State of Tasmania and Director of Housing v Shaw
[2001] TASSC 119
•11 October 2001
[2001] TASSC 119
CITATION: State of Tasmania & Director of Housing v Shaw [2001] TASSC 119
PARTIES: STATE OF TASMANIA
DIRECTOR OF HOUSING
v
SHAW, Stuart Gordon
TITLE OF COURT: SUPREME COURT OF TASMANIA (FULL COURT)
JURISDICTION: APPELLATE
FILE NO/S: FCA 12/2001
FCA 13/2001
DELIVERED ON: 11 October 2001
DELIVERED AT: Hobart
HEARING DATE: 1 June 2001
JUDGMENT OF: Cox CJ, Slicer J, Blow J
CATCHWORDS:
Torts - Negligence - Damage - Causation - Negligent misrepresentation - Election to affirm contract - Right to damages - Duty to mitigate damage.
Medlin v State Government Insurance Commission (1995) 182 CLR 1, Gould v Vaggelas (1985) 157 CLR 215, applied.
Gormley & Co Pty Limited v Cubit (1964 - 1965) NSWLR 557, Henjo Investments Pty Limited v Collins Marrickville Pty Limited (1989) 89 ALR 539, followed.
Aust Dig Torts [60]
REPRESENTATION:
Counsel:
Appellants: T J Ellis SC
Respondent: S B McElwaine
Solicitors:
Appellants: Director of Public Prosecutions
Respondent: Shaun McElwaine
Judgment Number: [2001] TASSC 119
Number of paragraphs: 42
Serial No 119/2001
File No FCA 12/2001FCA 13/2001
STATE OF TASMANIA and DIRECTOR OF HOUSING
v STUART GORDON SHAW
REASONS FOR JUDGMENT FULL COURT
COX CJ
SLICER J
BLOW J
11 October 2001
Orders of the Court:
Grounds 1 and 2 dismissed.
Appeal adjourned for argument on ground 3.
Serial No 119/2001
File No FCA 12/2001FCA 13/2001
STATE OF TASMANIA and DIRECTOR OF HOUSING
v STUART GORDON SHAW
REASONS FOR JUDGMENT FULL COURT
COX CJ
11 October 2001
I have had the advantage of reading the reasons for judgment prepared by the other members of the Court. I adopt their statement of the facts and in substance agree with their reasons for concluding that grounds 1 and 2 of the notice of appeal have not been made out. I only wish to add the following brief observations.
The respondent's claim was based in tort. He alleged that by reason of the negligent misstatements made by the appellants' agent, he had been induced to enter into a series of contractual obligations whereby for the sum of $35,000 plus $2,500 for sums expended on the development and "thrown away", he agreed, first, to transfer the land he had acquired at Reservoir Road, second, to purchase for $40,000 a slightly bigger area of vacant land at Blackwood Drive and third, to thereafter develop a shopping centre on "all of the lands" and "not offer any part of the land not utilised for the shopping centre to any other party except the Director of Housing". He undertook to commence the construction of the shopping centre within one year of the date of the contract, the Director reserving an absolute discretion to extend the time for commencement of the construction. To ensure the performance of the obligation to build the shopping centre, provision was made for the Director to lodge a caveat on the title and on failure to perform the obligation, on one month's notice of default, the Director was entitled to resume the land and to resell it upon such terms and conditions as the Director should see fit.
Pursuant to those contractual arrangements, entry into which the learned trial judge found had been induced by the misstatements of the appellants' agent, the respondent transferred the land at Reservoir Road to the Director, paid the difference in price in respect of the land at Blackwood Drive, together with the expenses of transfer, and took title to it. All this was done prior to gaining knowledge of the falsity of the representations. When that knowledge was gained, the respondent, through his father, sought to be released from the balance of his obligations by transferring the land back to the Director at the latter's cost for the sum of $75,000. Although it was suggested in argument that this was an unreasonable demand having regard to the original purchase price of $40,000, the difference was attributed by the respondent to "down time, loss of purchasers/lessees, loss of anticipated revenue (livelihood), capital gains potential, increased building costs since original deferment, costs associated with Drawings, Permits, Building Approvals" and the costs of taking title as purchaser. There is no basis on which we could conclude that this demand was unreasonable in these circumstances. Notwithstanding the appellants' equal knowledge of the true position, this overture was rejected, the caveat lodged, thereby inhibiting sale, and, although the time for commencement of construction was extended, the Director's position of insisting upon performance was made abundantly clear to the respondent.
