Molinara v Perre Bros Lock 4 Pty Ltd
[2014] SASCFC 115
•30 October 2014
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court: Civil)
MOLINARA v PERRE BROS LOCK 4 PTY LTD
[2014] SASCFC 115
Judgment of The Full Court
(The Honourable Chief Justice Kourakis, The Honourable Justice Nicholson and The Honourable Justice Parker)
30 October 2014
APPEAL AND NEW TRIAL - APPEAL - GENERAL PRINCIPLES - INTERFERENCE WITH JUDGE'S FINDINGS OF FACT - PROOF AND EVIDENCE
APPEAL AND NEW TRIAL - NEW TRIAL - IN GENERAL AND PARTICULAR GROUNDS - PARTICULAR GROUNDS - EXCESSIVE OR INADEQUATE DAMAGES - EXCESSIVE DAMAGES
TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION - CONSUMER PROTECTION - MISLEADING OR DECEPTIVE CONDUCT OR FALSE REPRESENTATIONS - CHARACTER OR ATTRIBUTES OF CONDUCT OR REPRESENTATION - SILENCE AND NON-DISCLOSURE
TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION - ENFORCEMENT AND REMEDIES - ACTIONS FOR DAMAGES - ASSESSMENT OR AVAILABILITY OF DAMAGES - BASIS UPON WHICH DAMAGES ASSESSED
In 2003 the respondent entered into an agreement to lend money to First Pacific Capital Pty Ltd (First Pacific Capital) providing finance in the amount of $125,000 for a term of one year. The appellant was a principal of First Pacific Capital. The loan continued to roll over each year, and in 2006 the appellant negotiated a further extension of the loan. In 2007, First Pacific Capital defaulted on the loan and within three months the company was deregistered. The respondent brought proceedings in the District Court claiming damages, pursuant to ss 12CA(1) and 12DA(1) of the Australian Securities and Investment Commission Act 2001 (Cth) (the ASIC Act), for misrepresentations made by the appellant. It was found by the Judge that the appellant misrepresented the financial position of First Pacific Capital in the course of negotiating the loan extension in 2006, and that but for those misrepresentations the loan capital would have been successfully recovered by the respondent taking legal proceedings against First Pacific Capital. Judgment was given in the sum of $112,500 being the whole of the unpaid principal of the loan.
The appellant appeals against the Judge’s finding that the respondent would have successfully recovered its loan capital but for the misrepresentations on the following grounds; that the failure of the respondent to commence legal proceedings against First Pacific Capital after its default in 2007 show that it would not have brought legal proceedings even if the misrepresentations had not been made, and that the respondent failed to prove that First Pacific Capital had a capacity to meet any demand or judgment which the respondent might have obtained had it brought proceedings.
Held by Nicholson J (Parker J agreeing) allowing the appeal in part:
The Judge’s finding that the respondent would have recovered the loan principal in full had it sought recovery in November 2006 in lieu of entering into a further extension of the loan agreement was not supported by the evidence before the Court.
Taking the evidence as a whole and after considering all relevant contingencies, the value of the respondent’s lost opportunity to recover the loan in and after November 2006 was no more than 40 per cent of the face value of the loan ($50,000). That opportunity had become worthless by the time the loan fell due in June 2007.
Having regard to the amount of $12,500 already paid by the appellant, the respondent is entitled to an award of damages in the amount of $37,500. The appeal is allowed to that extent.
Held by Kourakis CJ (dissenting):
The Judge was in the best position to evaluate the credibility and reliability of the testimony. The failure to proceed against First Pacific Capital, once it was discovered that the appellant had broken his word, does not render the Judge’s findings glaringly improbable (at [31]).
The loss of the 2006 debt is compensable pursuant to s12GF(1) of the ASIC Act and in accordance with the approach taken by Brennan J in Johnson v Perez and Falkingham v Hoffmans (A firm) (at [45]).
Absent any material evidence to counter the inference that First Pacific Capital and its principals had good reason and recourse from which to satisfy a demand for repayment of the loan, on the balance of probabilities, the respondent’s demand would have been satisfied (at [58]).
Australian Securities and Investment Commission Act 2001 (Cth) s12CA, s12DA, s12GF, referred to.
Adelaide Petroleum NL v Poseidon Ltd (1990) 98 ALR 431; Sellars v Adelaide Petroleum NL (1992-1994) 179 CLR 332; Falkingham v Hoffmans (A firm) [2014] WASCA 140; Perre Bros Lock 4 Pty Ltd v Molinara [2013] SADC 116; Payne v Parker [1976] 1 NSWLR 191; Johnson v Perez (1988) 166 CLR 351; Tabet v Gett (2010) 240 CLR 537; Malec v JC Hutton Pty Ltd (1990) 169 CLR 638, discussed.
Hungerfords v Walker (1989) 171 CLR 125; Poseidon Ltd v Adelaide Petroleum NL (1991) 105 ALR 25; Blatch v Archer (1774) 1 Cowp 63, 98 ER 969; Jones v Dunkel (1959) 101 CLR 298; O’Donnell v Reichard [1975] VR 916; Spence v Demasi (1988) 48 SASR 536; Frederick v State of South Australia (2006) 94 SASR 545; Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281; Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388; Kenny & Good Pty Ltd v MGICA (1992) Limited (1999) 199 CLR 413; Henville v Walker (2001) 206 CLR 459; I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109; Chaplin v Hicks [1911] 2 KB 786; Howe v Teefy (1927) SR (NSW) 301, considered.
WORDS AND PHRASES CONSIDERED/DEFINED
"misrepresentation"
MOLINARA v PERRE BROS LOCK 4 PTY LTD
[2014] SASCFC 115Full Court: Kourakis CJ, Nicholson and Parker JJ
KOURAKIS CJ.
In June 2003 the respondent, Perre Bros Lock 4 Pty Ltd (Lock 4), loaned First Pacific Capital Pty Ltd (First Pacific Capital) $125,000 for a term of one year (the Lock 4 loan). The Lock 4 loan was rolled over from year to year thereafter. In about November 2006 the principals of First Pacific Capital, the appellant Mr Molinara and his co-director Mr Sandercock, negotiated a further extension of the Lock 4 loan with Mr Frank Perre and his parents, to whom I shall refer collectively as the Perres. It is accepted that the Perres were acting as the agents of Lock 4. On 16 June 2007, First Pacific Capital defaulted on the loan, and within six months of the default, was deregistered. Lock 4 never brought proceedings against First Pacific Capital but eventually brought the proceedings, the subject of this appeal, against Mr Molinara, claiming damages pursuant to ss 12CA(1) and 12DA(1) of the Australian Securities and Investment Commission Act 2001 (Cth) (the ASIC Act) for misrepresentations he made in the course of negotiating the loan extension. Lock 4 limited its claim to the unpaid principal, which at the time of judgment was $112,500. Lock 4 did not make a claim for interest.
The Judge found that Mr Molinara misrepresented, in several ways, the financial position of First Pacific Capital to the Perres and that Lock 4, through the Perres, agreed to renew the Lock 4 loan on the strength of his misrepresentations. Those findings are not challenged. The Judge found that but for the misrepresentations Lock 4 would have successfully recovered the loan capital by taking legal proceedings against First Pacific Capital. It is that finding which the appellant challenges on this appeal.
Even though Mr Frank Perre was unaware of First Pacific Capital’s demise, Lock 4 never attempted to bring legal proceedings against it. Instead, Mr Perre used other means to pressure Mr Molinara to make good First Pacific Capital’s default. Indeed, Mr Molinara did eventually pay an amount of $12,500 to Lock 4. When no further payment was made Lock 4 eventually brought the action against Mr Molinara for misrepresentation which the Judge decided in its favour. Mr Molinara appeals against the Judge’s finding that Lock 4 would have successfully recovered its loan capital but for the misrepresentations on the grounds that:
(a)the failure of Lock 4 to commence legal proceedings against First Pacific Capital after its default in 2007 shows that it would not have brought legal proceedings to recover its loan in 2006 even if the misrepresentation had not been made and the loan not renewed and;
(b)Lock 4 failed to prove that First Pacific Capital had a capacity to meet any demand or judgment which Lock 4 might have obtained if it had brought proceedings.
I would dismiss the appeal. I am not persuaded that the Judge’s factual findings were wrong. My reasons follow.
