Kaze Constructions Pty Ltd v Housing Indemnity Australia Pty Ltd

No judgment structure available for this case.

Re: KAZE CONSTRUCTIONS PTY LIMITED and KAIN AND ZECEVICH PTY LIMITED
And: HOUSING INDEMNITY AUSTRALIA PTY LIMITED and NEIL FRANCIS McPEAKE
No. S G28 of 1986 FED No. 68
Trade Practices Act - Negligence - Assessment of Damages
(1990) 10 BCL 63

COURT

IN THE FEDERAL COURT OF AUSTRALIA

SOUTH AUSTRALIA DISTRICT REGISTRY
GENERAL DIVISION
Von Doussa J.(1)

CATCHWORDS

Trade Practices Act - builder ordered to carry out remedial work - misrepresentation to builder by its insurer and the insurer's agent that remedial work was in hand and had been carried out - work only partly completed - builder's licence cancelled for non-compliance with the order - adverse media publicity - whether insurer contravened s.52 - whether insurer's agent "involved" within s.75B - whether builder relied on respondents' conduct - builder entitled to damages under s.82 and in tort - additional claim by land agent company having common shareholders and directors with builder - claims for commissions not earned on lost building contracts - whether reliance by the land agent on respondents' conduct - whether land agent suffered loss "by conduct" of the respondents - land agent's claim under s.82 dismissed.

Negligence - duty of care to prevent economic loss - builder ordered to carry out remedial work - respondent insurer represented it would have work performed - builder relying on respondents - negligent misstatements that work carried out - work not completed - builder's licence cancelled for non-compliance with the order - whether builder entitled to recover for consequential loss of business and profits - whether respondents owed a duty of care to a land agent company which depended for commission on obtaining contracts for the builder - whether reliance by land agent on the respondents' conduct - whether foreseeable that land agent would suffer economic loss.

Assessment of Damages - claim for loss of profits by a corporation - incidence of income tax - company tax rates changing between dates of loss and date of award - method of assessment.

HEARING

ADELAIDE

#DATE 9:3:1990

Counsel for the applicants : Mr J.R. Mansfield QC

with Mr J. Moschakis/Ms S. Akerman

Solicitors for the applicants : Ward & Partners

Counsel for the 1st respondent : July 1989 - Mr D.J. Bleby

QC with Miss M.P. Mitchell February 1990 - Mr B.T. Lander QC with Mr S.G. Connell

Solicitors for the 1st respondent : July 1989 - Baker O'Loughlin

February 1990 - Thompson

Simmons & Co.

Counsel for the 2nd respondent : July 1989 - Mr D.J. Bleby

QC with Miss M.P. Mitchell

February 1990 - in person

Solicitors for the 2nd respondent : July 1989 - Baker O'Loughlin

ORDER

The applicant Kaze Constructions Pty Limited recover judgment against the respondents for $260,000.

Judgment be entered for the respondents against the applicant Kain & Zecevich Pty Limited.

The question of costs be reserved.

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

JUDGE1

At all material times the first applicant Kaze Constructions Pty Limited ("Kaze Constructions") was a licensed builder, and the second applicant Kain & Zecevich Pty Limited ("Kain & Zecevich") was a licensed land agent in South Australia. The two companies had similar shareholders, common directors, and carried on business from the same premises. In these proceedings they claim damages alleged to have resulted from an order of the Builders Appellate and Disciplinary Tribunal ("the Tribunal") made on 28 November 1984 which cancelled Kaze Constructions' licence as a builder. Although this order was suspended by an order of the Supreme Court of South Australia on 30 November 1984, and was later set aside on appeal, it gave rise to considerable publicity in the media. The applicants allege that the order made by the Tribunal was brought about by the conduct of the respondents which constituted, on the part of the first respondent Housing Indemnity Australia Pty Limited ("HIA") a contravention of s.52 of the Trade Practices Act 1974 ("the TP Act"), a breach of contract, and a breach of common law duty to exercise reasonable care. Against the second respondent Neil Francis McPeake ("Mr McPeake") it is alleged that he was knowingly involved in the s.52 contravention and was negligent.

At the outset I record that when the trial commenced both respondents were represented by the same counsel and solicitors, as they had been throughout all the pre-trial steps. However, part way through the trial, after the close of the applicants' case and after counsel for the respondents had opened and called their first witness, Mr McPeake, I was informed that those representing the respondents found themselves in a position of conflict which prevented them from continuing to act for either respondent. The trial was adjourned. When it resumed other counsel appeared for HIA, and Mr McPeake conducted his defence for the balance of the trial. During the adjournment HIA applied to amend its defence to withdraw certain admissions and to file a cross-claim against Mr McPeake. Those applications were refused for reasons which were given orally at the time.
The statement of claim alleges that HIA at relevant times was a company carrying on business as "an insurance underwriter and/or agent". The exact status of HIA was not explored at trial although it is common ground that HIA held a master policy of insurance underwritten by a group of insurance companies under which HIA issued "certificates of insurance" in respect of houses to be constructed by licensed builders. The policy applied wherever a builder notified HIA on a "declaration form" of a new "House Contract" for the erection of a house and paid a standard premium. In the years relevant to these proceedings the master policy was entitled "Legal Indemnity Insurance Policy For Cover Under The Defective Houses Act 1976 And Other Cover". The master policy had become effective from October 1979 to cover builders in South Australia against their possible liability under the terms of the Defective Houses Act 1976 (S.A.) which implied certain warranties as to workmanship and quality on the part of a builder of a new house. Whilst the master policy was negotiated by HIA the expression "insured" used in the policy wording is to be understood to refer in a particular case to the builder who has completed a declaration form and paid a premium. The policy provided that :

"...the Insurers will pay to or on behalf of the Insured all sums which the Insured shall become legally liable to pay pursuant to House Contracts...for any breach of any warranty implied pursuant to the terms of the Defective Houses Act 1976 of South Australia or any amendments thereto in force at the time of the claim. The Insurers will also pay...all costs charges and expenses incurred in the settlement or defence of claims or litigation arising therefrom where such costs charges and expenses are incurred by the Insurers or by the Insured with the written consent of the Insurers and all costs charges and expenses recoverable from the Insured by any claimant and the Insurers shall be entitled to take over and conduct in the name of the Insured the defence or settlement of any claim against which the Insurers are liable to indemnify the Insured pursuant to the terms of this Policy...".

By the conclusion of the trial the essential background facts which led to the order of the Tribunal on 28 November 1984 were no longer in dispute. On 3 July 1980 Kaze Constructions had entered into a contract to build a new house for Mr Steele at St Agnes. Kaze Constructions lodged a declaration form with HIA on 19 August 1980, and on 20 August 1980 a certificate of insurance was issued. On 29 December 1980 the contract between Kaze Constructions and Mr Steele was rewritten as Mr Steele had encountered financial difficulty leading to delay in the construction of the house. In October 1981 the house was virtually completed and Mr Steele went into possession. Difficulties had arisen in the administration of the contract due to continuing financial difficulties experienced by Mr Steele. After possession was given, Mr Steele made a number of complaints about the quality of workmanship, or about incomplete work. Some things were repaired to his satisfaction. Some were not. On 25 August 1982 Mr Steele wrote to the Department of Consumer Affairs who in turn wrote to Kaze Constructions seeking their comments on Mr Steele's complaints. Mr Kain and Mr Zecevich, the directors of Kaze Constructions, discussed the complaints. Mr Kain telephoned HIA. He spoke to the person in the office. She informed him that Mr McPeake was a senior inspector who handled insurance claims on behalf of HIA, and she suggested he be contacted for advice regarding the correspondence from Consumer Affairs. Mr McPeake was contacted. Thenceforth he acted on behalf of Kaze Constructions in communications with Consumer Affairs. A misunderstanding arose at this point as to the role of Mr McPeake. Kaze Constructions assumed he was instructed by HIA. Mr McPeake thought he had been instructed in a private capacity by Kaze Constructions. HIA had not interpreted Mr Kain's telephone enquiry as notification of a claim, and were unaware of events which followed over the next few months.
Mr McPeake is a former builder who now carries on business as a building consultant. His clients include HIA and various builders who use his services to mediate in disputes over the quality of workmanship. Mr McPeake entered into correspondence with Consumer Affairs as to the extent of the work that was required to complete Mr Steele's house to a satisfactory standard. Agreement was not reached. Consumer Affairs referred the matter to the Builders Licensing Board of South Australia ("the Board") which gave notice of its intention to investigate Mr Steele's complaint pursuant to its power under s.18 of the Builders Licensing Act 1967 (S.A.). Mr McPeake appeared before the Board. On 27 June 1983 the Board issued an order for the performance of remedial work by Kaze Constructions. The work covered four complaints. The first two related to bedrooms. That work was later performed and need not be further described. Complaint three related to four exterior features. The remedial work directed required extensive removal and relaying of concrete around an entry court to correct falls to stop rainwater ponding and entering the house. The fourth complaint concerned gaps evident between the brick work and timber panelling in the lounge/dining room ceiling area. Mr McPeake considered that the Board was in error in directing how the necessary remedial work should be done. He considered that the jurisdiction of the Board was limited to directing what defects were to be made good, leaving it to the discretion of the builder to decide how to perform the work.
As Mr McPeake and Mr Kain were leaving a meeting with the Board on 17 June 1983 the misunderstanding as to the role of Mr McPeake became evident. What was said between these men at the time is no longer relevant. It is common ground that shortly afterwards Mr McPeake spoke to the manager of HIA, Agris Lirs Melberzs-Rozitis. That gentleman has been referred to in the evidence as Mark Melberzs. Mr Melberzs referred the matter to the HIA board meeting on 15 July 1983 following which he informed Mr McPeake, who in turn informed Kaze Constructions, that "the claim had been accepted". A right of appeal to the Tribunal lay under the Builders Licensing Act against an order of the Board. Mr McPeake advised Kaze Constructions that an appeal should be made against those parts of the order relating to the exterior concrete work. HIA through Mr Melberzs authorised an appeal, which was then instituted. There has been some contention during the trial whether Mr Kain and Mr Zecevich encouraged the appeal, or whether they were reluctant parties who merely consented because they thought it was their duty to do so if the insurer desired to appeal. It is not material to resolve this dispute. It is common ground that Mr McPeake undertook the conduct of the appeal, and was responsible for arranging witnesses and deciding on tactics.
The hearing commenced on 21 November 1983 and concluded the following day when an oral judgment was delivered by the presiding judge, Judge Taylor. At the hearing, the notice of appeal was amended to exclude any challenge to the first, second and fourth items in the order of the Board, and the third item, the external work, was limited to three aspects which concerned the removal and replacement of cement and an adjoining damp-proof course. The appeal was allowed by varying the order which the Board had made concerning those aspects of the work. The original complaints, and the Board's order in relation to item 3 were as follows :