In these circumstances, the respondent was faced with the choice of carrying out the obligations laid upon him under the contract and suing for any consequent loss of seeking remedies such as rescission from the Court. Although it is important to keep in mind the nature of this action as one based in tort, it is not inappropriate to have regard to the observation of Lord Macmillan in Banco de Portugal v Waterlow and Sons, Limited [1932] AC 452 at 506:
"Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticize the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken."
In S Gormley & Co Pty Ltd v Cubit [1964 - 1965] NSWR 557 at 560 - 561, Asprey J, with whose reasons Sugerman and Walsh JJ agreed, said:
"It will be useful at this stage to state the position in law of a person who has been induced by fraudulent misrepresentation to enter into a contract of purchase with another person. The remedies of such first-mentioned person are (1) to elect to rescind the contract and to demand from the vendor, if that is possible, a complete restoration of the status quo or (2) to affirm the contract and sue for damages. Having decided, as mentioned above, to complete the purchase with a full knowledge of the state of affairs appertaining to the matters represented to her, the respondent in law must be deemed to have followed the second of these alternative remedies.
At common law the purchaser of a business who, as did the respondent in this case, elects to pursue the second category of remedy to which I have just referred is entitled, subject always to the principles of law which apply to all persons who seek to claim damages in an action of tort, to recover from the person who has made the fraudulent misrepresentation the amount of any damage which in fact strictly results to him from the deceit (see McAllister v Richmond Brewing Company (NSW) Pty Ltd (1942), 42 SR (NSW) 187, at p 192, per Jordan, CJ).
The action to recover such damages at common law is an action for deceit and this is an action in tort (Halsbury, 3rd ed, vol 29, para 1602, note (d) and not an action based upon the contract into which the representee was induced to enter (Monro v Bognor Urban District Council ([1914-15] All ER Rep 523; [1915] 3 KB 167) and, accordingly, it follows that the tortious measure and principles of damage must be applied (see Mayne and McGregor on Damages, 12th ed, paras 955-7). It is one of these principles, and a most important one, that a plaintiff in an action of tort is obliged to take all reasonable steps to mitigate the loss to him consequent upon the defendant's wrong and cannot recover damages for any such loss which he could thus have avoided but has failed, through action or inaction, to avoid (see Mayne and McGregor, supra, para 144); and the question as to what is reasonable for a plaintiff to do in mitigation of damages in any particular case is a question of fact and the burden of proof in this respect lies upon the defendant (Halsbury, 3rd ed, vol 11, para 479; Watts v Rake (1960), 108 CLR 158, at p 159; [1961] ALR 333, per Dixon, CJ)."
In Henjo Investments Pty Ltd and Ors v Collins Marrickville Pty Ltd (1989) 89 ALR 539 at 553, Lee J said:
"Under the general law, a person who affirmed the contract induced by deceit would lose the right to rescind but not the right to recover damages for the tort of deceit. The act of affirming the contract would make no difference in itself to the right to recover damages for the misrepresentation inducing the contract: see S Gormley and Co Pty Ltd v Cubit [1964-5] NSWR 557. There would, however, be an obligation upon the party affirming the contract to take reasonable steps to mitigate the loss resulting from the deceit. The actual or imputed affirmation may be treated as the point at which it becomes unreasonable for consequential damages to continue to accrue if no steps to mitigate the loss are taken thereafter or if affirmation of the contract was not the reasonable course to have followed: see Mr Figgins Pty Ltd v Centrepoint Freeholds Pty Ltd (1981) 36 ALR 23 at 60; T N Lucas Pty Ltd v Centrepoint Freeholds Pty Ltd (1984) 1 FCR 110 at 118; 52 ALR 467."
