Patersons Securities Ltd v Financial Ombudsman Service Ltd
[2015] WASC 321
•28 AUGUST 2015
PATERSONS SECURITIES LTD -v- FINANCIAL OMBUDSMAN SERVICE LTD [2015] WASC 321
| SUPREME COURT OF WESTERN AUSTRALIA | Citation No: | [2015] WASC 321 | |
| Case No: | CIV:1171/2015 | 5 AUGUST 2015 | |
| Coram: | MITCHELL J | 28/08/15 | |
| 45 | Judgment Part: | 1 of 1 | |
| Result: | Plaintiff's application for a declaration dismissed Judgment for the defendant on the counterclaim | ||
| A | |||
| PDF Version |
| Parties: | PATERSONS SECURITIES LTD FINANCIAL OMBUDSMAN SERVICE LTD M C PTY LTD MDVR |
Catchwords: | Financial services External dispute resolution scheme When judicial review of a final decision is available Obligation to do what is, in the decisionmaker's opinion, fair in all the circumstances Consequential loss |
Legislation: | Corporations Act 2001 (Cth), s 912A(2)(b) |
Case References: | AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173 Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49 Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223 Australian Football League v Carlton Football Club Ltd [1998] 2 VR 546 Australian Workers' Union v Bowen (1948) 77 CLR 601 Batten v Wedgwood Coal and Iron Co (1886) 31 Ch D 346 Caledonian North Sea Ltd v British Telecommunications Plc [2002] 1 Lloyd's Rep 553 Codelfa Construction Pty Ltd v State Rail Authority of NSW (1982) 149 CLR 337 Cromwell Property Securities Ltd v Financial Ombudsman Service Ltd [2014] VSCA 179; (2014) 288 FLR 374 Dickason v Edwards (1910) 10 CLR 243 Electricity Generation Corporation t/as Verve Energy v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26; (2008) 19 VR 358 European Bank Ltd v Evans [2010] HCA 10; (2010) 240 CLR 432 Ferris v Plaister (1994) NSWLR 474 Financial Ombudsman Services Ltd v Pioneer Credit Acquisition Services Pty Ltd [2014] VSC 172 Frank Davies Pty Ltd v Container Haulage Group Pty Ltd (No 1) (1989) 98 FLR 289 GEC Alsthom Australia Ltd v City of Sunshine (Unreported FCA, 20 February 1996) Hadley v Baxendale (1854) 9 Ex 341; 156 ER 145 Johnson v American Home Assurance Company (1998) 192 CLR 266 Keppel v Wheeler (1926) 1 KB 577 Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314 Mickovski v Financial Ombudsman Service Ltd [2012] VSCA 185; (2012) 36 VR 456 Neilson v James (1882) 9 QBD Netglory Pty Ltd v Caratti [2013] WASC 364 Pacific Carriers Ltd v BNP Paribas [2004] HCA 15; (2004) 218 CLR 451 Regional Power Corporation v Pacific Hydro (No 2) [2013] WASCA 356; (2013) 46 WAR 281 Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZL 324 Saint Line Ltd v Richardsons, Westgarth & Co Ltd [1940] 2 KB 99 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272 Utopia Financial Services Pty Ltd v Financial Ombudsman Service Ltd [2012] WASC 279 |
JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
- IN CIVIL
- Plaintiff
AND
FINANCIAL OMBUDSMAN SERVICE LTD
First Defendant
M C PTY LTD
Second Defendant
MDVR
Third Defendant
Catchwords:
Financial services - External dispute resolution scheme - When judicial review of a final decision is available - Obligation to do what is, in the decisionmaker's opinion, fair in all the circumstances - Consequential loss
Legislation:
Corporations Act 2001 (Cth), s 912A(2)(b)
Result:
Plaintiff's application for a declaration dismissed
Judgment for the defendant on the counterclaim
Category: A
Representation:
Counsel:
Plaintiff : Mr B Dharmananda SC & Mr D M Benson
First Defendant : Mr M W Wise
Second Defendant : No appearance
Third Defendant : No appearance
Solicitors:
Plaintiff : Clayton Utz
First Defendant : Arslan Lawyers
Second Defendant : No appearance
Third Defendant : No appearance
Case(s) referred to in judgment(s):
AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173
Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49
Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223
Australian Football League v Carlton Football Club Ltd [1998] 2 VR 546
Australian Workers' Union v Bowen (1948) 77 CLR 601
Batten v Wedgwood Coal and Iron Co (1886) 31 Ch D 346
Caledonian North Sea Ltd v British Telecommunications Plc [2002] 1 Lloyd's Rep 553
Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337
Cromwell Property Securities Ltd v Financial Ombudsman Service Ltd [2014] VSCA 179; (2014) 288 FLR 374
Dickason v Edwards (1910) 10 CLR 243
Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640
Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26; (2008) 19 VR 358
European Bank Ltd v Evans [2010] HCA 6; (2010) 240 CLR 432
Ferris v Plaister (1994) 34 NSWLR 474
Financial Ombudsman Services Ltd v Pioneer Credit Acquisition Services Pty Ltd [2014] VSC 172
Frank Davies Pty Ltd v Container Haulage Group Pty Ltd (No 1) (1989) 98 FLR 289
GEC Alsthom Australia Ltd v City of Sunshine (Unreported FCA, 20 February 1996)
Hadley v Baxendale (1854) 9 Ex 341; (1854) 156 ER 145
Johnson v American Home Assurance Company (1998) 192 CLR 266
Keppel v Wheeler (1927) 1 KB 577
Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314
Macmahon Mining Services Ltd v Cobar Management Pty Ltd [2014] NSWSC 731
Mickovski v Financial Ombudsman Service Ltd [2012] VSCA 185; (2012) 36 VR 456
Neilson v James (1882) 9 QBD 546
Netglory Pty Ltd v Caratti [2013] WASC 364
Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451
Regional Power Corporation v Pacific Hydro Group Two Pty Ltd (No 2) [2013] WASC 356; (2013) 46 WAR 281
Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324
Saint Line Ltd v Richardsons, Westgarth & Co Ltd [1940] 2 KB 99
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272
Utopia Financial Services Pty Ltd v Financial Ombudsman Service Ltd [2012] WASC 279
Summary 5
Parties 6
Investment contracts 6
Dispute resolution scheme 7
Terms of reference 7
Introductory provisions 7
Disputes within scope of the Service 8
Dispute resolution processes 8
Deciding Disputes 9
Remedies 11
Referral of the disputes in this case 11
The determination 12
Findings as to liability 12
General approach to loss 13
Direct and consequential loss 14
Relevant period 14
Calculation of MDVR's loss 14
Calculation of the SMSF's loss 15
These proceedings 17
General principles of construction 18
The contractual obligation in this case 24
Patersons' primary argument: consequential or indirect loss 27
Patersons' first step: breach of 9.3(a) of the terms of reference 28
Patersons' second step: construction of the term 'consequential loss' 30
Case law 31
Proper construction of 'consequential loss' in the terms of reference 35
Whether the panel erred in construing 'consequential loss' 37
Effect of any error by the panel in its construction of the term 'consequential loss' 38
Patersons' third step: direct and indirect loss in this case 38
Conclusion in relation to Patersons' primary argument 41
Patersons' alternative argument 42
Other matters 42
Use of the Vanguard Index Australian Shares Fund 43
Regard to previous decisions 43
Counterclaim for specific performance 44
Orders 44
- MITCHELL J:
Summary
1 In 2011, the plaintiff (Patersons) entered into investment contracts with the second and third defendants. As it is necessary for me to detail various aspects of their financial situation, I have anonymised the second and third defendants' names in the heading to these reasons. In the body of these reasons, I shall refer to them as 'the SMSF' and 'MDVR' respectively.
2 The investment contracts appointed Patersons as the agent of the SMSF and MDVR, with a discretionary authority to purchase securities on their behalf. The discretion was to be exercised in accordance with advice Patersons had provided. That advice was to adopt a strategy of building a 'balanced equities portfolio' which included at least 80% ASX 200 shares. Patersons accepts that, in breach of the investment contracts, it adopted a high risk strategy which did not accord with its advice, causing loss to the SMSF and MDVR.
3 By 2013, the SMSF and MDVR crystallised their losses, by liquidating the securities. They also referred complaints to the first defendant (FOS). FOS operates an external dispute resolution scheme of which Patersons is a member. Tripartite contracts then came into existence between FOS, Patersons and MDVR/the SMSF. The essence of the tripartite contracts was that the parties would accept the independent arbitration of the dispute in accordance with FOS's judgment as to what was fair in all the circumstances.
4 FOS determined1 that Patersons should pay the SMSF and MDVR $229,165 and $18,432 (plus interest) respectively to compensate them for direct financial loss caused by Patersons' failure to implement the agreed investment strategy.
5 Patersons seeks a declaration that FOS's determination is not binding on it. The essence of Patersons' primary argument is that FOS breached the tripartite contracts by allowing amounts which Patersons says are properly characterised as consequential losses (for which the terms of reference impose a $3,000 cap). Patersons also advances an alternative argument that FOS erred by failing to take account of loss which would have been incurred in any event, and calculated loss from the very start (not when the incorrect implementation occurred).
6 In my view, a correct measure of direct loss in this case is the difference between the liquidated value of the portfolios on 30 June 2013, and the value they would have held at that date if the investment contracts had been performed according to their terms. Had I been determining the merits of the case, I would have characterised the losses assessed by FOS, other than an assessed amount of $33,758 for the SMSF, as direct loss or allowable interest.
7 However, the parties provided for the dispute to be determined by FOS, not this court. Given the terms of the tripartite contracts, the question for the court is whether it was open to FOS, acting honestly and rationally, to decide that in all the circumstances it was fair to require Patersons to pay the specified sums of money to compensate MDVR and the SMSF for direct financial loss. In my view, FOS did not act unreasonably in forming that opinion, and did not fail to act in accordance with the terms of reference. The errors which the panel made did not cause FOS to exceed its contractual decision-making authority.
8 For these reasons, which are explained in greater detail below, I have rejected Patersons' primary and alternative arguments and determined that Patersons' action for declaratory relief must be dismissed.