" COMPLAINT ACTION

3. EXTERIOR

a. Concrete to entry court Entry court, court, level with floor of steps between court interior of the house and entry court. falling to the front Remove all concrete door. in these areas and relay with the correct falls. Provide some measure b. Concrete to court falls in front door area to the exterior wall of to stop the water the house causing water entering the house. to lay along side the Provide DPC between house. DPC is just the steps and the above this area of wall of the house. concrete. Make sure all water flows away from house and does not lay in these areas - provide drains if necessary. c. Steps from court to

entry court, no

evidence of DPC between

house wall and steps.

d. Exterior wall along side Expose DPC in this of kitchen, dining room area, if non-existent, and lounge area - the provide DPC seems to be and fix in a proper non-existent in places. and workmanlike manner."

Item 3(d) was not challenged by the amended grounds of appeal. The Tribunal confirmed the faults as found by the Board and listed under complaints, but substituted for the action ordered by the Board the following :

"We order that the builder make good the faults shown on both upper and lower front porches so as to achieve the following:

(1) So that all water falling on both porches is kept clear from the front wall of the house and does not settle on the porches;

(2) That the remedy in (1) above be carried out so that the owner may at his own expense lay quarry tiles or the like in a normal manner to those areas;

(3) That all consequential alterations to achieve the above e.g. the adjustment to the door frame and damp proofing etc., is the responsibility of the builder;

(4) The builder is to provide proper damp proofing between the steps and the front wall of the house."

The faults in the concrete had come about because it was originally planned that the concrete would be covered with tiles. The fall would have been corrected when the tiles were laid. But Mr Steele ran out of money and the tiling was deleted from the contract as the work was proceeding. In the course of the hearing before the Tribunal Mr McPeake had suggested alternative methods of remedying the problems. Rather than remove and relay the concrete he had suggested that the levels could be remedied by the simpler course of scabbling or chipping away the top surface of the concrete slab. The Tribunal concluded its reasons with the following observations:

"While it is not necessary to say anything about the method, all building work, whether original building work or the building work to be carried out in compliance with this order must be performed in a proper and workmanlike manner and it is the obligation of the builder to make sure that whatever method he chooses, the work is in the end accomplished so that it has been done in a proper and workmanlike manner. If it has not been carried out in a proper and workmanlike manner, the builder is in jeopardy of at least two things. The Board may make a further order in respect of remedial work which has not been done in a proper and workmanlike manner or (the builder) may stand in jeopardy of being prosecuted before this Tribunal for not complying with the remedial order and then be in jeopardy of the sanctions that may be imposed by the Tribunal under the Act."

The sanctions provided under the Builders Licensing Act included a fine and licence cancellation. The Tribunal's decision required compliance with the order within 28 days. The work required by the Board's original order to remedy fault 3(d) and the fourth of the complaint, the sealing of the gaps evident in the lounge/dining area still remained to be done as well as the work required by the Tribunal's variation to the order.
On the day that the Tribunal delivered its decision, and on the following day, the outcome of the appeal was discussed between Mr McPeake, Mr Kain and Mr Zecevich. I find that during those discussions Mr McPeake said words to the effect "I will have the work done", "we will arrange it for you, we will pay" - meaning HIA would pay under the insurance policy.
By December 1983 Mr McPeake had been separately engaged by Kaze Constructions as a building consultant to handle several complaints by other customers and from time to time he was in the Kaze Constructions' offices during the following weeks. On these visits either Mr Kain or Mr Zecevich asked about the repairs to Mr Steele's house and Mr McPeake on each occasion said that the work was in hand and not to worry. During December 1983, he said that the work was being carried out by Mr Manfield, a person who was known to Kaze Constructions as a builder. I accept the evidence of Mr Zecevich that following the decision of the Tribunal he expressed his concern that the building licence of Kaze Constructions could be placed in jeopardy. I also find as a probability, that during January 1984 Mr McPeake informed one or other of the directors of Kaze Constructions that the work had been completed, and also informed an officer of the Board to this effect.
It is now common ground that the work required to be done pursuant to the orders of the Board as varied by the Tribunal had not been completed by January 1984, and was still incomplete when on 13 June 1984 a complaint laid by the Board to the Tribunal under s.19j of the Builders Licensing Act was served on Kaze Constructions. The complaint alleged a failure within 28 days of 22 November 1983 to comply with the order of the Board as varied. I accept the evidence of Mr McPeake that following the Tribunal's decision, he obtained the approval of HIA to instruct a Mr Manfield to carry out work necessary to remedy complaints numbered 3(a), (b) & (c), that he then took Mr Manfield to the site to discuss the work, and later delivered some bricks to him at the site. Thereafter he assumed that Mr Manfield would adequately perform the work. Some time in January 1984 he was informed by Mr Manfield that the work had been completed, and he assumed that to be so. He did not inspect the site as he had faith in Mr Manfield. On 26 January 1984 Mr Manfield rendered an account to HIA for "work carried out for: Mr & Mrs R.A. Steele..." No other detail of that work was given. The quality of the work was not inspected by anybody on behalf of HIA who shortly afterwards paid the account. Mr Manfield had performed some work, but had not adequately remedied the matters required by complaints nos. 3(a), (b) & (c). At no time was the subject matter of complaints nos. 3(d) and 4 attended to. Mr McPeake frankly acknowledges that he overlooked arranging for those matters to be done.

I accept the evidence of Mr Kain and Mr Zecevich, which was not challenged by the respondents, that they relied on the assurances of Mr McPeake following the Tribunal's decision on 22 November 1983 that the work necessary to comply with the order was in hand, and for this reason took no independent steps to confirm that this was so or to have the work performed. As I have said, I think it is probable that they were also informed during January 1984 that the work had been completed. On about 23 March 1984, they received a letter bearing that date from HIA concerning Mr Steele's house. The letter advised :

"Housing Indemnity Australia Pty. Ltd., acting as Agents for and on behalf of the Insurers hereby formally advises that your claim in relation to the abovementioned property has been approved to the value of $1,994.96.

We advise that rectification work has been proceeding and we believe has now been completed. We would note that excess due on the policy is $250 and we trust that your cheque for same will be received by return mail."

On receiving this letter the directors of Kaze Constructions assumed the matter was complete, reasonably so in my view in light of the additional oral information also received from Mr McPeake.