In the present case, the carrying out by the respondent of his remaining obligations under the contract at the insistence of the appellants cannot be said to have broken the chain of causation between the tortious misrepresentations and the financial loss he suffered. The misrepresentations induced the contract, and the carrying out of the contract led to loss. The respondent was within his rights in electing not to rescind (which would have required an action seeing that the property had been transferred to the respondent and the appellants' clear position was one in which they denied his right to rescind) and he was entitled to seek damages for the loss he sustained in meeting his obligations under the contract. What he did was reasonable in the circumstances. Equally, it cannot be said that the appellants established a failure by him to mitigate his loss by an action for rescission when their clear stance at all material times was that he had no right to rescind but was obligated to carry out the building works they now condemn as "folly". I agree that grounds 1 and 2 have not been made out.
File No FCA 12/2001
File No FCA 13/2001
THE STATE OF TASMANIA and THE DIRECTOR OF HOUSING v
STUART GORDON SHAW
REASONS FOR JUDGMENT FULL COURT
SLICER J
11 October 2001
By agreement, grounds 1 and 2 of the appeal have been heard separately from ground 3 and the issue raised by that ground will be determined once reasons for judgment have been pronounced in relation to the former.
The respondent was a builder and property developer. In April 1997 he entered into an agreement with the Director of Housing for the purchase and development of land at Rocherlea. He had previously been involved in a similar development which did not proceed because of a change of policy on the part of the Director. The development of the land was to be in accordance with a development plan decided upon by the Director, designed to provide public housing. The specific development undertaken by the respondent was to be complementary to the overall project. The respondent's project was not financially profitable and he successfully claimed damages against the appellants on the basis of misrepresentations made by an officer of the Director. The learned trial judge found that misrepresentations had been made and that the respondent had acted upon them. No challenge is made to those findings.
Chronology
In July 1984, the respondent prepared a plan for the commercial development of land at Reservoir Road, Rocherlea. Previously the Director had acquired nearby land for the purpose of providing public housing. The overall development was that of a subdivision, to be built in seven stages, and included up to 700 building allotments, schools, a shopping centre and other community resources. In 1983 - 1984 the Department began to change its proposal, scale back its size and move the location of the project. In May 1985 the respondent purchased land in the area which by then had been rezoned from residential to commercial. The unchallenged findings of the learned trial judge were that by early 1986 the intention of the Director "was to double the number of houses in the Rocherlea subdivision within three to five years" and that "Waratah Road would be extended in an easterly direction and form the beginning of a link road which would be constructed at some unspecified time in the future, to link Rocherlea with Ravenswood" and that as a consequence "Blackwood Drive land would be in the centre of approximately 700 homes and on a busy access road".
In April 1987 the respondent purchased land from the Director in Blackwood Drive, in exchange for land previously purchased, intending to develop it as a commercial centre to service the surrounding community. The learned trial judge in a finding not challenged on this appeal, determined that the respondent had entered into the agreement to purchase the land as a result of the misrepresentation stated above.
The agreement of April 1987 obliged the developer to commence the construction of the shopping centre on the entirety of the land within one year, not sell any of the land to a third party and permitted the Director to resume the land in the event of non-compliance with those conditions and to register his interest by registration of a caveat. The respondent did so because he had no reason to question the accuracy of the statements made by a departmental officer.
In February 1988, the Director asked for the anticipated commencement date of construction and on 3 March the respondent advised that it would begin on 20 April 1988. On 21 June 1988 the respondent's father, an experienced builder, wrote to the Director expressing concern about the accuracy of the information previously provided and the viability of the project and asked that his son be released from the agreement. The Director's response was to lodge a caveat. In September, the respondent attempted unsuccessfully to sell the land and on 14 September sought an extension of time for completion, a request granted by the Director on 27 September. One shop was completed by November 1988 at which time the respondent asked again to be released from the agreement, on the basis of lack of financial viability. The request was for the caveat to be removed to permit the raising of further capital. The Director advised that:
"The department is quite prepared to consent to the registration of a Mortgage or Transfer, but will not withdraw the Caveat until further substantial progress with constructing the shopping centre is made"
and requested the provision of plans:
"… as soon as possible to show your good faith in eventually proceeding with the development."
Eventually the respondent expended a total of $375,866 and after taking into account rents received and the proceeds of sale, suffered a loss of $117,595 of which the sum of $102,545 was capital.