9 FOS counterclaims, seeking specific performance of the tripartite contracts by an order requiring Patersons to pay the determined amounts to the SMSF and MDVR. For reasons explained below, I will grant that relief.
Parties
10 Patersons is a financial services provider licensed under pt 7.6 of the Corporations Act 2001 (Cth). The SMSF is the trustee of MDVR's self-managed superannuation fund.
Investment contracts
11 On 24 August 2011, Patersons contracted to manage the SMSF's investment portfolio on a discretionary basis in accordance with a statement of advice which Patersons had provided. The advice was to adopt a strategy of building a 'balanced equities portfolio comprising approximately 80% ASX 200 stocks and approximately 20% of the equities portfolio in value-driven trading opportunities'. Patersons was appointed as the SMSF's attorney for the purposes of discretionary management of the SMSF's account. On 4 November 2011, MDVR entered into a similar agreement with Patersons in her personal capacity, by reference to similar advice provided on 6 September 2011.
12 It is common ground that Patersons did not manage the SMSF's or MDVR's investment portfolio in the manner provided for in the investment contracts. Patersons adopted a higher risk strategy than was contemplated by the advice. Dissatisfied with the performance of the investment, MDVR arranged for the sale of the securities forming her and the SMSF's portfolios by 30 June 2013. The SMSF's capital investment of $445,720 realised $360,337, a reduction of $80,007 after taking account of withdrawals of $5,376. MDVR's capital investment of $112,239 realised $39,223, a reduction of $13,849 after taking account of withdrawals of $59,167.
Dispute resolution scheme
13 Section 912A(1)(g) and s 912A(2) of the Corporations Act required Patersons to have a dispute resolution system which involved its membership of at least one external dispute resolution scheme approved by the Australian Securities and Investments Commission. The external scheme must cover complaints against Patersons made by retail clients in connection with the provision of all financial services covered by Patersons' financial services licence.
14 Patersons was a member of the FOS's external dispute resolution scheme. Clause 14 of FOS's constitution provides for terms of reference to apply in respect of a dispute. It also provides that the provisions of the constitution and terms of reference, as in force from time to time, form a binding contract between each member and FOS.
Terms of reference
15 The relevant terms of reference were dated 1 January 2010 (as amended on 1 January 2012).
Introductory provisions
16 Paragraph 1.1 of the terms of reference identifies the purpose of the scheme in the following terms:
The Service is conducted by FOS and has been established as an independent forum to resolve Disputes between Applicants and Financial Services Providers. The Service is free of charge for Applicants. The costs of the Service are met by the Financial Services Providers.
17 The term 'Dispute' is defined to mean an expression of dissatisfaction with a Financial Services Provider.
18 The principles that underpin FOS's operations and processes are described in the following terms in par 1.2:
In dealing with Disputes, FOS:
a) must do what in its opinion is appropriate with a view to resolving Disputes in a cooperative, efficient, timely and fair manner;
b) shall proceed with the minimum formality and technicality; and
c) shall be as transparent as possible, whilst also acting in accordance with its confidentiality and privacy obligations.
19 Paragraph 2 of the terms of reference deals with FOS's structure, while par 3 deals with presently irrelevant transitional provisions.
Disputes within scope of the Service
20 Paragraph 4 identifies the Disputes within the scope of the Service. Paragraph 4.1 provides that FOS may only consider a Dispute if the Dispute is between a Financial Services Provider and certain kinds of Applicant. Such Applicants include an individual and the corporate trustee of a self-managed superannuation fund. Paragraph 4.2 provides that FOS may only consider certain kinds of Disputes between a Financial Services Provider and an Applicant. One kind of Dispute which FOS can consider is a dispute that arises from a contract and that arises from or relates to the provision of a Financial Service by the Financial Services Provider, which is a member of FOS, to the Applicant.
21 Paragraph 5.1 of the terms of reference identifies certain kinds of Disputes which FOS may not consider. Paragraph 5.2 provides that FOS may refuse to consider, or continue to consider, a Dispute, if FOS considers this course of action appropriate.
Dispute resolution processes
22 Paragraph 6 of the terms of reference provides for a party to a Dispute to refer the Dispute for resolution, and provides for time limits as to when that may be done.
23 Paragraph 7.1 of the terms of reference provides for FOS to resolve a dispute by:
a) negotiation;
b) conciliation or mediation; or
c) deciding the Dispute in accordance with the process set out in paragraph 8.
24 The balance of par 7 provides for FOS to require parties to provide information or do anything else that FOS considers may assist its consideration of the Dispute.
Deciding Disputes
25 Paragraph 8.1 of the terms of reference provides that FOS is not bound by any legal rule of evidence. Paragraph 8.2 sets out how FOS will decide a Dispute in the following terms:
8.2 Dispute resolution criteria
Subject to paragraph 8.1, when deciding a Dispute and whether a remedy should be provided in accordance with paragraph 9, FOS will do what in its opinion is fair in all the circumstances, having regard to each of the following:
a) legal principles;
b) applicable industry codes or guidance as to practice;
c) good industry practice; and
d) previous relevant decisions of FOS or a Predecessor Scheme (although FOS will not be bound by these).
26 Paragraph 8.3 provides for FOS to consult with industry and consumer advisers when deciding a Dispute, and to obtain expert advice. Paragraph 8.4 generally requires FOS to ensure that the parties to the Dispute are provided with access to the documentation, information and material upon which FOS proposes to rely in its Determination.
27 Paragraph 8.5 provides for the following process for deciding disputes:
Unless paragraph 8.6 applies, the process for deciding a Dispute is as follows.
a) After giving the parties a reasonable opportunity to make submissions and provide information about the matters in dispute, FOS makes an assessment referred to as a Recommendation.
b) If both parties accept the Recommendation within 30 days of receiving it, the Dispute is resolved on the basis of the Recommendation.
c) If, within 30 days of receiving the Recommendation, either:
(i) the Financial Services Provider does not accept the Recommendation in relation to the Dispute; or
(ii) either party requests FOS to proceed from a Recommendation to a Determination,
FOS will proceed to a Determination by either an Ombudsman or by a FOS Panel (as the Chief Ombudsman or his or her delegate decides is appropriate). Before the Determination is made, the parties will be given a reasonable opportunity to make submissions, and provide any further information, in response to the Recommendation.
29 Paragraph 8.7 states that each Recommendation and Determination must do certain things. Relevantly for this case they must be in writing, reach a conclusion about the merits of the Dispute and set out reasons for that conclusion. Under par 8.7(a)(iv), the Recommendation and Determination:
must specify any remedy, determined in accordance with paragraph 9, that FOS considers fair and appropriate[.]
30 Paragraph 8.7(b) provides that:
A Determination is a final decision and is binding upon the Financial Services Provider if the Applicant accepts the Determination within 30 days of receiving the Determination.
31 The term 'Determination' is defined to mean:
a decision by FOS about a Dispute in accordance with paragraph 8 (which may include a decision as to remedy under paragraph 9)[.]
32 Paragraph 8.8 deals with the manner in which an Applicant may accept a Recommendation or Determination. Under par 8.9 if an Applicant does not accept a Recommendation or Determination in relation to the Applicant's Dispute, the Applicant is not bound by the Recommendation or Determination and may bring an action in the courts or take any other available action against the Financial Services Provider.
Remedies
33 Paragraph 9 deals with remedies which FOS may grant. Paragraph 9.1 relevantly provides:
Subject to paragraphs 9.2 to 9.8, FOS may decide that the Financial Services Provider or the Applicant undertake a course of action to resolve the Dispute including:
a) the payment of a sum of money.
34 Paragraph 9.2 provides that:
Subject to paragraph 9.7, FOS may decide that the Financial Services Provider compensate the Applicant for direct financial loss or damage.
- The effect of par 9.7 is that the maximum total value of the remedy decided upon by FOS for a claim must not exceed a specified cap. There is no suggestion in the present case that the total compensation in the present case exceeds that cap.
35 Paragraph 9.3(a) of the terms of reference provides that, subject to a presently immaterial exception and par 9.7:
FOS may decide that the Financial Services Provider compensate the Applicant for consequential financial loss or damage up to a maximum amount of $3,000 per claim made in the Dispute.
36 Paragraph 9.3(d) provides that the cap on liability in par 9.3(a) does not in any way restrict FOS's ability to make an interest award under par 9.5. Paragraphs 9.4 and 9.5 respectively make provision for costs and interest.
37 The terms of reference then go on to provide for a number of matters which it is unnecessary to set out in detail here.
Referral of the disputes in this case
38 On 16 July 2013, MDVR, in her personal capacity and on behalf of the SMSF, referred a dispute to FOS in respect of the financial services provided by Patersons. In essence MDVR and the SMSF were dissatisfied with the financial advice which Patersons had provided, and Patersons' failure to manage the investments in accordance with that advice.
39 It is common ground between the parties that the referral of these disputes gave rise to tripartite contracts between FOS, Patersons and MDVR/the SMSF. It is also common ground that it was a term of these contracts that the parties were to observe and perform the rules of the external dispute resolution scheme conducted by FOS, and that these included the rules set out in the terms of reference.
The determination
40 On 27 October 2014, after following the relevant processes, a panel constituted by FOS issued a determination in respect of the disputes referred to it by MDVR and the SMSF as Applicants.
Findings as to liability
41 In general terms, the panel found that the advice given to MDVR and the SMSF was appropriate. It resolved that aspect of the referred disputes against MDVR and the SMSF. However, it found that the advice which had been given to MDVR and the SMSF was not properly implemented as their portfolios were 'not reflective of a balanced investor'.
42 In relation to the SMSF, the panel found that:
• It held a high proportion of stocks in the energy and materials sector (61% combined on 1 April 2013 - see section 3.3 below).
• It held between 11.41% and 25.28% in 'value driven stock' with the balance in ASX 200 stocks.
• The combination of 'value driven stocks' together with options trading meant the SMSF's overall investments were too heavily weighted in speculative investment to be appropriate for a balanced investor. It went beyond the 80:20 ratio set out in the SMSF's MDA agreement.
• The trading strategy adopted by the broker was inconsistent with the SMSF's SOAs and the SMSF's objectives.
