would then have terminated the underwriting agreement between it and Southern Cross, the share offer would not have proceeded and Southern Cross would not have commenced trading and would not therefore have suffered the loss and damage claimed against Arthur Andersen …

Counsel for Arthur Andersen referred to evidence from which, it was submitted, it could be inferred that, absent the payment made to the cross-respondents or one of them on or about 3 July 1992 as part of Mr Reid’s alleged fraud and which was applied in contravention of s 205 of the Corporations Law, Tyrolean would not have subscribed for the requisite shares in accordance with its sub-underwriting obligations and the share offer would not have proceeded. Counsel further submitted that there was a close connection between the wrongful conduct of the cross-respondents and the relevant loss and damage. It was alleged that the wrongful conduct was calculated by the cross-respondents to enable Southern Cross to commence trading in circumstances where it would otherwise have been unable to do so if the share offer did not proceed. It was alleged that the cross-respondents, as the lessors to Southern Cross of four aircraft, had a substantial commercial interest in Southern Cross commencing to trade.

As can be seen, the submissions made by counsel for Arthur Andersen depend upon a conclusion that the, or a, cause of the trading losses incurred by Southern Cross, in the relevant sense, was that Southern Cross commenced to and did trade.  In my view, the submission ignores the distinction which must be drawn, when adopting a practical, common sense conception of causation, between conduct which is a cause of relevant damage and conduct which is an occasion or opportunity for that damage.

…

It is said that the wrongful conduct of the cross-respondents allowed Southern Cross to trade when it otherwise would not have done so and thereby caused the relevant loss.  That is, it is sought to say that the fact that Southern Cross traded was causative of the loss.  A case sought to be made out on that basis and without more, cannot succeed as a matter of principle, for the reasons expressed in the authorities referred to above.  The wrongful conduct of the cross-respondents, if made out, is properly characterised as the occasion for the loss suffered by Southern Cross and not the, or a, legal cause of it.  To hold otherwise would be to apply the “but for” test without regard to logic or common sense.

I am not satisfied that a prima facie case for the relief sought has been made out.

Although stating that Arthur Andersen claimed contribution or indemnity from GPA only in respect of Southern Cross’ claim on it for the totality of its trading losses, counsel for Arthur Andersen put a gloss on this, in so far as he said that Southern Cross, even if ultimately unable to fix Arthur Andersen with liability for the full amount of these trading losses, might be able, at trial, to obtain judgment against Arthur Andersen for some lesser amount.  It was said that Arthur Andersen should be entitled to maintain its contribution or indemnity proceedings against GPA in respect of any such lesser amount.  The difficulty is that, on its pleadings as presently framed, Southern Cross does not identify any basis upon which it might be able to recover from Arthur Andersen an amount or amounts less than the totality of the trading losses (save perhaps for an amount of $1.6M to which reference will be made later).  Moreover, Arthur Andersen has not attempted to point to evidence that Southern Cross might be able to sheet home to it liability for the defaults referred to in para 35 of its pleading for some lesser amount in respect of which it should be entitled to pursue a claim for contribution or indemnity from GPA.

There is some attraction in the argument that, in circumstances like the present, where Arthur Andersen has not been confronted with any pleaded claim by Southern Cross for a lesser amount than the totality of all the trading losses it suffered, Arthur Andersen should still be entitled to cross-claim for contribution or indemnity against GPA not only in respect of the totality, but also in respect of any lesser part of trading losses for which it may ultimately be held liable to Southern Cross and that, in consequence, it should only have to point to a prima facie case in respect of facts necessary to show a basis on which GPA, on the assumption that Arthur Andersen is held liable to Southern Cross in some amount, may be liable to pay contribution or indemnity to Arthur Andersen.  The argument has attraction, particularly where a respondent like Arthur Andersen is seeking indemnity from a third party by way of cross-claim and would otherwise need to identify and point to evidence capable of establishing its own liability to Southern Cross for the lesser sum, when Southern Cross itself has not so far thought to set up the more limited claim against Arthur Andersen.