At trial the appellants contended that the respondent ought to have mitigated his loss by rescinding the contract when he became aware of the consequences of the misrepresentation. Developed, the argument claimed that since the respondent had elected to perform the contract rather than rescind it was that:
"… this election caused the plaintiff to suffer almost all his losses and in consequence, the plaintiff cannot recover anything other than insignificant damages… "
The learned trial judge concluded that:
"This submission confuses an action for damages for breach of contract with an action for damages for negligent mis-statement. The doctrines of so-called waiver and election have no application to the measure of damages for tortious conduct. I venture to refer to a decision of mine, Cohen v Wilson Dowd [1999] TASSC 123, in which these doctrines and their applicability were examined. I conclude that there is nothing that the plaintiff could have reasonably done but did not do, to mitigate the loss sustained by the defendant's tortious conduct."
Basis of appeal
The relevant grounds of appeal challenge that conclusion stating:
"2.1The learned Trial Judge erred in law and in fact in finding that there was a causal relationship between the misrepresentations and the loss suffered by the respondent, in that such finding was not one which was reasonably open on the evidence.
2.2The learned Trial Judge erred in law in finding that there was nothing the respondent could reasonably have done to mitigate his loss, in that such finding was not one which was reasonably open on the evidence."
Refined, the contention as restated during the course of this appeal, was that it is an error in law to hold that the doctrine of "so-called" election has no application to the measure of damages for tortious conduct. If that be so, then the error further impacts on the finding that there was nothing which the respondent could do to mitigate his damage. It is said that he could rescind or do nothing and in either case the respondent would have incurred a lesser loss. His decision to proceed with the project, despite his awareness of the matters giving rise to misrepresentation, was causative of loss, breaching the nexus with the representations. This was not a case such as that considered by the Full Court in J Boag & Son Brewing Ltd v Bridon Investments Pty Ltd [1999] TASSC 118, where the purchaser had confirmed compliance with a term of the contract.
The Director had at all times refused to permit the respondent to be relieved of any obligation to perform the contract. The Director was in possession of the same information as that possessed by the respondent and his refusal to remove the caveat itself inhibited any prospect of sale to a third party. The learned trial judge found that the Director's attitude "had always been that the plaintiff was not entitled to rescind, and that the defendant intended to enforce the terms of the contract".
The appellant's contention is a mixture of principles concerning rights and obligations governed by the law of contract, an obligation to mitigate loss in cases of tortious conduct and the principles of "novus actus interveniens". The admixture is said to require the respondent to have rescinded. It is necessary to identify and separate the components forming the argument.
Causation
The case pleaded was that of negligent mis-statement which induced the contract. Had that contract been made with a different entity (assuming the existence of a duty of care on the part of the person making the representation) there would be no right of rescission. The fact that the contract was made with the Director does not necessarily alter that position. The representations were not internal to the terms of the contract, but related to other activities of the department. Entry into a contract following a misrepresentation does not subsume a claim for damages (Esso Petroleum v Mardon [1976] 1 QB 801, Norris v Sibberan [1990] VR 161).
The respondent was required to establish that the loss was occasioned by those misrepresentations. He was not required to prove that they were the only or dominant cause of the loss (Chappel v Hart (1998) 195 CLR 232). The test is as stated in March v Stramare (E and M H) Pty Ltd (1991) 171 CLR 506, Rogers v Whitaker (1992) 174 CLR 479 and Rosenberg v Percival (2001) 75 ALJR 734. The question is whether the entry into the contract was causative of injury. That injury was the construction of a building project required by a contract. There might be cases where the performance of a contractual obligation is so disproportionate to the clear and known consequences that the duty to mitigate required by the law of tort subsumes obligation. But that is an issue separate from that of causation. The decision, even with the benefit of hindsight, not to refuse to perform the terms of the agreement does not constitute a "novus actus interveniens". The term is not in itself a legal principle. It is a convenient way of describing a breach in a factual link between cause and effect. It separates the Amazonian butterfly from snow in Antarctica, but remains a matter of judgment formulated in accordance with experience and commonsense (Medlin v State Government Insurance Commission (1995) 182 CLR 1).