After the complaint by the Board was served, Mr McPeake sought and obtained instructions from HIA to handle the hearing of the complaint before the Tribunal. He did so. His performance in handling the matter is not the subject of any claim against him, but with the benefit of hindsight it can be said that the complaint was unfortunately handled before the Tribunal. Although the Tribunal was informed that Kaze Constructions had left the performance of the work to its insurer, the Tribunal was not fully informed as to the events which had happened, and was not told of the fact that Kaze Constructions had been informed that the work had been completed. The Tribunal brought down its decision on 28 November 1984. The Tribunal treated the conduct of Mr McPeake, and his oversights in respect of work not done, as that of Kaze Constructions and was particularly strong in its criticism of the company. It was also critical of the quality of the work performed by Mr Manfield. It concluded its reasons for decision by saying :

"In the opinion of the Tribunal, the failure on the part of the respondent to comply with the order in full is a serious one. We find it very hard to conceive that in those areas where deficiencies remain anyone could consider that a proper and caring attempt to comply with the order for remedial work has been entered upon. The matters themselves are important ones and have existed for a not inconsiderable period of time. It is not, in our view, an explanation for the behaviour of the respondent, to which the order was directed, to say that it referred the matter to its insurers and that the insurers then arranged for others or another to remedy the defects, particularly when in so many ways, they have demonstrably not been remedied. The respondent has clearly shown that in this matter it has not fittingly discharged the duties, responsibilities and obligations of the holder of a General Builder's Licence under the Act. All the circumstances of this case require disciplinary action which is more than nominal or minimal. There is nothing before us to suggest that the respondent has on other occasions acted improperly. In the present case, one could not say that the respondent acted with any enthusiasm. For the most part the work which has been done in an attempt to meet the requirements of the order has been done tardily and then, frequently, poorly, so that in some circumstances not only has a particular problem not in any way been remedied but rather aggravated whilst at the same time new problems have arisen."

The formal order of the Tribunal was that the general builder's licence of Kaze Constructions be cancelled and that the company be disqualified from obtaining or holding a licence under the Builders Licensing Act until the expiration of nine months from the date of the order.

The Tribunal's order received prominent attention in the media. The Advertiser newspaper, the following morning carried an article on page 8 which commenced :

"BUILDING COMPANY'S LICENCE CANCELLED TRIBUNAL RULE LEAVES 50 HOUSES IN DOUBT An Adelaide building firm - with 50 houses currently under construction and employing 140 subcontractors - yesterday lost its building licence for nine months..."

The newspaper article went on to identify Kaze Constructions, and to quote from the reasons of the Tribunal.

The cancellation of Kaze Constructions' licence was quite unexpected not only by the company, but by Mr McPeake. He immediately arranged for HIA to instruct solicitors to advise Kaze Constructions. An appeal to the Supreme Court against the Tribunal's order was lodged, and on 29 November 1984 an order was made suspending the operation of the Tribunal's order pending the appeal. That order was reported by The Advertiser newspaper on 30 November 1984 on page 7 but in a less prominent article than had appeared the day previously.
The appeal came on for hearing on 6 February 1985. At the suggestion of the Full Court, counsel for the Board (the complainant before the Tribunal) agreed to the appeal being allowed by consent so that the matter could be remitted to the Tribunal to reconsider penalty in light of important facts which had not been brought to the Tribunal's attention initially. The matter was reconsidered by the Tribunal on 26 March 1985 and a fine of $300 was imposed, which HIA promptly paid. On 27 March 1985 The Advertiser newspaper reported briefly the outcome of the appeal, and that on reconsideration of the matter the Tribunal had imposed a fine of $300 with no loss of licence.
It has now emerged that Mr McPeake's state of mind, that Mr Manfield had completed the rectification work, was altered late in January 1984. Mr McPeake received information that there was something amiss with the rectification work and that a complaint would be lodged against Kaze Constructions alleging non-compliance with the order of the Board as varied. This information came to Mr McPeake from a member of the Board. The nature of the problem was not identified. Surprisingly, Mr McPeake did not make any enquiry after receiving that information either from officers of the Board, from Mr Steele, or by inspection of the premises, to check that the work specified in the order had been completed; nor did he report what he had heard to Kaze Constructions.
Further, early in March 1984 Mr Steele made a fresh complaint to Consumer Affairs about an entirely new problem in the shower. Consumer Affairs contacted Kaze Constructions. Mr Kain handled the communication and referred it to Mr McPeake. Mr McPeake attended Mr Steele's home with an officer from Consumer Affairs and inspected the shower. He then arranged remedial work which cured a leak. This work was carried out by 18 April 1984. Mr McPeake says that in the course of the inspection of the shower he paid no attention to the other areas where remedial work had been ordered. This seems extraordinary in light of the information he had received in January 1984 that there was something amiss with the work, and the more extraordinary when he was there with an officer from Consumer Affairs with whom the adequacy of the remedial work required under the order of the Board could be discussed.
I accept the evidence of Mr Kain that at the end of April, or early in May 1984 Mr Whitehead from Consumer Affairs telephoned him and asked what Kaze Constructions was doing to complete the work which had been ordered by the Board. Mr Kain says he immediately telephoned Mr McPeake and reported the conversation. Mr McPeake said that there was one small thing to be done but "Don't worry about it, it's in hand" and Mr Kain replied "For goodness sake get it completed and get back to David Whitehead and discuss it with him". Mr McPeake says he has no recollection of discussions on this topic either with Mr Whitehead or Mr Kain. However Mr McPeake's recollection of events in a number of respects was shown to be defective. I have no reason to doubt the evidence of Mr Kain on this point. It is clear from exhibits A10 and A6/38 that Mr Whitehead had been to the premises, had spoken with Mr Steele in March 1984, and had been informed again by Mr Steele in May 1984 that there was still an item of work outstanding under the Board's order. The probability is that Mr Whitehead would have communicated with Kaze Constructions.
Against HIA, the applicants rely on the conduct of Mr McPeake from 22 November 1983 through to the issue of the complaint in June 1984, and on the letter of HIA dated 23 March 1984 as proving the contravention of s.52 of the TP Act. It is clearly proved that throughout this time Mr McPeake was acting as the agent for HIA which had appointed him to arrange the performance of the work necessary to comply with the order of the Board. He was acting within the scope of his actual authority, and his conduct is deemed, for the purposes of the TP Act, to have been engaged in also by HIA: s.84(2). It is not disputed that the conduct was in trade and commerce. Positive assertions made orally by Mr McPeake that the remedial work had been performed were false, as was his statement late in April or early May to Mr Kain that there was one, and by inference only one, small thing to be done, the performance of which was in hand. The HIA letter of 23 March 1984, although expressed in terms that "we believe" the work has been completed, in context conveyed a false representation that the work had been completed. I consider the first applicant has established a contravention of s.52 by HIA.
Mr McPeake well understood that the directors of Kaze Constructions were relying on him, and HIA, to make whatever arrangements were necessary to comply with the order of the Board. In these circumstances, whether his failure to qualify his advice given in January 1984 that the work had been completed, when he learned that it might not have been, amounts to a contravention of s.52 raises a difficult question. In Rhone-Poulenc Agrochimie SA & Anor v. UIM Chemical Services Pty Ltd & Anor (1986) 12 FCR 477 at 489 Bowen C.J. observed that where silence is relied on in order to show a breach of s.52 it will depend on the circumstances whether the silence constitutes conduct which is misleading or deceptive. He said that whilst the court might gain assistance from consideration of cases at common law and in equity, s.52 is not confined by them. See also Henjo Investments Pty Ltd v. Collins Marrickville Pty Ltd (1988) 79 ALR 83 at 95. At common law, where a statement believed to be true is later found to be false, the failure to correct it may amount to a misrepresentation: Brownlie v. Campbell & Ors (1880) 5 App Cas 925 at 950, Briess & Ors v. Woolley & Ors (1954) AC 333 at 353, Jones v. Dumbrell (1981) VR 199, With v. O'Flanagan (1936) Ch 575 at 584. In the present case it would do so. However where the question is whether silence amounts to conduct in contravention of s.52 it is necessary to have regard to the extended definition of conduct in sub.s.4(2) of the TP Act. Where the silence relied on, if it is to come within the ambit of sub.s.4(2), must fall within the notion of "refusing to do an act", it may be that the refusal must be otherwise than inadvertent: see para.4(2)(c) and the commentary in Heydon, Trade Practices Law paras.11.660 and 11.670. As a contravention of s.52 is otherwise established it is not necessary to decide this question.
The applicants allege that Mr McPeake was a person involved in the s.52 contravention within the meaning of s.75B of the TP Act. It is pleaded by para.38 of the statement of claim that he was involved in the contravention in that he:

(a) aided, abetted, counselled or procured the said contravention.

(b) had been directly knowingly concerned in or a party to the said contravention.