43 The panel also found that:
The adviser also engaged in short term trading in equities as well as exchange traded options (ETOs) over shares and the ASX 200 share index (through XJO options), adopting both bullish and bearish strategies some of which were within a month (appropriately named a 'sudden death option'). In adopting this trading strategy, the adviser was punting that he had read the market correctly, rather than investing for the long term (6).
44 The panel found that the trading strategies adopted by the adviser engaged by Patersons were not as agreed and did not demonstrate the exercise of the requisite level of due care and diligence.
45 The panel found that Patersons' advice was not properly implemented in relation to MDVR's portfolio in that:
• It held only a small number of stocks, only two stocks from 1 July 2012 and no stocks at all from February 2013.
• All other investment was in options trading, taking it outside the 70:30 ratio set out in [MDVR's] MDA agreement.
• The options account had limited diversity (resources or ASX 200).
• The trading strategy adopted by the adviser was inconsistent with [MDVR's] SOA and her risk profile and objectives, for similar reasons as those referred to above in respect of the SMSF (7).
46 In relation to questions of causation, the panel observed:
The Panel's findings are not based on the performance of the strategy adopted, but rather on the FSP's failure to ensure the trading strategy it implemented on behalf of [MDVR] and the SMSF was consistent with what was agreed, consistent with her risk profiles and objectives and was implemented with due care and diligence. This conduct caused [MDVR] and the SMSF to suffer loss (8).
General approach to loss
47 Having found that Patersons caused loss by failing to manage the investment portfolios in the agreed manner, the panel considered how that loss should be quantified. The panel described its general approach in the following terms:
The Panel considers it artificial to segregate the options trading from the equities portfolio for each of [MDVR and the SMSF's accounts]. This is because the equities and options together form a trading strategy and therefore need to be considered as a whole.
It was the combination of the level of 'value driven' shares together with the option trading strategies, that resulted in the failure to properly implement the advice contained in the SOAs to both [MDVR] and the SMSF.
In calculating loss, the objective is to restore [MDVR] and the SMSF, as closely as possible, to the position that they would have been in but for the conduct of the FSP. This is not necessarily achieved by refunding the amount originally invested. It requires comparing the position of [MDVR] and the SMSF as a result of the FSP's conduct with the position they would have been in had the advice been properly implemented.
Mere difficulty in estimating loss does not relieve the Panel of the responsibility of estimating loss as best it can, sometimes even to the extent of guess work rather than estimation. However, where information is available relevant to a claim for compensation, that information should be used rather than to speculate on the quantum of the loss (9).
Direct and consequential loss
48 The panel was cognisant of the limits on the award it could make for consequential or indirect, as opposed to direct, loss. The panel observed:
The FSP submits that a consideration of either the returns [MDVR] would otherwise have received or how the SMSF would otherwise have invested but for the FSP's breach amount to consequential loss. As such, argues the FSP, a $3,000 cap applies to such lost opportunity, pursuant to FOS's Terms of Reference.
Generally speaking, in investments disputes, FOS considers that how an applicant would have otherwise invested but for the relevant breach is part of an applicant's direct loss. This is because the breach directly relates to the investment of the applicant's money. The use of the applicant's money is not one step removed from the conduct that caused the loss.
As such, the Panel will consider [MDVR] and the SMSF's lost opportunity as a result of the FSP's breach (10).
Relevant period
49 The panel said that it considered the losses should be calculated from August 2011/September 2011. This was the time when the initial advice was provided to the SMSF and MDVR and they entered into the investment contracts. The panel rejected a submission by MDVR that allowance should be made for losses sustained between March and August 2011, while she was waiting for the self-managed superannuation fund to be established.
Calculation of MDVR's loss
50 The panel calculated MDVR's loss in the manner indicated in the following table (Appendix 2):
Amount $ | |
| 76,477 |
| 35,762 |
| 112,239 |
| 39,223 |
| 73,016 |
| 59,167 |
| 13,849 |
| 13,849 |
| 4,583 |
| 18,432 |
51 The 'but for' interest was interest at 3% per annum, compounding monthly, from August 2011 to 23 October 2014.
Calculation of the SMSF's loss
52 The panel described the method by which it assessed the SMSF's loss in the following terms:
The Panel considers the best estimation of loss is to assume the SMSF's funds had been invested across the Vanguard Index Australian Shares Fund, which invests across the ASX 300 in manner designed to track the All Ordinaries Index. The Panel considers this approach appropriate given the SMSF's investor profile and the investment strategy in the SMSF's SOAs (12).
53 The panel indicated that it accepted Patersons' submission that the All Ordinaries Index was the appropriate index. (In fact, Patersons' submission as to the appropriateness of the All Ordinaries Index related to the calculation of loss arising from inappropriate advice, rather than the failure to implement the advice as contemplated by the investment contracts. I shall return to this issue in considering Patersons' complaints about the determination.)
54 The panel rejected the SMSF's submission that the performance of its portfolio should be compared with Telstra Super on the basis that it had not been established that the SMSF would have invested in that fund during the relevant period. It also rejected a suggested comparison with other funds which invested in assets other than equities, on the ground that the SMSF engaged Patersons to invest in the share market. The panel concluded that the Vanguard Index Australian Shares Fund, which was designed to track the All Ordinaries Index, was the appropriate comparator.
55 The panel then said:
Had the SMSF invested in the Vanguard Index Australian Shares Fund, the SMSF would have made a gain of $115,400 to 30 June 2013, rather than lost $80,007, bringing the total loss to $195,407 to 30 June 2013.
Had this amount remained invested from 30 June 2013 to 23 October 2014, the SMSF would have gained a further $33,758.
The SMSF's total loss to 23 October 2014 is therefore $229,165 (12).
56 The panel also said that this loss had been calculated as indicated in the following tables:
| Amount $ |
| 445,720 |
| 360,337 |
| 85,383 |
| 5,376 |
| 80,007 |
| If invested in the Vanguard Australian Shares Index Fund | Amount $ | |
| Capital invested | 445,720 | |
| Portfolio value as at 30 June 2013 | 555,744 | |
| Gain | 110,024 | |
| Plus withdrawals | 5,376 | |
| Net gain | 115,400 | |
| Loss due to breach | 195,407 | |
| If $195,407 loss was invested from 30 June 2013 to date | Amount $ | |
| Capital invested on 30 June 2013 | 195,407 | |
| Portfolio value as at 23 October 2014 | 229,165 | |
| Gain | 33,758 | |
| Total loss due to breach | 226,165 | |
57 On 28 October 2014, MDVR and the SMSF accepted the determination issued on 27 October 2014.
These proceedings
58 Patersons commenced these proceedings by writ. It claims declarations that, in making the determination, FOS breached various terms of the contract comprising the constitution and terms of reference. Patersons also seeks a declaration that the panel's determination is not binding on it.
59 FOS alleges that Patersons has breached the tripartite contracts by failing to make payment to MDVR and the SMSF of the compensation referred to in the panel's determination. It claims an order for specific performance requiring Patersons to pay $13,849 plus interest to MDVR and $229,165 plus interest to the SMSF.
60 MDVR and the SMSF have indicated that they do not wish to participate in the proceedings and will abide by the court's decision.
61 The respective cases of Patersons and FOS are based in contract. Neither party asserts that FOS was exercising a public function which was amenable to judicial review by this court. Although the Corporations Act requires Patersons to enter into an external dispute resolution scheme, the rights of the parties in this case are governed by the terms of a contract on which they have agreed. The issues raised in this case concern the proper construction of the agreement which the parties have reached, and the enforcement of claimed contractual rights. Those issues are not to be confused with the issues which commonly arise on an application for judicial review of the exercise of a statutory power by a public officer.
General principles of construction
62 As the tripartite agreement is a commercial contract, it is to be construed in the manner described by the High Court in Electricity Generation Corporation v Woodside Energy Ltd:2
The meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean. That approach is not unfamiliar. As reaffirmed, it will require consideration of the language used by the parties, the surrounding circumstances known to them and the commercial purpose or objects to be secured by the contract. Appreciation of the commercial purpose or objects is facilitated by an understanding 'of the genesis of the transaction, the background, the context [and] the market in which the parties are operating'. As Arden LJ observed in Re Golden Key Ltd, unless a contrary intention is indicated, a court is entitled to approach the task of giving a commercial contract a businesslike interpretation on the assumption 'that the parties … intended to produce a commercial result'. A commercial contract is to be construed so as to avoid it 'making commercial nonsense or working commercial inconvenience'. (footnotes omitted)
63 The contract in this case provides for the determination of a commercial dispute by an independent third party, with no interest in the outcome, producing a decision which is final and binding on the parties. Contracts of this kind are not uncommon. Courts have generally adopted an approach to the construction of such contracts which limits the opportunity for curial interference with the decision on the basis that it is incorrect.
64 An early Australian example of this approach is found in Dickason v Edwards.3 In that case an appeal committee of a friendly society affirmed a decision to expel Mr Dickason from the society. The rules of the society, which operated as a contract between the members, provided for the expulsion of a member adjudged by a committee to be guilty of conduct calculated to bring disgrace on the society. While Griffiths CJ would have been prepared to review the merits of the decision,4 O'Connor and Isaacs JJ took a more conservative view. O'Connor J observed:5
I agree that it is open to the Courts to review the decision of a committee such as this on a question of that kind. The only ground, however, upon which the Courts could interfere is that no reasonable man could come to the conclusion that the facts proved amounted to the offence charged under the rules.
65 O'Connor J himself found it difficult to conclude that Dickason's conduct fell within the rules, but could see no ground for interfering with the view taken by the relevant committee.
66 Isaacs J observed:
I think that, although the Court has an undoubted right to review the finding in one sense, it has only to see whether the finding was arrived at in accordance with the rules, without any departure from the principles of natural justice, and bonâ fide. If those conditions are complied with, then I think that, so long as the finding is one which the Court finds it impossible to designate as one at which no reasonable man could honestly arrive, the Court cannot review it.
67 The Court did declare that Dickason remained a member of the society. The decision to expel him was affected by a gross failure to accord procedural fairness, in breach of an implied requirement of the rules.