Rescission
This was not a case where the respondent was required, as a matter of law, to decide to rescind the contract. Accepting for the purpose of this analysis that his remedy was contractual in nature, the law of contract nevertheless afforded him a range of options. Those options were outlined in the joint judgment of Dixon CJ, Webb, Fullagar, Kitto and Taylor JJ in Alati v Kruger (1995) 95 CLR 216 when they stated at 222:
"On the footing which must be accepted, that the contract had been induced by a fraudulent representation made by the appellant to the respondent, the latter had a choice of courses open to him. He might sue for damages for breach of the warranty contained in cl 21, for the statement in that clause clearly formed one of the terms of the contract and was not only a representation; but he could not do this and rescind the contract for misrepresentation. Secondly, he might sue to recover as damages for fraud the difference between the price he had paid and the fair value of the property at the time of the contract (Holmes v Jones (1907) 4 CLR 1692), but that again would involve affirming the purchase. Or, thirdly, provided that he was in a position to restore to the appellant substantially that which he had received under the contract, he might avoid the purchase and sue to recover his purchase money back from the appellant, with interest and also with damages for any loss which he may have suffered through carrying on the business in the meantime … ."
His decision was affirmed by the conduct of the appellant at trial. That decision was not challenged by cross-examination at trial and no evidence called to the effect that the Director would have accepted rescission. All of the conduct of the Director was to the contrary.
The findings of the learned trial judge were that the respondent continued to attempt to make the project viable and sought to limit the scale of development and sell assets in order to provide capital. He attempted to work within the contract albeit with variations. The Director inhibited those attempts. It is one thing for counsel with the benefit of hindsight and in the complexity of legal principle to contend for a better option, but such ignores the experience of the law in affording a party injured in contract a range of options for redress. Any decision as to the reasonableness of the option actually chosen remains a matter for judgment by a court and is required to be determined according to the circumstances confronting the injured party at the time.
However, central to this component of the argument remains the proposition that this was an action in tort not contract.
Tort and mitigation
The appellants had the responsibility to show, at trial, those steps which the respondent ought to have taken to have mitigated his loss (Watts v Rake (1960) 108 CLR 158). That was not done either at trial or on the hearing of this appeal.
There is much convergence between the remedies provided by tort and contract. A party injured by pre-contract conduct is not permitted to proceed irrespective of cost, or with an expectation of bounty. To that extent the term "election" has a similar import in both areas of law. But the term "election" has a more confined meaning when used in relation to contractual breach. The term is used in circumstances where tortious conduct involves contract was referred to by Asprey J in Gormley & Co Pty Limited v Cubit (1964 - 1965) NSWLR 557 when he stated at 561 - 562:
"It is one of these principles, and a most important one, that a plaintiff in an action of tort is obliged to take all reasonable steps to mitigate the loss to him consequent upon the defendant's wrong and cannot recover damages for any such loss which he could thus have avoided but has failed, through action or inaction, to avoid …; and the question as to what is reasonable for a plaintiff to do in mitigation of damages in any particular case is a question of fact and the burden of proof in this respect lies upon the defendant ... .
Counsel for the appellant ... put his case on the footing that the damage suffered by the respondent and for which she sued flowed solely from her election to proceed with the completion of the contract with knowledge that the representations which had been made to her were false. I cannot accept this as a valid argument. … The falsity of that representation ... when ascertained by the respondent were the factors that would have enabled the respondent, if she had chosen to take that course, to disaffirm the contract before its completion but she was not bound to disaffirm it … . She was entitled to elect to affirm it and rely upon a claim for damages and various reasons may be readily envisaged as to why she should do so but her motives or reasons are not relevant here and we are only concerned with the fact of her choice of action.
Having made the election which she was perfectly entitled to make, the settlement of the purchase was effected by the respondent under the contract into which she had been induced to enter by misrepresentation. The respondent then proceeded to recover a verdict for damages upon the basis which the law regards as proper in those circumstances … and it cannot, in light of the unchallenged findings of fact, be said that the appropriate ingredients to constitute the action for deceit were not available to her or that her damages were self-imposed."
(See also Henjo Investments Pty Limited v Collins Marrickville Pty Limited (1989) 89 ALR 539.)