There are a number of defects, however, in Arthur Andersen’s argument. The first is that the only basis upon which Arthur Andersen claims contribution or indemnity from GPA is under s 23B the Wrongs Act 1958 (Vic): it is an essential element of such a claim that Arthur Andersen is able to prove that GPA is “liable in respect of the same damage” as is claimed by Southern Cross against Arthur Andersen. In so far as Arthur Andersen may wish to recover contribution or indemnity from GPA in respect of a particular part of Southern Cross’ trading losses, it must point to evidence capable of establishing a possible basis on which both it and GPA might be liable to Southern Cross for that part of the losses to establish an essential element of the right to contribution or indemnity which it claims. Its case entirely lacks the prima facie proof required by O 8 r 2(2)(c) of that element of the claim it wants to be free to run against GPA. The second is that the object of O 8 r 2 is to ensure that a foreign resident will only be brought into litigation in the Federal Court if the party to the litigation seeking to bring the foreigner into it can demonstrate to the Court that there is a good factual, as opposed to a speculative, basis for thinking that the foreigner may be liable to the Australian litigant. The narrower case for contribution or indemnity from GPA which Arthur Andersen wants to have open to it is, for the reasons given, entirely speculative. The third answer to Arthur Andersen’s contention here is that it cannot say it is ignorant of the factual foundations for Southern Cross’ claims against it: the action has progressed to the stage where very extensive, if not complete, discovery has taken place. It was not suggested that, in these circumstances, Arthur Andersen was not in a position to know what are the various factual bases upon which Southern Cross might be able to sheet liability home to Arthur Andersen for any particular part, if not the whole, of the trading losses the subject of its existing claim against Arthur Andersen.

Subject only to the claim in respect of the $1.6M, the sole basis upon which Southern Cross seeks to make Arthur Andersen liable is that its various defaults were a cause of its suffering the entirety of the trading losses it experienced during its relatively short operational life.  For the reasons given by the learned primary judge, with which we agree, it is not open, as a matter of principle, to Arthur Andersen to say that it may be liable for the totality of those losses to Southern Cross, even if the defaults Southern Cross claims Arthur Andersen was guilty of are all proven and that, as Southern Cross alleges, it was due to those defaults that Southern Cross commenced to trade.  It may be possible to show by appropriate evidence that particular losses suffered by Southern Cross in trading were so caused by defaults of the kind that Southern Cross claims that Arthur Andersen committed.  But it will fail to recover any of those losses from Arthur Andersen in the absence of such evidence.  For example, if Southern Cross only commenced to trade because of Arthur Andersen’s defaults but incurred losses because of bad business decisions made thereafter, eg, by deciding to fly on a wholly uneconomic route, or because it incurred expenses which cannot be fairly sheeted home to Arthur Andersen, eg, by engaging in lavish business entertainment, Southern Cross will fail to show that such trading losses were caused by the defaults of Arthur Andersen.  It is Southern Cross which has at least an evidentiary burden to discharge, in order to link particular trading losses with Arthur Andersen’s defaults.  The learned primary judge refers to authorities which support this approach in reaching his conclusion that Southern Cross’ claim against Arthur Andersen for the totality of its trading losses and thus the latter’s claim for indemnity against GPA in respect of those same losses cannot be assumed to be well-founded in the absence of evidence to prove a causal link.

Counsel for Arthur Andersen demonstrated that there was evidence sufficient to raise a prima facie case in the special sense required by O 8 r 2(2)(c) that GPA was involved in a breach of s 205 the Corporations Law in respect of its receipt of the $4.4M in early July 1992 from Southern Cross’ overdraft account improperly established by Reid.  But Arthur Andersen failed to point to evidence sufficient to complete proof of a prima facie case that GPA is liable to indemnify it in respect of Southern Cross’ claim for the totality of its trading losses made against Arthur Andersen.

Arthur Andersen’s theory is that, but for the provision by Reid of moneys belonging to Southern Cross to GPA for the purpose of enabling GPA to buy shares in Southern Cross necessary to fulfil its sub-underwriting arrangements with JB Were, JB Were would have withdrawn from its underwriting agreement with Southern Cross with the result that the float would not have proceeded. The remaining element of Arthur Andersen’s case against GPA is that all Southern Cross’ actual trading losses can be said to have been caused by GPA’s breach of s 205, in so far as that breach permitted the float to proceed and thus permitted Southern Cross to go into business, a business which resulted in its incurring the $75M of trading losses.

