Kenny & Good Pty Ltd v MGICA (1992) Ltd
[1997] FCA 743
•8 August 1997
FEDERAL COURT OF AUSTRALIA
DAMAGES - Trade Practices Act 1974 - (Cth) measure of damages - mortgage insurer providing insurance relying on misleading valuation of property - valuation provided for mortgage valuation purposes - default by mortgagor - shortfall after sale of security - mortgage insurer liable to indemnify mortgagee - valuers found liable to insurer by reason of contravention of s 52 of the Trade Practices Act 1974 (Cth) - ‘no-transaction case’ - whether loss attributable to market fall recoverable - principles governing assessment of damages under s 82 of the Trade Practices Act 1974 (Cth).
DAMAGES - breach of duty - measure of damages - mortgage insurer providing insurance relying on negligent valuation of property - valuation provided for mortgage valuation purposes - default by mortgagor - shortfall after sale of security - mortgage insurer liable to indemnify mortgagee - valuers found liable to insurer in tort - ‘no-transaction case’ - whether loss attributable to market fall recoverable - whether the decision of the House of Lords in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191 should be followed - discussion of the principles governing assessment of damages for breach of duty.
CAUSATION - negligent over-valuation of property - mortgage insurer relying on valuation in providing mortgage insurance - whether loss due to market fall attributable to negligence of valuers - test to be applied.
Trade Practices Act 1974 (Cth), ss 52, 82.
Fair Trading Act 1987 (NSW) ss 42, 68.
MGICA (1992) Ltd (formerly MGICA Ltd) v Kenny & Good Pty Ltd (1996) 140 ALR 313, upheld.
Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191, not followed.
Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] QB 375, discussed.
Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, cited.
Caparo Industries Pty Ltd v Dickman [1990] 2 AC 605, distinguished.
Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158, cited.
Chandler v Crane Christmas & Co [1951] 2 KB 164, cited.
Esanda Finance Corporation v Peat Marwick Hungerfords (1997) 142 ALR 750, cited.
March v E & M H Stramare Pty Ltd (1991) 171 CLR 506, cited.
Gates v City Mutual Life Assurance Society Limited (1986) 160 CLR 1, cited.
L Shaddock & Associates Pty Ltd v Parramatta City Council (No 1) (1981) 150 CLR 225, applied.
South Australia v Johnson (1982) 42 ALR 161, cited.
Gould v Vaggelas (1984) 157 CLR 215, cited.
Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co (The Wagon Mound) [1961] AC 388, cited.
Richards v Victoria [1969] VR 136, cited.
Hill (t/as RF Hill & Associates) v Van Erp (1997) 142 ALR 687, cited.
Medlin v State Government Insurance Commission (1995) 182 CLR 1, cited.
Chapman v Hearse (1961) 106 CLR 112, cited.
Faulkner v Keffalinos (1970) 45 ALJR 80, cited.
Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514, applied.
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, cited.
Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281, cited.
Potts v Miller (1940) 64 CLR 282, discussed/distinguished.
Smith v New Court Securities Ltd v Citibank NA [1997] AC 254, cited.
Toteff v Antonas (1952) 87 CLR 647, cited.
Copping v ANZ McCaughan Ltd (Full Court of S Ct/SA, 21 March 1997, unreported), discussed/cited.
KENNY & GOOD PTY LIMITED & ANOR v MGICA (1992) LIMITED
NG 814 of 1996
Wilcox, Branson & Sackville JJ
Sydney
8 August 1997
IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NG 814 of 1996 ) GENERAL DIVISION )
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: KENNY & GOOD PTY LIMITED
First AppellantLANCE KENNY
Second AppellantAND: MGICA (1992) LIMITED
Respondent
JUDGE(S): WILCOX, BRANSON, SACKVILLE JJ PLACE: SYDNEY DATED: 8 AUGUST, 1997
MINUTES OF ORDER
THE COURT ORDERS THAT:
The appeal be dismissed, with costs.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NG 814 OF 1996 ) GENERAL DIVISION )
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: KENNY & GOOD PTY LIMITED
First AppellantLANCE KENNY
Second AppellantAND: MGICA (1992) LIMITED
Respondent
JUDGE(S): WILCOX, BRANSON, SACKVILLE JJ PLACE: SYDNEY DATED: 8 AUGUST, 1997
REASONS FOR JUDGMENT
THE COURT:
INTRODUCTION
This appeal concerns the correct measure of damages, where a mortgage insurer has suffered losses which it claims are the consequence of a negligent and misleading over-valuation of property by valuers. The losses claimed in this case by the insurer include a deficiency on realisation of a security, a portion of which loss resulted from a general downturn in the property market after the insurer had entered into the insurance arrangement. The particular question is whether the mortgage insurer is entitled to recover all losses arising from its obligation to indemnify the mortgagee, or whether its damages should exclude that portion of its losses attributable to the general decline in the property market.
The learned primary Judge, whose decision is reported (MGICA (1992) Ltd (formerly MGICA Ltd) v Kenny & Good Pty Ltd (1996) 140 ALR 313), described the present case as a "no-transaction case": at 362. By this expression, his Honour meant a case in which, but for the negligent and misleading over-valuation, the mortgage insurer would not have insured the mortgage at all. He contrasted a "no-transaction case" with a "successful transaction case": Kenny & Good, at 362-363. In the latter case, had the valuers provided a proper valuation (that is, one resulting from the exercise of due care and skill), the mortgage insurer would still have provided insurance on the same security, but would have done so for a lesser sum. (The primary Judge derived this terminology from the speech of Lord Hoffmann in Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191 (HL) (“Banque Bruxelles”), also a “no-transaction case”. However, the expressions "no-transaction" and "successful transaction" appear first to have been used (although not in a valuation context) by Staughton LJ in Hayes v James & Charles Dodd [1990] 2 All ER 815 (CA), at 818-819. They were subsequently adopted by the Court of Appeal in Banque Bruxelles: Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] QB 375 (Bingham MR, Rose and Morritt LJJ), at 404-405.)
The primary Judge held that, in a “no-transaction case”, the mortgage insurer is entitled to recover damages in tort for all its losses flowing from the negligent valuation, including those attributable to a downturn in the market subsequent to the valuation: Kenny & Good, at 372, 383. His Honour rejected an argument that the valuers are liable to the insurer only for the amount representing the difference between the valuation supplied and the true value of the property. In reaching the decision his Honour preferred the general approach of the Court of Appeal in Banque Bruxelles to the unanimous holding of the House of Lords in the same case: Ibid, at 373-374. (The principal speech in the House of Lords was delivered by Lord Hoffmann; Lords Goff, Jauncey, Slynn and Nicholls concurred.) His Honour seemed to proceed on the assumption that the tortious measure of damages applied both to the cause of action based on breach of duty by the valuers and to the cause of action for damages under s 82 of the Trade Practices Act 1974 (Cth) ("TP Act") and s 68 of the Fair Trading Act 1987 (NSW) ("FT Act") arising by reason of the valuers' misleading and deceptive conduct.
The appeal is from a judgment in favour of the respondent ("MGICA"), the mortgage insurer, against the appellant valuers, jointly and severally, in the sum of $1,977,513.67, plus interest. The notice of appeal specified a large number of grounds, but when written submissions were filed the appellants abandoned all grounds of appeal except ground nine. This ground contends that his Honour was in error in not applying the decision of the House of Lords in Banque Bruxelles. It follows that the only issue on the appeal is whether his Honour's approach to the assessment of damages was correct. In considering that issue, it must be borne in mind that the valuers were found to be liable to MGICA both in tort and by reason of their contraventions of the TP Act and the FT Act.
THE FACTS
The first appellant ("K & G") carried on business at all material times as a real estate valuer and property consultant. The second appellant ("Mr Kenny") was its principal. We refer to the appellants together as “the valuers”. MGICA provided mortgage insurance under a "Pool Mortgage Insurance Policy". In March 1990, MGICA's agent instructed the valuers to carry out a valuation of what the primary Judge described as a "prestige waterfront residential property" at Hunters Hill, a suburb of Sydney ("the Property"): Kenny & Good, at 315. The Property was owned by Beca Developments Pty Ltd ("Beca"), the principals of which were Mr & Mrs Pselletes. Beca was seeking a loan to be used, in part, to refinance its overdraft and to assist with the development of a hotel in North Sydney, in conjunction with the Australian Elizabethan Theatre Trust: Ibid.
Mr Kenny prepared a valuation report, dated 19 April 1990. The report recorded that he was required to establish the current fair market value of the Property and, in particular, its "as is" and "on completion" values. He recorded his understanding that Permanent Custodians Ltd ("PCL"), which became the mortgagee of the Property, and MGICA could each use and rely on his report. The report valued the Property at $5.35 million "as is" and at $5.5 million "on completion": Kenny & Good, at 322-323, 327. It recommended the Property "as suitable security for investment of trust funds to the extent of 65% of our valuation for a term of 3-5 years": Ibid, at 332.
On 11 May 1990, PCL advanced to Beca $3.575 million (65 per cent of the valuation figure of $5.5 million). A small portion of this sum was retained by PCL, pending completion of building work. However, this amount was subsequently released. The advance of $3.575 million included the first year's interest payable by Beca: Kenny & Good, at 323, 325.