Nothing which the respondent did has been shown to be unreasonable in the circumstances which he faced. He had undertaken a project which required the existence of a substantial community. He was required to expend both labour and capital to achieve a mutually agreed purpose, namely the provision of service facilities and to, at least, recoup his contribution. There remained scope for modification, but such was thwarted by the attitude of the respondent. Once the project was commenced, the respondent could either have risked legal action by the appellants or been required to incur legal expenses in having the caveat removed. The appellants, possessing as they did the powers and resources of the State, can hardly legitimately claim, at this stage, that he ought not have been amenable to their demands. He was entitled to pay regard to the best commercial option available to him, perform the bargain and then claim for any loss (White & Carter Limited v McGregor [1961] 3 All ER 1178).
Conclusion
The action was that of tort and breach of duty, issues which were not challenged in this appeal. The principles determining an award of damages are those pertaining to the law of torts. There was a causal relationship between the tortious conduct of the appellants and the injury suffered by the respondent. The learned trial judge was correct in finding "that there was nothing which the respondent could have reasonably have done to mitigate the loss" and the Court's finding was one "which was reasonable open [sic] the evidence". Grounds 1 and 2 of the appeal ought be dismissed.
File No FCA 12/2001
FCA 13/2001
THE STATE OF TASMANIA and THE DIRECTOR OF HOUSING v
STUART GORDON SHAW
REASONS FOR JUDGMENT FULL COURT
BLOW J
11 October 2001
The respondent sued the appellants in tort for damages for negligent misstatement. The learned trial judge made findings that (a) certain representations were made; (b) they were misrepresentations of fact; (c) they were made in circumstances that gave rise to a duty of care on the part of the second appellant ("the Director"); (d) there was a breach of that duty of care; (e) the respondent relied upon the misrepresentations in embarking upon a chain of events that led to the signing of a contract for the purchase of land by him, and the building of a shopping centre on it by him; and (f) he suffered financial loss as a result. In this appeal, the appellants are not challenging the findings as to (a), (b), (c), or (d). However they contend that the financial loss suffered by the respondent as a result of proceeding to build a shopping centre pursuant to his contract was not caused by the breach of the duty of care. Further, they contend that the respondent had a duty to mitigate his loss, and failed to discharge that duty.
Causation
The learned trial judge made an unchallenged finding that a Mr Lieberknecht represented to the respondent's parents in early 1986 that the Director intended to double the number of houses in the Rocherlea subdivision within three to five years; that Waratah Road would be extended in an easterly direction and form the beginning of a link road to Ravenswood; and that Blackwood Drive would in consequence be in the centre of approximately 700 houses and on a busy access road. His Honour also made an unchallenged finding that the respondent entered into a contract dated 16 April 1987 for the purchase of land in Blackwood Drive from the Director in reliance upon those representations and that, but for their making, he would not have executed that contract. The contract required the respondent to purchase the Blackwood Drive land for $40,000, with completion of the purchase to take place within 30 days after the acceptance of a plan of subdivision by the Recorder of Titles and the issue of a certificate of title in respect of the land. The respondent completed that purchase prior to learning that the representations made to his parents were false. Clause 6 of the contract required the respondent to commence constructing a shopping centre on the land within one year after the date of the contract. The respondent had not commenced construction when he learned that the representations were false.
The respondent learned that in about April, May or June 1988. The appellants contend that he thereupon had the right to choose whether to affirm the contract or whether to seek its rescission.
Shortly after the respondent learned that the representations were false, his father wrote on his behalf to the Director offering a transfer of the land to the Director if the Director would pay $75,000 plus interest from the date of that letter, which was 21 June 1988. The Director's response was to lodge a caveat claiming an interest in the land on the basis that he was entitled to resume it pursuant to the contract. Clause 10 of the contract provided to the effect that, in the event of the respondent not commencing construction of the shopping centre within one year after the date of the contract, the Director would be entitled to resume the land or part thereof pursuant to the Lands Resumption Act 1957. By cl 12 of the contract, the respondent consented to the Director lodging a caveat against the title to the land. (Despite these provisions, the Director did not have an estate or interest in the land that entitled him to lodge a caveat, as the learned trial judge observed.) It appears that from the time the letter of 21 June 1988 was delivered until the delivery of the judgment now appealed from, the Director did not ever concede that there had been any misrepresentation or any breach of his duty of care. I therefore infer that, after the respondent learned that the representations were false and made his knowledge known to the Director, the Director would not have been willing to take appropriate steps to restore the respondent and himself to their original positions, and that the respondent would have needed to institute appropriate legal proceedings if he had wished to transfer the land back to the Director and obtain an appropriate payment from him.