This pleading follows the wording of paras.(a) and (c) of s.75B. In Yorke & Anor v. Lucas (1985) 158 CLR 661 the High Court held that for para.(a) to apply to a person it must be shown that he intentionally aided, abetted, counselled or procured a contravention; and to form the necessary intent he must have knowledge of the essential matters which make up the contravention whether or not he knows those matters amounted to a contravention. The Court also held that before a person can be said to have been a party to a contravention within para.(c) he must be an intentional participant, the necessary intent being based upon knowledge of the essential elements of the contravention. In Fencott & Ors v. Muller & Anor (1983) 152 CLR 570 at 584 Gibbs C.J. had earlier observed that "in the most general words of s.75B, those of para.(c), the word 'knowingly' significantly confines the operation of the provision". These observations reflect the fact that although s.75B operates as an adjunct to the imposition of civil liability, its derivation is to be found in the criminal law, and the concepts which it employs draw on their criminal law background. Notwithstanding the confined operation which these concepts place on s.75B, I consider Mr McPeake is a person who was involved in the contravention of s.52 by HIA. Insofar as that contravention depended on the fact that Mr McPeake himself had overlooked performing or causing to be performed the items of work specified in the order of the Board as item Nos. 3(d) and 4, he knew that the work was required to be done, and that he had to do it or arrange for it to be done. He must be taken to know in a relevant sense that he had not taken either step. He was also directly knowingly involved in informing Mr Kain in late April or early May 1984 that although there was, as Mr Whitehead had alleged, certain work to be completed, the performance of that work was in hand.

I defer for the moment discussion on what consequences follow under s.82 of the TP Act from these conclusions.
The alternate claim by Kaze Constructions in contract in my view is not made out. The contract alleged is said to be constituted by the promise orally made by Mr McPeake on behalf of HIA after the decision of the Tribunal on 22 November 1983 that HIA would perform or cause to be performed the remedial work required by the order, which promise Kaze Constructions accepted, the consideration for the contract being the decision by Kaze Constructions not to undertake the remedial work itself. In my opinion Mr McPeake and the directors of Kaze Constructions were under a common misapprehension in November 1983 that the acceptance by HIA of "the claim" by Kaze Constructions in respect of Mr Steele's house under the master policy carried the consequence that HIA had the obligation to perform or cause to be performed the remedial work. Those involved in the discussions were not intending in November 1983 to enter into a new contractual arrangement. When Mr McPeake said to the effect "I will arrange to have the work done" he was merely restating what he and the directors of Kaze Constructions already thought was the obligation of HIA under the terms of the insurance: cf Gates v. City Mutual Life Assurance Society Limited (1983) 68 FLR 101 at 103, upheld by the High Court on appeal (1986) 160 CLR 1.
The applicants also allege that HIA is liable to each of them on the separate grounds of breach of duty owed personally by HIA, and of vicarious liability for the negligence of Mr McPeake who also owed a duty of care to each applicant. I do not think there can be any doubt that in the circumstances of their relationships both HIA and Mr McPeake owed a duty of care to Kaze Constructions to exercise reasonable care to prevent it suffering harm including purely economic harm. I shall assume for the purposes of the case, as counsel assumed in their addresses, that the claim by Kaze Constructions is for purely pecuniary loss. In Sutherland Shire Council v. Heyman & Anor (1984-1985) 157 CLR 424 at 507-508, Deane J., in reference to what he described as cases in the less developed areas of the law of negligence, which included those where the damage sustained is confined to pecuniary loss said :

"In such cases, ... the mere fact that it is reasonably foreseeable that carelessness on the part of a person may be likely to cause damage to another person is not in itself sufficient to give rise to a prima facie duty of care: a relevant duty of care will only arise if the requisite element of 'proximity', in the broad sense in which Lord Atkin used the term in Donoghue v. Stevenson, is satisfied. In any general formulation of the ingredients of a cause of action in negligence which is intended to encompass cases involving mere omission or mere economic loss, 'proximity' of relationship in this broader sense should be seen as a distinct general requirement which must be satisfied before any duty of care to avoid reasonably foreseeable injury will arise: cf Jaensch (1984) 155 CLR 495 at 585-586; Peabody Fund v. Parkinson (1985) AC 210 at 239-241. In such cases, as Mason J. demonstrates in his judgment in this appeal, it is likely that the existence of the requisite element of proximity will reflect, among other things, reliance by the plaintiff upon care being taken by the defendant to avoid or prevent injury, loss or damage to the plaintiff or his property in circumstances where the defendant has induced or encouraged such reliance or (depending upon the particular combination of factors) was or should have been aware of it."

In his judgment, Mason J., as he then was, said at p 461-2:

"Reliance has always been an important element in establishing the existence of a duty of care. It has been suggested that liability in negligence is largely, if not exclusively, based on the plaintiff's reliance on the defendant's taking care in circumstances where the defendant is aware or ought to be aware of that reliance: Reiter, 'Contracts, Torts, Relations and Reliance' in Reiter and Swan (eds), Studies in Contract Law

(1980), pp 310-311. Be this as it may, the concept of proximity as explained by Stephen J. in Caltex Oil (Australia) Pty. Ltd. v. The Dredge 'Willemstad' (1976) 136 CLR 529, at pp 574-575 and Deane J. in Jaensch v. Coffey (1984) 155 CLR 549, at pp 586-587 (but cf. Leigh and Sillivan Ltd. v. Aliakmon Shipping Co. Ltd. (1985) QB 350, at pp 395-396) involves in most cases a degree of reliance: see Junior Books Ltd. v. Veitchi Ltd.

(1983) AC 520, at p 546. And it has certainly been an influential factor in setting limits to the far-ranging effect of the foreseeability doctrine and in confining the class of persons to whom a duty of care may be owed. It is natural, therefore, that the plaintiff's foreseeable and reasonable reliance on the defendant's statement has been a constant feature of the cases in which a defendant has been held liable for economic loss sustained as a result of negligent misstatement: Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd.

(1964) AC 465, at pp 486, 496, 502-503, 514; Ministry of Housing and Local Government v. Sharp

(1970) 2 QB 223, at p 268; Dutton v. Bognor Regis Urban District Council (1972) 1 QB 373, at pp 394-395, 405; Scott Group Ltd. v. McFarlane

(1978) 1 NZLR 553, at p 576."

The decision in Caltex Oil (Australia) Pty Ltd v. The Dredge "Willemstad" (1976) 136 CLR 529 discussed the principles which govern the existence of a duty of care where negligent acts or omissions, as distinct from negligent misstatements, cause economic loss. Here the failure of Mr McPeake to carry out the items of remedial work which were not entrusted to Mr Manfield were negligent omissions, but the cause of action as framed in the statement of claim relies not on these omissions but on negligent misstatements concerning the performance of the work. In San Sebastion Pty Ltd & Anor v. Minister Administering the Environmental Planning and Assessment Act 1979 & Anor (1986) 162 CLR 340 the High Court considered a claim for economic loss caused by negligent misstatement. In the joint judgment of Gibbs C.J., Mason, Wilson and Dawson JJ. their Honours said at 354-355 :

"...the correct view is that, just as liability for negligent misstatement is but an instance of liability for negligent acts and omissions generally, so the treatment of the duty of care in the context of misstatements is but an instance of the application of the principles governing the duty of care in negligence generally. The special complications which arise in connexion with the imposition of a duty of care on the author of a statement can only be unravelled in a variety of factual situations. Decisions such as Hedley Byrne, Mutual Life & Citizens' Assurance Co. Ltd. v. Evatt (1968) 122 CLR 556; on appeal

(1970) 122 CLR 628; (1971) AC 793 and Shaddock & Associates Pty. Ltd. v. Parramatta City Council (No. 1) (1981) 150 CLR 225 are therefore to be seen as illustrations of the general duty of care in its application to particular instances of negligent misstatement.

The relationship of proximity is an integral constituent of the duty of care concept. We refer to that relationship in its broader sense, namely, as embracing a general limitation upon the test of reasonable foreseeability, this being the sense in which it has been discussed and applied in recent judgments in this Court (Caltex (1976) 136 CLR 529, at pp 574-576; Jaensch v. Coffey

(1984) 155 CLR 549, at pp 552-553; Sutherland Shire Council v. Heyman (1985) 157 CLR 424, at pp 461-462, 506-507; Stevens v. Brodribb Sawmilling Co. Pty. Ltd. (1986) 160 CLR 16. The notion of proximity, because it limits the loss that would otherwise be recoverable if foreseeability were used as an exclusive criterion of the duty of care, is of vital importance when the plaintiff's claim is for pure economic loss. When the economic loss results from negligent misstatement, the element of reliance plays a prominent part in the ascertainment of a relationship of proximity between the plaintiff and the defendant, and therefore in the ascertainment of a duty of care. But when the economic loss results from a negligent act or omission outside the realm of negligent misstatement, the element of reliance may not be present. It is in this sphere that the absence of reliance as a factor creates an additional difficulty in deciding whether a sufficient relationship of proximity exists to enable a plaintiff to recover economic loss."