At the beginning of the second year of the loan, Beca defaulted. The default was apparently brought about, at least in part, by the appointment of a provisional liquidator to the Australian Elizabethan Theatre Trust: Kenny & Good, at 325. With the consent of PCL and MGICA, Beca eventually sold the Property on 6 January 1992, for $2.65 million. The primary Judge found (at 359) that, in consequence of these events, MGICA had incurred the following liability to indemnify PCL in respect of the deficiency on the realisation of the security:
$
Unpaid principal 3,575,000.00
Unpaid interest 500,252.52
Insurance premiums 3,541.41
Rates and Taxes 4,485.27
Other statutory charges 43,560.00
Legal fees 6,374.30
Selling agent's commission 54,100.00
Advertising 14,632.40
Preservation of property 45,408.33
Other 380,159.44
Total 4,627,513.67
Less gross proceeds of sale
of security 2,650,000.00
Total claim 1,977,513.67
The sum of $1,977,513.67 is the amount for which the primary Judge gave judgment in favour of MGICA.
The primary Judge, in a detailed and careful judgment, found (at 349) that the true value of the property, as at 18 April 1990, on an "as completed" basis was $3.9-$4.0 million. He also found that this was a figure which Mr Kenny, using his own methodology and exercising due skill and care, should have arrived at in his valuation: Kenny & Good, at 340. His Honour found that the overvaluation of the Property by Mr Kenny demonstrated a failure on his part to exercise the standard of care and skill ordinarily exercised by professional valuers of residential property. Accordingly, his Honour concluded that the appellants had breached the duty they owed to MGICA: Ibid, at 335-355, 383.
The primary Judge also found that Mr Kenny's valuation report, and a subsequent letter sent by him to MGICA, conveyed representations, not only that the opinions as to value were held but also that the opinions were based on reasonable grounds; that they were the product of due care and skill; and that they were not outside the range of latitude properly to be allowed to a valuer: Kenny & Good, at 356-357. His Honour considered that the valuation of $5.5 million was so far removed from the true value of the property, as to be misleading and deceptive: Ibid, at 357. The valuers had therefore contravened s 52 of the TP Act and s 42 of the FT Act: Ibid, at 383. His Honour also found that MGICA had relied upon the valuation as indicating that the proposed loan would comply with its loan to valuation ratio policy (“LVR”) of 65 per cent and that the Property therefore offered a sufficient "cushion" to safeguard it against losses occasioned by any default on the part of Beca. Accordingly, his Honour found that the valuation was a substantial cause of MGICA including the mortgage from Beca in its Pool Policy, thereby providing an indemnity to PCL in the event of default by Beca: Ibid, at 358.
The primary Judge specifically found that MGICA would not have provided mortgage insurance in respect of PCL's advance of $3.575 million if the valuation had been less than $5.5 million. His Honour gave reasons for finding that, if the valuation had been carried out with due care and skill, yielding an "on completion" figure in the order of $3.9-$4.0 million, MGICA would not have entered into the mortgage insurance transaction at all. Accordingly, he proceeded on the basis that this was a “no-transaction case”: Kenny & Good, at 363.
One further finding should be noted. Mr Kenny had allowed in his valuation for a fall in the relevant residential market of 7.5 per cent during the period June 1989 to April 1990. This led the primary Judge to find that Mr Kenny should have appreciated, as at April 1990, “at least that the market for the Property was ‘fragile’ or ‘vulnerable’ and that a further fall was ‘on the cards’ ” : Kenny & Good, at 365. However, his Honour considered that this finding was unnecessary to the result of the case, because it was not in dispute that a fall in the market for real estate was foreseeable: Ibid.
BANQUE BRUXELLES
Since Banque Bruxelles loomed large in the reasoning of the primary Judge and in the argument before us, it is convenient to refer to the judgments of the Court of Appeal and the House of Lords at the outset. The Court of Appeal in that case dealt with six appeals, each involving a finding that a valuer had negligently over-valued the land in question. Three of the matters were the subject of further appeals to the House of Lords. Banque Bruxelles did not involve any claim equivalent to the MGICA’s claims under the TP Act and the FT Act.
The Court of Appeal
The judgment of the Court of Appeal in Banque Bruxelles commenced by referring to the general approach to the assessment of damages. The Court stated that, in a claim in tort, the general rule is that the damages should be, as nearly as possible, that sum which will put the injured party in the same position as he or she would have been if that party had not sustained the wrong for which compensation was to be awarded (citing Livingstone v Rawyards Coal Co (1880) 5 App Cas 25, at 39, per Lord Blackburn): Banque Bruxelles (CA), at 401-402.
The Court then proceeded by assuming "some hypothetical but not unrepresentative facts" (at 403):
"(1)A valuer (V) negligently advises a lender (L) that the value of a property is £1m.
(2) L's policy is to lend 80 per cent of valuation on mortgage.
(3)So L lends the borrower (B) £800,000 in reliance on the valuation on terms that it is repayable on default or at some future date or over some future period with interest payable in the meantime.
(4)In fact the market value of the property at the date of valuation was £500,000.
(5) Had V so advised no loan would have been made.
(6) B defaults in repayment and L repossesses and sells the land.
(7) By this time there has been a sharp fall in the property market.
(8) L sells for the best available price: £300,000."
The Court identified the issues as follows (at 403):
"What is the measure of L's damage recoverable against V? The main answers advanced are (a) £300,000 (£800,000 minus £500,000) plus the costs of realisation, reasonable interest etc; and (b) £500,000 (£800,000 minus £300,000) plus the costs of realisation reasonable interest etc. The crucial difference between these measures is the loss resulting from the fall in the property market, by which we mean that part of the debt not repaid which is equal to the diminution in value of the security attributable to the fall in the property market. At the heart of these appeals lies the question whether this element of loss is recoverable by L against V or not."
Their Lordships then identified five major questions (at 403):
"On these facts the following major questions arise.
(1) What is the duty which V has broken?
(2) What is the loss for which L claims to be compensated?
(3) Did V's said breach of duty cause L's said loss?
(4) Are the damages which L claims too remote?
(5)Is there any reason of policy why L should not recover the compensation to which he would otherwise be entitled?"
The answer to question (1) was that V's duty was to take reasonable care to give a reliable and informed opinion on the open market value of the land in question at the time of the valuation. V's concern was, however, with the current value; he or she was not asked to predict future events. But both V and L had in mind that an overvaluation would create the risk that L would lend in circumstances where otherwise he or she would not, or that the loan would be greater than otherwise would be the case: Banque Bruxelles (CA), at 403-404.
As to question (2), it was not in doubt that, in general, in a “no-transaction case”, L is entitled on the restitutionary principle to be indemnified against all the losses incurred as a result of entering into the transaction. The controversy focussed on one element of L's loss, namely, that attributable to a fall in the property market. The central issue, as seen by the Court of Appeal, was whether that element of the loss was caused by the breach of any duty which V undertook. The resolution of that issue therefore depended on the answer to question (3): Banque Bruxelles (CA), at 404-405.
Before addressing the causation issue, the Court (at 405-406) addressed questions (4) and (5). As to question (4), the Court held that L's damage was not too remote from the breach of duty. The test was whether, at the date of the contract or tort, damage of the kind for which the plaintiff claims compensation was a reasonably foreseeable consequence of the breach of contract or tortious conduct of which the plaintiff complained. If the kind of damage was reasonably foreseeable, it was immaterial that the extent of damage was not. L and V knew, as everyone does, that market prices could move upwards or downwards. It was therefore foreseeable that if, on the strength of an overvaluation by V, L entered into a mortgage transaction he or she would not otherwise have entertained, the risk of loss would be increased if the market moved downwards. As to question (5), the Court had not been asked to rule that L was disentitled on policy grounds to recover that part of the loss attributable to the fall in the property market. Accordingly, it did not do so.
The Court then returned to the question of causation, addressing the argument that, in the circumstances posed, V did not cause that part of L's loss which was attributable to the fall in the property market. Their Lordships pointed out (at 408) that in “no-transaction” mortgage lending cases it had been the practice since Baxter v F W Gapp & Co Ltd [1939] 2 KB 271 (CA) (more fully reported at [1939] 2 All ER 752) to award the lender his or her net loss sustained as the result of entering into the transaction. A straightforward application of the restitutionary principle suggested that the lender should be entitled to recover that proportion of the overall loss representing the fall in the property market between the date of the transaction and the date of realisation. Any distinction between a large and small market fall lacked any basis in principle.
The Court accepted that there was a causal link between the breach of duty and the lender's loss (at 420, 421):
"Since the valuer's negligence caused the lender to enter into the transaction, which he would not otherwise have done and because he cannot escape from the transaction at will, we regard that negligence as the effective cause of the loss which the lender suffered as a result. The market fall cannot realistically be seen as a new intervening cause.... In the result, we do not think that a fall in the market can be said to have broken the link between the valuer's negligence and the damage which the lender has suffered."
The Court also said this in relation to a distinction drawn by Phillips J in one of the six matters (Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd) (at 421):
"We do not think the judge was right to distinguish between the risk of overvaluation and the risk of market fall and between the valuer's duty in relation to each. The valuer's duty was as we have defined it.... If the valuer overvalued the land it was foreseeable that the lender would lend on inadequate security, perhaps in circumstances where (properly advised) he would not lend at all. It was foreseeable that the borrower might default, and if he did the lender's recovery would depend on what the land might fetch at the time of realisation. This would, foreseeably, depend on how the market moved. We agree, of course, that the valuer in no sense guaranteed or underwrote the lender's business investment. Had the valuer valued the land competently, he would have been under no liability to the lender no matter how disastrous the investment proved. But once it is established that the valuer's negligence led the lender to make a loan he would not otherwise have made it seems to us that the lender is entitled to be compensated for all the damage he has suffered. If the market moves upwards, the valuer reaps the benefit; if it moves downwards, he stands the loss."