The Evidence
Mr Molinara gave evidence that the business of First Pacific Capital was to make secured loans to property developers. He explained that the security included first and second mortgages and caveats. According to Mr Molinara, as at the beginning of 2006 First Pacific Capital had borrowed about $3 million from private individuals and entities, like Lock 4, which it then on-lent to property developers. Amongst lenders to First Pacific Capital were members of Mr Molinara’s extended family who, together, had loaned First Pacific Capital $500,000.
Mr Molinara claimed that many of the loans made by First Pacific Capital were successful, but that in late 2005 two substantial borrowers, a developer in Queensland and another in Melbourne, defaulted. Even though First Pacific Capital took recovery action against them Mr Molinara testified that the defaults “completely dried up our liquidity”. Mr Molinara explained that First Pacific Capital attempted to meet its obligations to its creditors with little or no income coming into the company:
We did our very best to pay the interest on the outstanding loans. Many of those loans – or those interest payments were made. Many were paid. Many we had entered into arrangements to suspend payments for a period of time to allow us time to try to recover the debt. We were also trying to fund our legal costs in the recovery action. So our liquidity was critical at that time.
Mr Molinara testified that one of the developers which borrowed from First Pacific Capital was a related company, First Pacific Property Development Pty Ltd (FPP Development). First Pacific Capital had loaned FPP Development $200,000 as “seed capital”. FPP Development undertook three property developments in the greater Adelaide metropolitan area. Mr Sandercock was a director of FPP Development and both Mr Molinara and Mr Sandercock were shareholders of that company. Even though Mr Molinara was not certain, he testified that the loan to FPP Development had been repaid before the Lock 4 loan was extended in 2006.
Mr Molinara testified that he and Mr Sandercock came to a private agreement in 2006 to use the profits of FPP Development to pay First Pacific Capital’s creditors:
We had agreed that we would use the profits and the funds from First Pacific Property Development to repay monies back into First Pacific Capital. We would personally forego any profits or we would – and our own particular loans to that company in an effort to satisfy any outstanding liabilities of First Pacific Capital.
It is implicit in that answer and given that Mr Molinara was a shareholder of FPP Development that he held an interest of some kind in the profits it was hoped it would generate.
The 2006 extension of the Lock 4 loan agreement was negotiated in an office in Franklin Street. The Judge found, in accordance with Mr Molinara’s evidence, that on 18 September 2006 First Pacific Capital was evicted from offices which it had leased in Hutt Street and that it commenced to operate from the office in Franklin Street on 1 November 2006 shortly before the meeting (the November meeting).
Mr Frank Perre testified that in the course of the November meeting Mr Molinara gave him the following assurance:
He assured us that he had a number of projects that he had about some in Adelaide and some in Queensland I think it was and when those projects were completed that then they’ll be in a position to pay us interest and principal.
Mr Perre went on to testify that Mr Molinara told himself and his parents that the Lock 4 loan capital was tied up in projects but that “they” would be able to repay the loan in twelve months when the projects were completed.
Mr Perre testified that had he not received those assurances he would not have caused Lock 4 to renew the loans and would have told his parents “to seek legal advice and to recoup the money”.
Mr Perre’s mother testified that in the course of the November meeting Mr Molinara referred to the building developments in Adelaide and in Queensland. She also testified that Mr Molinara assured her that the Lock 4 loan capital was safe and that if he were given an opportunity to finish the building developments the Lock 4 loan would be repaid before the end of the year. Mrs Perre denied that Mr Molinara had said anything about Queensland borrowers defaulting. Mrs Perre testified that had she not received the assurances from Mr Molinara she would have caused legal action to be taken against First Pacific Capital to recover the debt.
Mr Molinara testified that he resigned as a director of First Pacific Capital in August 2006 because he and Mr Sandercock had decided to pursue different business opportunities. He testified that he attended the meeting with the Perres even though he was not, at that time, a director because he had a close relationship with the Perre family. Despite that personal explanation for his presence Mr Molinara signed the 2006 loan agreement as a director of First Pacific Capital.
Mr Molinara testified that in the November meeting he and Mr Sandercock explained that First Pacific Capital was not in a position to make any interest payments or to repay the loan. Mr Molinara testified that he told the Perres that there had been defaults on interstate loans, and continued as follows:
I explained to the Perres that we had an alternative strategy in the event that we weren’t able to recover any funds from the two large loans that we had provided in Queensland and in Melbourne. That strategy involved the completion of the projects that the related company was working on. It provided that if the project was successful and we were able to successfully realise the – realise – sell the properties, we believe that we would be in a position to repay funds to the benefit of all stakeholders in FPC.
Mr Molinara agreed that he represented to the Perres that First Pacific Capital was an investor in property development projects which were in the process of being completed and that First Pacific Capital expected to receive a return on its investments in those projects. Mr Molinara claimed that he told the Perres that on the successful completion and sale of First Pacific Property Development building projects “funds would then be returned to First Pacific Capital to meet its obligation to its investors”. He told them that the money would be returned in about twelve months.
Mr Molinara was asked in cross-examination:
QDid you say words to that effect, to the Perres, that you expected to receive a return on the investments.
AI don’t remember using those words no, but if that’s the impression that they got then I can’t deny that.
Mr Molinara testified that at the time he believed the representations to be true.
The Judge accepted the testimony of Mr Frank Perre and his mother over the testimony of Mr Molinara on all disputed questions of fact as to what was said in the November meeting.
Mr Molinara testified that in 2006, First Pacific Capital was not in a position to repay on demand the Lock 4 loan funds or any of the other loans made to it. Mr Molinara’s evidence was that First Pacific Capital had not recovered any of the loans it had made to developers, despite the security it had taken. Mr Molinara gave the following evidence as to the financial capacity of First Pacific Capital to repay the Lock 4 loan:
QYou are not suggesting, are you, that at the time of the end of the third loan agreement First Pacific Capital didn’t have assets that it could have called on, realised or sold that would have realised $125,000. You are not suggesting that, are you.
AI am suggesting it didn’t have the ability to repay that loan at a particular time. First Pacific Capital’s assets were loans which it had advanced to third parties and was in the process of recovering those loans.
Mr Molinara testified that First Pacific Capital had been served with two statutory demands in 2006 but that they were not for substantial amounts. He paid one of the demands, in the sum of about $20,000 from his own financial resources. Mr Molinara also testified that an application to wind up the company, notice of which is recorded on the ASIC register on 26 June 2006, related to a claim by a graphic designer for an amount of $10,000 which was eventually settled for an amount of $8,000.
Mr Molinara gave evidence that the projects of FPP Development did not come to a successful fruition because his fellow director, Mr Sandercock, was “involved with people that he shouldn’t have been involved in”. Mr Molinara claimed that in 2007 he discovered that Mr Sandercock had misappropriated funds from FPP Development and as a result there were insufficient funds to complete the projects. The mortgagees took possession and exercised their power of sale but the proceeds of sale were less than the amounts secured.
Despite the default, Lock 4 did not institute proceedings against First Pacific Capital. Mr Molinara gave evidence that he was visited by a person claiming to act for the Perres who demanded repayment of the Lock 4 loan in a menacing way. Mr Frank Perre denied any knowledge of that demand but agreed that he did contact the producer of a television current affair program in an attempt to embarrass Mr Molinara into making a repayment. The Judge declined to make any finding on that evidence:[1]
There was countervailing evidence as to what might be called informal debt recovery communications between Frank Perre and the defendant. I am unable to decide the truth in relation to the defendant’s allegations in that regard, and do not consider it necessary to do so to resolve the issues in this action.
[1] Perre Bros Lock 4 Pty Ltd v Molinara [2013] SADC 116 at [93].
Be that as it may, on 5 June 2007 Mr Molinara’s wife sent Lock 4 a cheque in the sum of $2,500. Mr Molinara sent a bank cheque in the sum of $10,000 to Lock 4 on 9 July 2009. No other repayment has been made.
Mr Perre first instructed solicitors in December 2010 and they instituted the action against Mr Molinara which is the subject of this appeal in May 2012.
Mr Molinara did not produce any of the financial records of First Pacific Capital in the course of the action. Mr Molinara testified that he had sought the documents from the First Pacific Capital accountants shortly before the hearing in the District Court, but was told that they had been destroyed. Nor did Mr Molinara produce any documentary evidence concerning the alleged recovery actions against the borrowers in Queensland and Victoria. No Lands Titles Office records evidencing the mortgages by which the loans made by First Pacific Capital were secured were produced.
Mr Molinara gave the following evidence about his failure to retain First Pacific Capitals financial statements and his inability to remember the state of its finances:
QThe specific question I put to you is in relation to the 05/06 financial statements of First Pacific Capital. And I took your answer to be that you had at one time received them; correct.