We doubt that there is evidence to show, to the degree of cogency required by O 8 r 2 that, if GPA had not received the $4.4M of Southern Cross’ moneys, it would not have taken up the shareholding in Southern Cross which it did or that if GPA had refused to take up that shareholding, JB Were would have withdrawn from its underwriting agreement with Southern Cross (something which it can be accepted would have ensured Southern Cross did not commence business operations).  But it is unnecessary to reach a concluded opinion on these aspects of Arthur Andersen’s case since it is quite clear that there is no material before the Court sufficient to make out that element of the prima facie case which Arthur Andersen must show against GPA which involves Arthur Andersen demonstrating that, if Southern Cross had sued GPA, it would have been able to sheet home to GPA responsibility for the totality (or for some particular part) of its trading losses.

Counsel for Arthur Andersen contended that, among the numerous as yet unidentified bases upon which Southern Cross might ultimately fix Arthur Andersen with liability for something in the way of damages, there is a basis discernible from the pleadings by Southern Cross against Arthur Andersen upon which a possible outcome of that case is judgment for Southern Cross against Arthur Andersen for a sum limited to the $1.6M referred to in paras 35(b) and 22(e) of the Southern Cross pleading. But even if it were possible for this to be the outcome of the litigation between Southern Cross and Arthur Andersen, there is no allegation, let alone prima facie proof, that the involvement of GPA in the breach of s 205 alleged against it by Arthur Andersen was in any sense a cause of Southern Cross suffering this particular loss. The basis for this claim appears to be that but for GPA taking up the $4.4M of shares in Southern Cross, the float would not have proceeded and that it was because of this that it might be able to be said that the $1.6M was lost to Southern Cross. No other foundation for this particular claim was articulated by Arthur Andersen. Not only did Arthur Andersen fail to point to any evidence sufficient to establish, to the level of persuasion presently required, a causal connection between the loss to Southern Cross of the $1.6M and this breach by GPA, it failed to identify with any degree of precision a basis for how this loss might be argued to be GPA’s responsibility. GPA received the $4.4M on 3 July 1992 and had made its decision by 10 July 1992 to take up the $4.4M of shares in Southern Cross that it was required to buy by JB Were and paid that sum to JB Were on 14 July. Reid is alleged in the pleading to have misappropriated the $1.6M “on or about” 17 July, ie, the day the decision was made that the float should proceed to allotment of the shares; it is also alleged that Reid used the $1.6M to pay for shares in the float that were taken up by him and others. There is nothing in the material to suggest that GPA had any knowledge at any time of Reid’s misappropriation of this $1.6M. Reid’s misappropriation took place after GPA’s breach. The breach cannot be causally related to the misappropriation. At most, the breach was something which created the opportunity for the loss to Southern Cross by reason of the misappropriation. This is so whether it turns out that Reid took the $1.6M for shares in the float at the last minute, because that was essential to the float proceeding, or whether he took the $1.6M to participate in an allotment that was already assured of proceeding.

There is no basis for thinking that, even if Arthur Andersen could show a breach of s 205 by GPA in early July by receipt of the $4.4M from Southern Cross, and that the taking up of shares in Southern Cross by GPA in reliance upon that receipt was a cause of the float proceeding, any of that was causally connected with the loss to Southern Cross of the $1.6M.

Leave to appeal in both cases is refused with costs.

I certify that this and the preceding seven (7) pages are a true copy of the Reasons for Judgment herein of the Court.

Associate:

Dated:             13/11/98  

Counsel for the Applicant:	Mr PD McMurdo QC and Ms S Brown
Solicitor for the Applicant:	Minter Ellison
Counsel for the Respondent:	Mr SL Doyle SC and Mr RI Lilley
Solicitor for the Respondent:	Deacons Graham & James
Date of Hearing:	11 November 1998
Date of Judgment:	13 November 1998