The House of Lords
On the appeals to the House of Lords, as we have noted, Lord Hoffmann delivered the principal speech. His Lordship observed that the Court of Appeal had taken as its starting point the principle stated in Livingstone v Rawyards Coal Co. This, however, was the wrong place from which to begin (at 211):
"Before one can consider the principle on which one should calculate the damages to which a plaintiff is entitled as compensation for loss, it is necessary to decide for what kind of loss he is entitled to compensation. A correct description of the loss for which the valuer is liable must precede any consideration of the measure of damages. For this purpose it is better to begin at the beginning and consider the lender's cause of action."
A plaintiff who sued for a breach of duty, whether in contract or in tort, had to do more than prove the defendant had failed to comply. The plaintiff had to
"show that the duty was owed to him and that it was a duty in respect of the kind of loss which he [had] suffered" (at 211).
These requirements were illustrated by the decision of the House of Lords in Caparo Industries Pty Ltd v Dickman [1990] 2 AC 605, where auditors, who had failed to take reasonable care in auditing the company's statutory accounts, were liable neither to an outside bidder nor to shareholders who had bought more shares in reliance on the accounts. While the shareholders were owed a duty of care, it was in their capacity as members of the company and not in their capacity as potential buyers of shares. Lord Hoffmann accepted that, in the case before their Lordships, a duty was owed to the lenders. The "real question [was] the kind of loss in respect in which the duty was owed" (at 212).
How was the scope of the duty to be determined?
"The scope of the duty, in the sense of the consequences for which the valuer is responsible, is that which the law regards as best giving effect to the express obligations assumed by the valuer: neither cutting them down so that the lender obtains less than he was reasonably entitled to expect, nor extending them so as to impose on the valuer a liability greater than he could reasonably have thought he was undertaking.” (at 212.)
Lord Hoffmann considered that rules making a wrongdoer liable for all the consequences of his or her wrongful conduct were "exceptional" and needed "to be justified by some special policy". Normally, the law limited liability
"to those consequences which are attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate." (at 213.)
His Lordship illustrated the difference between the ordinary principle and that adopted by the Court of Appeal by an example (at 213):
"A mountaineer about to undertake a difficult climb is concerned about the fitness of his knee. He goes to a doctor who negligently makes a superficial examination and pronounces the knee fit. The climber goes on the expedition, which he would not have undertaken if the doctor had told him the true state of his knee. He suffers an injury which is an entirely foreseeable consequence of mountaineering but has nothing to do with his knee.
On the Court of Appeal's principle, the doctor is responsible for the injury suffered by the mountaineer because it is damage which would not have occurred if he had been given correct information about his knee. He would not have gone on the expedition and would have suffered no injury. On what I have suggested is the more usual principle, the doctor is not liable. The injury has not been caused by the doctor's bad advice because it would have occurred even if the advice had been correct."
Lord Hoffmann went on to say (at 214) that
"the Court of Appeal's principle offends common sense because it makes the doctor responsible for consequences which, though in general terms foreseeable, do not appear to have a sufficient causal connection with the subject matter of the duty. The doctor was asked for information on only one of the considerations which might affect the safety of the mountaineer on the expedition. There seems no reason of policy which requires that the negligence of the doctor should require the transfer to him of all the foreseeable risks of the expedition.
I think that one can to some extent generalise the principle upon which this response depends. It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them.
The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong." [Emphasis in original.]
Lord Hoffmann considered that the principle that the adviser is responsible only for the consequences of the information being wrong was subject to certain exceptions. One exception was fraud, where the defendant is bound to make reparation for all the actual damages directly flowing from the fraudulent inducement (citing Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158, at 167, per Lord Denning MR).
His Lordship also observed (at 218) that the question of whether the lender has suffered a loss is not the same as the question of how one defines the kind of loss which falls within the scope of the duty of care. If the market moves downward after a lender advances money in reliance on a negligent over-valuation, it may result in a greater loss than is attributable to the valuer's error. Moreover, the distinction between a "no-transaction" and a "successful transaction" case was quite irrelevant to the scope of the duty of care. Every transaction induced by a negligent valuer was a "no-transaction case", in the sense that, ex hypothesi, the transaction which actually happened would not have taken place. Lord Hoffmann considered that the distinction between the two categories should therefore be abandoned (at 218).
Lord Hoffmann then applied the general approach to the facts of the cases before him. The position was illustrated by the second of the three cases the subject of appeals to the House of Lords, namely, United Bank of Kuwait Plc v Prudential Property Services Ltd. His Lordship's analysis (at 222) of that case was as follows:
"In United Bank of Kuwait Plc v Prudential Property Services Ltd, the lenders on 19 October 1990 advanced £1.75m on the security of a property valued by the defendants at £2.5m. The judge found that the correct value was between £1.8m and £1.85m. It was sold in February 1992 for £950,000. Gage J quantified the lenders' loss (including unpaid interest) at £1,309,876.46 and awarded this sum as damages.
In my view the damages should have been limited to the consequences of the valuation being wrong, which were that the lenders had £700,000 or £650,000 less security than they thought. The plaintiffs say that the situation produced by the overvaluation was not merely that they had less security but also that there was a greater risk of default. But the valuer was not asked to advise on the risk of default, which would depend upon a number of matters outside his knowledge, including the personal resources of the borrower. The greater risk of default, if such there was, is only another reason why the lender, if he had known the true facts, would not have entered into the particular transaction. But that does not affect the scope of the valuer's duty.
I would therefore allow the appeal and reduce the damages to the difference between the valuation and the correct value."
In the first of the three cases, South Australia Asset Management Corporation v York Montague Ltd, the lenders advanced £11 million on property valued at £15 million, but which the trial Judge found was actually worth £5 million. The property was sold for £2.477 million and the plaintiff's loss was quantified at £9.753 million (subject to a reduction for contributory negligence). Lord Hoffmann approached the matter this way (at 222):
"The consequence of the valuation being wrong was that the plaintiffs had £10m less security than they thought. If they had had this margin, they would have suffered no loss. The whole loss was therefore within the scope of the defendants' duty."
THE PRIMARY JUDGE'S REASONS
His Honour accepted that the whole of the loss suffered by MGICA was caused by the fall of the market after the making of the advance on 11 May 1990: Kenny & Good, at 365. He reached this conclusion because of his finding that, had the security been realised immediately following the making of the advance on 11 May 1990, the Property would have been sold for $4 million or, having regard to the falling market, for slightly less. In those circumstances PCL, and so MGICA, would have suffered no loss, since the advance was limited to $3.575 million: Ibid. It followed that the facts were similar to those of the appeal decided by the House of Lords in United Bank of Kuwait Plc v Prudential Property Services Ltd.
Before considering whether he would follow the decision of the House of Lords in Banque Bruxelles, his Honour referred to a number of authorities in Canada, the United Kingdom, Australia and New Zealand: : Kenny & Good, see 365-369. These included the following: Lowenburg, Harris & Co v Wolley (1895) 25 SCR 51 (S Ct Canada); Baxter v FW Gapp & Co; Kooragang Investments Pty Ltd v Richardson & Wrench Ltd, (Supreme Court of New South Wales, Rogers J, 4 July 1980, unreported), (aff'd: [1981] 2 NSWLR 1 (PC)); Trade Credits Ltd v Baillieu Knight Frank (NSW) Pty Ltd (1985) 12 NSWLR 670 (NSW SCt/Clark J); Duncan & Weller Pty Ltd v Mendelson [1989] VR 386 (FC); McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39 (CA). He considered that the Australian decisions seem to have accepted that the restitutionary approach to damages was applicable to a “no-transaction case”, including one in which part or whole of the loss suffered arises immediately from a fall in the market. However, these cases had pre-dated Banque Bruxelles and the precise issue he faced had not called for decision in them, Ibid, at 369.
The primary Judge analysed in some detail the reasoning in the speech of Lord Hoffmann in Banque Bruxelles: Kenny & Good, at 371-374. At the heart of that reasoning, as his Honour saw it, was the holding that it is never sufficient to ask simply whether A owes B a duty of care and that it is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless. The primary Judge expressed the view (at 371) that their Lordships had
"redefined the valuer's duty in a manner which purports to foreclose questions of causation, remoteness and measure of damages, which have, at least conventionally, been treated as distinct from the formulation of duty. In my opinion, the valuer's duty is a duty to exercise an appropriate level of care and skill in arriving at, and reporting, an opinion, as to market value which will be, after allowing for the degree of latitude called for by the nature of the subject matter and by the process and nature of valuation, safe to be relied on by the intending mortgagee or mortgage insurer."
He agreed with the Court of Appeal in Banque Bruxelles, that the starting point was to identify the legal wrong done and to inquire what the loss-sufferer's position would have been had the wrong not been done (in the case of tort, for example, had the tortious act or omission not occurred). In the case of breach of a contractual duty or tortious negligence
"if damages are not to be awarded in respect of a particular loss or class of loss `caused' by the contractual or tortious negligence, this result should be achieved by the application of principles which deny recovery where the particular loss or class of loss is considered `too remote', or is the result of what is regarded as a new intervening cause or as a claimant's failure to mitigate loss" (at 372).
His Honour pointed out that the House of Lords accepted that the suffering of loss or damage is a necessary element of tortious negligence: Kenny & Good, at 373. Their Lordships had accepted that this element could be satisfied by a loss which is exclusively attributable to a fall in the market: Bank of Kuwait Plc v Prudential Property Services Ltd was precisely such a case. In essence, therefore, their Lordships were limiting the extent of compensable losses by imposing a cap referable to the difference between the negligent valuation and the true value of the property. It was contrary to principle to limit recovery for a class of loss which is not too remote, on the ground that the precise course of events by which the loss was suffered or the extent of the loss suffered was not foreseeable.