AI believe so.
QWhen do you say that financial year’s records were no longer in your possession.
AI can’t say. I just don’t have a copy of it.
QLet me ask you what you recall then. As at June 2006 what do you recall First Pacific Capital’s assets as being, can you remember.
ANo.
QYou can’t remember at all.
AIt was seven years ago. I don’t remember the balance sheet of the company, it was seven years ago. No.
QCan you remember whether the amounts of assets exceeded the amount of all liabilities of the company.
AI only remember in 2005/2006 – actually the financial statements would have been prepared but I don’t recall the financial situation of the company at that particular –
Mr Molinara did not adduce any evidence of his personal financial resources or of his capacity to raise loans from members of his family in 2006.
The Findings
The Judge made the following findings, which are not challenged on this appeal, as to the misrepresentations which Mr Molinara made to the Perres:
·that First Pacific Capital was not in a precarious financial position (by failing to disclose its eviction and name change);
·that First Pacific Capital had a direct interest in property developments;
·that Mr Molinara was still a director of First Pacific Capital.
The Judge found that but for the misrepresentations Lock 4 would have brought an action to recover its loan from First Pacific Property, and that such an action would have had reasonable prospects of success. The Judge also found that there was a reasonable prospect that had a legal demand been made it would have been met. His Honour gave judgment in the sum of $112,500 being the whole of the unpaid principal of the loan.
Discussion
I deal first with the challenge to the Judge’s finding that Lock 4 would have brought an action against First Pacific Capital in 2006 to recover its loan. Mr Perre and his mother testified to that effect. The Judge was of course in a better position to evaluate the credibility and reliability of the testimony of Mr Perre and his mother than this Court. However, Mr Molinara contends that the Judge’s finding is glaringly improbable given the failure of Lock 4 to make any attempt to recover against First Pacific Capital after its default in September 2007. That submission fails to have proper regard to the very effect of the misrepresentations. It is understandable, given Mr Molinara having personally assured the Perres, as a family friend, that First Pacific Capital was in a sound financial position and that the loan to Lock 4 would be repaid within the year, that the Perres, and as a result Lock 4, focussed on Mr Molinara’s personal failure to honour his word. The appellant’s submission has force but it goes to a factual dispute which the Judge was in the best position to determine. Having regard to the ways of human affairs, in circumstances such as this, the failure to proceed against First Pacific Capital when it was discovered that Mr Molinara had broken his word does not render the Judge’s finding glaringly improbable. I would dismiss that ground of appeal.
I turn to the second ground which impugns the finding that legal action taken in 2006 would have successfully recovered the principal of the Lock 4 loan.
On this question it is first necessary to identify the loss suffered as a result of the misrepresentation. At the time of the November meeting Lock 4 held a right in property in the form of a chose in action (the 2006 debt) against First Pacific Capital to recover the principal of the Lock 4 loan in the sum of $125,000. By reason of the misrepresentation, Lock 4 gave up the 2006 debt by renewing the Lock 4 loan for a further year and deferring its right to claim the principal until September 2007 (the deferred right).
The remedy provided for a breach of ss 12CA and 12DA of the ASIC Act is found in s 12GF(1) of that Act which provides:
A person who suffers loss or damage by conduct of another person that contravenes a provision of Subdivision C (sections 12CA to 12CC) or Subdivision D (sections 12DA to 12DN) may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.
In Kizbeau Pty Ltd v WG & B Pty Ltd,[2] concerning a claim made pursuant to s 52 of the Trade Practices Act 1974 (Cth), the High Court held that:[3]
the proper measure of damages is the difference between the real value of the thing acquired as at the date of acquisition and the price paid for it.
[2] (1995) 184 CLR 281.
[3] Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281 at 291.
The same measure is applicable to s 12GF ASIC Act. In this case it calls for a differential valuation of the 2006 debt and the deferred right. The cases of Murphy v Overton Investments Pty Ltd,[4] Kenny & Good Pty Ltd v MGICA (1992) Limited,[5] Henville v Walker[6] and I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd[7] do not, relevantly to this case, qualify that principle. Those cases establish that in statutory actions for misrepresentation, with remedial provisions in the form of s 12GF ASIC Act, the defendant is liable for all of the loss materially contributed to by his misrepresentation. However, the liability does not extend to losses which would have been suffered even if the misrepresentation had not been made.[8]
[4] (2004) 216 CLR 388.
[5] (1999) 199 CLR 413.
[6] (2001) 206 CLR 459.
[7] (2002) 210 CLR 109.
[8] Murphy v Overton Investments Pty Ltd (2004) 216 CLR 388 at [66], Kenny & Good Pty Ltd v MGICA (1992) Limited (1999) 199 CLR 413 at [25]-[26] per Gaudron at [119] per Kirby and Callinan JJ. I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 at [62] per Gaudron, Gummow and Hayne JJ.
Applying the principle stated in Kizbeau, if the 2006 debt and the deferred right were “things” for the purpose of that statement and if the value of the deferred right was less than the value of the 2006 debt, then Lock 4 has sustained a compensable loss as a result of Mr Molinara’s misrepresentations.
The chose in action underlying the 2006 debt is a “chance”, the loss of which may sound in damages. The loss of a chance to make a gain is a detriment that can be valued in monetary terms for the purposes of an award of damages. In Chaplin v Hicks[9] damages were awarded for the loss of chance to participate as one of 50 finalists in a contest in which 12 would have been successful. Fletcher Moulton LJ described the mere chance in that case as a “right of considerable value” in the sense that its loss sounded in damages of which it was the function of the jury to assess. In Howe v Teefy[10] the plaintiff was awarded substantial damages for the loss of the chance of making a profit from the winnings of a racehorse which the defendant failed to deliver in breach of his contractual promise.
[9] [1911] 2 KB 786.
[10] (1927) SR (NSW) 301.
Plainly enough in contests of the kind considered in Chaplin v Hicks and Howe v Teefy it would be a brave Judge who would find, on the balance of probabilities, that a particular contestant would have won against the much lower possibility available in betting markets on that contest. The contest cases present the paradigm case in which a plaintiff will struggle to discharge the onus of proof on the balance of probability but even in those cases there will occasionally be some very one-sided sporting contests in which a finding approaching certainty could be made.
In Sellars v Adelaide Petroleum NL[11] the majority explained this species of loss as follows:
In the realm of contract law, the loss of a chance to win a prize in a competition resulting from breach of a contract to provide the chance is compensable, notwithstanding that, on the balance of probabilities, it is more likely than not that the plaintiff would not win the competition. As the contract contained a promise to provide the chance, the breach of the contract resulted in the loss of the chance and that loss was for relevant purposes an actual loss, in the sense in which Dixon and McTiernan JJ used that expression in Fink v. Fink. And, where there has been an actual loss of some sort, the common law does not permit difficulties of estimating the loss in money to defeat an award of damages. The damages will then be ascertained by reference to the degree of probabilities, or possibilities, inherent in the plaintiffs succeeding had the plaintiff been given the chance which the contract promised.
This approach is not confirmed to contracts relating to games of chance, sporting contests or other competitions. Fink v Fink concerned a contract to provide an opportunity for a reconciliation, breach of which was held to entitle the wife to damages. And there can be no doubt that a contract to provide a commercial advantage or opportunity, if breached, enables the innocent party to bring an action for damages for the loss of that advantage or opportunity. So, in The Commonwealth v. Amann Aviation Pty. Ltd., Mason CJ. and Dawson J., Brennan J. and Deane J. concluded that a lost commercial advantage or opportunity was a compensable loss, even though there was a less than 50 per cent likelihood that the commercial advantage would be realized. Damages for breach of contract were assessed by reference to the probabilities or possibilities of what would have happened.
Damages in tort have also been assessed by reference to the probabilities or possibilities of what will happen or what would happened. That approach has been frequently adopted in the assessment of damages for personal injuries where a court has been called upon to assess future possibilities and past hypothetical situations.
In Malec v. J.C. Hutton Pty. Ltd., this Court drew a distinction between, on the one hand, proof of historical facts what has happened - and, on the other hand, proof of future possibilities and past hypothetical situations. The civil standard of proof applies to the first category but not to the second, particularly when it is necessary to determine future possibilities and past hypothetical situations for the purpose of assessing damages.
Footnotes omitted
[11] (1992-1994) 179 CLR 332 at 349-350 per Mason CJ, Dawson, Toohey and Gaudron JJ.
