G.M. & A.m. Pearce & Co Pty Ltd v Australian Tallow Producers Pty Ltd & Ors

[2005] HCATrans 975

[2005] HCATrans 975

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M62 of 2005

B e t w e e n -

G.M. & A.M. PEARCE & CO PTY LTD

Applicant

and

AUSTRALIAN TALLOW PRODUCERS PTY LTD AND BARRY PALMER AND MARY PALMER

Respondents

Application for special leave to appeal

GUMMOW J
KIRBY J
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT MELBOURNE ON FRIDAY, 18 NOVEMBER 2005, AT 2.29 PM

Copyright in the High Court of Australia

MR A.G. UREN, QC:   If the Court pleases, I appear with my learned friend, MR J.R. DIXON, for the applicant.  (instructed by Pointon Partners)

MR P.W. COLLINSON, SC:   If the Court pleases, I appear with my learned friend, MS D.A. SIEMENSMA, for the respondents.  (instructed by Secombs)

GUMMOW J:   Yes, Mr Uren.

MR UREN:   If the Court pleases.  There are a number of broad issues which we submit are of some public importance which arise out of this case on which, it seems to us, in any event that there is little authority directly in point especially from this Court and also that the issues which the case gives rise to do constitute matters of commercial importance especially in circumstances where people may go out on a limb, as it were, in making arrangements and entering into obligations in advance and in hope of commercial agreements ensuing when they do not, in fact, ensue and one person is left with the responsibility of liabilities which they have undertaken. 

GUMMOW J:   You did have in your finding…..of the existence of breach of fiduciary duty which, on one view of it, was rather fortunate.

MR UREN:   But the difficulty is what the Court of Appeal has done, in our respectful submission.  It has taken a view with respect to the assessment of equitable compensation for the undoubted breach which is much too harsh against the interests of the person who has been wronged and much too exonerative, if that is an actual word, of the persons who have been guilty of the wrongdoing.

There are also several important aspects of factual inference with which we would disagree with the Court of Appeal, but even allowing for the findings which the Court of Appeal and the trial judge made, in our submission, the approach which was taken to the assessment of equitable compensation was not a proper one and one which, in fact, puts the risks of making adverse decisions in consequence of the position that one is put in as a result of the breach, putting that risk right on the person who is the innocent party and exonerating and releasing the person who has been in breach of duty.

I wonder if I could indicate to the Court how that issue arises by taking the Court to the appeal book at page 74, I think, in the judgment of the Court of Appeal and this is in respect of one of the primary issues in the case which was that of the forex contract.  The loss as suffered as a result of the forex contract turning adverse to the party who held it, that is the applicant, was treated by the appellant and also by the court as part of the claim for equitable compensation.  That appears in paragraph 41 of the court’s judgment. 

We have a situation where this loss is sought to be regained, as it were, as part of equitable compensation but in dealing with this issue, the Court of Appeal did not do two things…..came to a result adverse to the applicant.  One thing it did not do is to formulate any test for the measure of equitable compensation ‑ ‑ ‑

GUMMOW J:   I know, but what do you say the test is?

MR UREN:   The test is that of the wronged party would be entitled to equitable compensation for a loss which would not have occurred but for the breach.  We take that from a number of authorities which have never been disagreed with so far as we are aware.  There is Re Dawson, there is Hill v Rose, there is O’Halloran in the New South Wales Court of Appeal and there are references to those cases in Maguire v Makaronis in this Court.

That test seems in respect of persons in this relationship to be the corollary, as it were, or the working out in equity of putting the party in the same position as if the wrong had not occurred and that is the way in which the matter has been treated in O’Halloran’s Case.  Although it may be said, for instance, that Dawson’s Case was a trust case this present case has aspects of it which make it closer to the case of a breach of trust than, say, to the category of case of a breach of an obligation of confidence or something of that sort. 

In the present case, not to put it too emotively, something was stolen or misappropriated so property was in fact misappropriated by the respondents.  The misappropriation of that property put the applicant in a very difficult position because the property which was the contract was going to produce the US dollars and the US dollars were going to pay out the forex contract.  The forex contract was not an asset like a motor car that one could just decide to use or not, it was a liability which had to be discharged to give the ANZ Bank $US1 million, or thereabouts, in exchange for Australian dollars in due course.  What the applicant had to do was find $US1 million from some source to satisfy the demands of the ANZ Bank when they arose on the date of the maturing of the forex contract.