His Honour also pointed out that, in a "pure fall of market tortious case" the cause of action accrues, not at the time the transaction is entered into by the mortgagee or a mortgage insurer, but at a later time: Kenny & Good, at 373-374. In such a case, the cause of action accrues when the security is realised or a claim is made on the insurer. His Honour considered that it was also contrary to principle that a cause of action should accrue after the transaction is entered into, by virtue of a loss being incurred which exceeds the extent of "wrongness" of the valuation, while the quantum of damages recoverable is calculable at the time the transaction is entered into: Ibid, at 374.
Finally, the primary Judge addressed the mountaineer illustration given by Lord Hoffmann. The injury to the mountain climber might have happened, for example, by reason of an avalanche or other circumstances having nothing to do with the soundness or otherwise of the climber's knee. In such a case the primary Judge expressed the view that the class of injury would simply be too remote from the range of losses which might foreseeably be suffered if the doctor examining the mountaineer's knee did not exercise due care and skill, to be the subject of an award of damages against the doctor. Thus a decision in favour of the lender did not mean that the climber in the hypothetical example would recover the losses flowing from the avalanche.
THE COMPETING SUBMISSIONS
The Valuers’ Contentions
The valuers submitted that the decision of the House of Lords in Banque Bruxelles is a persuasive authority, directly in point on the issue of whether, in a case of negligence by valuers, damages should include compensation for the loss attributable to a falling market. They contended that Banque Bruxelles is not inconsistent with any High Court authority and that the primary Judge's criticisms were inconsistent with the approach of the House of Lords in Caparo Industries v Dickman and Lord Denning's exposition of the duty of care in Candler v Crane Christmas & Co [1951] 2 KB 164 (CA). They pointed out that the decision in Caparo Industries v Dickman and Lord Denning's judgment in Candler v Crane Christmas & Co have been cited with approval by the High Court: see, for example, Gala v Preston (1991) 172 CLR 243, at 260, per Brennan J; Bryan v Moloney (1995) 182 CLR 609, at 654, per Brennan J; San Sebastian Pty Ltd v Minister Administering Environmental Planning and Assessment Act1979 (1986) 162 CLR 340, at 370, per Brennan J. To that list should be added Esanda Finance Corporation v Peat Marwick Hungerfords (1997) 142 ALR 750 (H Ct), decided on 18 March 1997, two months prior to the argument in the present case: see at 756-757, per Brennan CJ; at 762, per Dawson J; at 765, per Toohey and Guadron JJ; at 776-777, per McHugh J; at 796-797, per Gummow J.
The valuers supported the view expressed by Lord Hoffmann in Banque Bruxelles, that an applicant (or plaintiff) must show that not only is a duty owed to that party, but that it is a duty in respect of the kind of loss which that party has suffered. Mr Davies SC, who appeared with Ms Webster for the valuers, argued that, in essence, the primary Judge had applied the "but for" test of causation, which had been rejected by the High Court in March v E & M H Stramare Pty Ltd (1991) 171 CLR 506. There was no causal connection between Mr Kenny's negligent over-valuation and the fall in the market; the fall would have occurred in any event. There might have been such a connection if Mr Kenny had been asked to advise whether MGICA should have advanced the loan. But all he had done was to provide information to enable MGICA to decide upon a course of action.
Mr Davies acknowledged that, in Gates v City Mutual Life Assurance Society Limited (1986) 160 CLR 1, the High Court had said that the measure of damages in tort is appropriate in most, if not all, cases involving a claim for damages under s 82 of the TP Act: at 14, per Mason, Wilson and Dawson JJ. He also acknowledged that the High Court had said that the making of false representations was similar in character and effect to tortious conduct, "particularly fraudulent representation and negligent mis-statement": Gates v Mutual City Life, at 14. However, he submitted that, as Banque Bruxelles illustrated, there was a distinction between the approach generally taken in deceit cases (where the defendant had acted in a deliberately dishonest manner) and that taken in cases of negligent misstatement. The present case fell into the latter category.
In these circumstances, the proper measure of damages was the difference between the value placed on the land by Mr Kenny ($5.5 million) and its true value at that time, as determined by the primary Judge ($3.9 - $4.0 million). This was an appropriate figure, because MGICA had $1.5 - $1.6 million less security than it had thought.
MGICA’s Submissions
Subject to two factual qualifications, MGICA supported the general approach taken by the primary Judge. The first qualification was the following. At one point in his judgment, the primary Judge said that the valuers did not know of any lending or insuring margin which might operate: Kenny & Good, at 370. However, earlier in the judgment, his Honour had referred to Mr Kenny's report which recommended the Property "as a suitable security for investment of trust funds to the extent of 65 per cent of our valuation for a term of 3-5 years": Ibid, at 332. MGICA submitted that the inevitable inference from the report was that the appellants knew that MGICA was seeking to guard itself against a fall in the market by insuring a loan to 65 per cent of the then value of the Property.
Secondly, MGICA disputed his Honour's finding that the whole of its loss was attributable to a fall in the market. Mr Steele QC, who appeared with Mr White for MGICA, pointed out that his Honour had reached this finding on the basis that, if the Property had been sold immediately following the making of the advance on 11 May 1990, it would have been sold for slightly less than $4 million, a price sufficient to cover the advance made by PCL of $3.575 million: Kenny & Good, at 365. Mr Steele contended that this was immaterial, the Property could not have been realised by PCL or MGICA until after Beca had defaulted. (His Honour found (at 325) that Beca defaulted by failing, on 7 June 1991, to pay interest of $86,038 then due. PCL took possession of the Property on 2 July 1991.) Mr Steele submitted that, having regard to practical considerations, the Property could not have been realised earlier than the date it was sold, namely, 6 January 1992. Even if it had been sold at that date for its value as at April 1990 (on his Honour's findings (at 349) , about $3.95 million), MGICA would have suffered a loss of some $677,513 (the difference between the sum of $4,627,513, being unpaid principal and interest and other expenses, and the notional sale price of $3.95 million). Thus only part of MGICA's loss was attributable to the fall in the market.
MGICA submitted that the measure of compensatory damages in deceit is the same as that applicable to the tort of negligent mis-statement, with the possible exception that in negligent mis-statement the damages are limited to that which is reasonably foreseeable. The approach to the assessment of damages in Banque Bruxelles is inconsistent with the approach taken in cases such as L Shaddock & Associates Pty Ltd v Parramatta City Council (No.1) (1981) 150 CLR 225; South Australia v Johnson (1982) 42 ALR 161 and Gould v Vaggelas (1984) 157 CLR 215. The High Court had not contemplated that an additional element, namely, the requirement that damages be limited to the consequences of the valuation being wrong, should be introduced into the assessment of damages for negligent mis-statement, as distinct from the assessment of damages for deceit.
In any event, counsel said, even if Banque Bruxelles were a correct statement of the principles governing the assessment of damages in cases of negligent mis-statement, it did not apply to the assessment of damages under s 82 of the TP Act, or s 68 of the FT Act. The measure of damages in cases of deceit was the appropriate standard to apply in actions for damages under the statutory provisions. There was no basis for "capping" the liability of a valuer for misleading conduct by reference to the difference between the valuation of the property and the true value of the property at the time of the valuation. MGICA's loss was not the taking of inadequate security, but the liability to pay out under its insurance policy when the borrower (Beca) defaulted.
REASONING
The starting point adopted by Lord Hoffmann in his speech in Banque Bruxelles was not the measure of damages for the loss suffered by the lender, but identification of the kind of loss for which the valuer was liable. The lender had to show that he or she was owed a duty and that it was a duty in respect of the kind of loss suffered. The primary Judge's starting point, by contrast, was to identify the legal wrong done and to inquire what the loss-sufferer's position would have been if that wrong had not been done. His Honour considered that the question of what damages should be awarded was to be answered by reference to orthodox principles of causation, remoteness, and (if appropriate) failure to mitigate loss: Kenny & Good, at 371-372. As will be seen, we think that the differences between the two judgments have less to do with their starting points than with the different approaches to the scope of the duty owed by the valuer to the lender or mortgage insurer. Nonetheless, at the risk of stating the obvious, it is appropriate to recount the elements of both causes of action on which MGICA succeeded before the primary Judge.
The Cause of Action in Negligence
To succeed in a claim for damages founded on the negligence of the respondent (defendant), the applicant (plaintiff) must show that
•the respondent owed the applicant a duty, recognised by law, requiring the respondent to adhere to a certain standard of conduct;
• the respondent breached that duty;
• the applicant suffered loss;
• the loss was caused by the respondent's breach of duty; and
•the loss suffered by the applicant was not too remote - that is, on the principle laid down in Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co Ltd (The Wagon Mound) [1961] AC 388, the injury complained of was not only caused by the alleged negligence, but was also an injury of a class or character which was reasonably foreseeable as a possible result of the negligent act or omission.
See Richards v Victoria [1969] VR 136 (FC). Of course, as Professor Fleming points out, there is "functional similarity" between some elements of the cause of action, such as duty and remoteness: J G Fleming, The Law of Torts (8th ed 1992), p 104. Moreover, as cases such as The Wagon Mound,Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, Hill (t/as RF Hill & Associates) v Van Erp (1997) 142 ALR 687 (H Ct) demonstrate, the content of each of the elements is far from static.