The majority approved the approach taken by Brennan J to the assessment of damages for the loss of the chance of taking a legal action to trial in Johnson v Perez.[12]In that case, Brennan J who was in dissent said:[13]
When a plaintiff loses his original cause of action by the negligence of his solicitor, what is the extent of his loss? He has lost the monetary compensation for his personal injuries which he would have received at the time when he would have received it but for the solicitor’s negligence. That being the extent of the plaintiff’s loss, a court which seeks to put him back in the “same position” must assess, as best it can, whether or not the cause of action would have yielded a judgment or a settlement and, if so, how much the plaintiff would have received and when. It may be necessary to conduct a trial within a trial to determine what the cause of action would have produced. That is what the cause of action was worth to the plaintiff. It has been said that, when a plaintiff loses a cause of action, the court should determine its value by estimating, if need be, the plaintiff’s prospects of success in the original action: Kitchen v Royal Air Force Association. Lord Evershed MR pointed out that, where it is plain that the plaintiff would have succeeded in the original action, the plaintiff has lost what he would have recovered; equally where it is plain that the plaintiff would have failed in the original action, the plaintiff has lost nothing of value. But, his Lordship said, if it is uncertain whether the plaintiff would have succeeded in the original action –
“The question is, has the plaintiff lost some right of value, some chose in action of reality and substance? In such a case, it may be that its value is not easy to determine, but it is the duty of the court to determine that value as best it can.”
That is not to say that, when the plaintiff’s chance of success in the action against the original defendant can be estimated at a particular percentage, the plaintiff’s loss is to be calculated as a corresponding percentage of what would have been the assessment of his damages if he had wholly succeeded in a trial of his lost cause of action. The value of the lost cause of action cannot be assessed as though there were a market for doubtful causes of action in damages for personal injury. The value of the lost cause of action is not what a speculator would be prepared to offer the plaintiff as the price of an assignment of the cause of action. The plaintiff’s loss being whatever monetary compensation he would have received at the time he would have received it but for his solicitor’s negligence, the court must find whether or not he has lost something of value. If he would have failed in the original action, he has lost nothing; if he would have succeeded, he has lost what he would have received at the time he would have received it; if the action would have been compromised, he has lost what he would have been paid in settlement at the time when he would have been paid. Or, if it is doubtful whether or not he would have succeeded in the action and it is not probable that the action would have been compromised, the court assessing the damages must determine as best it can on the balance of probabilities whether the plaintiff would have succeeded (and, if so, to what extent) or failed. In making that determination, the court may need to estimate the extent to which a successful plaintiff’s damages would have been reduced because of contributory negligence.
[12] (1988) 166 CLR 351.
[13] Johnson v Perez (1988) 166 CLR 351 at 371-372.
The majority in Sellars then continued:[14]
Notwithstanding the observations of this Court in Norwest, we consider that acceptance of the principle enunciated in Malec requires that damages for deprivation of a commercial opportunity, whether the deprivation occurred by reason of breach of contract, tort or contravention of s. 52(1), should be ascertained by reference to the court's assessment of the prospects of success of that opportunity had it been pursued. The principle recognized in Malec was based on a consideration of the peculiar difficulties associated with the proof and evaluation of future possibilities and past hypothetical fact situations, as contrasted with proof of historical facts. Once that is accepted, there is no secure foundation for confining the principle to cases of any particular kind.
On the other hand, the general standard of proof in civil actions will ordinarily govern the issue of causation and the issue whether the applicant has sustained loss or damage. Hence the applicant must prove on the balance of probabilities that he or she has sustained some loss or damage. However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities. It is no answer to that way of viewing an applicant's case to say that the commercial opportunity was valueless on the balance of probabilities because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable.
[14] Sellars v Adelaide Petroleum NL (1992-1994) 179 CLR 332 at 355 per Mason CJ, Dawson, Toohey and Gaudron JJ.
In Tabet v Gett[15] the High Court rejected the loss of the chance of a better medical outcome as a species of personal injury in a medical negligence claim but affirmed its continuing applicability as a head of damage in contract and statutory misrepresentation cases in which a plaintiff has wrongly been denied a commercial opportunity.[16]
[15] (2010) 240 CLR 537.
[16] (2010) 240 CLR 537 at [54] per Gummow J; [124] per Kiefel J.
In Falkingham v Hoffmans (A firm)[17] Pullin and Murphy JJA elaborated on the elements of damage and causation which must be proved to sustain an award of damages for the loss of a chance to prosecute legal proceedings in these terms:[18]
Each of those matters must be established on the balance of probabilities. As to the first of those issues, the plaintiff must establish that the cause of action was real as distinct from being fanciful, or put another way, that the opportunity had some value, not being a negligible value. The relevant question has also been put negatively - was the plaintiff's case not viable, or doomed to fail? The plaintiff's lost chance has value even if the court, reviewing the facts with 20/20 hindsight, would assess the plaintiff's prospects at less than 50%. Even where the prospects are less than 50%, the plaintiff has lost a real chance to obtain compensation by way of a verdict, and the defendant remains at some real risk of the plaintiff ultimately succeeding at trial. Typically in that event, a valuable right has been lost by the foreclosure of the prospect of a favourable settlement.
As to the second issue, the plaintiff must establish, on the balance of probabilities, that he or she would have pursued the opportunity to obtain compensation by way of verdict or by compromise. Ordinarily, that would be established by proof that the plaintiff would have litigated the cause of action to trial or earlier valuable settlement. That is not to deny the possibility that there may be cases where the evidence might be that the hypothetical defendant would have agreed to pay or settle the claim without the need for the plaintiff to litigate.
The assessment of whether the appellant would have pursued the cause of action is determined subjectively, that is, by what the appellant (rather than a reasonable person) would have done in the circumstances:
…
In some cases, the plaintiff may be able to prove that he or she would have succeeded against the hypothetical defendant, and that there are no contingencies bearing on the likelihood of that success which need to be taken into account: Johnson v Perez [1988] HCA 64; (1988) 166 CLR 351, 366. Where there are contingencies bearing upon whether the plaintiff would have succeeded in the hypothetical action against the hypothetical defendant, the value of the lost chance is assessed by reference to the degree of probabilities or possibilities of success in the underlying action, and not on the civil standard: Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332, 354 - 355. If the defendant is uninsured or potentially unable to meet an award of damages, that contingency will also ordinarily be taken into account: Johnson (366).
…
In taking into account any uncertainties, evidentiary difficulties or other problems in assessing the value of the underlying litigation, the discount is global and evaluative in nature rather than mathematical: Nigam [266]; Rosa [100], [105].
[17] [2014] WASCA 140.
[18] [2014] WASCA 140 at [39]-[40], [44] and [46].
In the quantification of Lock 4’s loss contingencies and probabilities can be taken into account. In Malec v JC Hutton Pty Ltd[19] Deane, Gaudron and McHugh JJ said:
If the law is to take account of future or hypothetical events in assessing damages, it can only do so in terms of the degree of probability of those events occurring. The probability may be very high – 99.9 per cent – or very low – 0.1 per cent. But unless the chance is so low as to be regarded as speculative – say less than 1 per cent – or so high as to be practically certain – say over 99 per cent – the court will take that chance into account in assessing the damages. Where proof is necessarily unattainable, it would be unfair to treat as certain a prediction which has a 51 per cent probability of occurring, but to ignore altogether a prediction which has a 49 per cent probability of occurring. Thus, the court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect the degree of probability. The adjustment may increase or decrease the amount of damages otherwise to be awarded.
[19] (1990) 169 CLR 638 at 643.
On the other hand Brennan and Dawson JJ warned against overreliance on percentages saying:[20]
[W]e think it undesirable for damages to be assessed on the footing of an evaluation expressed as a percentage. Damages need not be assessed by first determining an award on the footing that the hypothetical situation would have occurred and then discounting the award by a selected percentage. Damages founded on hypothetical evaluations defy precise calculation.
[20] Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 at 640.
I would hold that the loss of the 2006 debt is a loss which is compensable pursuant to s 12GF(1) of the ASIC Act in accordance with the approach taken by Brennan J in Johnson v Perez and Falkingham v Hoffmans (A firm).