So far as the evidence goes, firstly, US dollars had not materialised from trade at that stage, they had not materialised from the Platte River contracts and they had not materialised from contracts which the applicant had as part of its own trade so it had no US dollars.  It could have got US dollars by buying them but it would have had to have bought them on the spot market. If it had bought them on the spot market to pay out the ANZ Bank, it would have had to have borrowed $94,000-odd from some source.  So the actions of the wrongdoer put the applicant in a very difficult position. 

What the applicant did was allow the contract to be rolled over.  It also did another thing.  It asked the respondents to use the US dollars that they were going to get to pay the bank.  They said no, they would not do that.  So then they left the applicant in a difficult position.  The applicant then had to do one of a number of things.  It could have borrowed $94,000 but one might ask, rhetorically, why should it be the obligation of the person who is wronged to borrow such substantial sums of money in order to exonerate the wrongdoer who could have used the US dollars it was going to get from the Platte River contracts which it, in fact, stole in order to pay out the liability.

It may be that Mr Pearce made a decision which, in the context of how the exchange rate went at that time, was one which was unsatisfactory but, nonetheless, it was a decision which has not been categorised as unreasonable and it was also a decision which was made, let us say, in the hope of the situation being resurrected but that hope did not ultimately eventuate. 

GUMMOW J:   What do you say, Mr Uren, about paragraph 27 of your opponent’s submissions on page 125 concerning the forex contract?

MR UREN:   As we have said, we dispute the argument that the applicant chose to appropriate the forex contract and we have reasons which we set out at page 131 as to why that is a complete misapprehension.  It is only an inference, it is not actual evidence.  There was no evidence to that effect.  It was denied by Mr Pearce but, nonetheless, it was inferred by the court.

The reasons we give at paragraph 6 on page 131 ought to have really put an end to the proposition that we chose to appropriate the contract to our own benefit.  But even if we did, the point we emphasise is the forex contract is not like a motor car where you might say, “I decide to keep the motor car”.  The forex contract is an obligation to give the ANZ Bank $1 million and the source of the $1 million has to come from somewhere.  If the respondent is not going to pay the $1 million out of the Platte River proceeds, then the applicant has to get the $1 million.  The applicant might have got the $1 million by borrowing but one might ask rhetorically, as we did before, why should the innocent party have to go to such substantial debt in order to exonerate somebody else who will not comply with their obligation.

HAYNE J:   Or, had it been in a position to do so, might simply have drawn the cheque and closed the contract out.

MR UREN:   But the evidence was that he would have had to have borrowed for that purpose.

HAYNE J:   I understand, as a matter of fact, the Pearce Company was in a position where it would have had to borrow, but why is that presently relevant?

MR UREN:   It is relevant because it was an item which the Court of Appeal used and the trial judge used as one of the ingredients in saying that the applicant had chosen to appropriate the contract for its own benefit.  You see, it does not appropriate the contract for its own benefit, it has in fact got the contract.  The contract obliges it to pay the bank $1 million ‑ ‑ ‑

HAYNE J:   On a particular date.

MR UREN:   On a particular date, yes, but it did not have the $1 million so it has to get them from somewhere and if it is not obligated to borrow for that purpose then it has to wait or, alternatively, close out the contract and go into debt to the bank to that extent, so either way is unpalatable to a person who is in commerce.  He may not want to increase his liabilities by borrowing and he may also not choose to suffer the commercial opprobrium of merely reneging, as it were, on an obligation to his own bank.

So the fact is he has to get the $1 million from somewhere and it might have been possible to have got the dollars from his own trading but that was, as it turned out, not a thing which was commercially wise to do because of the effect that this would have on his own trading position.  So it was allowed to be rolled over for as long as the bank would roll it over but the point we would make is that it was only rolled over because of the position in which the Pearce Co had been put by the other side and that position would not have occurred but for the breach. 

The point we make is the prima facie test is satisfied.  It would seem that the Court of Appeal was content to regard the test as the one which we have indicated because of what it said at page 81 in another context but then we get to the question of severance.  Now, the Court of Appeal decided, paragraph 44 on page 74:

that Pearce Co’s conduct was such that it destroyed any causal nexus –

But in this context, in our submission, it is not possible merely to say that without providing some legal analysis.  So we submit that not only has the Court of Appeal not formulated a test in this context for equitable compensation itself, but it has not articulated any test of severance.