Nonetheless, the elements of the cause of action provide a useful starting point, because of the importance attached by Lord Hoffmann in Banque Bruxelles to the mountaineering example. This example was said to illustrate the fallacy of awarding damages to a lender in a “no-transaction case”, for losses attributable to a fall in the market. However, on the orthodox principles to which we have referred, it is difficult to see why permitting a lender or insurer to recover the loss attributable to a fall in the market in a "no-transaction case” supports the conclusion that the mountaineer in Lord Hoffmann's example would recover damages against the doctor.
The mountaineer could succeed only if the loss he or she suffered was caused by the doctor's breach of duty. Causation is an issue of fact. The issue is not to be resolved by the application of a particular formula, such as the "but-for" test, but in accordance with commonsense and experience: March v Stramare, at 515-516, per Mason CJ; Medlin v State Government Insurance Commission (1995) 182 CLR 1, at 6, per Deane, Dawson, Toohey and Gaudron JJ. The "but-for" test, while retaining an important role as a negative criterion which will commonly exclude causation if not satisfied, is inadequate as a comprehensive positive test: Medlin, at 6. Reasonable foreseeability is not a test of causation. Rather, reasonable foreseeability marks the limits beyond which the wrongdoer will not be held responsible for damage resulting from the wrongful act: Chapman v Hearse (1961) 106 CLR 112, at 122; March v Stramare, at 510. There is no occasion to consider reasonable foreseeability unless and until it appears that the negligent act or omission has caused the damage complained of: Chapman v Hearse, at 122; Richards v Victoria, at 143. If, however, the class or character of damage suffered by the applicant was not the reasonably foreseeable consequence of the respondent's negligent act or omission, the respondent is not liable to the applicant: The Wagon Mound, at 425. If the applicant suffers both foreseeable and unforeseeable classes of loss, recovery is available only for the foreseeable class of loss: The Wagon Mound, at 425-426.
The requirement that there be a causal relationship between the breach of duty and the applicant's loss would seem to provide an answer, at least under Australian law, to the example raised by Lord Hoffmann in Banque Bruxelles. His Lordship considered that the approach of the Court of Appeal (which allowed for recovery of that portion of the loss suffered by the lender which was attributable to the fall in the market) rested on the proposition that the wrongdoer is liable for all the consequences of the wrongful conduct. This meant that the doctor in the mountaineering example given by Lord Hoffmann would be liable for the injuries suffered by the climber. This would be so even though the injuries sustained by the climber had nothing to do with the physical disability the doctor had negligently failed to diagnose, as where the climber was injured in an avalanche.
Lord Hoffmann appears to be suggesting that the Court of Appeal would have regarded the negligence of the doctor as causally related to the mountaineer's injuries regardless of the particular circumstances in which those injuries were sustained. It is not necessary for present purposes to consider whether this reading is what the Court of Appeal intended. Once it is accepted that the causation requirement is not satisfied by a simple "but for" test, the doctor in the mountaineering example would not be held liable for the injuries inflicted on the climber by an avalanche. In March v Stramare, Mason CJ (with whom Toohey and Gaudron JJ agreed) approved (at 516) a passage from the judgment of Windeyer J in Faulkner v Keffalinos (1970) 45 ALJR 80, at 86:
“But for the first accident, the [plaintiff] might still have been employed by the [defendants], and therefore not where he was when the second accident happened: but lawyers must eschew this kind of ‘but for’ or sine qua non reasoning about cause and consequence.”
In other words, if the only consequence of a respondent's negligence is that the applicant was present at the particular time and place at which an injury occurs, the negligence is not causally related to the injury. Thus, in the mountaineering example, the mere fact that the climber would not have undertaken the expedition but for the doctor's misdiagnosis, does not establish, of itself, that injuries sustained by the climber were caused by the doctor's negligence.
The Cause of Action Under the TP Act
An applicant claiming damages under s 82 of the TP Act, based on an infringement of s 52 of the TP Act, must show that:
•the respondent engaged in misleading or deceptive conduct, in contravention of s 52 of the TP Act;
• the applicant sustained loss or damage;
• the loss or damage was sustained "by" the contravening conduct (s 82(1)).
The same principles apply to ss 42 and 68 of the FT Act.
Damage is the gist of the statutory cause of action for which s 82(1) of the TP Act provides: Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514, at 525, per Mason CJ, Dawson, Gaudron and McHugh JJ. Section 82 of the TP Act is to be understood as taking up the common law practical or common-sense concept of causation as expounded in March v Stramare: Wardley v WA, at 525. Where the misleading conduct is constituted by misrepresentations, acts done by the representee in reliance upon the misrepresentations amount to a sufficient connection to satisfy the concept of causation: Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, at 348, per Mason CJ, Dawson, Toohey and Gaudron JJ.
Damages Under the TP Act: The Appropriate Measure
Since the primary Judge found that MGICA had made out all the elements of a cause of action based on s 82 of the TP Act (and s 68 of the FT Act), it is convenient first to consider the approach to the assessment of damages under s 82 of the TP Act. The High Court has said, on more than one occasion, that the rules for assessing damages in tort, and not those for assessing damages in contract, are appropriate guides in most, if not all, assessments of damages under s 82 of the TP Act: Gates v City Mutual Life, at 6-7, per Gibbs CJ; at 11-14, per Mason, Wilson and Dawson JJ; Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281, at 290, per curiam. The object of awarding damages in tort is to place the applicant in the position he or she would have been in had the tort not been committed: Gates v City Mutual Life, at 12, per Mason, Wilson and Dawson JJ; South Australia v Johnson (1982) 42 ALR 161, at 169-170 (the Court). It follows that, in general, damages under the TP Act are awarded on a "reliance" rather than an "expectation" basis: Gates v City Mutual Life, at 12. (The position may not be the same where relief is awarded under s 87 of the TP Act: see Akron Securities Ltd v Iliffe (1997) 143 ALR 457 (NSW CA). However, no issue under s 87 arises in the present proceedings.)
The High Court has also said that the principles governing the assessment of damages in deceit provide guidance in assessing damages under s 82 of the TP Act. In Gates v City Mutual Life, the joint judgment of Mason, Wilson and Dawson JJ illustrated the differences between the tortious and contractual measures of damage by reference (at 12) to the damages recoverable for a fraudulent misrepresentation inducing entry into a contract for the purchase of goods. In Kizbeau v W G & B, the judgment of the Court characterised (at 290) actions based on s 52 of the TP Act as "analogous to actions for torts". More particularly, the Court described (at 291) an action for damages for deceit for inducing a person to enter a contract of purchase as "closely analogous" to an action for damage for breach of s 52.
This is not to say that the measure of damages for the statutory cause of action for damages under the TP Act is necessarily the measure applicable in an action for deceit or, for that matter, for negligent mis-statement. This point was made by Mason CJ, Dawson, Gaudron and McHugh JJ in Wardley v WA (at 526):
"The measure of damages recoverable under s 82(1) can only be fully ascertained after a thorough analysis of those provisions in Pts IV and V of the Act for contravention of which the statutory cause of action may be maintained. But the common law measure of damages will in many cases be an appropriate guide, though it will always be necessary to look to the provisions of the Act with a view to ascertaining the existence of any relevant legislative intention. In a case such as the present, it may safely be assumed that the plaintiff is entitled to recover `a sum representing the prejudice or disadvantage [the plaintiff] has suffered in consequence of his altering his position under the inducement' [Toteff v Antonas (1952) 87 CLR 647, at 650] of the misleading conduct or ‘the actual damage directly flowing from' [South Australia v Johnson, at 170] that conduct, to take up and adapt well-known statements of the measure of damage applicable in an action of deceit. Whether the condition of foreseeability, applicable to claims for consequential damages in cases of negligent misrepresentation inducing the purchase of property [Ibid., at 170] would apply to a claim for consequential damages under s 82(1) is a question that may be put to one side for present purposes." [Some citations omitted.]
It is of some importance to appreciate the context in which those observations were made. Wardley v WA involved a limitations point arising under s 82(2) of the TP Act, which the High Court determined on the case pleaded by the respondent (the State of Western Australia). The pleaded case was that the appellants, which were merchant banks, had engaged in misleading and deceptive conduct. It was alleged that the appellants had misrepresented the extent of the net assets of Rothwells Ltd, thereby inducing the State to provide an indemnity to a lender which had advanced funds to Rothwells. The pleadings did not allege that the appellants had fraudulently misrepresented the position, although a case in deceit was pleaded against a principal of Rothwells: see State of Western Australia v Bond Corporation Holdings Ltd (1991) 28 FCR 68, at 71-76, where French J summarises the allegations in the amended statement of claim.
The Court in Wardley v WA thus accepted that the measure of damages in cases of deceit was a guide in the proceedings founded on ss 52 and 82 of the TP Act, even though the pleaded case did not allege fraud against the appellants. Of course, it is well established - and was well established by 1991 - that the intent of the representor is not relevant to a claim for damages for infringement of s 52 of the TP Act: Hornsby Building Information Centre Pty Ltd v Sydney Building Information Centre Ltd (1978) 140 CLR 216, at 228, per Stephen J; Global Sportsman Ltd v Mirror Newspapers Pty Ltd (1984) 2 FCR 82 (FCA/FC), at 88. Indeed, it is also well established that s 52 is not confined to conduct resulting from the respondent’s failure to take reasonable care: Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191, at 197, per Gibbs CJ. It follows that the High Court in Wardley v WA applied the measure of damage applicable in an action of deceit in circumstances where it was clear that liability under the TP Act did not depend on the intention of the representor, nor on any departure by the representor from standards of reasonable care.