When the lost chance is a missed opportunity to bring legal proceedings, if sufficient evidence is lead, the result of the proceedings might be established on the balance of probabilities but speaking generally there will be significant obstacles. For example, different judges might reasonably reach very different conclusions about the credit of witnesses. Be that as it may, there is no principle which limits the loss which a plaintiff can claim with respect to a future, or hypothetical past, event to a loss of chance. Rather, damages for loss of a chance are available as an alternative when the financial loss itself cannot be proved on the balance of probabilities if, and only if, the loss of the chance, in itself, has a value. When a loss of chance has some value a Malec v Hutton assessment of that value, and a consequential award, can be made. However, as Brennan J explains in Johnson v Perez[21] a plaintiff is not precluded from establishing on the balance of probabilities the award he or she would have received if his or her legal action had been prosecuted, recovering full compensation for the loss of that award. However, a plaintiff will not recover any damages if he or she does not prove that the lost action has some prospect of success and, therefore, value. As Brennan J also explained in Johnson v Perez,[22] damages are not awarded on the basis that there is a market in unmeritorious actions.
[21] (1988) 166 CLR 351.
[22] (1988) 166 CLR 351 at 372.
The finding of the Judge that Lock 4 would have brought proceedings in 2006, having been affirmed, it follows that both the determination of whether Mr Molinara’s misrepresentations caused loss and the quantification of that loss, requires a comparison of the values of the 2006 debt and the deferred right. That question in turn demands a consideration of what Lock 4 would, or might have, recovered in the legal action, which the Judge found it would have taken, and the consequences, if any, of which the deferral of that action had on the prospects of recovery of the principal.
It will have been noticed that the Judge expressed his finding as to causation, and quantification, of loss as going no further than that Lock 4 had a reasonable prospect of successfully obtaining a judgment in the sum of $125,000 and a reasonable prospect of recovering that amount. The finding that Lock 4 had reasonable prospects of recovering the principal of the Lock 4 loan suggests that the Judge treated the loss suffered by Lock 4 as a “loss of a chance”. Given the award, the Judge must, by implication, have found on the balance of probability that Lock 4 would have recovered the judgment sum in full but his reasons do not go so far as to state, let alone explain, that finding. They are, therefore, inadequate and it falls to this Court to either remit the matter or determine the question for itself. I find that the evidence before this Court allows it to make the finding on which the Judge’s award is implicitly based. My reasons follow.
There is little difficulty in concluding that the right to repayment of the principal one year later was valueless given the deregistration of First Pacific Capital within months of the expiry of the renewed term. On an objective analysis of the circumstances in which Mr Molinara, Mr Sandercock and their corporate alter egos found themselves in late 2006, it was overwhelmingly probable that within one year their businesses would have collapsed into insolvency. However, that objective appraisal of the financial position of First Pacific Capital does not mean that Mr Molinara and Mr Sandercock would not have arranged the payment of demands made in 2006. It is to that critical question that I now turn.
I commence by observing that given the Judge’s adverse findings as to Mr Molinara’s credit, the lack of objective evidence to account for the multi-million loss of investor’s money, and the alleged fraudulent activities of Mr Sandercock, I would only act on those parts of Mr Molinara’s evidence which are admissions against interest.
That evidence showed that First Pacific Capital and its principals were in a vulnerable financial position when the extension of the Lock 4 loan was negotiated. Plainly enough, if First Pacific Capital failed to recover the principal of the two substantial loans made to the interstate developers, assuming for now that there was some truth in that part of Mr Molinara’s testimony, its business would fail. Lock 4 and the other creditors of First Pacific Capital, its shareholders and principals stood to suffer substantial losses. At the time that the Lock 4 loan extension was negotiated in 2006 any hope that First Pacific Capital might survive depended on the success of the recovery actions it had brought against the interstate developers. An application to wind up First Pacific Capital at that stage is likely to have brought an end to those actions and to have precipitated its liquidation. Mr Molinara and Mr Sandercock therefore had every reason to keep First Pacific Capital solvent. It is no doubt for this reason that the statutory demands and winding up application of which Mr Molinara testified were fended off by the directors personally paying the demands. Of course, the interstate default may only have been part of the story. Mr Sandercock and Mr Molinara may have had other reasons, which profited them personally, to stave off any external administration of First Pacific Capital.
The high value of the loan capital held by First Pacific Capital, Mr Molinara’s admission that but for the interstate defaults the business was successful, and the payment of all of the demands made against First Pacific Capital in 2006 strongly support an inference that First Pacific Capital had access to resources, and would have paid, the legal demand which Lock 4 would have made, on its solicitor’s advice, in 2006. The strong motive of the principals to keep First Pacific Property operating in 2006 reinforces that inference.
The Judge was not favourably impressed by Mr Molinara’s evidence. Mr Molinara was one of two people at the centre of a $5 million business collapse which has left little trace of the capital advanced to it. In that context, Mr Molinara’s testimonial, and claim that First Pacific Capital did not have access to funds to repay the Lock 4 loan, does not attract much weight.
I have no hesitation that the Perres would have insisted on full recovery of the principal even though they may have waived the interest. They would not easily have been defected from that position. I acknowledge the paucity of the evidence on which to make a finding on the balance of probabilities that First Pacific Capital would have repaid the whole of the principal of the Lock 4 loan but it fell within Mr Molinara’s capacity to adduce evidence to discount the strength of the inference to which I referred in paragraph [54]. That evidence might have supported his contention that there was no prospect of recovery even in 2006, or alternatively it may have provided an evidential foundation for discounting the prospects of success. Mr Molinara’s failure to do so counts heavily against him. Lock 4 did not carry any procedural obligation to warn Mr Molinara of the possible evidential consequences of his failure by cross-examining him on the issue.
It must be remembered that First Pacific Capital never had any legal or moral defence to Lock 4’s claim. There is no question here of the parties possibly reaching a reasonable compromise on the merits of Lock 4’s claim. The only issue is whether First Pacific Capital had access to money, and its principals a sufficient motive to stave off external administration, at the time the demand would have been made.
In the absence of any material evidence to counter the inference that First Pacific Capital and its principals had both good reason and resources from which to satisfy a demand for repayment of the Lock 4 loan, I would find on the balance of probabilities that Lock 4’s demand for the principal of its loan would have been satisfied in full.
If, on this issue of causation, I were satisfied only that First Pacific Capital would have made some repayment but remained unable to say how much, I would have weighed the competing contingencies heavily in favour of Lock 4, and would have awarded it compensation approximating the whole of the unpaid principal.
Conclusion
I would dismiss the appeal.
NICHOLSON J.
Introduction
This is an appeal against an award of $112,500 made in favour of the respondent company by way of damages for the appellant’s misleading or deceptive conduct. I have had the advantage of reading the reasons of the Chief Justice. I agree with much of the Chief Justice’s reasoning. However, I have reached a different conclusion.
On 12 June 2003, the respondent company lent $125,000 to a finance company, First Pacific Capital Pty Ltd (First Pacific Capital). The loan agreement was renewed (“rolled over”) annually. By late 2006, representatives of the respondent Mr Guiseppe Perre, Mrs Giuseppina Perre and their son Mr Frank Perre (the Perres) had become disconcerted by the fact that First Pacific Capital had stopped meeting the monthly interest payments on the loan. In or about November 2006, they met with a director of First Pacific Capital (a Mr Sandercock) and the appellant, who had recently resigned as a director, to discuss their concerns. As a result of what occurred at the meeting, the Perres, on behalf of the respondent agreed to roll over the loan for a further 12 month period, backdated to 16 June 2006.
First Pacific Capital failed to repay the loan and its accumulated interest obligation when it fell due in June 2007. The company was deregistered in December 2007. It is common ground that it failed financially. After quite some delay, the respondent brought proceedings against the appellant seeking recovery of the loan principal. The respondent did not take any conventional legal step[23] to attempt to recover the loan directly from First Pacific Capital at any time prior to its deregistration.
[23] Such as issuing a statutory demand or initiating court proceedings.
These proceedings against the appellant were brought on the basis that his conduct at the November 2006 meeting gave rise to breaches of ss 12CA(1) and 12DA(1) of the Australian Securities and Investment Commission Act 2001 (Cth). The respondent alleged that the appellant had misrepresented First Pacific Capital’s financial position during the meeting, by providing incorrect information regarding its investments and by remaining silent on certain critical issues, so as to procure a fourth roll over of the loan. The respondent contended that had it (through the Perres) been made aware of the true financial situation of First Pacific Capital, it would not have renewed the loan in November 2006 but would have sought repayment by First Pacific Capital and, if necessary, taken legal action.