68 The High Court again considered the expulsion of members of a society in Australian Workers' Union v Bowen.6 In this case, members of a trade union were expelled for misconduct. The case also raised procedural fairness issues, which it is unnecessary to examine here. A judge of the Arbitration Court had found that no proper ground of misconduct had been shown to exist. Latham CJ addressed the validity of the expulsion by reference to whether it was possible the committee could, as reasonable men, honestly reach the conclusion that the members had been guilty of misconduct.7 Dixon J, with whom Rich & Starke JJ generally concurred, observed:
It is important to keep steadily in mind that we are dealing with a domestic forum acting under rules resting upon a consensual basis. It is a tribunal that has no rules of evidence and can inform itself in any way it chooses. Members may act upon their own knowledge and upon hearsay if they are satisfied of the truth of what they so learn and if they give the member with whom they are dealing a proper opportunity of answering the charge and defending himself. The tests applied to juries' verdicts, namely, whether there was evidence enabling a reasonable man to find an affirmative or whether upon the evidence a finding was unreasonable, have no place in the examination of the validity of such a domestic tribunal's decisions. But the tribunal is bound to act honestly, that is to say it must have an honest opinion that what the member before it did amounted to misconduct and its decision must be given in the interests, real or supposed, of the body it represents and not for an ulterior or extraneous motive.8
69 In rejecting attacks on the expulsion decision, Dixon J observed that, while there was a strong case against a finding, 'the argument amounts to an attempt to review the finding rather than destroy it on the grounds of want of bona fides or misconception of functions'.9
70 Similarly, Williams J was of the view that:10
His Honour could only interfere if he was satisfied that the acts charged were incapable of constituting misconduct within the meaning of the rule, or if he was satisfied that there was no material before the executive council upon which honest men acting bona fide could find that the charges had been established. (citations omitted)
71 In Australian Football League v Carlton Football Club Ltd,11 the primary judge declared that a penalty, imposed by the AFL's disciplinary tribunal for unduly interfering with an umpire, was of no force and effect. In the Victorian Court of Appeal, Tadgell and Hayne JJA held that the primary judge had erred in so deciding.
72 Tadgell J referred to the various reasons why the courts have consistently refused to review the merits decisions made by private or domestic tribunals established to deal with disputes of the relevant kind. One of those reasons was that:
where the parties have agreed to have their disputes decided by domestic tribunals designated for the purpose, the courts have been in the habit of respecting the agreement or, one might say, not countenancing a breach of it by one party wishing to desert it and to resort to the civil courts for resolution of a dispute that the tribunal was designed to decide.
73 After referring to what Dixon J said in Bowen, Tadgell JA found the primary judge to have erred in undertaking his own assessment of the player's conduct. He noted:12
It may be conceded that it is not very difficult to present a view of the oral and visual material that is favourable to a conclusion that the player did not interfere with the umpire unduly or at all or that, if he did, he did not intend it. If the tribunal had reached that conclusion no-one could have said with justification that the tribunal had erred. To undertake an examination of the facts, so far as the judge knew them, with the object of supporting such a view is, however, an inadmissible mode of attacking the validity of the tribunal's conclusion.
74 Tadgell J also considered that:13
When a domestic tribunal is given the task of applying such a criterion [of undue interference] to the facts that it finds, a court is entitled to substitute its own opinion for that of the tribunal only if the tribunal's decision is so aberrant that it cannot be classed as rational.
75 Hayne JA saw Carlton's central point as being that no reasonable person could have come to the conclusion that the player had breached the relevant rule. Hayne JA accepted that there could be only one right construction of the rule, and that it was against that construction of the rules that one must ask whether the tribunal's conclusion was open to it. 14 Hayne JA did not accept that it had been shown that the tribunal misconstrued the rule it was required to consider. He rejected the submission that there was 'no evidence' from which the tribunal could find that the player had breached the rule.15He also observed:16
Rule 27.1(d) of the AFL. Rules and Regulations provides that 'the decision of the Tribunal should be final and binding'. In my view that provision does not prevent a player suing for breach of contract if enforcement of the tribunal's decision would constitute such a breach. Likewise, it is not effective to preclude the court applying a general principle of law (if that is its proper characterisation) that enforcement will be restrained of decisions of domestic tribunals that are 'absurd' or 'unreasonable' (Dickason at 254 per O'Connor J) or are decisions that 'no reasonable man could come to' (Dickason at 254 per O'Connor J) or are decisions contrary to 'fundamental principles of common justice' (Dickason at 255 per O'Connor J.) or are decisions 'at which no reasonable man could honestly arrive' (Dickason at 258 per Isaacs J) or are decisions for which there is 'no evidence' (Lee v Showmen's Guild of Great Britain [1952] 2 QB 329 at 340 per Somervell LJ) or are decisions affected by 'Wednesbury unreasonableness' (Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223). (I need not and do not choose between these various expressions.)
76 The Victorian Court of Appeal returned to consider the approach of the courts to challenges to decisions of independent domestic tribunals in Mickovski v Financial Ombudsman Service Ltd.17 That case concerned a challenge to a decision of a panel chair under a previous version of FOS's terms of reference. Clause 15.3 of those terms of reference provided for a decision of a panel chair to be final. The court accepted that the panel chair had misconstrued the rule which identified complaints with which FOS could not deal. However, the court concluded that this was not a sufficient error to vitiate his decision.18 The court said that where parties agree that a determination is to be 'final':
they are taken to have agreed that the determination will not be subject to review unless affected by fraud or dishonesty or lack of good faith or (by analogy with jurisdictional error) unless it is otherwise apparent that the determination has not been carried out in accordance with the agreement [41]. (citations omitted)
77 The court concluded that the panel chair made an error in construing the rules for the purposes of deciding whether FOS had jurisdiction. However, the error was in the ambit of the decision-making power conferred on him by cl 15.3 of the terms of reference. In explaining what was meant by this, the court said:
That is to say, the Panel Chair was not guilty of fraud or lack of good faith; he was not prejudiced; and he did not misconceive the task which he was required to undertake. He simply made an error in the process of reasoning which he adopted in the execution of his decision making responsibility [15].
78 The grounds on which courts could review a decision made under FOS's terms of reference were also considered by the Victorian Court of Appeal in Cromwell Property Securities Ltd v Financial Ombudsman Service Ltd.19 In that case a challenge was made to a decision that FOS should not refuse to consider a referred complaint on the ground that it would be more appropriately dealt with by a court. The applicable terms of reference were as amended on 1 January 2012 (ie, the terms of reference with which I am concerned).
79 Warren CJ and Osborn JA proceeded on the basis that there was an implied contractual provision requiring FOS to exercise its power to refuse to consider a dispute reasonably.20 They described the essence of the tripartite agreement as being that the parties would accept the independent arbitration of the dispute in accordance with FOS's judgment as to what was fair.21 They saw the standard of review involved as akin to that applied in administrative law cases by reference to the decision in Associated Provincial Picture Houses Ltd v Wednesbury Corporation,22 observing:
In summary, we consider that the relevant standard for review under the [terms of reference], and in contracts of this type by reference to reasonableness is the standard set in Wednesbury. We do so on the basis that there is long standing authority in this Court and in other jurisdictions, that where parties contract into an arbitral process with a third party, a court should only intervene where the decision is plainly unjust. The decision can only be reviewed if it is 'one to which no reasonable tribunal could properly come on the evidence'. To set the standard of positive reasonableness, as Cromwell submitted, would defeat the intention of the contract and potentially play havoc with a scheme that is meant to be efficient, cost effective, and informal [93]. (citation omitted)
80 Warren CJ and Osborn JA held that FOS's decision was not unreasonable in this sense.
81 Tate JA dissented in her analysis of the facts of the case, but adopted the same principle.23 She explained the rationale for the general principle in the following terms:
What the contract provides for is the provision by FOS of an independent third-party dispute resolution scheme where the disputes lie between members of FOS and those who are eligible to bring complaints. As I have endeavoured to demonstrate above, the standard of Wednesburyunreasonableness applies not because FOS is a public body or is performing governmental functions, for it is not, but rather because this is the standard long recognised as applicable to a private domestic body engaged in the resolution of disputes between its members, and it signals that intervention is warranted by a court either on the basis of a term implied into the contract by operation by law or because of general principles of law. It is a standard that reflects the need for judicial restraint to avoid subverting the rationale behind the provision of such services [256]. (citation omitted)
82 Noting this general approach to the construction of relevant contracts, the question remains whether what has been done by the person or body making the independent decision is authorised by the particular contract. The answer to this question ultimately turns on the proper construction of the contract which enables the dispute to be referred to independent determination.
83 This point was made by McHugh JA in Legal & General Life of Australia Ltd v A Hudson Pty Ltd.24 In that case a lease provided for a dispute in a rent review to be determined by a valuer acting as an expert, whose decision was to be final and binding on the parties to the lease. McHugh JA found that the valuer made an error in the rate applied to part of the leased premises.25 McHugh JA considered that the question of whether the valuation was binding on the parties to the lease depended on whether the valuation was made 'in accordance with the contract'.26 McHugh JA concluded that the mistake was not one which enabled the court to set aside the valuation. This was because there was nothing in the contract which would enable the valuation to be set aside on the simple ground that the valuer made a mistake. The mistake in the process of valuation was not a departure from the terms of the contract.27
84 The approach favoured by McHugh JA in Legal & General was applied by the Victorian Court of Appeal in AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd.28 In that case a determination of amounts payable in respect of gas tariffs, which was to be based on amounts of gas withdrawn from the system, proceeded on a mistaken understanding of the amount of gas withdrawn. It was held that, on the proper construction of the contract, the valuation did not accord with the contract and so was not final and binding. This decision also highlights the importance of construing the contract concerned.
The contractual obligation in this case
85 Having noted the general approach to the construction of contracts of this kind evidenced by the authorities, it remains necessary to construe the terms of reference in this case in order to ascertain the contractual obligations of the parties. In undertaking that task, it is important to bear in mind that those authorities, other than Cromwell, were dealing with different contractual instruments. Cromwell was concerned with the exercise of discretion under par 5.2 of the terms of reference. It remains necessary in this case to construe the terms of reference to see what kinds of determination under par 8 of the terms of reference create contractual rights and obligations.