The valuers submitted that the measure of damages in an action based on s 82 of the TP Act, or on s 68 of the FT Act should be that applicable to cases of negligent misrepresentation rather than deceit. (The submission assumed, incorrectly in our view, that the measure of damages in negligent misrepresentation would yield a different result in this case than the measure in deceit.) Mr Davies contended that it was inappropriate to apply the specially generous principles governing actions in deceit to cases in which the representations, although misleading, were made innocently. In our view, for the reasons we have given, this contention is inconsistent with the approach taken by the High Court in Wardley v WA.
In any event, there are sound policy reasons why the valuer’s submission should not be accepted. As we have said, a cause of action under s 82 of the TP Act does not depend on proof of intent or want of reasonable care. If the measure of damages in negligent misrepresentation and deceit were likely to produce different results in a given case brought under s 82 of the TP Act, it would be necessary to investigate whether, when the respondent made the relevant misrepresentations, he or she knew of their falsity or recklessly failed to consider whether or not they were true. Intention and knowledge of falsity would become issues for determination, even though neither formed a part of the elements of the cause of action under the TP Act. The time required to decide some otherwise straightforward cases would be likely to increase substantially, especially because of the complications that arise when allegations of dishonesty are made in civil litigation. (We do not mean to imply that the presence or absence of fraud can never be significant in relation to remedies under the TP Act. Fraud may be relevant, for example, to the exercise of the discretion conferred on the Court by s 87 of the TP Act: Munchies Management Pty Ltd v Belpario (1988) 58 FCR 274 (FCA/FC), at 288.)
We should add that, on the reasoning in Wardley v WA, even if it were thought to be appropriate to apply by analogy the measure of damages for negligent representation to claims under the TP Act, it would not assist the valuers in the present case. The joint judgment in Wardley v WA accepted that there was an unresolved question as to whether the condition of foreseeability, applicable to claims for consequential damages in cases of negligent misrepresentation inducing the purchase of property, applies to a claim for consequential damages under s 82 of the TP Act. But even if that condition applied in the present case, on the finding made by the primary Judge, MGICA’s losses attributable to a decline in values were reasonably foreseeable. His Honour specifically found that the valuers should reasonably have foreseen (and indeed did foresee) the possibility of a general decline in the property market: Kenny & Good, at 365.
The Measure of Damages in Deceit
The starting point for an analysis of the assessment of damages in deceit is often taken to be the judgment of Dixon J in Potts v Miller (1940) 64 CLR 282. The appellants in the present case relied on that judgment as showing that the approach taken by the House of Lords in Banque Bruxelles is consistent with the approach to be taken to the assessment of damages in an action based on deceit. In Potts v Miller, Dixon J referred to authority holding that, in an action for fraudulent misrepresentation inducing the representee to purchase shares, the proper measure of damages was the difference between the purchase money and a fair price for the shares at the time of purchase. His Honour said (at 297) that it appeared to be an "inflexible rule" that the fraudulent representor is to receive credit for the fair or real value of the shares at the time of purchase. Dixon J noted (at 298) that the reason given for the rule was that if, after the date of the purchase, the thing purchased loses value "owing to accidental or extrinsic causes, that loss is not the reasonable consequence of the inducement". His Honour continued (at 298-299):
“This reasoning makes it necessary to distinguish between the kinds of cause occasioning the deterioration or diminution in value. If the cause is inherent in the thing itself, then its existence should be taken into account in arriving at the real value of the shares or other things at the time of the purchase. If the cause be `independent', `extrinsic', `supervening' or `accidental', then the additional loss is not the consequence of the inducement. `If a man buys a horse, as a racehorse, on the false representation that it has won some great race, while in reality it is a horse of very inferior speed, and he pays ten or twenty times as much as the horse is worth, and after the buyer has got the animal home it dies of some latent disease inherent in its system at the time he bought it, he may claim the entire price he gave; the horse was by reason of the latent mischief worthless when he bought; but if it catches some disease and dies, the buyer cannot claim the entire value of the horse, which he is no longer in a condition to restore, but only the difference between the price he gave and the real value at the time he bought. [Twycross v Grant (1877) 2 CPD 469, at 544-545, per Cockburn CJ.]"
In assessing these remarks, it should be noted that Potts v Miller was a case in which the property purchased in alleged reliance upon the fraudulent misrepresentation (company shares) was readily marketable, but the plaintiff continued to hold the property for a long time after he discovered the facts. We do not think that Dixon J intended his words to be treated as applicable to all cases. In Smith New Court Securities Ltd v Citibank NA [1997] AC 254, a unanimous House of Lords rejected the notion that there was any strict and inflexible rule, in cases of fraudulent misrepresentation, that damages should be limited to the difference between the price paid for an asset and its true value at the date of purchase (see at 266, per Lord Browne-Wilkinson, at 284-285, per Lord Steyn). Lord Browne-Wilkinson (at 263) described Dixon J in Potts v Miller as "loyally applying the old inflexible rule [whilst being] plainly unhappy with it". Be that as it may, in Toteff v Antonas (1952) 87 CLR 647, another fraudulent misrepresentation case, Dixon J said (at 650) that in an action of deceit
"a plaintiff is entitled to recover as damages a sum representing the prejudice or disadvantage he has suffered in consequence of altering his position under the inducement of the fraudulent misrepresentations made by the defendant."
It was this passage to which the joint judgment in Wardley v WA referred, in stating the appropriate approach to the assessment of damages in that case: at 526. In Toteff v Antonas itself, the plaintiff was awarded the difference between the price paid for a business and the price for which it was sold some 14 months later, although the sale price seems to have been treated as the value of the business at the date of its acquisition.
That Potts v Miller does not lay down an inflexible rule is shown by the approach to the assessment of damages taken in Gould v Vaggelas. Gibbs CJ referred (at 220-221) to the usual rule, that the measure of damages is the difference between the amount paid by the representee and the true value of the asset acquired, as merely an application of the more general principle stated in Toteff v Antonas. His Honour said (at 221-222) that there was no inflexible rule that trading losses could not be recovered.
"There is no reason in principle why the defrauded purchaser should not recover damages for all the loss that flowed directly from the fraudulent inducement (unless, possibly, the loss was not foreseeable). If the purchaser, besides paying more for the business than it was worth, has suffered additional losses which resulted directly from the fraud he ought to be compensated for them. Of course, the court must be satisfied that the loss did result directly from the fraud and not from some supervening cause such as the folly, error or misfortune of the purchaser himself...".
This formulation recognises that the defrauded purchaser is not necessarily entitled to all losses flowing from the transaction he or she was induced to enter. It is not enough that the fraud caused the purchaser to enter the transaction and that the losses would not have been incurred but for the transaction. As Doyle CJ has recently remarked, the exclusion of losses from a "supervening cause" imposes a limiting factor on an otherwise wide test: Copping v ANZ McCaughan Ltd, (Full Court of S Ct (SA), 21 March 1997, unreported) at par 70. Examples of supervening causes include losses attributable to business ineptitude or unexpected competition: Kizbeau v W G & B Pty Ltd, at 291.
In Gould v Vaggelas a company purchased a tourist resort. The plaintiffs, although they were principals of the company, were not the purchasers, and the company was not a party to the litigation. Gibbs CJ said (at 223) that in such a case
"the measure of damages is the sum which represents the loss which the plaintiffs have suffered because they altered their position in reliance on the fraudulent misrepresentation."
The plaintiff's losses included the value of the property provided by them as part consideration for the purchase of the resort, and the amounts due under guarantees they provided in connection with the purchase.
Wilson J quoted (at 242), with approval, a passage from the judgment of the Court in South Australia v Johnson, at 169-170.
"The principle which underlines the award of damages in tort is, generally speaking, that of restitutio in integrum. The object is to restore the plaintiff to the position in which he would have been placed if the wrongful act had not been committed. The measure will vary as between deceit and negligence. In deceit, the plaintiff recovers the difference between the amount paid and the value of the property acquired, the object being to place him in a position equivalent to that which he would have occupied had the transaction not taken place. The defendant being guilty of a deliberate wrong, the damages will include the whole loss directly flowing from the fraudulent inducement because, as Lord Denning MR declared in Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 at 167, `it does not lie in the mouth of the fraudulent person to say that they could not reasonably have been foreseen'.
It is otherwise in cases of negligent misrepresentation. Although the wrongdoer is liable for the damage which flows directly from his wrongful act or omission, the plaintiff's damages are limited to that which was reasonably foreseeable. This limitation applies in accordance with the general principle in negligence."
(The last two sentences in the above extract from South v Johnson were not quoted by Wilson J, but we have added them to the extract.) Wilson J accepted (at 242) that consequential losses were compensable provided "they flowed directly from the fraudulent inducement". Doyle v Olby (Ironmongers) Ltd, where the defrauded purchaser carried on business for three years before selling it, was just such a case. See also Brennan J in Gould v Vaggelas, at 254-255.
Further assistance in relation to the assessment of damages in actions based on deceit is to be derived from the judgment of Doyle CJ in Copping v ANZ McCaughan. The appellants were borrowers of Swiss francs ("CHF") under a foreign currency loan. They had been induced to enter the transaction by a misrepresentation relating to the establishment of a sinking fund to provide what was thought to be a safeguard against some depreciation of the Australian dollar ("AUD"). The key finding made by the trial Judge was that the appellants would have borrowed in CHF even if the misrepresentations had not been made and therefore would have suffered the losses flowing from the subsequent decline in the AUD. The case was therefore similar to a "successful transaction case”. The question was whether, in an action founded on the Misrepresentation Act 1971 (SA) and on the principles of negligent misstatement, the appellants were entitled to recover their losses flowing from the fall in the AUD against the CHF.