The effect of the evidence of Frank and Giuseppina Perre was that the appellant misled them as to the secure nature of the loan money. The appellant represented that First Pacific Capital had no capacity to repay the loan in November 2006 but that there was no problem. It just needed time for the benefits of some unfinished projects to materialise and the respondent would not lose its money. Frank and Giuseppina Perre both said that if they had been aware that First Pacific Capital was then in financial difficulty they would not have agreed to roll over the loan but would have sought repayment of the loan.
The Judge found that certain representations by the appellant at the November 2006 meeting (including express statements and material silences) were false and misleading and designed to induce the respondent to roll over the loan for another year. The Judge found that, had the appellant not misled the respondent to the effect that its money was safe, it would have sought repayment of the loan. Implicit in this finding of detrimental reliance, in the context of the evidence given by the Perres and the respondent, is a finding that the loan moneys were not as secure or safe in November 2006 as the Perres were led to believe. If it were otherwise it could not be said that they had been materially misled. It was only because the Perres were misled as to the true position concerning the financial position of First Pacific Capital as at November 2006 that the respondent agreed to roll over the loan. This implicit finding will be of some relevance when it comes to the assessment of the loss resulting from the reliance conduct.
The Judge went on to find that had the respondent sought to recover the loan in November 2006, there were reasonable prospects that it would have been successful. The Judge awarded damages in the full amount of the principal ($125,000) less $12,500 that had been paid by the appellant prior to trial. The respondent made no claim against the appellant for unpaid interest or Hungerfords v Walker[24] type damages.
[24] (1989) 171 CLR 125.
There is no challenge to the findings of the Judge with respect to the appellant’s conduct at the November 2006 meeting. Rather, the appeal is against the Judge’s finding that the conduct caused any loss to the respondent.
The appellant’s grounds of appeal
There are essentially two aspects to the appellant’s case on appeal. First, the appellant contends that the Judge erred in finding that, but for the appellant’s conduct, the respondent would have instructed solicitors to take action against First Pacific Capital in November 2006 or that any such instructions would have been given in a timely fashion. Second, the appellant contends that the Judge erred in concluding that had a recovery action been initiated, there were reasonable prospects of it being successful. It is on these bases that the appellant submits that the misconduct by him at the November 2006 meeting, as found, did not result in any loss to the respondent.
I agree with the Chief Justice that it was open to the Judge, on the evidence, to find that had the respondent been aware of the true position in November 2006, it would not have renewed the loan but would have called for and taken steps in an effort to secure repayment of the loan. This ground of appeal should be dismissed.
I agree, in substance, with the Chief Justice’s analysis of the nature of the loss caused to the respondent and as to the correct approach to the assessment of this loss. I agree that, on the balance of probabilities, a loss was suffered in or about November 2006, being in the nature of the foregone commercial opportunity to press, and if necessary take action against First Pacific Capital, for repayment of the loan of $125,000. However, I take a view different from that of the Chief Justice as to the application of the legal principles, relevant to this valuation exercise, to the facts of this case.
The assessment of the loss
In broad terms, the proper assessment of the respondent’s loss calls for a comparison of its financial position, at the time immediately prior to its reliance on the appellant’s wrongful conduct, with its financial position as a consequence of the appellant’s conduct. Having given up its entitlement to require repayment of the loan by having rolled over the loan for a further 12 months, the respondent was placed in the position where it had no right, as against the debtor company, to recover its loan during that further loan period.
This is not a case like Johnson v Perez[25] where the commercial opportunity was lost for good. Here, the entitlement to realize or call in the chose in action in question was simply deferred. The loss caused to the respondent as a result of the appellant’s conduct is to be assessed as the value of the chose (entitlement to recover its loan) as at and after November 2006[26] as compared with its value as at or about the time when the respondent resumed an entitlement to call for and recover the loan.
[25] (1988) 166 CLR 351.
[26] Even if proceedings for recovery had been commenced forthwith in November 2006 there may have been a substantial time lag before it would be apparent that First Pacific Capital was willing and able to repay some, all or none of the loan.
A description of the correct approach to such a valuation exercise was provided by the trial Judge (French J, as his Honour then was) in Adelaide Petroleum NL v Poseidon Ltd.[27] The approach taken by French J was left undisturbed on appeal to both the Full Federal Court[28] and to the High Court.[29]
[27] (1990) 98 ALR 431 at 528 and 531 (on appeal in the High Court, sub nom Sellars v Adelaide Petroleum NL & Ors (1994) 179 CLR 332.
[28] Poseidon Ltd v Adelaide Petroleum NL (1991) 105 ALR 25 (Sheppard, Burchett and Lee JJ).
[29] Sellars v Adelaide Petroleum NL & Ors (1994) 179 CLR 332.
Adelaide Petroleum NL had conducted parallel negotiations with two companies, Poseidon and Pagini, with the object of having one of them acquire certain shareholdings as part of a corporate restructuring. At a certain point, Adelaide stopped negotiating with Pagini and executed Heads of Agreement with Poseidon. That agreement came to an end in circumstances involving misleading or deceptive conduct by Poseidon and one of its executives, Sellars. Adelaide resumed negotiations with Pagini and, ultimately, entered into an agreement with that company that was less beneficial than might have been. In its claim against Poseidon and Sellars, Adelaide alleged that their misleading or deceptive conduct caused Adelaide to break off negotiations with Pagini and to lose the additional benefits that would have resulted from the agreement it originally would have entered into with Pagini.
French J said this:
In this case the loss is measured by reference to the benefits that were foregone when [Adelaide] decided not to continue [its] negotiations with [Pagini]. But the actual loss cannot be assessed by simply equating it to the benefit foregone. There was no certainty and many contingencies attaching to the successful conclusion of the [Pagini] transaction. It is appropriate, however, to take as a base for assessment, the amount of the benefit foregone on the assumption that an agreement with [Pagini] would have been concluded in June 1988.
. . . .
[This is] no more than a starting point for calculation of the loss of chance represented by the decision not to proceed with the [Pagini] transaction.
. . . .
The contingencies to be taken into account in relation to the loss of benefit of the [Pagini] agreement are various and do not readily lend themselves to assignment of probabilities.
His Honour went on to make findings concerning the various contingencies arising on the facts of the case before him. French J used these findings to discount the starting figure for the loss which was the total amount of the benefit foregone on the assumption that it would have been enjoyed in full.
In the present case, as indicated, the appellant’s misleading or deceptive conduct caused the respondent to defer calling in and endeavouring to recover the loan principal from the debtor company. The finding that, in fact, the respondent did sustain a loss of this commercial opportunity, is one to be made on the balance of probabilities.[30] However, the assessment of the value of such a lost opportunity involves an evaluation of past hypothetical fact situations, to be ascertained by reference to the Court’s assessment of the prospects of succeeding with the opportunity had it been pursued. The plurality judgment in Sellars described the correct approach in the following terms.[31]
Notwithstanding the observations of this Court in Norwest, we consider that acceptance of the principle enunciated in Malek requires the damages for deprivation of a commercial opportunity, whether the deprivation occurred by reason of breach of contract, tort or contravention of s.52(1), should be ascertained by reference to the court’s assessment of the prospects of success of that opportunity had it been pursued. The principle recognized in Malek was based on a consideration of the peculiar difficulties associated with the proof and evaluation of future possibilities and past hypothetical fact situations, as contrasted with proof of historical facts. Once that is accepted, there is no secure foundation for confining the principle to cases of any particular kind.
On the other hand, the general standard of proof in civil actions will ordinarily govern the issue of causation and the issue whether the applicant has sustained loss or damage. Hence the applicant must prove on the balance of probabilities that he or she has sustained some loss or damage. However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities. It is no answer to that way of viewing an applicant’s case to say that the commercial opportunity was valueless on the balance of probabilities because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable.
[30] Sellars (1994) 179 CLR 332 at 355 (Mason CJ, Dawson, Toohey and Gaudron JJ).
[31] Sellars v Adelaide Petroleum NL & Ors (1994) 179 CLR 332 at 355 (Mason CJ, Dawson, Toohey and Gaudron JJ) (emphasis in the original).
In Falkingham v Hoffmans (a firm)[32] Pullin and Murphy JJA explained the position, in the context of a claim for loss of a chance to prosecute legal proceedings, in a manner that also is apposite.
In some cases, the plaintiff may be able to prove that he or she would have succeeded against the hypothetical defendant, and that there are no contingencies bearing on the likelihood of that success which need to be taken into account... . Where there are contingencies bearing upon whether the plaintiff would have succeeded in the hypothetical action against the hypothetical defendant, the value of the lost chance is assessed by reference to the degree of probabilities or possibilities of success in the underlying action, and not on the civil standard... . If the defendant is uninsured or potentially unable to meet an award of damages, that contingency will also ordinarily be taken into account... .