Now, what are the acts which, if done by an innocent victim of a breach of fiduciary duty, constitute acts of severance?  Now, there is a reference in Canson’s Case in the judgment of Justice McLachlin to the question of severance, I think possibly obiter, but nonetheless, she regarded it as necessary to prove that the acts which were done by the innocent party be so egregious, and this is something we have referred to in our submission, as to in fact cut the causal tie.  But it is not impossible to see what test the Court of Appeal applied.  All they said was:

Pearce Co.’s conduct was such that it destroyed any causal nexus –

One would expect a decision of that sort to be reached in the context of the circumstances which are, or would include, how would Pearce have got the US dollars to pay the bank out in any event?  Secondly, is it the case that an innocent victim should have borrowed a substantial sum to pay out the liability which the other side refused to meet and also, how egregious should the conduct be with respect to the rollover decision before it is regarded as severing the causal connection?

Now, none of these things got any discussion by the Court of Appeal at all.  In our submission, the real point is that Mr Pearce was put in a cleft stick by the actions of the respondents and his endeavours to avoid the cleft stick were ones which unfortunately increased liabilities, but it might have gone the other way if the exchange rate had turned out differently and despite what ‑ ‑ ‑

KIRBY J:   Mr Uren, your opponents say that you were lucky to get the finding of breach of fiduciary duty, they are still griping about that, and they say that you were over‑compensated by the primary judge, so what is the point – it just looks to be an argument on settled principles.  What is the point that is a point of important principle or a point of injustice to your client or something that is very interesting, because otherwise you are not going to get special leave as far as I am concerned?  It is just a dispute about money.

MR UREN:   Your Honour, the point in respect of this particular area of the case is what is the appropriate test for the severance of the causal connection between the loss and the breach?  Now, it is perfectly – one can say without fear of contradiction that there is a direct link between the loss and the breach.  They do flow in a chain which can be written out and seen.  So one has to ask what cuts off the causal nexus.  It must be true that Mr Pearce rolled over the contract because he did not ‑ ‑ ‑

KIRBY J:   But the respondent says that you applied the forex contract for your own commercial purposes, that that broke the causal link with any breach.

MR UREN:   Yes, your Honour, that was not correct and we have corrected that in our submission.  That was based on a faulty finding of the trial judge which was corrected on appeal.  We did not use the contract for our own commercial purposes.  It was never used by Pearce.  It is another one of our complaints, that it was an ingredient in the trial judge’s decision which the Court of Appeal for reasons which, in our respectful submission, are not entirely clear, said that should not have any effect on the ultimate result.  But it is not the fact that the contract was used by Pearce Co for its own purposes and that is admitted.  It is not the fact.  So all we have is the fact of a simple rollover by somebody who had an obligation as of 30 June as to which it is not true to say, as the Court of Appeal said, that no liability was incurred as at that date, as I have said at paragraph 46. 

There was a liability to find $1 million for the ANZ Bank and if they bought a $US1 million on the stock market to pay the ANZ Bank out, there would have been a debt incurred of $94,000.  So that was the position that the applicant was in.  The effect of the Court of Appeal’s decision is, it would seem, that a person who is in this situation has to in fact go into debt in order to cease the liability even though the wrongdoer has declined to do what it should have done in order to ameliorate the situation.

So, in our respectful submission, the question of the proper test of severance and whether severance is able to be found in the context of circumstances such as these which really only ultimately constitute a choice which the applicant made in a difficult commercial situation, that, in our submission, is something which has not yet been – at least these issues have not, so far as we are able to see, been given any authoritative pronouncement in any court, but especially by this Court.

If it was found, for instance, that the test which the Court of Appeal must have applied was too harsh on the wrong party, then, in our respectful submission, it would be the case that a pronouncement would be made which would enunciate the correct test and that would then give rise to the point of commercial interest and also public interest.  That is the major point. 

The other point of some significance is the point of apportionment.  The Court of Appeal when working out the value of the lost opportunity apportioned the profits which might otherwise have ensued between the

respective parties on a two-thirds/one-third basis.  It seems to us basically on the basis that that is what they would have agreed on, or were going to agree on, if they had in fact agreed.  But, in our submission, if no agreement was made, that is an inappropriate basis upon which to make any such apportionment and the Court should have had regard to the facts as they were in the context in relation to the efforts which would have produced the profits rather than the simple agreement, the profit‑sharing agreement, which would have been made, but in fact was not.  I see the time has expired.  If the Court pleases.

GUMMOW J:   Thank you, Mr Uren.  We do not need to call on you, Mr Collinson.

We are not satisfied that the particular facts of this case provide an appropriate occasion for consideration by this Court of issues of principle respecting the measure of equitable compensation for breach of fiduciary duty and of the other issues of principle which the applicants seek to raise.  Accordingly, special leave is refused with costs. 

The Court will adjourn to reconstitute.

AT 2.50 PM THE MATTER WAS CONCLUDED