86 The authority conferred by par 8.5(c) is to proceed to a 'Determination'. Paragraph 8.7(b) provides that a 'Determination' is a final decision and is binding on Patersons if accepted by the Applicant. Patersons accepts that the effect of the reference to it being bound by a Determination is that it is under an obligation to pay the amounts specified in the Determination to the SMSF and MDVR.29 In that manner the tripartite contract provides for the creation of contractual rights and obligations by reference to a Determination. However, for all these purposes, the word 'Determination' is used in its defined sense.
87 A decision is only a Determination, as defined in par 20.1 of the terms of reference, if it is made 'in accordance with paragraph 8 (which may include a decision as to remedy under paragraph 9)'. A decision of a panel will, therefore, only produce the legal consequences provided for by the tripartite contract if it is a 'Determination'; ie, if it has been made in accordance with par 8 of the terms of reference. If the decision is made otherwise than in accordance with par 8 then it is not a 'Determination'. Such a decision does not produce the legal consequences for the rights and obligations of the parties which the contract provides for a Determination to have.
88 It is then critical to identify what par 8 of the terms of reference requires of a Determination. Many of those requirements concern the process by which a Determination is made, rather than the criteria to be applied on making a Determination. Process matters include the information which FOS can receive (pars 8.1, 8.3 and 8.4), the procedural steps involved in making a Determination (pars 8.5 and 8.6), the form of a Determination (par 8.7) and the manner in which an applicant may accept a Determination (pars 8.8 and 8.9).
89 Paragraph 8.2 is the central provision in par 8 dealing with the substantive manner in which the dispute is to be resolved. Paragraph 8.2 requires FOS to do 'what in its opinion is fair in all the circumstances'.
90 In forming an opinion about what is fair, FOS is to have regard to legal principles. However, it is not required to apply those principles.30 Paragraph 8.2 also provides for FOS to have regard to a variety of other matters. In deciding upon the fair and appropriate remedy, FOS is not limited to making decisions which could be made at law or equity.31
91 It follows that the opinion which FOS is to form under par 8.2 is not a legal opinion about the pre-existing legal rights, duties and liabilities of the parties to the Dispute. While FOS is to have regard to the existing contractual rights, its task is not confined to determining the legal liabilities of the parties under the relevant contract. Rather, FOS is to act on the basis of its opinion of what is fair in all the circumstances. This is a very broadly expressed contractual power.
92 The opinion which FOS is to form under par 8.2 does not only govern its decision in relation to the Dispute. FOS is also expressly required to do what in its opinion is fair in all the circumstances when deciding whether a remedy should be provided in accordance with par 9 of the terms of reference. This is confirmed by par 8.7(a)(v), which requires a Determination to:
specify any remedy, determined in accordance with paragraph 9, that FOS considers fair and appropriate.
93 Paragraph 9 provides for FOS to decide that Patersons pay the Applicants a sum of money by way of compensation for direct financial loss and damage. However, it is for FOS to decide whether direct financial loss or damage has occurred and the amount of the payment which is fair and appropriate to compensate for that loss and damage. FOS's decision is not open to challenge on the ground that direct loss or damage has not in fact been sustained or because the payment required exceeds that which a court of law would award as compensation for the loss or damage.
94 That FOS is to do what in its opinion is fair means that its decisions will rarely be open to successful curial challenge on their merits. The standard applied in determining what is fair is not exclusively legal. As the decision in Mickovski illustrates by reference to the former terms of reference, even errors of construction of the terms of the contract going to the 'jurisdiction' of FOS need not be reviewable.
95 I accept that, either as a matter of fact or law, it is implicit that the opinion referred to in par 8.2 must be an honest opinion at which a reasonable person could honestly arrive in a bona fide and rational exercise of the function conferred by the contract for the purpose of deciding the dispute. Reasonableness is to be assessed in the manner described by the Victorian Court of Appeal in Cromwell. In assessing the reasonableness of the opinion, it must be kept in mind that the subject of the opinion is not the existing legal rights, duties and liabilities of the parties. Rather, the subject of the opinion is what is fair in all the circumstances.
96 In the present case FOS has not been shown to have acted dishonestly, for an improper purpose or otherwise than in accordance with the procedure set out in par 8 of the terms of reference. In those circumstances, the question for the court is whether a reasonable person, acting rationally and with regard to the matters specifically referred to in pars 8(a) - (d), could have formed an opinion that it was fair in all the circumstances that Patersons pay the SMSF and MDVR the specified amounts to compensate them for direct financial loss or damage. If an affirmative answer can be given to that question, the decision of the panel will be a Determination as defined in the contract, which will be final and binding on the parties.
97 This construction of the tripartite contract advances the commercial purpose of the parties in entering into the agreement. The purpose of that contract was to enable FOS to resolve disputes between Patersons and its customers in a manner that was 'efficient, timely and fair',32 without recourse to curial processes. To achieve that outcome, the parties agreed to accept the independent arbitration of the dispute by FOS based on its opinion as to what was fair. It would frustrate the commercial purpose of the agreement if the panel's decision were potentially no more than a precursor to a legal debate in this court as to the correctness of the conclusions which the panel had reached. The commercial purpose of the agreement will be achieved only if the parties' capacity to challenge the panel's decision by reference to the correctness of the decision is tightly confined.
Patersons' primary argument: consequential or indirect loss
98 Patersons' primary complaint is that FOS awarded compensation for consequential financial loss, or indirect loss, in excess of the agreed cap of $3,000 per claim. Patersons alleges that, in doing so, FOS acted in breach of contract and beyond its contractual mandate. For that reason Patersons contends that the purported determination is ineffective and not binding upon it.
99 The first step in Patersons' argument is to submit that FOS will act in breach of par 9.3(a) of the terms of reference if it decides that Patersons must pay an amount to compensate the SMSF and MDVR for consequential financial loss or damage (which is indirect as opposed to direct financial loss or damage) in an amount greater than $3,000.
100 The second step in Patersons' argument is that, on the proper construction of the contract, the reference to consequential or indirect loss is to the loss of profit or loss of opportunity to make a gain. Patersons contends that direct loss in a case such as the present is the direct or immediate loss resulting flowing from the incorrect implementation of the advice.
101 The third step in Patersons' argument is that:
1. the amount of $4,583 allowed for 'but for' interest in the case of MDVR; and
2. the amounts of $155,400 allowed for net gain and $33,758 allowed for gain in the case of the SMSF,
(as indicated on the tables at [50] and [56] above) are properly characterised as consequential or indirect losses for the purposes of the tripartite contracts. Patersons contends that the only direct losses were the loss of capital invested, which was $13,849 in the case of MDVR and $80,007 in the case of the SMSF.
102 This process of reasoning leads, on Patersons' case, to the conclusion that FOS has breached the contract by determining that Patersons pay amounts of more than $3,000 for loss which is consequential financial loss within the meaning of par 9.3(a) of the terms of reference, on its proper construction. Patersons therefore claims that the determination is not binding on Patersons, meaning that it is not obliged to pay the determined amounts to MDVR or the SMSF.
Patersons' first step: breach of 9.3(a) of the terms of reference
103 Implicit in Patersons' argument is the proposition that FOS will breach the contract if it requires the payment of a sum of money in excess of $3,000 to compensate for loss which is objectively consequential or indirect, as opposed to direct, loss or damage. That is, Patersons' argument proceeds on the basis that FOS will breach the contract if it awards compensation above the threshold for loss or damage which the court characterises as consequential or indirect.
104 The principal difficulty with this submission is that it invites the court to undertake the kind of judicial review which the parties have sought to avoid by providing for FOS to decide their Dispute and the appropriate remedy by reference to its opinion as to what is fair. The plaintiff would require this court to analyse the kinds of loss actually suffered to form its view as to whether the loss is direct or consequential. The panel's decision as to the amount which Patersons should pay to compensate for direct loss would then be assessed by reference to the court's own views of the extent and character of losses suffered by MDVR and the SMSF.
105 If the court were to adopt that approach it would be substantially performing the task which the parties have assigned to FOS. The court would be rightly open to the criticism levelled by Tadgell JA at the primary judge in AFL v Carlton. It would be adopting an inadmissible mode of attacking the validity of the panel's conclusion.
106 In my view, FOS will not breach the contract merely by allowing compensation for loss which has not in fact occurred, is not of the value assessed by the panel or which the panel has mischaracterised as direct loss. Those questions are committed to FOS for its final determination. FOS's contractual obligation is relevantly to form an opinion as to whether it is fair and appropriate in all the circumstances to require that a specified amount be paid to compensate for direct loss. So long as it decides the dispute and remedy by reference to such an opinion, FOS will fulfil its contractual function. It will not breach the contract by requiring payment of compensation in an amount exceeding what the court assesses as the value of direct loss, unless it acts dishonestly, for an improper purpose or unreasonably in valuing that loss.
107 I accept that FOS would have been in breach of the contract if it had assessed what FOS regarded as consequential loss to be in excess of $3,000 and required Patersons to pay that amount. In such a case, FOS may be seen to be acting for a purpose not contemplated by the contract, and its opinion would not be of a kind provided for in par 8 of the terms of reference. As Le Miere J noted in Utopia:33
A decision that the Financial Services Provider pay to the Applicant a sum of money will only be appropriate if it is for the purpose of compensating the Applicant for direct financial loss or damage or, to a limit of $3,000, for consequential financial loss or, in the special circumstances specified, for non-financial loss.
- If FOS had identified what it regarded as consequential loss to be in excess of $3,000 and had decided to require a payment of money to compensate for the full amount of that loss, it would not be acting for the requisite purpose.
108 However, in the present case the panel did not purport to require payment of any amount in respect of consequential loss. The panel's determination requires compensation to be paid only for what it regarded as direct loss. The real substance of Patersons' complaint is not that the panel decided to require Patersons to pay an amount as compensation for consequential loss. Rather, the complaint is that, in ascertaining the amount of direct loss, the panel compensated for loss which was not objectively direct.