Both HIA and Mr McPeake were in very close proximity in the relevant sense to Kaze Constructions. Before the appeal to the Tribunal HIA had informed the company that it would arrange the necessary remedial work. Both respondents advised Kaze Constructions to appeal to the Tribunal, and decided which parts of the work ordered to be done would be performed, and which parts would be subject to the appeal. The respondents knew anyway, but it was restated to them by the Tribunal, that if the work required by the Board's order as varied by the Tribunal was not done in a workmanlike manner Kaze Constructions was in jeopardy of prosecution and the imposition of sanctions under the Builders Licensing Act. HIA by its registrar Mr Melberzs, and Mr McPeake, informed Kaze Constructions that the remedial work required by the Tribunal would be carried out. They knew that Kaze Constructions was relying on them to complete the work in a workmanlike manner. And they either knew or should have realised that Kaze Constructions would rely on the advice that the remedial work had been performed. From their proximity to Kaze Constructions, and from the foreseeability of the imposition of sanctions leading to loss and damage to Kaze Constructions if remedial work was not appropriately carried out, arose a duty of care on the part of each of the respondents to take reasonable steps to guard against such loss or damage. It was their misstatements about the completion of the work which caused Kaze Constructions not to undertake the work.
In my opinion each respondent failed to discharge that duty. HIA is liable to Kaze Constructions in negligence for breach of the duty of care which it owed personally to Kaze Constructions, and vicariously for the breach of duty owed by Mr McPeake. Mr McPeake is also liable in negligence to Kaze Constructions.
The claim by Kain & Zecevich against HIA in negligence rests on different facts. I will turn to this issue after I have discussed the relationship between the two applicant companies. That relationship is also important in considering whether Kain & Zecevich has a claim for damages pursuant to ss.82 or 87 of the TP Act.
Mr Kain and Mr Zecevich met as fellow employees whilst working for a land agent in the late 1960's. In 1970 they formed the company which is now Kain & Zecevich; the company assumed that name in 1971 and thereafter carried on business as a licensed land agent. Both men have training as land salesmen and at relevant times were registered as managers to conduct a corporation licenced as a land agent under the Land and Business Agents Act 1973 (S.A.). In 1976 Kaze Constructions commenced to carry on business as a licensed builder. Mr Kain and Mr Zecevich are the directors of both companies. They and their families beneficially own the shares in each company. For a short time another person was involved in Kaze Constructions when it first commenced business but he soon dropped out. For the first few years Kaze Constructions built "spec" houses either on land it owned or on land which was owned by other companies owned by interests associated with Mr Kain and Mr Zecevich. These houses were then sold through Kain & Zecevich. The two applicant companies have always shared an office, and office staff. The office has moved from time to time. In about 1981 Kaze Constructions made a decision to alter its operations and increase its turnover. It began to concentrate on building "contract homes" i.e. it built homes for clients on the clients' land. The change proved successful, and in the 1983-4 financial year Kaze Constructions entered into contracts to build about 151 houses. The marketing strategy was to have two or three houses at any one time in separate display villages where several builders, each conducting similar businesses, had display homes and competed for clients. Each builder would have one or more basic home designs to which various "add on" features could be incorporated. Kaze Constructions concentrated mainly on one basic design, "the Zeanka" home, but there were many possible variations. The company also built a few houses to different standard designs, or to architectural drawings. The Zeanka home was designed to appeal to second home buyers. The company's display homes were manned by salesmen employed by Kain & Zecevich whose role was to encourage people to enter building contracts with Kaze Constructions. Customers tended to be either people attracted by the display homes, or people referred to Kaze Constructions by satisfied customers for whom the company had built houses. When a contract was signed the paper work was sent by the salesman to the common office of the applicant companies. A soil report was obtained concerning the client's land. If favourable, Kaze Constructions signed the contract and took the necessary steps to obtain the appropriate statutory approvals. Once approvals were obtained, construction commenced. It usually took 4 to 6 weeks to obtain the approvals, and a further 12 to 16 weeks to complete a house. After foundations were poured, Kaze Constructions received the first progress payment. At this stage the company paid Kain & Zecevich a commission for obtaining the building contract. The commission varied according to the value of the contract but was about 5% of the contract price. Once the commission was received by Kain & Zecevich it was split as to 45% to the salesman who had obtained the contract, and 55% to the company itself.
Mr Kain and Mr Zecevich have given evidence, which I accept, that many people signing building contracts already owned a house which they would desire to sell. Kain & Zecevich were usually instructed as selling agents for this purpose. So Kain & Zecevich received commission for obtaining building contracts for Kaze Constructions, and they also received commissions for selling houses already owned by people who had signed building contracts. Virtually all the income of Kain & Zecevich came from these two sources, and in roughly equal proportions.
The applicant companies outside their joint office had a large sign advertising:

KAIN & ZECEVICH Pty Ltd

Lic. Agents ...

Associated Company

KAZE CONSTRUCTIONS

Lic. Builders Pty Ltd

The applicants also displayed an advertising sign, I presume on construction sites, the prominent words of which read

KAZE CONSTRUCTIONS PTY LTD ... an associated company of

KAIN & ZECEVICH PTY LTD.

Business cards used by the directors also referred to of the two companies being "associated".

Mr Kain and Mr Zecevich had both been involved as active participants in the affairs of the Housing Industry Association (S.A. Division). That body is an association of people and organisations having an interest in the housing construction industry. The formation of HIA had been promoted by the Housing Industry Association and shared a common office and office staff. Mr McPeake had been closely involved in the affairs of the Housing Industry Association and HIA for many years. He was the state president of the Association from 1972 to 1974, and a national director from 1972 to 1979. Prior to 1972 Mr McPeake had met Mr Kain and Mr Zecevich at Association meetings, and in this context knew them "quite well". He understood "they were a small project builder-type company, had a couple of show homes around the place that they used to sell from - and they were not a big builder". He knew that Mr Kain and Mr Zecevich were directors of Kaze Constructions, and that Kain & Zecevich was a land agent. There is no evidence about what understanding HIA had about the relationship between the two applicants, but I am prepared to infer that HIA through its managing officers would have gathered through their dealings with Kaze Constructions and its directors at least the same understanding as Mr McPeake.
After Mr McPeake was instructed in August 1982 to act in respect of Mr Steele's house he attended the offices of the applicants on several occasions. By the end of 1982 his understanding was that whilst Mr Kain and Mr Zecevich were involved in each of the applicant companies, Mr Kain was the person who supervised the building part of the enterprise and Mr Zecevich ran the real estate side. Apart from recognising that the two applicants were part of the enterprise run by Mr Kain and Mr Zecevich he had no closer understanding of the association between the two companies. There is no evidence that either HIA or Mr McPeake knew that Kain & Zecevich was engaged by Kaze Constructions to sell building contracts or that Kain & Zecevich received a substantial part of its income from commissions earned on such sales. Nor is there any evidence that either respondent knew that Kain & Zecevich was dependent to any extent for its income on "flow on business" arising from the sale of existing homes by people who had entered into building contracts with Kaze Constructions. The Land and Business Agents Act made it an offence for a person who was not a licensed land agent, or a licensed salesman employed by a licensed agent, to sell an interest in land, but that prohibition would not have prevented an unlicensed person, employed by Kaze Constructions, soliciting building contracts from people going through display homes.
The facts about the two applicant companies which I infer HIA knew, and which Mr McPeake concedes that he did know, do not in my opinion give rise to an inference which amounts to proof on the balance of probabilities that they should have realised that Kain & Zecevich received commission payments on building contracts entered into and performed by Kaze Constructions. Whether there were practices common in the building industry which should have led HIA or Mr McPeake to realise that commission payments were likely is not disclosed by the evidence. I am not satisfied that Kain & Zecevich has proved that either of the respondents should have foreseen that Kain & Zecevich was so intimately associated with Kaze Constructions that a want of due care by the respondents in connection with the remedial work ordered to be performed on Mr Steele's house was likely to cause economic harm of the kind alleged to Kain & Zecevich.
Further, I consider that Kain & Zecevich has failed to establish such a close proximity between the company and the respondents or either of them that in law a duty of care by the respondents arose not to cause purely economic harm to Kain & Zecevich - for that is what Kain & Zecevich allege: lost income from commissions. There was no contractual relationship between Kain & Zecevich and the respondents. No representation was made to Kain & Zecevich by the respondents. The respondents in no way encouraged or induced reliance of any sort by Kain & Zecevich on the actions or statements of the respondents, nor has any such reliance been asserted in evidence on the part of Kain & Zecevich. In their dealings with the respondents over Mr Steele's house, Mr Kain and Mr Zecevich were acting at all times as directors of Kaze Constructions, and correspondingly the respondents dealt with them in that capacity.
In my opinion the claims of Kain & Zecevich based on negligence against each respondent must fail.
The next question is whether Kain & Zecevich can establish an entitlement to recover damages in respect of the contravention of s.52. Section 52 provides a norm of conduct which corporations are to meet in trade and commerce; the failure to observe that norm has consequences which are elsewhere provided in the TP Act or under the general law: Brown & Anor v. Jam Factory Pty Ltd & Anor (1981) 53 FLR 340 at 348-349 per Fox J. One consequence is the possible exercise of the power of the court to grant an injunction under s.80 of the TP Act. It will be noted that injunctive relief may be granted under that section on the application of the Minister, the Trade Practices Commission, "or any other person". Another consequence is that the conduct of a person in contravention of s.52 attracts the operation of s.82 and may give rise to a liability to pay damages. That remedy is available only to a person who comes within the limitations imposed by the wording of sub.s.82(1) which reads :

"(1) A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention."