. . . .
In taking into account any uncertainties, evidentiary difficulties or other problems in assessing the value of the underlying litigation, the discount is global and evaluative in nature rather than mathematical... .
[32] [2014] WASCA 140 at [44] and [46] (citations omitted).
In the present case, there are a number of contingencies which bear upon the question of whether or not the respondent would have succeeded, in or about November 2006, in obtaining a full recovery of the loan amount. Some of these contingencies will require an evaluation of past hypothetical fact situations, to be arrived at by reference to the degree of probability or possibility that each such contingency would have been overcome. Even if any or all such contingencies were highly likely to be overcome this would not, in the circumstances of this case, result in an assessment equal to the full value of the benefit foregone. Just as it is no answer to say that a commercial opportunity is valueless on the balance of probabilities because to do so would be to value the commercial opportunity by reference to a standard of proof which is inapplicable;[33] it is similarly inappropriate to assess the loss at 100 per cent if, on a balance of probabilities, the commercial opportunity would have been enjoyed. To do so would, again, be to value it by reference to a standard of proof which is inapplicable.
[33] Sellars (1994) 179 CLR 332 at 355 (Mason CJ, Dawson, Toohey and Gaudron JJ).
Like in Sellars, as observed by French J, the contingencies to be taken into account here when assessing the value of the respondent’s loss, “are various and do not readily lend themselves to assignment of probabilities.” Nevertheless, in order to value the foregone opportunity to recover the loan principal, as at or after November 2006, some understanding of at least the following matters would be of assistance:
(i)what was the then financial position of the debtor company;
(ii)what was the then financial position of the appellant, the debtor company’s director at the time (Mr Sandercock) or any other entity that might be prepared to lend the debtor company financial support;
(iii)would the debtor company or any of the entities in (ii) above have been able and willing to marshal financial resources in a way that would permit a discharge of the debt;
(iv)what potentially irrecoverable costs would the respondent have been put to in order to compel repayment of the debt, if resisted; and
(v)what are the prospects that the respondent would have agreed to a compromise of its claim, not on the basis that it had no legal entitlement to recover the money but, on the basis that the costs, difficulties and risks involved in achieving a nil recovery would outweigh the prospect of recovery in full from a company known to be in financial difficulty.
The matters in (i) and (ii) above are matters of historical fact capable of proof on the balance of probabilities. However, the matters in (iii), (iv) and (v) are contingencies involving past hypothetical facts. The evidence in the trial relevant to any of these issues is extremely scant to say the least. The trial appears to have been conducted by the respondent on the basis that it was only necessary for the Perres to prove that if they had not been misled they would have called in the loan. The available evidence permits only quite limited findings to be made from which the financial circumstances of First Pacific Capital and of the appellant, as at or after November 2006, might be inferred and only limited findings as to inferences that ultimately might be drawn concerning the capacity and willingness of any potentially available source, in or after November 2006, to repay the debt.
In a substantial section of the judgment[34] the Judge sets out in quite some detail a summary of the evidence given by all witnesses including that of the appellant and including his evidence concerning, inter alia, what he said he told the Perres concerning: the projects being undertaken by First Pacific Capital, the cash flow difficulties then being experienced by First Pacific Capital, the fact that First Pacific Capital was not in a position to repay the loan but would be in such a position if the loan could be rolled over for a further 12 months, and as to the strategies being employed by First Pacific Capital and himself in order to improve the present liquidity or cash flow difficulties. A problem for this Court hearing the appeal is that, very often, it cannot be discerned with confidence where the recitation of evidence stops and a fact finding begins, particularly given that the Judge was unimpressed with the appellant’s evidence and found it unreliable. This problem is accentuated, not assisted, by the approach of dealing with this material under the heading “Findings” and declaring that “the following narrative constitutes my findings made on the basis of admissions on the pleadings, the oral evidence, and the exhibits.”[35] Substantial portions of that which follows this declaration of intent, in all likelihood, do not constitute findings of fact (other than “this was the evidence.”). The difficultly for the appellate court is in discerning what is and what is not a finding of fact.
[34] Perre Bros Lock 4 Pty Ltd v Molinara [2014] SADC 116 at [24]-[73].
[35] Perre Bros Lock 4 Pty Ltd v Molinara [2014] SADC 116 at [24].
Most, if not all, of the evidence relevant to the financial circumstances of First Pacific Capital and the appellant was that given by the appellant himself. However, the evidence was not clearly targeted in the sense that there was little evidence that touched on the financial circumstances as at or after November 2006. Another difficulty arises from the fact that the trial Judge was unimpressed with the appellant as a witness, at least, in connection with liability issues.
I formed the view that Mr Molinara was somewhat evasive and that he also [that is, like the Perres] had a poor memory; poorer when it suited him. I formed the view that he endeavoured to give answers that would exonerate him, but was sometimes misguided in doing so.[36]
As a consequence, it is difficult for this Court on appeal to form a clear view as to which aspects of the appellant’s evidence were or may be relied on and accepted.
[36] Perre Bros Lock 4 Pty Ltd v Molinara [2014] SADC 116 at [22].
Nevertheless, it is sufficiently clear that the following findings[37] made by the Judge were open on the evidence.
[37] Perre Bros Lock 4 Pty Ltd v Molinara [2014] SADC 116 at [24] and following. Some of these findings must have been based on the appellant’s evidence.
(i)The appellant ceased being a director of First Pacific Capital on 17 July 2006 but remained a stakeholder.
(ii)At the beginning of 2006 First Pacific Capital had borrowed, in total, about $3M from various investors, including people like the Perres. All of this money was lent out and secured by way of first mortgage, second mortgage or “caveat”.[38]
[38] Precisely what this was intended by the appellant to mean was not clear on the evidence; the registration of a caveat on title to real property does not, of itself, confer any form of security interest in the property.
(iii)The appellant and his family lent First Pacific Capital in the order of $500,000 and Mr Sandercock’s family also lent money.
(iv)Notification of an application for a winding up order was provided on 14 September 2005. Presumably, steps were taken by someone to prevent or stop this application from proceeding.
(v)A further notification of an application to wind up First Pacific Capital was provided on 26 June 2006.
(vi)First Pacific Capital was deregistered on 30 December 2007.
(vii)First Pacific Capital lent substantial sums to a related company First Pacific Property Development Pty Ltd of which Mr Sandercock was a director and the appellant “apparently a stakeholder”.
(viii)First Pacific Property Development was involved in three substantial property developments.
(ix)The appellant “privately agreed” with Mr Sandercock that they would use the profit from First Pacific Property Development to “repay monies back into First Pacific Capital”.
(x)First Pacific Capital at the time of the November 2006 meeting had no investment in any development projects.
(xi)Any profit which First Pacific Property Development might have made would only be used to repay creditors of First Pacific Capital “at the whim of the [appellant] and Mr Sandercock”.
(xii)Two statutory demands had been received by First Pacific Capital at a time [unparticularised] prior to the November 2006 meeting. One of the demands was personally paid by the appellant possibly in the amount of $20,000. The other one was met by Mr Sandercock although there is no evidence of the amount.
(xiii)Under cover of letter dated 5 June 2007 [at or about the time the rolled over loan fell due] “the [respondent] received a cheque in the sum of $2,500”.
(xiv)On 9 July 2009, [two years after the loan fell due] the respondent received a bank cheque for $10,000 from the appellant.
It can be inferred that the appellant would have been anxious, in and for some time after November 2006, to keep First Pacific Capital afloat, if only to preserve the possibility of having his family’s loans repaid, that the appellant and Mr Sandercok were (at unknown times) prepared and able to stave off threats of liquidation by each meeting a statutory demand for a relatively modest amount and that the appellant was able and willing to pay relatively modest amounts off the loan after it fell due. It is also likely that the appellant and/or Mr Sandercock, from time to time, had a capacity to prioritise demands from lenders if and when any cash flow became available to pay down debt.
It can also be inferred, with some confidence, that First Pacific Capital itself was in financial difficulty for quite some time prior to the roll over in November 2006 and from which it never recovered.
Of course, it must be kept in mind that the purpose of reviewing the evidence, such as it is, is to attempt an assessment of the willingness and capacity of any relevant entity to repay the respondent’s loan as at and after November 2006.