109 That complaint is made in a setting where all parties accept that there was direct loss as a result of Patersons' failure to invest the funds as agreed. Patersons does not dispute that it was fair and reasonable to require Patersons to pay a sum of money to compensate MDVR and the SMSF for direct loss. The debate is about the quantum of the award rather than the fact of the award.
110 In this context, the question for the court in assessing that complaint is whether it was open to FOS, acting honestly and rationally, to decide that in all the circumstances it was fair to require Patersons to pay the specified sums of money to compensate MDVR and the SMSF for direct financial loss. If it was open to FOS to decide the dispute in that manner then FOS will not be in breach of the contract, even if the court is of the view that some of the financial losses are properly characterised as consequential.
111 For the above reasons, I do not accept the first step in Patersons' argument, to the effect that FOS will be in breach of the contract if its decision required compensation for losses which the court regards as consequential.
Patersons' second step: construction of the term 'consequential loss'
112 The second step in Patersons' primary argument is that the reference to consequential or indirect loss in the contract is to loss of profit or loss of opportunity to make a gain.
Case law
113 I shall begin by considering some authorities which deal with the construction of terms such as 'consequential loss' or 'direct loss' in contractual exclusion clauses. The outcome of that review is a conclusion that concepts of 'direct', 'indirect' and 'consequential' loss do not have fixed and settled legal meanings.
114 The English position is explained in McGregor on Damages:34
[I]n the context of contractual exclusions of liability for consequential loss or damage, the courts have consistently seen the distinction between normal loss and consequential loss differently, as that between losses falling within the first and second rules in Hadley v Baxendale respectively. There is today a vast array of authorities, mainly in the Court of Appeal, which hold an exclusion clause to be inapplicable because the damage or loss does not fall within the second rule in Hadley v Baxendale. (citations omitted)
115 In Hadley v Baxendale,35 the plaintiffs, who owned a flour mill, engaged the defendant to convey a broken shaft from the mill to a business which had agreed to construct a new shaft using the broken part as a model. Delivery of the broken shaft was unreasonably delayed. The plaintiffs sued for breach of contract, and were awarded damages for profits lost during the period they were unable to operate their mill for want of a shaft. In setting aside the verdict, on the basis that the defendant was not liable for lost profits when it did not know that the mill had to be stopped until the shaft was replaced, Baron Alderson stated the following principles:
Now we think the proper rule in such a case as the present is this:- Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e., according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it. Now, if the special circumstances under which the contract was actually made were communicated by the plaintiffs to the defendants, and thus known to both parties, the damages resulting from the breach of such a contract, which they would reasonably contemplate, would be the amount of injury which would ordinarily follow from a breach of contract under these special circumstances so known and communicated. But, on the other hand, if these special circumstances were wholly unknown to the party breaking the contract, he, at the most, could only be supposed to have had in his contemplation the amount of injury which would arise generally, and in the great multitude of cases not affected by any special circumstances, from such a breach of contract.
116 So the English approach to exclusion clauses treats only losses caused by special circumstances, and which are only recoverable by a plaintiff if the defendant has knowledge of them, as consequential losses.
117 The English approach was criticised by the authors of McGregor on Damages in the following terms:
The whole approach, it is believed, is to be deprecated … It is … illogical and fails to make practical sense to confine consequential loss in contract to loss falling within the second rule in Hadley v Baxendale, being contradictory for one contracting party to communicate special circumstances to the other so as to fix him with a liability for loss to which he would not otherwise be subject and at the same time to accept an exclusion of liability in respect of the selfsame loss. (citation omitted)The authors go on to argue36 that the issue should not be regarded as settled in England, having not reached the Supreme Court, and that Lord Hoffmann expressly left the issue open in Caledonian North Sea Ltd v British Telecommunications Plc.37
118 The criticism of the English approach was picked up in Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd.38 In that case Peerless claimed that Environmental Systems (ES) had breached its contract by supplying a defective vapour emission control system and related services. One issue was whether damages were recoverable for the cost of labour incurred in attempting to make the system operate and the extra cost of gas. ES contended that compensation for these items was not available in the face of provision in the contract which provided that ES did not accept 'consequential loss'. The primary judge held the expression covered only losses recoverable under the second rule in Hadley v Baxendale, and that the claimed losses did not fall within that rule.
119 Nettle JA, with whom Ashley & Dodds-Streeton JJA agreed, accepted the criticism of the English position advanced in McGregor on Damages. He saw the true distinction as being between:39
'normal loss', which is loss that every plaintiff in a like situation will suffer, and 'consequential losses', which are anything beyond the normal measure, such as profits lost or expenses incurred through breach.
- Nettle JA regarded this as reflecting the way that ordinary reasonable business persons would naturally conceive of consequential loss. The claimed losses for labour and gas were regarded as 'consequential losses' for this purpose.
120 The decision in Peerless was noted by Le Miere J in Utopia.40 Le Miere J also noted that New Zealand and Australian courts had also adopted the approach of equating consequential losses with the second rule in Hadley v Baxendale, referring to decisions in Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd41 and Frank Davies Pty Ltd v Container Haulage Group Pty Ltd (No 1).42
121 In 2009, Professor JW Carter reviewed the English and Australian law in this area and found both approaches to be artificial and, in his view, wrong in approaching the expression 'consequential loss' from particular legal perspectives rather than from a commercial perspective which will vary from case to case.43
122 Professor Carter's observations were found to be compelling by Kenneth Martin J in Regional Power Corporation v Pacific Hydro (No 2).44 Kenneth Martin J doubted that Nettle JA had intended to articulate any 'generally applicable replacement disposition' in Peerless.45 In Pacific Hydro, the Regional Power Corporation claimed damages for breach of an agreement to supply power which occurred while the defendant's power station was inoperative for 12 months. The damages claimed included a claim for the costs of arranging an alternative source of power. That aspect of the claim was resisted on the ground that the relevant contract excluded liability for any 'indirect, consequential, incidental, punitive or exemplary damages or loss of profits'.
123 In holding the claimed losses to be direct, Kenneth Martin J approached the construction of the exclusion clause by reference to the proper construction of the contract as a whole, rather than the application of a general rule. However, he gained some assistance from an observation of Ryan J in GEC Alsthom Australia Ltd v City of Sunshine.46 In a similar context to that considered by Kenneth Martin J, Ryan J had observed that the expression 'consequential loss' connotes loss at a step removed from the transaction and its immediate effects. In that context it was regarded as confined to loss resulting from the use or inability to use plant or investment 'for a purpose extraneous to that directly contemplated by the transaction documents'.
124 In Macmahon Mining Services Ltd v Cobar Management Pty Ltd, McDougall J referred to the above authorities in dealing with a strike-out application. He did not purport to give a definitive ruling on the proper construction of the exclusion clause in that case, which referred to direct and indirect loss. However, McDougall J saw great appeal in an observation of Atkinson J in Saint Line Ltd v Richardsons, Westgarth & Co Ltd that:47
Direct damage is that which flows naturally from the breach without other intervening cause and independently of special circumstances, while indirect damage does not so flow.
125 What emerges from the above discussion is a variety of different views expressed by very eminent judges and academics as to the proper approach to the construction of terms such as 'direct loss', 'indirect loss' and 'consequential loss' appearing in exclusion clauses of contracts.
126 I agree the view of Kenneth Martin J in Pacific Hydro: Nettle JA did not, in Peerless, intend to set down a fixed and inflexible rule, to be applied in all circumstances and all contractual contexts, that loss of profits can only be consequential or indirect loss. The critical concept employed by Nettle JA was 'normal loss', which is loss that every plaintiff in a like situation will suffer. Consequential losses were anything beyond the normal measure. In many cases, a loss of profits will not be normal loss, because generally the profits which a plaintiff may make will depend on the particular plaintiff's revenue or cost streams. For many contracts, the loss of profit resulting from breach will vary between plaintiffs, and so will not be a loss that every plaintiff in a like situation will suffer. As a general statement, it is no doubt correct to say that loss of profits will not be 'normal loss' in that sense. However, there may be particular cases where that is not so. For example, if the relevant contractual obligation is to secure a minimum net rental return then the failure to deliver that return will produce 'normal loss' which any plaintiff having the benefit of that contractual promise would suffer.
127 I also agree with Kenneth Martin J that the appropriate approach is to construe the particular contract as a whole, and that references to direct and indirect loss are to be considered in the context in which they appear in the particular contractual instrument.
128 Given that the meaning of the terms of a commercial contract is to be determined by what a reasonable businessperson would have understood those terms to mean, it does not seem appropriate to construe terms by reference to general rules stated in previous cases dealing with different contracts. Common words such as 'direct' and 'indirect' are more likely to be understood by reasonable business people as having their ordinary meaning as opposed to a meaning developed in a series of curial decisions of which they have no reason to be aware.48
Proper construction of 'consequential loss' in the terms of reference
129 Paragraph 9.2 of the terms of reference refers to direct loss. Consequential loss is defined to mean indirect loss. The terms of reference draw the dichotomy between direct and indirect loss. I agree with the Patersons' submission that the ordinary and natural meaning of the terms 'direct' and 'indirect' distinguish between 'immediate loss' (direct loss)49 and loss 'coming or resulting otherwise than directly or immediately, as effects, consequences etc'. 50
130 In considering the context in which those words appear, it is important to note that the contract contemplates the terms being applied to a wide variety of circumstances. The disputes to which the terms must be applied will include disputes arising under the range of different kinds of arrangements that may constitute the provision of financial services. These includes loans, investments, insurance policies, facilities for non-cash payments, leasing and hire purchase arrangements and financial or investment advice.51 Disputes arising from or relating to the variety of matters referred to in par 4.2(b) may be the subject of remedies contemplated by par 9 of the terms of reference. The disputes need not relate to contractual liability. Under par 4.2(a) it is sufficient that the dispute arises from an obligation arising under Australian law. This potentially includes obligations arising from the common law (such as a tortious duty of care), equitable obligations (such as those imposed on a trustee) and statutory obligations (such as those imposed by the Australian Consumer Law or the Corporations Act).