Doyle CJ expressed the view that, in assessing damages, caution must be exercised in adopting or approving any single approach, designed to be suitable in all cases.
"It may be that one can do little more than attend to the basic underlying principle and then consider how that principle is appropriately applied in the particular circumstances of the case" (par 62).
Nonetheless, he approached the case on the assumption that damages under the Misrepresentation Act should be assessed by reference to the principles governing damages in deceit.
Taking that approach, Doyle CJ interpreted both the House of Lords decision in Smith New Court v Citibank and the principal Australian authorities as supporting, or at least being consistent with, the view that in a case involving misrepresentations, the loss claimed must be related to the misrepresentations on which the applicant’s claim is based. In his view, it is not sufficient that the loss is a consequence of the misrepresentation, in the sense that it would not have occurred but for the transaction induced by the representation. Doyle CJ accepted that the concept of losses "flowing directly from the fraudulent inducement is not a precise one": par 77. However, he considered that, on the findings of the trial Judge, the borrower had not been induced by the misrepresentations to borrow in CHF, but had been induced by them to enter into a particular transaction for the purpose of borrowing in CHF. The borrower's loss was not attributable to the misrepresentation which had been made, since the representation did not relate to the stability of the AUD. It would have been otherwise if the borrower would not have borrowed in CHF, but for the representation (para 85).
"The underlying distinction which is to be drawn is not a precise one. It seems to me to be directed to the consequences of the inducement, to the consequences of the change of position. It is sufficient if the relevant loss can be said to be caused by the representation, and it is not necessary to show that the loss is attributable to that which made the representation wrongful. In that sense the test is a relatively generous one, in that the misrepresenting party may have thrown upon it risks unrelated to the representation. But there is still the requirement that the loss flow from the representation and it seems to me to be impossible to conclude that it does so flow if one concludes that quite apart from the representation the [borrower] would have entered into a transaction bringing with it the very risk which eventuated in the relevant transaction and which can be seen as the cause of the loss which the [borrower] seeks to recover." (par 86.)
Damages Under the TP Act: General Principles
We share the caution expressed by Doyle CJ in laying down hard and fast rules for the assessment of damages, whether under the TP Act or otherwise. Care must be taken to examine the facts of the particular case and not to determine cases by placing them into preconceived categories. However, bearing that caution in mind, the authorities to which we have referred support several general propositions relevant to the present case.
•In assessing damages under s 82 of the TP Act, the principles applicable to actions for deceit, being closely analogous, provide a useful guide in most cases.
•In a case where something is purchased in consequence of a misrepresentation, the prima facie measure of damages is the difference between the price paid and the true value of the thing. But this is not an inflexible rule and is merely illustrative of a more general proposition, namely, that the purchaser is entitled to recover as damages, a sum representing the prejudice or disadvantage he has suffered in consequence of altering his position under the inducement of the respondent's misrepresentation. That general principle applies to other claims, such as those brought by lenders or mortgage insurers who have entered into transactions in reliance on false or misleading representations.
•A person induced to enter a transaction by misrepresentations, generally speaking, must show that the losses claimed are related to the misrepresentation. It is not enough simply to show that the transaction was induced by the representation and the losses would not have occurred but for the transaction. The loss must flow directly from the inducement.
•Where property acquired in a transaction induced by a misrepresentation subsequently declines in value, damages are not awarded in respect of that decline if it is attributable to an independent, extrinsic or supervening cause.
•If the applicant would have entered into the relevant transaction, even if the misrepresentation had not been made, any losses flowing from the transaction as such cannot be said to flow directly from the inducement. In such a case the applicant would have been exposed, in any event, to the precise risk that ultimately eventuated.
The Present Case
If the general principles governing the assessment of damages in deceit apply to the present case, as the observations in Wardley v WA suggest, it is necessary to consider what prejudice or disadvantage MGICA suffered in consequence of altering its position under the inducement provided by the valuers' misleading representations. It is also necessary to consider whether the losses claimed by MGICA are related to the representations made by the valuers. In considering these questions, the findings made by his Honour should be borne in mind. They include the following:
•The valuation report of 18 April 1990 and the letter of 13 February 1991 conveyed to MGICA representations that the valuations were the product of due care and skill and that, after making due allowance for their nature as expressions of opinion, they could safely be relied on by MGICA: Kenny & Good, at 356-357.
•The valuers knew that the valuation and letter would be used as the basis for a loan of trust funds for three to five years and for the provision of mortgage insurance in respect of that loan: Ibid, at 332.
•The valuation itself made an allowance for a general fall in the market from June 1989 to April 1990, thereby demonstrating that Mr Kenny was aware that the Property could decline in value; in any event a decline in the property market was foreseeable: Ibid, at 365.
•MGICA relied on the valuation to demonstrate that its loan to valuation ratio policy of 65 per cent was satisfied and that the Property offered a sufficient "margin" or "cushion" to safeguard it against loss that might be occasioned by Beca's default: Ibid, at 358.
•The valuation was the only substantial cause of MGICA entering into the mortgage insurance arrangement in respect of the Property: Ibid.
•Had the misrepresentations not been made, MGICA would not have provided mortgage insurance in respect of the Property: Ibid, at 363-364.
We should add that we agree with MGICA that the inevitable inference from the terms of the valuation is that the valuers were aware that MGICA had a policy of lending no more than 65 per cent of the value of a property and that this policy was designed, inter alia, to guard against a fall in the property market.
In these circumstances, it seems to us that the prejudice or disadvantage suffered by MGICA by reason of the misleading valuation extended to all its losses, including those attributable to the decline in the property market. We also think that MGICA's losses are sufficiently related to the representations made by the valuers. The very point of the representations contained in the valuation was to assure MGICA that it enjoyed a sufficient margin to take account of future eventualities. These included the foreseeable (and foreseen) risk that the Property would decline in value. The representation that MGICA could safety rely on the valuation induced MGICA to accept a risk that it would not have accepted had the representation not been made. It is true that the valuers made no representation as to the likelihood that Beca would default on its loan transaction with PCL. But MGICA would not have been exposed to any risk in consequence of that default had it not been induced to insure that transaction by the misrepresentations. Whether it would have been exposed to a similar risk or to a similar loss, under some other insurance commitment, had the misrepresentation not been made, is purely a matter of speculation and is immaterial. The present is not a case like Copping v ANZ McCaughan where, quite apart from the misrepresentations, the representee would have been exposed to the precise risk that ultimately caused loss. For MGICA to be liable on its indemnity, there had to be a default by Beca and a shortfall in the realisable value of the Property compared with the amount due under the mortgage. Those events may have occurred independently of any false representation by the valuers, but the valuers’ false representations were the critical factor in exposing MGICA to the risk of loss if they did occur.
It cannot be said that the losses sustained by MGICA arose from "sources supervening upon or extraneous to the...inducement": Kizbeau v W G & B, at 291. The valuers represented that it was safe to rely on their valuation, for the purpose of determining whether there was a sufficient margin or cushion to guard against risks, including a decline in the property market generally. The decline in the market which occurred was one of the events contemplated by the representations on which MGICA relied.
It follows that MGICA’s damages in respect of its cause of action under the TP Act (and the FT Act) are to be assessed in the manner adopted by the primary Judge. In particular, the primary Judge was correct to include in MGICA’s damages that portion of the loss attributable to the fall in value of the Property after MGICA entered into the mortgage insurance arrangement.
Damages For Negligent Misrepresentation
In view of our conclusion that MGICA is entitled to damages under the TP Act and FT Act in the sum awarded by the primary Judge, it is not strictly necessary to address the measure of MGICA’s damages in tort. However, we think it appropriate, if only briefly, to consider whether the measure of damages in tort leads to the same result. If the measure of damages in tort were to be different, it would create a potential difficulty for the assessment of damages in at least some cases in which the respondent’s course of conduct constitutes both a breach of duty owed to the applicant and a contravention of the TP Act or the FT Act.
The trial Judge criticised the approach taken by the House of Lords in Banque Bruxelles on the ground that their Lordships, in effect, redefined the duty of the valuers so as to foreclose questions of causation, remoteness and measure of damages, which have conventionally been treated as distinct from the formulation of duty: Kenny & Good, at 371. With great respect, we think that there is force in this criticism, which receives support, at least in Australia, from the approach to the assessment of damages for negligent representation taken by the High Court.
In L. Shaddock & Associates Pty Ltd v Parramatta City Council, a solicitor, acting on behalf of the purchasers of a property, obtained a certificate from the council responsible for the area in which the property was located. The certificate indicated that there were no road widening proposals. In fact, such proposals had been made. In reliance on the certificate, the purchasers proceeded to completion. The primary Judge found (see at 247) that, if the purchasers had become aware of the road widening proposal on receipt of the certificate, they would have exercised their contractual power of rescission.
All members of the High Court held that the council owed a duty of care to the purchasers and had breached that duty. Mason J, with whom Aickin J agreed, rejected an argument that, because the solicitor had not brought home to the council the purpose to which the information would be put, no duty of care arose (at 253):
“True it is that he did not state why the information was wanted or what action his clients proposed to take on the strength of it. But the existence of a duty of care does not depend upon knowledge on the part of the speaker of the precise use to which the information will be put. It is enough if he knows, or ought to know, that the inquirer is requesting it for a serious purpose, that he proposes to act upon it and that he may suffer loss if it proves to be inaccurate. These requirements were satisfied in the present case.”
See also at 236, per Gibbs CJ.