In the circumstances of this case, the question arises whether the failure by the appellant to call Mr Sandercock to give evidence concerning his own and First Pacific Capital’s financial position at the material time or the failure of the appellant to produce documentary evidence of his own or First Pacific Capital’s financial position at the material time, is such as to enable the Court to more readily draw inferences in favour of the case propounded by the respondent.
In Blatch v Archer[39] Lord Mansfield CJ said:
It is certainly a maxim that all evidence is to be weighed according to the proof which it was in the power of one side to have produced and in the power of the other to have contradicted.
Comprehensive discussions of this principle and illustrations of its application in civil trials are to be found in Jones v Dunkel,[40] O’Donnell v Reichard,[41] and Payne v Parker.[42] A leading discussion in South Australia still would appear to be that by Cox J in Spence v Demasi.[43] Another helpful discussion can be found in Frederick v State of South Australia (White J).[44]
[39] (1774) 1 Cowp 63 at 65; 98 ER 969 at 970.
[40] (1959) 101 CLR 298.
[41] [1975] VR 916.
[42] [1976] 1 NSWLR 191, particularly at 200-202 per Glass JA.
[43] (1988) 48 SASR 536 at 547-549.
[44] (2006) 94 SASR 545 at [36]-[42].
For present purposes, I set out and adopt, with respect, a number of the propositions arrived at, following a review of the then available authorities, by Glass JA in Payne v Parker.[45]
[45] [1976) 1 NSWLR 191 at 201 (citations omitted).
1.The rule [known in Australia as the rule in Jones v Dunkel] is a principle of the law of evidence whereby a particular form of reasoning is authorised.
2.The reasoning which is permissible involves the treatment of a failure to adduce evidence as a reason for increasing the weight of the proofs of the opposite party or reducing the weight of the proofs of the party in default. The principle may be invoked for a deficiency in the evidence either of a party bearing a legal onus of proving an issue, or of a party bearing the evidentiary burden only. If the failure is of the latter kind, the direct evidence of the party with the onus of proof can be more readily accepted, and inferences in his favour may be more confidently drawn. If the failure is of the former kind, a consonant formulation would be that the direct evidence of the party carrying the onus may be more readily rejected, and the inferences for which he contends may be treated with greater reserve. The default “brings a great slur on his cause”.
3.The failure to call a particular witness is merely one instance of evidentiary deficiency which brings the principle into operation. Other instances are the failure to adduce any evidence at all… the failure to produce a particular document, and the failure to prove a particular fact.
4.[I[t is for the judge to determine whether the principle could be applied, and for [the trier of fact] to decide whether it should be applied. The determination has the same legal status as a decision whether the res ipsa principle can or should be applied.
5.Whether the principle can be applied is a question of law, which admits of only one answer. No exercise of discretion is involved… .
6.Whether the principle can or should be applied depends upon whether the conditions for its operation exist. These conditions are three in number:
(a) the missing witness would be expected to be called by one party rather than the other,
(b) his evidence would elucidate a particular matter,
(c) his absence is unexplained.
7.The first condition is also described as existing where it would be natural for one party to produce the witness, or the witness would be expected to be available to one party rather than the other, or where the circumstances excuse one party from calling the witness, but require the other party to call him, or where he might be regarded as in the camp of one party, so as to make it unrealistic for the other part to call him, or where the witness’ knowledge may be regarded as the knowledge of one party rather than the other, or where his absence should be regarded as adverse to the case of one party rather than the other. It has been observed that the higher the missing witness stands in the confidence of one party, the more reason there will be for thinking that his knowledge is available to that party rather than to his adversary. If the witness is equally available to both parties, for example, a police officer, the condition, generally speaking, stands unsatisfied. There is, however, some judicial opinion that this is not necessarily so. Evidence capable of satisfying this condition has been held to exist in relation to a party's foreman; his safety officer; his accountant; his treating doctor.
8.According to Wigmore, the second condition is fulfilled where the party or his opponent claims that the facts would thereby be elucidated. Under other formulations, the condition is made out when the witness is presumably able to put a true complexion on the facts; might have proved the contrary; would have a close knowledge of the facts; or where it appears that he had knowledge. I would think it in-sufficient to meet the requirements of principle that one party merely claims that the missing witness has knowledge, or that, upon the evidence, he may have knowledge. Unless, upon the evidence, the tribunal of fact is entitled to conclude that he probably would have knowledge, there would seem to be no basis for any adverse deduction from the failure to call him.
9.The third condition is satisfied if no explanation is offered for the absence of the witness, or the tribunal thinks that the explanation given is unsatisfactory. The explanation tendered may be that the witness is ill, overseas, dead or refuses to waive his privilege.
There was unchallenged evidence by the appellant concerning a significant falling out between him and Mr Sandercock. Furthermore, the appellant had ceased being a director of First Pacific Capital before the November 2006 meeting. It also is to be kept in mind that the appellant was not defending this litigation on behalf of First Pacific Capital, its directors or its shareholders but on his own behalf. In these circumstances, there is no evidence, bearing in mind that the onus rests with the respondent, from which to infer that, at the time of trial, Mr Sandercock was in the appellant’s camp (6(a) above). Neither is his absence unexplained (6(c) above).
Similarly, the appellant was not pressed in cross-examination with any asserted failure to comply with his pre-trial (documentary) disclosure obligations. He was asked in cross-examination about whether he ever received a copy of First Pacific Capital’s financial statements for the financial years 2003/2004, 2004/2005 and 2005/2006. The appellant said that he no longer had any such documents. This is not particularly surprising given that the respondent’s statement of claim was not filed until 4 June 2012. In re-examination he explained that he had been asked by his lawyers to try and obtain copies of financial statements from the company’s former accountants, Rinaldi and Co. He was unable to do so; they told him that the firm’s policy was to destroy such client documents where the account remained inactive for five years.
The burden of proving not just a loss but also its quantum always rested with the respondent. If it wished to lay a foundation for a Jones v Dunkel submission it could have pursued its entitlements, under the rules, to pre-trial disclosure from the appellant and, if necessary, non-parties. During his trial opening, counsel for the respondent acknowledged to the Judge that no discovery of documents relating to the financial position of First Pacific Capital had been sought. In addition or in the alternative, the appellant could have been further cross-examined on the availability of any documentary material, its nature and its whereabouts. Apart from the evidence of the appellant that no company financial records remain available to his knowledge, the Court has been left to speculate on these matters.
In any event, the rule in Jones v Dunkel does not permit inferences to be drawn or matters to be established which are not themselves available on the evidence that is before the Court. The absence of evidence cannot be used as positive evidence in favour of the respondent’s case at trial. Such an absence might lead to an inference that any missing evidence would not have assisted the appellant’s case[46] and operate as a reason for increasing the weight of the respondent’s proofs such as they were.
[46] This was the Judge’s finding concerning the failure to have Mr Sandercock give evidence, Perre Bros Lock 4 Pty Ltd v Molinara [2013] SADC 116 at [23].
However, there is no matter, based on the evidence that is before the Court, about which I would be prepared to more readily draw an inference in favour of the respondent because of this absence of evidence.
On my review of the evidence, it is not apparent to me that the liquidity position of the debtor company or the appellant, as at and after November 2006, was such as, inevitably, would have permitted or resulted in a repayment of the loan in full at that time. In any event, the contingencies that I have identified (and there may be others) still would need to be taken into consideration. It is to be remembered that, at the time of the November 2006 meeting, the respondent had not received monthly interest payments for a long time and the very reason the loan was renewed was that the debtor company was in a more difficult financial state than the appellant was prepared to admit. As earlier mentioned, such a conclusion is implicit in the Judge’s finding that the appellant misled the Perres as to the secure nature of the loan should it be rolled over.
Conclusion
As Pullin and Murphy JJA observed in Falkingham:[47]
In taking into account any uncertainties, evidentiary difficulties or other problems in assessing the value of the underlying litigation, the discount is global and evaluative in nature rather than mathematical... .
[47] Falkingham v Hoffmans (a firm) [2014] WASCA 140 at [46].
Doing the best I can on the minimal evidence available, I would assess the value of the respondent’s lost opportunity to recover the loan in and after November 2006 at no more than 40 per cent of the face value of the loan ($50,000). I agree with the Chief Justice that by the time the respondent’s entitlement or opportunity to recover its loan revived in 2007, that opportunity had become worthless. Allowing for the amount of $12,500 already paid, this would lead to a damages award in the order of $37,500. I would allow the appeal to that extent.
PARKER J.
I agree with the reasons of Nicholson J and would partly uphold the appeal to the extent indicated by his Honour. I have nothing to add.
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