131 Given the wide range of circumstances in which the references to direct and indirect loss must be applied, it is dangerous to attempt any all-encompassing definition even for the purposes of the tripartite contract. What is direct or indirect loss will depend on the circumstances of the particular case, and may vary according to the nature of the obligation owed, the manner and circumstances in which the obligation was breached, the kind of loss resulting from that breach and manner and circumstances in which the loss was sustained.
132 In the context of a contract providing for the grant of remedies in such a broad range of disputes, a reasonable business person would not give the words 'direct' or indirect' loss a meaning other than their ordinary and natural meaning. In my view, the essence of the distinction evoked by that meaning is, in general terms, between direct loss which flows naturally from the breach without other intervening cause and indirect loss which does not so flow.52 Whether particular loss - including loss of profits - is direct or indirect depends on all the circumstances of the particular case.
133 It follows that I do not accept Patersons' submission that 'direct loss' refers to the immediate loss of capital flowing from breach, while 'indirect loss' refers to the loss of the opportunity to make a profit or gain. In many contexts in which par 9 must be applied there will be no 'capital' at all. It is an error to construe the paragraph in a manner which is only applicable to contracts for the investment of capital with a view to making profit. Patersons' argument as to the meaning to be given to phrases appearing in par 9 suffers from too narrow a focus on the circumstances in which those phrases are to be applied in the present case. The phrases are not targeted towards losses caused by breaches of contractual obligations to invest in a certain manner, but apply to a much broader range of disputes. In this case, the phrases 'direct loss' and 'indirect loss' are not to be read down by reference to what is at issue in the present disputes.
134 I have not referred to the extrinsic material relating to the development of the current version of the terms of reference in reaching the above conclusions. That is for two reasons.
135 First, there is no evidence that MDVR or the SMSF had any knowledge of the matters referred to in the extrinsic material, which are not notorious facts. Reference to surrounding circumstances is only permissible where facts are known to the contracting parties.53
136 Secondly, I did not find the extrinsic material relied on by Patersons to assist in the construction of the contract. The material indicates that FOS initially proposed a term of reference providing for compensation for 'financial loss or damage (whether direct or consequential)', and that the term was ultimately not included. However, I am unable to perceive any common understanding as to the content of the relevant concepts reflected in that material.
137 For these reasons, I uphold FOS's objection to the admissibility of FOS's discussion paper on the development of new terms of reference and the draft terms of reference on relevance grounds.54
138 I also note that Patersons relied on the contents of submissions made by various 'stakeholders' on draft terms of reference. I do not regard the statements in those submissions as reflecting anything other than the subjective understanding of the person making the submission. While the fact of the content of the submissions is agreed, the agreed fact does not assist in resolving the construction question.
Whether the panel erred in construing 'consequential loss'
139 The panel's general understanding of the concept of economic loss is reflected in the following passage, quoted above but reproduced again for ease of reference:
Generally speaking, in investments disputes, FOS considers that how an applicant would have otherwise invested but for the relevant breach is part of an applicant's direct loss. This is because the breach directly relates to the investment of the applicant's money. The use of the applicant's money is not one step removed from the conduct that caused the loss.
140 Depending on what is comprehended by the concept of 'investment dispute', this statement may be too broad. There may well be many investment disputes, particularly where the breach consists of inappropriate advice, where the loss of opportunity to invest in another way will be properly characterised as an indirect loss.
141 However, in this passage the panel is only speaking generally. The passage also recognises the fundamental distinction between direct and indirect losses. It identifies a critical distinction as being whether the loss is 'one step removed' from the conduct. That is in substance the basic distinction which I have perceived. While the general proposition put may be put in a manner which is unduly broad, I am not convinced that it evidences a misunderstanding of the fundamental distinction between direct and indirect loss as those terms are used in the contract.
Effect of any error by the panel in its construction of the term 'consequential loss'
142 Even if the panel's determination does disclose an error as to the proper construction of 'direct loss' and 'indirect loss' in the terms of reference, that misconstruction did not involve the panel acting in breach of the contract. Given the range of views which have been expressed by judges and academics as to the nature of direct and consequential loss, it cannot be said that the view adopted by the panel was unreasonable even if it was wrong. If there was an error in construction of the terms of reference it was an error of the kind referred to in Mickovski, which was within the ambit of the decision-making power conferred on FOS by par 8 of the terms of reference.
Patersons' third step: direct and indirect loss in this case
143 The third step in Patersons' argument concerns the identification of the direct and indirect loss suffered by MDVR and the SMSF in the particular circumstances of this case.
144 In considering this submission, it is important to appreciate the nature of the breach. The breach was not a failure to give appropriate advice, resulting in the client having less money to invest. In such a case the loss reflected in the opportunity cost of not having more money to invest may well be regarded as indirect or consequential loss. In such a case the decisions which the client would have made if they have not suffered the loss stand between the breach and the loss.
145 Rather, in the present case the breach found was a failure to act in accordance with a contract which required an investment to be made in a particular way. If the action for breach of contract had been litigated in a court, an appropriate measure of damages would have been the difference in the value of the investment portfolio as at 30 June 2013 (when the loss was crystallised) and the value which the portfolio would have had at that date if the contract had been performed according to its terms.
146 In that manner MDVR and the SMSF would have been placed in the same situation, with respect to damages, as if the contract had been performed according to its terms.55 Had the contract been performed according to its terms, on 30 June 2013 MDVR and the SMSF each would have had a portfolio of securities predominantly (80%) made up of ASX 200 shares. Patersons' failure to implement the agreement meant that MDVR and the SMSF held a different set of securities at that date, with a different value resulting from the greater than authorised proportion of speculative securities.
147 I accept FOS's submission that the principle for assessing damages is the same as that which is applied where an agent is engaged to invest the funds of the principal in a particular asset, and fails to do so despite the asset being available for purchase, and the value of the asset rises. In such a case the principal is entitled to recover against the agent the enhanced value as if the asset had been purchased.56 In the present case, Patersons was appointed agent with a discretion as to the particular securities to be purchased, but failed to exercise that discretion as required by the investment contracts. Provision for discretion complicates the task of assessing the value of securities that would have been held if each investment contract was performed according to its terms. However, the provision for discretion does not alter the principle on which damages are to be assessed.
148 The loss suffered by MDVR and the SMSF was not the difference between the value of securities held at the crystallisation date and the amount invested at some earlier time. The investment contracts did not guarantee profit. If the value of securities would have fallen below the amount invested even if the contract was performed according to its terms then Patersons would not be liable to compensate for that loss. Even if the value of securities held on the crystallisation date exceeded the amount invested, there may still have be loss caused by the failure to implement the investment contract if doing so would have added even greater value to the portfolio. What was lost as a result of the breach was the loss in the value which the securities would have held if the portfolio was assembled in the manner provided for by the contract.
149 I do not regard the difference in the value of the securities portfolio held on 30 June 2013, and the value of the portfolio which would have been held if the investment contract had been performed according to its terms, as an 'opportunity cost'. In my view it is the direct result of Patersons' failure to implement each investment contract according to its terms. There was no intermediate step between the breach and the loss. The loss did not depend on any investment decision being made by the client. The investment parameters were set by the terms of the investment contracts themselves. The loss I have described was properly classified as a direct, rather than an indirect or consequential, loss.
150 I would reach the same conclusion even if direct losses were those which fell within the first rule in Hadley v Baxendale. Given the terms of the investment contract, the difference in value between the securities Paterson purchased and the securities Patersons ought to have purchased may fairly and reasonably be considered as arising naturally from that breach of contract itself. Further, if the approach suggested in Peerless is adopted, such loss may be regarded as 'normal loss' loss that every plaintiff in a like situation (ie with the same contractual terms) will suffer. On any of those views, the difference between the actual value of the portfolio and its value if the investment contract had been performed was loss caused directly by Patersons' failure to perform the investment contract according to its terms.
151 The panel did calculate this difference, using the Vanguard Index Australian Shares Fund to identify the value of the portfolio if the investment contract had been performed, when it said:
Had the SMSF invested in the Vanguard Index Australian Shares Fund, the SMSF would have made a gain of $115,400 to 30 June 2013, rather than lost $80,007, bringing the total loss to $195,407 to 30 June 2013.
152 While the panel performed separate calculations for loss of capital and gain in its table calculating the SMSF's total loss, it did not need to do so. The substantive effect of its calculation in the table to identify loss due to breach was to subtract the actual value of the portfolio on 30 June 2013 from the value which the securities would have had on that date if the investment contract had been performed.
153 By contrast, the losses attributed after the loss crystallisation date of 30 June 2013 were, in my view, properly characterised as indirect losses. The assessment of those losses involves interposing an investment decision made by the relevant client following the sale of the securities which were subject to the investment contract. The extent of the profits which would have been achieved with the funds that the client did not have, by reason of the breach of contract, would depend on the investment decisions which the client would have made after 30 June 2013. I would, therefore, regard the panel's calculated loss after 30 June 2013 of $33,758 as an indirect or consequential loss.
154 Therefore, I would regard all of the loss assessed for the SMSF, other than the $33,758 'gain' on a hypothetical investment after 30 June 2013, as direct loss. The $33,758 was, in my view, more properly characterised as an indirect or consequential loss. Had I been deciding the matter on its merits, I would have reduced the latter allowance to $3,000.
155 However, I am not determining the matter on its merits. While the panel may have made a mistake in the characterisation of this aspect of the loss as direct, the approach adopted by the panel was not irrational or unreasonable. It was an error made within the panel's decision-making authority.
156 The panel's rationale for calculating MDVR's loss is a little more difficult to understand. However, given the small amount of 'opportunity cost' of $4,583 as 'but for interest', and the fact that the rate of return for MDVR was lower than that calculated for the SMSF, the panel's conclusion as to the quantum of MDVR's direct loss was not irrational or unreasonable. Further, the panel's award to MDVR is an award of interest which the cap does not restrict (par 9.3(d) of the terms of reference).