As Gummow J. has pointed out in his searching discussion on the construction and scope of the cause of action created by s.82 in Elna Australia Pty Ltd v. International Computers (Australia) Pty Ltd (1987) 75 ALR 271 at 279-282 and Elders Trustee & Executor Co Limited v. E.G. Reeves Pty Ltd & Ors (1987) 78 ALR 193 at 241-243, there are wrapped up in the language of s.82 concepts which the common law would describe by the terms "causation", "remoteness", and "measure of damages". In the first instance it is necessary to consider the requirement of causation which is incorporated by the expression "by": the suffering of loss and damage must be "by conduct of another person that was done in contravention of a provision of Part IV or V". The section requires thereby that there be a sufficient causal link between a respondent's conduct and the applicant's loss and damage. Where damages are claimed for a contravention of s.52 the applicant must establish reliance upon the conduct complained of as supplying a sufficient causal connection: Pappas & Anor v. Soulac Pty Ltd & Anor (1983) 50 ALR 231, Jones v. Acfold Investments Pty Ltd (1985) 59 ALR 613 and Elders Trustee v. Reeves at 241-243. In Pappas v. Soulac, where the purchaser of a shopping centre sought damages from the vendor whose agent through its employee Mr Spencer had contravened s.52 in representing that it was occupied by "good tenants", Fisher J. observed at p 238 :

"The applicants will only be entitled to an award of damages under s.82 of the Act if they establish that they were induced by the representation concerning the tenants to enter into the second contract. The situation is the same under s.7(1) of the Misrepresentation Act 1971 (S.A.), pursuant to which a claim in the alternative is made. The question in each instance is whether they acted upon the statements of Mr Spencer in a sense of placing reliance upon his conduct in entering into the contract. There must be a causal connection between the conduct and the loss for which they seek to be compensated."

Conduct is misleading or deceptive within the meaning of s.52 if it conveys a misrepresentation: Taco Company of Australia Inc. & Anor v. Taco Bell Pty Ltd & Ors (1982) 42 ALR 177 at 202. Section 82 provides a remedy to a person who has in fact been misled and deceived by relying on the conduct of the respondent. In the present case the respondents engaged in conduct that contravened s.52. Kaze Constructions relied on that conduct. On the footing that in consequence of doing so it suffered loss and damage, Kaze Constructions clearly enough has established a causal connection between the respondents' conduct and loss and damage for which it now claims.
The claim of Kain & Zecevich rests on materially different circumstances. The claim is based on the fact that Kaze Constructions suffered loss or damage which was made manifest through the loss of new building contracts. In turn Kain & Zecevich suffered loss or damage in that it did not earn commission on new contracts, and from "follow on business". In this way Kain & Zecevich felt an economic impact which followed on from the conduct of the respondents. Other people as well would have felt an economic impact. The salesmen employed by Kain & Zecevich through whom the lost building contracts would have been negotiated lost their share of the commission. Sub-contractors of Kaze Constructions were not engaged to erect houses, and some of them would have suffered loss of income. Hardware suppliers to Kain & Zecevich would have lost sales. But in my view none of these people could sustain a claim under s.82 because none of them have been misled or deceived by relying on conduct of the respondents. What has caused the loss of each of them is not their reliance on the respondents' conduct but the fact that Kaze Constructions relied on it. Loss or damage suffered by a person who does not rely on the conduct which contravenes s.52 is not within s.82 because the necessary causal link between the conduct and the loss or damage for which recovery is sought does not exist. For the same reasons s.87 does not give a cause of action to recover such loss or damage either.

For these reasons I do not consider Kain & Zecevich has made out an entitlement for damages against the respondents.
I now turn to the assessment of the damages suffered by Kaze Constructions. It is not contended by the company that any loss flowed directly from an inability on its part to carry out work during the short period when the licence cancellation operated. The loss alleged is said to flow from the adverse publicity which attended the licence cancellation. This deterred potential customers. The claim is pleaded, and has been presented, as a claim for loss of profits, and the calculations given in support of the claim conclude with estimates of lost gross profit before taxation.
I accept the evidence of the applicants' witnesses that there was a dramatic drop in new contracts entered into in December 1984, and that apart from January 1985, the number of new contracts at no time after the licence cancellation returned to the average monthly numbers which had prevailed in the preceding years, especially during the 1983 and 1984 calendar years. The applicants' calculations assume that the difference in the fortunes of Kaze Constructions following the cancellation are due wholly and solely to the cancellation and the attendant publicity. This assumption is strenuously contested by the respondents.
In support of the contention that the damages should be assessed by reference to gross profits lost without regard to taxation which would have been paid on those profits by the applicant had they been earned, counsel cited Lonie v. Perugini & Anor (1977) 18 SASR 201. In that case it was held that in assessing damages for the loss of fruit trees in a commercial orchard caused by the escape of a fire, the past loss of profits should reflect the gross loss before taxation as the damages recovered would be assessable income in the hands of the plaintiff under s.26(j) of the Income Tax Assessment Act 1936. That case was decided before Atlas Tiles Limited v. Briers (1978) 144 CLR 202 which held that the principle in British Transport Commission v. Gourley (1956) AC 185 had no application in Australia. In turn Atlas Tiles was not followed by the majority of the Full Bench of the High Court in Cullen v. Trappell (1980) 146 CLR 1. Cullen v. Trappell restored the Gourley principle as applicable to the assessment of damages and has confirmed that in Australia the impact of taxation must be recognised and allowed for. Two questions immediately arise in the practical application of the Cullen v. Trappell principle: would the loss of profits for which the damages are to compensate have been taxable in the hands of the plaintiff had they in fact been earned, and will the damages upon payment be taxable in the plaintiff's hands? In claims for bodily injury, Cullen v. Trappell establishes that as future earnings, which would have been the product of lost earning capacity, would have been taxable in the plaintiff's hands, and as the award of damages will not be taxable, the assessment of damages for lost earning capacity should reflect the incidence of taxation to which the future earnings would have been subject. On the other hand where the award of damages will be taxable in the plaintiff's hands, ordinarily the incidence of taxation will be disregarded. See, for example, Lonie v. Perugini and Simpson Limited v. Hubbards Pty Ltd (1982) 44 ALR 695. Where the rates of taxation which would have applied to a plaintiff's earnings or profits had they not been lost differs markedly from the rate of taxation which the award of damages will attract, the process of assessment of damages may be complex, but the court must assay the task and do the best it can on the information before it. The award of damages should as nearly as possible fairly compensate for the economic loss which the plaintiff has suffered, and "substantial fairness rather than precise accuracy must be the aim" (Atlas Tiles Limited v. Briers at 236 per Stephen J.).
The statement of claim, and the calculations of the applicants' loss of profits put forward in evidence, direct attention to the trading performance and the revenue and expenses of the company before and after 28 November 1984. The applicant has elected to claim damages on a footing which is intended to replace as closely as may be the profits which it has lost. An award of damages assessed on these lines will have the character of profits and in my view will in all likelihood be assessable as income according to the ordinary notions of income, or if not on that basis, as an "amount received by way of...indemity for or in respect of any loss...of profit or income which would have been assessable income if the loss had not occurred" within the meaning of s.26(j) of the Income Tax Assessment Act: Robert v. Collier's Bulk Liquid Transport Pty Ltd (1959) VR 280, Williamson v. Commissioner for Railways (1960) 60 SR (NSW) 252 and Lonie v. Perugini (supra). There is the question however whether the damages to which Kaze Constructions is entitled are properly to be assessed as compensation for lost trading profits.
The measure of damages pursuant to s.82 for a contravention of s.52 will in most cases, if not all cases, be the measure of damages in tort: Gates v. City Mutual Life Assurance Society Limited (1986) 160 CLR 1 at 14. In the present case as the applicant's claim against each of the respondents rests on misstatements negligently made the measure of damages in tort is appropriate. The object of an award of damages in tort is to restore the plaintiff to the position in which it would have been placed if the wrongful act had not been committed: State of South Australia v. Johnson (1982) 42 ALR 161 at 169-170. It is necessary to determine what the position of the applicant would have been had it not relied on the representations of the respondents; or, in other words, to determine how much worse off the applicant is by reason of its reliance on that conduct. It is not surprising therefore that the applicant has put forward the calculations which it has, and has sought an award based on gross loss of profits.
In the course of interchange between bench and bar during the trial the question was raised whether the award should have the object of compensating for damages to the reputation and goodwill of Kaze Constructions; and whether the reputation and goodwill should be treated as being in the nature of a capital asset in much the same way as the loss of earning capacity suffered by an individual in a bodily injury claim is treated, where the loss of income caused by a wrongful act is taken merely as evidence showing the extent to which the earning capacity (the capital asset) would have produced income. This approach was not taken up by counsel for the applicants. In my view the approach, even if it could be supported by precedent (and none was cited), would not adequately compensate the applicant. If it were open to assess the applicant's damages on this basis, and if it also followed that such an approach would clothe the award with the character of a capital payment which would not attract taxation in the applicant's hands, the applicant would not be obliged to so limit the claim. An analogy is to be found in claims in tort for damage caused by negligence to the property of another. In Williamson v. Commissioner for Railways, (supra) at p 267, Sugerman J. said :

"The appropriate method of assessing damages in respect of damage caused by negligence (including the negligent lighting and spread of fire) to the property of another, is dependent upon the circumstances. The plaintiff may claim (that is, as a capital loss) the difference in value of the property to him before and after the fire: Genders v. South Australian Railways Commissioner

(1928) SASR 272; Moss v. Christchurch Rural Council (1925) KB 750. Or, more particularly where the property is employed in a business, he may claim the cost of repairing or making good the damage, the diminution of value of the property after repairing or making good, and for losses sustained by reason of loss of use during the period occupied in repairing or making good."