The Court addressed the question of damages. The damages awarded by the primary Judge had included the difference between the true value of the land, as affected by the road widening proposals, and the price paid by the purchasers. In addition, the primary Judge awarded consequential losses comprising, inter alia, rates and land tax. Mason J, with whom Gibbs CJ and Stephen J expressly agreed on this point, upheld the award. His Honour reasoned as follows (at 254-255):
“The primary judge considered that the appellants would have been entitled to recover all items of consequential damage up to the end of 1974 because until that time ‘they were exploring what could be done with the land and making efforts to salvage what they could from what was in fact a disastrous purchase’. His Honour found that the period up to the end of 1974 was a reasonable period.
The respondent is right in saying that the items were expenses to which the appellants would have been subject had the land been free from the road-widening proposal. However, this does not prevent the expenses from constituting recoverable damage. The judge found that, but for the negligent mis-statement, the appellants would not have bought the land, the land being useless for the purpose for which it was acquired. Consequently, the appellants’ loss includes, not merely the diminution in value of the land, but also the expenses of acquisition and retention for a reasonable time, expenses which would not have been incurred had the respondent not been negligent. It was not suggested that the items in question fell outside the boundary of foreseeability. The measure of recoverable damages for negligent mis-statement is the amount of money necessary to restore the plaintiff to the position he was in before the statement, subject to the loss being foreseeable. The test is somewhat different from that applied in deceit (Doyle v Olby (Ironmongers) Ltd [at 167], and breach of warranty.” [Footnote citation omitted.]
The facts of Shaddock are not the same as the present case. In that case there was no general fall in the property market following the purchasers’ acquisition of the relevant property. But Mason J applied what the primary Judge in the present case described as the “conventional approach” to the assessment of damages. The council’s duty of care arose regardless of whether it knew the precise use to which the information would be put. Damages were assessed by reference to the principle that the measure of damages is the compensation required to restore the plaintiff to the position he or she was in before the negligent misstatement was made. The Court did not suggest that the quantum of damages would be limited because the council’s duty related only to the provision of information, rather than the giving of advice about the proposed transaction. Nor was it suggested that damages should depend on determining which elements of the loss sustained by the purchasers were “attributable to the inaccuracy of the information” (compare Banque Bruxelles, at 216, per Lord Hoffmann).
We think that there are other difficulties, apart from Shaddock, in applying Banque Bruxelles to the circumstances of the present case. Perhaps the key to Lord Hoffmann’s analysis in Banque Bruxelles is the passage in which his Lordship states (at 214) that a person under a duty to take reasonable care to provide information on which someone else will decide a course of action “is responsible only for the consequences of the information being wrong”. The problem about this formulation, in our view, is that it tends to beg the critical question. What, relevantly, are the “consequences” of the information being wrong?
In the same passage, Lord Hoffmann observes that a
“duty of care which imposes on the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties.”
That observation seems unexceptionable, but in our view it supports recovery in a “no-transaction case”. In the present case, MGICA did not incur a loss until it became liable to indemnify PCL under the insurance arrangement. It incurred that loss only because it had been induced by the valuers’ negligent misrepresentation to enter into the transaction, and on terms that did not include its customary 35 per cent cushion.
MGICA certainly had not incurred any loss at the time it entered the insurance arrangement. As the trial Judge found, MGICA would not have entered into the insurance arrangement in respect of the Property had the negligent valuation not been made. There was no evidence as to what MGICA would have done had it not insured PCL in respect of its mortgage over the Property. MGICA may or may not have entered into a mortgage insurance arrangement in respect of another property, in lieu of the arrangement entered into with PCL. If MGICA had entered another arrangement, it is pure speculation as to whether it would have incurred the same or a similar loss as that ultimately incurred in respect of the Property. Of course, if MGICA did enter another mortgage insurance arrangement, it would have been exposed to the consequences of the general fall in the property market. But that fall would not necessarily have resulted in any loss. Whether it did so would depend on a variety of factors, including the sufficiency of the buffer of 35 per cent of the assessed value of the other mortgaged property to guard against a fall in value and other contingencies, and the effect of the general decline in values upon the particular property insured (bearing in mind that a decline in values does not necessarily affect all properties uniformly). In short, it cannot be assumed that MGICA would have incurred losses even if the information provided by the valuers had been correct. It is therefore difficult to see how Lord Hoffmann’s reasoning can be applied to this case.
A further important element in Lord Hoffmann’s reasoning is his reliance on Caparo Industries v Dickman to support the proposition that the kind of damage within the scope of the valuer’s duty of care is limited to the “consequences of the valuation being wrong”, namely, the difference between the value of the security the lenders or insurers thought they had and the value they actually had. Yet it is difficult, with respect, to see how Caparo Industries v Dickman supports limiting the damages of the lenders or insurers in this way.
In Caparo Industries v Dickman, there was no dispute that the auditors owed a duty to the company which had engaged them to carry out an audit and prepare a report, as requested by statute. The question was whether the auditors owed a duty of care to shareholders, who claim to have relied on the accounts when purchasing additional shares in the company. The case was argued on the pleadings, which alleged that the auditors had prepared the accounts and report negligently. Lord Bridge, with whose speech Lords Roskill and Ackner expressed agreement (they also expressed agreement with the speeches of Lords Oliver and Jauncey), analysed a series of cases that had considered the circumstances in which a duty of care to avoid economic loss arises. Lord Bridge concluded his analysis (at 620-621) as follows:
“The salient feature of all these cases is that the defendant giving advice or information was fully aware of the nature of the transaction which the plaintiff had in contemplation, knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation. In these circumstances the defendant could clearly be expected, subject always to the effect of any disclaimer of responsibility, specifically to anticipate that the plaintiff would rely on the advice or information given by the defendant for the very purpose for which he did in the event rely on it. So also the plaintiff, subject again to the effect of any disclaimer, would in that situation reasonably suppose that he was entitled to rely on the advice or information communicated to him for the very purpose for which he required it. The situation is entirely different where a statement is put into more or less general circulation and may foreseeably be relied on by strangers to the maker of the statement for any one of a variety of different purposes which the maker of the statement has no specific reason to anticipate. To hold the maker of the statement to be under a duty of care in respect of the accuracy of the statement to all and sundry for any purpose for which they may choose to rely on it is not only to subject him, in the classic words of Cardozo CJ to ‘liability in an indeterminate amount for an indeterminate time to an indeterminate class”: see Ultramares Corporation v Touche (1931) 174 N.E. 441, 444; it is also to confer on the world at large a quite unwarranted entitlement to appropriate for their own purposes the benefit of the expert knowledge or professional expertise attributed to the maker of the statement.”
It was this analysis (quoted with approval by Brennan CJ in Esanda Finance v Peat Marwick Hungerfords, at 756) that led Lord Bridge to hold (at 623) that auditors of a public company’s accounts would owe no duty of care to members of the public at large who rely on the accounts in deciding to buy shares in the company. A shareholder deciding to buy additional shares would be engaging in a “wholly independent transaction having no connection with the existing shareholding” (at 626-627). Such a shareholder is then in no different position from a member of the public deciding to buy shares in the company.
At the conclusion of Lord Bridge’s speech, he made a comment which was later cited by Lord Hoffmann in Banque Bruxelles (at 212). The comment made by Lord Bridge was this (at 627):
“It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless.”
It is of some importance to note that this comment was made in the context of deciding whether the auditors owed any duty of care, in that capacity, to shareholders contemplating the purchase of additional shares in the company. It was not directed to the measure of damages in a case where a person giving advice or information admittedly owes a duty of care to the representee to avoid the infliction of economic loss, including some loss which is conceded to be compensable.
Clearly, Lord Bridge would have regarded the valuers in the present case as owing a duty of care to MGICA to avoid the infliction of economic loss, since the circumstances satisfy the test specified in the portion of Lord Bridge’s judgment extracted above. As the valuers in the present case conceded (in line with the approach taken by the House of Lords in Banque Bruxelles on the appeal relating to Bank of Kuwait v Prudential Property), MGICA is entitled to damages for economic loss. Whether in a case of this kind, damages should be capped in the manner discussed in Banque Bruxelles was not in our view an issue addressed in Caparo Industries v Dickman. Nor was it addressed by the High Court in Esanda v Peat Marwick Hungerfords.
We referred earlier to the relevant findings of the trial Judge. Whatever the position in other cases, the valuers in this case were aware that the property market had declined and could decline further, and that MGICA had adopted a loan to valuation ratio of 65 per cent for the Property, in part in order to safeguard against a subsequent fall in its value. They knew that the decision by MGICA to expose itself to the risks associated with the mortgage insurance in respect of the Property, including a subsequent fall in its value, would be based on the valuation. As Shaddock shows, the measure of damages is the amount of money necessary to restore MGICA to the position it was in before the statement was made, subject to the loss being foreseeable. In the circumstances described, there being no issue that the loss attributable to the fall in value of the Property was foreseeable, the damages should compensate for the whole of MGICA’s loan, including that portion attributable to the fall in the property market.
It follows that we think that the trial Judge’s assessment of the damages to be awarded for breach of the valuers’ duty of care was correct.
CONCLUSION
The appeal should be dismissed, with costs.
I certify that this and the preceding twenty eight (28) pages are a true copy of the Reasons for Judgment herein of the Court.
Associate:
Dated: 8 August, 1997
Counsel for the Applicant: Mr D. Davies SC and Ms C. Webster Solicitor for the Applicant: Colin Biggers & Paisley Counsel for the Respondent: Mr J.J. Steele QC and Mr R.W. White Solicitor for the Respondent: Hickson Lakeman & Holcombe Date of Hearing: 26 May 1997 Date of Judgment: 8 August 1997
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