Conclusion in relation to Patersons' primary argument
157 For the above reasons, the critical question is not whether the loss assessed by the panel is, in the court's view, properly classified as consequential or indirect loss. The critical question is rather whether it was open to the panel, acting honestly and rationally, to decide that in all the circumstances it was fair to require Patersons to pay the specified sums of money to compensate MDVR and the SMSF for direct financial loss. That question is to be answered in the affirmative. While the panel made some errors, the errors did not involve FOS forming an opinion as to what was fair in all the circumstances other than in accordance with par 8 of the terms of reference. The errors did not cause the panel to exceed its contractual decision-making authority.
Patersons' alternative argument
158 Patersons' alternative argument is that FOS's calculation of loss in the determination was unreasonable or irrational because:
1. it did not take into account losses that would have been incurred regardless of Patersons' incorrect implementation of the agreed investment strategy; and
2. it calculated a loss from the very start, not when the incorrect implementation occurred.
159 It follows from the manner in which I have calculated the loss above that I do not accept these submissions. The paper losses and gains to the portfolios were crystallised when the securities were liquidated by 30 June 2013. Calculating the loss by reference to the difference between the value of the portfolio at that date and the value it would have had if investments had been made in accordance with the investment contracts takes account of market movements which would have affected the investment in any event. This approach looks at the result as at the loss crystallisation date by reference to the amount invested since the commencement of the investment contract. It takes account of defaults whenever they occurred during the life of the investment contract, and does not require a finding as to the date or dates of default.
160 This is, in effect, what the panel did and, to the extent that the approach adopted by the panel involved error, the errors did not make the ultimate conclusion unreasonable in the relevant sense.
161 I agree with the panel's view that it would be artificial to segregate particular trades in attempting to quantify loss. The breach of the investment contracts concerned the proportions of different categories of securities which made up the investment portfolios. It was the structure of the overall portfolio, rather than the holding of individual securities, which constituted the breach.
Other matters
162 There were two other matters raised by Patersons' submissions that do not fit neatly within the pleaded primary or secondary arguments noted above. I will nevertheless deal with the matters raised.
Use of the Vanguard Index Australian Shares Fund
163 Patersons submitted that the Vanguard Index Australian Shares Fund, which is designed to track the All Ordinaries Index, was not the appropriate fund to use as a comparator. This was because the investment contracts did not require Patersons to purchase securities which would track the All Ordinaries Index.
164 While there is force in this submission, the discretionary nature of Patersons' authority to purchase securities means that any assessment of the value the portfolios would have had if the contract was performed according to its terms will involve estimation and assumption. In my view it was open to the panel to form the opinion that it was fair to use the Vanguard Index Australian Shares Fund, particularly in the absence of any suggestion of a better comparator before the panel and on appeal.
165 I do not base this conclusion on the fact that Patersons had made submissions to the panel that it was appropriate to use the Vanguard Index Australian Shares Fund. I do not accept FOS's submission that Paterson had agreed that the Vanguard fund should be used in assessing compensation for losses caused by a failure to implement the investment advice. Patersons had made submissions as to the fund being appropriate for the calculation of losses arising from 'inappropriate advice'.57 However the panel found the advice to be appropriate. The breach found by the panel concerned a breach of the investment contracts in which Patersons undertook to implement that advice. Patersons had not made a submission that the Vanguard Index Australian Shares Fund should be used to calculate loss arising from such a breach.
Regard to previous decisions
166 Patersons also submits that par 8.2(d) of the terms of reference requires FOS to have regard to its previous decisions, even though they are not binding, in forming an opinion about what is fair in all the circumstances. Patersons submits that FOS had previously decided that loss of profit or the loss of the opportunity to make a gain is consequential loss.58 It says that the failure to take account of those previous relevant decisions was itself a breach of par 8.2 of the terms of reference.
167 I accept FOS's submission that the previous decisions concerned different scenarios and none addressed the present situation where there was a breach of an investment contract by failing to invest in securities in an appropriate manner. Further, par 8.2 should not be construed as a statute identifying mandatory relevant considerations to which regard must be had as a condition for the valid exercise of a statutory power. It would be an absurd and uncommercial result if the FOS's decision was of no effect if the panel failed to advert to any similar case which FOS had previously decided. The contract should not be construed as providing for a mere failure to refer to a particular previous decision to deprive a Determination of its contractual effect.
Counterclaim for specific performance
168 Patersons accepts that, if the panel's determination is binding on it under par 8.7(b) of the terms of reference, it had a contractual obligation to pay the determined amounts to MDVR and the SMSF. I have concluded that the determination is final and binding.
169 In those circumstances, FOS seeks specific performance of the contractual obligation to make the payments. The availability of specific performance in these circumstances was considered by Le Miere J in Utopia. For the reasons Le Miere J gave in that case, it is appropriate to make an order for specific performance of the obligation here.
Orders
170 For the above reasons I shall make the following orders:
1. The plaintiff's action be dismissed and judgment be entered for the first defendant.
2. The first defendant by counterclaim pay to the third defendant by counterclaim the sum of $13,849 together with interest to 23 October 2014 of $4,583 and interest from 24 October 2014 to the date of payment at the rate of 3% per annum compounding monthly.
3. The first defendant by counterclaim pay to the second defendant by counterclaim the sum of $229,165 and interest from 24 October 2014 to the date of payment at the rate of 3% per annum compounding monthly.
171 I shall hear from counsel as to costs, and what provision ought be made as to the time for compliance with orders 2 and 3.
1 Determination 330479 of 27 October 2014.
2Electricity Generation Corporation v Woodside Energy Ltd [2014] HCA 7; (2014) 251 CLR 640 [35].
3Dickason v Edwards (1910) 10 CLR 243.
4Dickason (249).
5Dickason (254).
6Australian Workers' Union v Bowen (1948) 77 CLR 601.
7Bowen 609, 614 - 615.
8Bowen (628).
9Bowen (629).
10Bowen (634).
11Australian Football League v Carlton Football Club Ltd [1998] 2 VR 546.
12AFL v Carlton (558 - 559).
13AFL v Carlton (559).
14AFL v Carlton (564).
15AFL v Carlton (566).
16AFL v Carlton (568 - 569).
17Mickovski v Financial Ombudsman Service Ltd [2012] VSCA 185; (2012) 36 VR 456.
18Mickovski [42].
19Cromwell Property Securities Ltd v Financial Ombudsman Service Ltd [2014] VSCA 179; (2014) 288 FLR 374.
20Cromwell [66].
21Cromwell [88].
22Associated Provincial Picture Houses Ltd v Wednesbury Corporation [1948] 1 KB 223.
23Cromwell [251].
24Legal & General Life of Australia Ltd v A Hudson Pty Ltd (1985) 1 NSWLR 314.
25Legal & General (330).
26Legal & General (335 - 336).
27Legal & General (336).
28AGL Victoria Pty Ltd v SPI Networks (Gas) Pty Ltd [2006] VSCA 173.
29 Transcript 14 - 15.
30Financial Ombudsman Services Ltd v Pioneer Credit Acquisition Services Pty Ltd [2014] VSC 172.
31Utopia Financial Services Pty Ltd v Financial Ombudsman Service Ltd [2012] WASC 279 [34].
32 Paragraph 1.2(a) of the terms of reference.
33Utopia Financial Services Pty Ltd v Financial Ombudsman Service Ltd [2012] WASC 279 [34].
34 Harvey McGregor QC, McGregor on Damages (19th ed, 2014), 29-30 [3-013] - [3-014].
35Hadley v Baxendale (1854) 9 Ex 341; (1854) 156 ER 145. As to the continuing significance of the rule in assessing contractual damages in Australia see European Bank Ltd v Evans [2010] HCA 6; (2010) 240 CLR 432 [10] - [13].
36 See 30 [3-015].
37Caledonian North Sea Ltd v British Telecommunications Plc[2002] 1 Lloyd's Rep 553 [10].
38Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd[2008] VSCA 26; (2008) 19 VR 358. Peerless was applied by the Supreme Court of South Australia in Alstom Ltd v Yokogawa Australia Pty Ltd (No 7) [2012] SASC 49 [269] - [292].
39Peerless [87], [93].
40Utopia [24].
41Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324.
42Frank Davies Pty Ltd v Container Haulage Group Pty Ltd (No 1) (1989) 98 FLR 289.
43 Prof JW Cater Exclusion of Liability for Consequential Loss (2009) Journal of Contract Law 118.
44Regional Power Corporation v Pacific Hydro Group Two Pty Ltd (No 2) [2013] WASC 356;(2013) 46 WAR 281 [95].
45Pacific Hydro [92], [96].
46GEC Alsthom Australia Ltd v City of Sunshine(Unreported FCA, 20 February 1996).
47Macmahon Mining Services Ltd v Cobar Management Pty Ltd [2014] NSWSC 731 [16], citing Saint Line Ltd v Richardsons, Westgarth & Co Ltd [1940] 2 KB 99, 103.
48 There is no settled judicial interpretation of the terms to justify a conclusion that a professionally drafted contract was drawn adopting the meaning given in previous decisions: see Ferris v Plaister (1994) 34 NSWLR 474, 498;Johnson v American Home Assurance Company (1998) 192 CLR 266, 272;Netglory Pty Ltd v Caratti [2013] WASC 364 [287].
49Macquarie Dictionary (6th ed, 2013), 421 (definition 14 of 'direct').
50Macquarie Dictionary (6th ed, 2013), 755 (definition 2 of 'indirect').
51 See the definition of 'Financial Service' in par 20.1 of the terms of reference.
52 It is unnecessary in this case to decide whether loss which arises from 'special circumstances' is generally to be regarded as indirect for the purposes of the contract, as no special circumstances are alleged.
53Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337, 352; Pacific Carriers Ltd v BNP Paribas [2004] HCA 35; (2004) 218 CLR 451 [22].
54 Trial bundle items 21 and 22.
55Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272[13].
56McGregor on Damages, [33-05] - [33-06]; Neilson v James(1882) 9 QBD 546, 456;Batten v Wedgwood Coal and Iron Co(1886) 31 Ch D 346; Keppel v Wheeler (1927) 1 KB 577.
57 Exhibit 1.17, [6.13].
58 Exhibit 1.30 (Determination 279502 of 18 June 2014) [83] - [84]; Exhibit 1.31 (Determinations 288211 and 302988 of 3 July 2014) [79] - [81].
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