These observations were followed by the Full Court of South Australia in Lonie v. Perugini. In my view any attempt to assess the damages of Kaze Constructions as a capital loss by assessing the diminution in the value of the reputation and goodwill of the company would not provide adequate or just compensation. I consider that it is appropriate to assess damages on the basis contended for by the company.

Kaze Constructions' case on damages is helpfully summarised in calculations, which are arithmetical in nature, made by its accountant Mr Musolino in exhibit A17. He made three alternative calculations. First he sought to calculate the "maintainable earnings" of the company in the following manner :

Adjusted Net Income (before tax) relating to Building Activities:

Year Ended 30 June 1982 $281,942 Year Ended 30 June 1983 153,169 Year Ended 30 June 1984 89,552 Year Ended 30 June 1985 135,878 TOTAL $660,541 AVERAGE PER YEAR $165,135

He explained that the profit for the year ended 30 June 1985 was included because of a time lag between the date of execution of a building contract and the construction and completion of the house. In his opinion the results for the year ended 30 June 1985 did not significantly reflect the impact of loss to the company flowing from the cancellation of the licence. He then multiplied the average annual figure by four to project the loss over the financial years ended 30 June 1986 to 1989, made an adjustment for devaluation due to inflation, added trading losses actually incurred by the company over the years of the projection (losses of $333,871), and arrived at a claim for $1,140,190.

Another calculation proceeded along the same lines but omitted the year ended 30 June 1982 when estimating the average maintainable earnings. This alternative calculation was done as Mr Musolino considered the trading figures in the year ended 30 June 1982 to be abnormal and to reflect changes in the company which could distort the picture. By omitting the profit for that year the average annual maintainable earnings were reduced to $126,200. Again that figure was projected over four years, and after the same adjustments, a claim of $950,081 was estimated.
The final calculation sought to establish the number of building contracts which had been lost. Mr Musolino considered the performance of another building contractor, Rossdale Homes Pty Ltd, which he was told held a comparable position in the contract home building market in 1984 to that occupied by Kaze Constructions. He ascertained that Rossdale Homes Pty Ltd had, broadly speaking, maintained its position in the market in comparison with other builders in subsequent years and had experienced an actual increase in the number of houses built over that time. Mr Musolino assumed that the applicant, without the licence cancellation, would also have maintained its relative position in the market and built at least 120 houses per year after 1984, this being taken as the average annual rate at November 1984. In the four years from 1 July 1984 to 30 June 1988 Kaze Constructions actually built 176 homes. He therefore assumed the number of contracts lost to be 304. To the contracts lost he applied an average profit per house. After adjustment for income received from South Australian Housing Trust work, this calculation estimated the claim at $1,116,111.
The calculations spanned four years as the applicant's directors say the following events occurred. Immediately following the publicity about the licence cancellation there was a dramatic drop in new contracts. Hitherto they had established a substantial pool of well-skilled and reliable sub-contractors who were fully engaged by Kaze Constructions. As 1985 progressed, and work on contracts obtained before November 1984 was finished, there was not enough new work to keep the sub-contractors busy. Sub-contractors were looking elsewhere for work and the company feared it would lose them. To maintain turnover and to occupy the sub-contractors, the directors tendered for and obtained contracts to erect multiple unit developments for the South Australian Housing Trust. The company experienced teething problems undertaking this new style of work and was required to put on extra supervisors. The South Australian Housing Trust work proved to be less profitable. One salesman employed by Kain & Zecevich left on 12 December 1984, and two more salesmen left in May 1985. Kain & Zecevich then operated with two salesmen as opposed to five. One manned the display home in the northern suburbs and serviced that area, and the other salesman performed similar functions in the southern suburbs. The number of new contracts remained low. The company made progressively less profit on work undertaken for the South Australian Housing Trust and the work became more difficult to get. Whereas the company had been profitable up to the year ended 30 June 1985, thereafter it suffered a trading loss of $4,084 in the 1985-86 year, and losses of $97,647, $34,626, and $197,514 in the following three years. The company wound down its operations and stopped building in the 1988-1989 year. To complete the picture, Kain & Zecevich ceased to operate as a land agent in late 1987. The directors, Mr Kain and Mr Zecevich, formed a new company with another person, Mr Carey, and thereafter have operated as Carey, Kain and Zecevich Pty Ltd, licensed land agents. This new company, it seems, undertook a certain amount of property development in addition to operating as land agents.
The respondents have not led evidence to dispute that these events occurred. However it is the respondents' case that the downturn in the fortunes of Kaze Constructions was due mainly, if not almost wholly, to causes other than the licence cancellation and its attendant publicity.
First it was contended that in 1984 there was a substantial downturn in the domestic home building market in South Australia and in particular in the suburban Adelaide area. Statistics published by the Australian Bureau of Statistics were tendered (exhibits A27 and R7). These figures support the respondents' case. They show that in the Adelaide area (which includes the areas in which Kaze Constructions was operating) the following number of houses in the private sector were approved :

1983-4 5,922

1984-5 5,435

1985-6 3,921

1986-7 3,666

1987-8 4,301

During this time there was also a drop in the number of houses and other dwellings built in the public sector. There is a graph included in exhibit A27 which illustrates the drop in expenditure in South Australia on new houses in the market range in which Kaze Constructions operated. HIA called Mr Kennett who is presently a management and marketing consultant operating in the building industry. Mr Kennett has extensive experience in the industry. In 1984 he was the managing director of a building materials' supplier. The sales of his company peaked in November 1984 and dropped thereafter. Allowing for the time lag between contract and construction, his evidence also supports the respondents' case that the downturn commenced before November 1984. Mr Kennett advanced reasons why this downturn was marked. Those reasons were not really challenged by the applicants, particularly the explanation based on the effect of government subsidies which became available through the first home owner's scheme introduced in October 1983. As well, Kaze Constructions' own figures show that the number of new contracts was dropping in 1984. Figures constructed by Mr Musolino which appear in annexure 4 to exhibit A17 show the six monthly figures as :

Period New Contracts 1981 July - Dec 46 1982 Jan - June 41 July - Dec 26 1983 Jan - June 61 July - Dec 78 1984 Jan - June 73 July - Dec 54 1985 Jan - June 26 July - Dec 19 1986 Jan - June 19 July - Dec 19

Towards the end of the trial the parties prepared exhibit A29 from primary records which gives a more precise picture as to the dates on which new clients signed building contracts during the 1984-1985 year. Omitting development work undertaken by Kaze Constructions for associated companies the new contracts were signed as follows :

1984 July 9

August 4

September 10

October 8

November 14

December 2

1985 January 10

February 1

March 2

April 2

May 6

June 5

In the period 1 July to 29 November 1984 (the date of the publicity) Kaze Constructions obtained 45 new contracts, whereas in the following seven months it obtained only 28 contracts.
Counsel for the applicants contended that little weight should be attached to the statistics as not every builder would be affected equally. Many variables would lead to different builders being affected in different ways. Some geographical areas within the Adelaide region may be affected more than others. These considerations are probably correct, but I am unable to tell from the evidence whether Kaze Constructions was likely to suffer a drop in business in line with the general downturn, or whether it might suffer to a greater or lesser extent. It is impossible to tell why Rossdale Homes Pty Ltd was apparently insulated from this downturn. The success of Rossdale Homes Pty Ltd in the contracted market would of course be at the expense of other builders. This uncertainty in the evidence does not assist Kaze Constructions which carries the onus of proof. I consider I should assume, broadly, that Kaze Constructions would have been affected in line with the average downturn, that the market in which it operated would have contracted in line with the average disclosed by the statistics.
The respondents also contend that during 1984 strong competition developed from a new building company, Homestead Constructions Pty Ltd, which would have eaten into Kaze Constructions share of the market, and that the competition from this company increased in following years, to the extent that it was causing worry even to the largest of the home builders. There is evidence that this competition existed, and the extent of the competition is to some extent quantified in exhibit R11. To an extent which I am unable to quantify precisely I find that competition from this source also had an effect upon the number of new contracts obtained by Kaze Constructions.
The respondents also relied on other matters as contributing to the decline in new contracts obtained by Kaze Constructions. First it was contended that the number of insurance claims it experienced after 1982 indicated poor quality workmanship. I am not satisfied that this contention has been made good by the respondents. Mr Kent, the current manager of HIA, gave evidence about the claims experience. It is correct that many "circumstances" which might have given rise to insurance claims were reported after 1982, but the number which gave rise to actual payments was not so great. Mr Kain and Mr Zecevich say that after the claim on Mr Steele's house, HIA showed a propensity to deny claims on technicalities, such as a failure to report a circumstance within a strict time limit, or because the company had endeavoured to remedy the defect before reporting it. The company then adopted a policy of reporting every possible circumstance forthwith. It is not possible on the information before the Court to analyse the claims to see if they exhibit a pattern of poor quality workmanship. I am left with the impression that if all the costs and expenses, including legal fees, incurred in connection with Mr Steele's house were excluded, the claims picture would not indicate such a pattern. Also on the issue of insurance there is evidence that the HIA underwriters, whether for good reason or bad, refused to indemnify Kaze Constructions against its liability for the cost of making good warranty claims in late 1987. For a time the company was able to obtain insurance through another broker, but that insurance was not available beyond April 1989. I am satisfied that the loss of insurance played a very significant part in the decision of the directors to cease building operations during the 1988-1989 year. I consider the decision made by the underwriters of the insurance scheme administered by HIA to decline further insurance in 1987 is an event far too remote from the actionable conduct of the respondents to sound in damages.

The respondents also contended that the limited number of designs available to potential customers was important. It was argued that the main basic plan, the Zeanka house, had been on the market for some years, and, in effect, would have been going stale. I am not satisfied that this was the case. Many variations to the design were possible.
Generally, I was impressed by Mr Kain and Mr Zecevich when they gave evidence. Their evidence about the events which happened between August 1982 and December 1984, which at first in many respects was strenuously challenged, was by the end of the trial accepted by the respondents as correct, or otherwise established as correct by written records, in almost every respect. However their evidence, and particularly that of Mr Zecevich, about their knowledge of a downturn in the building industry from and after mid 1984, and their dogged insistence that no factors other than the bad publicity about the licence cancellation influenced the future of Kaze Constructions, I am unable to accept as correct. Both of them are intelligent alert people. I am sure they paid regard to literature about the market which they received from the Housing Industry Association, and I am sure that they well knew there was a serious market downturn. If they really believed that the bad publicity was the sole cause of the loss of new contracts I am unable to understand why they did not change the name of the company, or trade through another company, especially as a new company was formed for this purpose in 1984 to provide for the event that the licence cancellation could not be overturned in the Supreme Court. I am also unable to accept that the salesman, Mr Bullock, left on 12 December 1984 because of the loss of opportunity caused by the adverse publicity. His departure followed too soon after that event. I think it is more likely that he left for unconnected reasons, and the evidence of another salesman, Mr Simeone, lends support to this conclusion.
However, notwithstanding the reservations which I have about the directors' evidence, I am satisfied that there was in the short term after the publicity on 29 November 1984 a dramatic downturn in new contracts which was due to the adverse publicity. The cancellation of a builder's licence is the type of event which receives prominent media attention at the time, and I accept the evidence to the effect that this type of news spreads immediately through the industry. The figures already set out from exhibit A29 show that only two new contracts were obtained in December 1984. However the January figures (10 contracts), which relate mainly to contracts entered into at the end of the month, suggest that the blaze of publicity which immediately followed the cancellation had been largely forgotten by the relevant section of the public by then. Thereafter it is difficult to tell how much of the decline in new contracts was due to the publicity, and how much was due to other factors. I think it is probable that the decision of the directors in the first half of 1985 to redirect the company's mode of operation into construction work for the South Australian Housing Trust was influenced mainly by the economic downturn, and perhaps by the growing competition from Homestead Constructions Pty Ltd.
As the company changed its mode of operation, and as there were other factors influencing the fortunes of the company, I do not find Mr Musolino's comparison of the "maintainable earnings" with trading figures in the financial years 1986 and following of much assistance in the assessment of damages. I prefer to approach the matter by endeavouring to estimate the number of contracts that were lost by reason of the conduct of the respondents. A precise calculation of the loss of profits attributable to that wrongful conduct is not possible. The assessment must be approached broadly. The following conclusions are, in a sense, arbitrary, and the calculations which follow may give the appearance of an attempt at precision. It is unfortunate that what is in essence an exercise of judgment, takes on the appearance of an arithmetical exercise, but as it is necessary to reflect the incidence of tax, and to allow interest on the compensatory damages, it is not possible to proceed simply to a global figure. The figures I set out can only provide a guide. I have used them to arrive finally at a judgment which I think achieves justice between the parties according to the evidence.
I estimate that about 25 contracts were lost in the period from 29 November 1984 to 30 June 1985, and a further 20 contracts were lost thereafter. I find that it is unlikely that the licence cancellation and attendant publicity had any affect beyond 30 June 1986, but the figure of 20 lost contracts during that year is probably generous, and therefore makes allowance for the possibility of losses thereafter.
I propose to allow as the measure of the gross profit the sum of $4,600 on each of the contracts lost up to 30 June 1985, and the sum of $5,000 on each of the other contracts. These are Mr Musolino's estimates of the gross profit margins in these years.
An assessment of damages based solely on an estimate of the new contracts lost would not compensate the applicant in respect of overhead costs associated with redirecting the company into work as a contractor for the South Australian Housing Trust. Kaze Constructions seeks to recover these costs and all the trading losses which followed on the footing that the redirection was to mitigate the loss caused by the respondents. I have held that the redirection was mainly the result of other causes, but the drop in new contracts referable to the respondents' conduct was probably a contributing influence, at least in precipitating the change to occur when it did. I propose to make an allowance on account of these costs notwithstanding the virtual impossibility of ascertaining from the evidence what they were. However I do not consider the trading losses which apparently followed should be the subject of compensation beyond the award allowed in respect of the loss of new contracts. The cause of the trading losses, and in respect of what aspects of the company's operations and in relation to what jobs those losses occurred, is not disclosed by the evidence. The evidence discloses that in February 1985 the company agreed to build eight houses for Kain and Carey Holdings Pty Ltd - a company in which Mr Kain had an interest. These houses are not included in the new contract figures set out above. Later there were other developments undertaken by Kaze Constructions for companies in which Mr Kain or Mr Zecevich had an interest. The evidence does not disclose whether these projects were profitable or produced a loss to the company. I am unable on the evidence to determine why the South Australian Housing Trust work did not prove profitable. Whether this was due to tendering error or to some other and what causes is not disclosed. Whilst it may be said that the trading losses followed on from the events of November 1984, and from the change in direction in the company's operations, it is not proved that the losses (apart from losses flowing directly from the diminution in new building contracts) were caused by the respondents' conduct; and in any event I would hold those losses to be too remote from the respondents' conduct to be recoverable.
The assessment is complicated by the facts, firstly, that the rate of company taxation for a private company in the years ended 30 June 1985, and 1986 was 46% but upon receipt of the damages in the current financial year the taxation rate will be only 39%, and secondly, that if interest is calculated by reference to the gross profit lost, this would not recognise that the company would have been assessed to tax which would have been paid. Further, I consider interest should not be allowed on that part of the award which allows for the taxation which will be paid on the compensatory component of the award as Kaze Constructions has not been out of pocket for that tax; the company has not yet suffered the practical impact of the detriment: see Batchelor v. Burke (1981) 148 CLR 448 at 451. I propose to disregard the likelihood that Kaze Constructions in the current year has carried forward tax losses. In Simpson Limited v. Hubbards Pty Ltd (1982) 44 ALR 695 at 703 it was said that tax losses might be regarded in one sense as an asset of the plaintiff, and there is no reason why a plaintiff should be required to dissipate the asset to the benefit of a defendant.
I assess the damages as follows:

Gross loss of profits

25 x $4,600 $115,000 20 x $5,000 100,000 Allowance for costs of redirection 25,000 $240,000 Less tax at 46% 110,400 $129,600 Interest for 4 yrs at 15% on

compensatory verdict 77,760 Allow tax at 39% on compensatory verdict 50,544 Provisional award $257,904

Using these figures as a guide, and rounding them off, I consider Kaze Constructions should recover against the respondents the sum of $260,000. The claim by Kain & Zecevich however must fail.
I will hear the parties on the question of costs.

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Citations

Kaze Constructions Pty Ltd & Anor v Housing Indemnity Australia Pty Ltd & Anor [1990] FCA 68

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[1990] FCA 68

09 MARCH 1990