He chose not to do that. He decided to proceed with construction of the shopping centre. His father wrote on his behalf on 14 September 1988 seeking the Director's consent to an extension of time for the commencement of construction. An officer of the Director wrote back on 27 September 1988 granting an extension until two years thereafter. The respondent commenced construction in October 1988. The appellants contend that, by seeking the extension of time and commencing construction, the respondent elected to affirm the contract. The cost of constructing the shopping centre was not fully recouped by the respondent from its rents and the proceeds of its sale. The appellants contend that the respondent's losses were not caused by the negligent misrepresentations of Mr Lieberknecht, but that the respondent's election to affirm the contract broke the chain of causation, and was the sole cause of his subsequent losses. They contend that, upon him becoming aware that the representations had been false, the only reasonable course open to him was to seek rescission of the contract and restitutio in integrum by appropriate legal proceedings.
The proper approach to the question of causation of damage for the purposes of the law of torts was considered by the High Court in Medlin v State Government Insurance Commission (1995) 182 CLR 1. In that case Deane, Dawson Toohey and Gaudron JJ said the following, at 6:
"For the purposes of the law of negligence, the question whether the requisite causal connection exists between a particular breach of duty and particular loss or damage is essentially one of fact to be resolved, on the probabilities, as a matter of common sense and experience. (See Fitzgerald v Penn (1954) 91 CLR 268 at 277-278; March v Stramare (E and MH) Pty Ltd (1991) 171 CLR 506 at 515, 522-523; Bennett v Minister of Community Welfare (1992) 176 CLR 408 at 412-413, 418-419, 428.) And that remains so in a case such as the present where the question of the existence of the requisite causal connection is complicated by the intervention of some act or decision of the plaintiff or a third party which constitutes a more immediate cause of the loss or damage. In such a case, the "but for" test, while retaining an important role as a negative criterion which will commonly (but not always) exclude causation if not satisfied, is inadequate as a comprehensive positive test (See, eg, March v Stramare (E and MH) Pty Ltd (1991) 171 CLR at 515-519, 522-524). If, in such a case, it can be seen that the necessary causal connection would exist if the intervening act or decision be disregarded, the question of causation may often be conveniently expressed in terms of whether the intrusion of that act or decision has had the effect of breaking the chain of causation which would otherwise have existed between the breach of duty and the particular loss or damage. The ultimate question must, however, always be whether, notwithstanding the intervention of the subsequent decision, the defendant's wrongful act or omission is, as between the plaintiff and the defendant and as a matter of common sense and experience, properly to be seen as having caused the relevant loss or damage."
Similar questions of causation often arise in Trade Practices Act cases concerning the purchases of business. If a purchaser learns, after settlement, that the turnover or profits of the business have been misrepresented, but decides to continue to operate the business in the hope of making a profit, and suffers trading losses, it is often argued that such losses are the result of the purchaser's election to continue operating the business and/or the purchaser's mismanagement of the business, and not of the misleading or deceptive conduct that led the purchaser to buy the business. See, for example, Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1989) 89 ALR 539.
In Gould v Vaggelas (1985) 157 CLR 215, which concerned a deceit action, Gibbs CJ said at 221 - 222:
"There may be cases in which the purchaser continues to trade, either because he has no real alternative or because he has not become aware of the nature of the fraud, and in those circumstances incurs losses which are not represented by the difference between the price and value of the business. There is no reason in principle why the defrauded purchaser should not recover damages for all the loss that flowed directly from the fraudulent inducement (unless, possibly, the loss was not foreseeable). If the purchaser, besides paying more for the business than it was worth, has suffered additional losses which resulted directly from the fraud he ought to be compensated for them. Of course, the court must be satisfied that the loss did result directly from the fraud and not from some supervening cause such as the folly, error or misfortune of the purchaser himself …".
In S Gormley & Co Pty Ltd v Cubit [1964 - 1965] NSWR 557, a vendor misrepresented the takings of a shop. As a result of the misrepresentation, the purchaser entered into a contract to purchase the business from the vendor. The contract included a clause which allowed the purchaser to rescind if, after one week's trial, the takings of the business were not as represented. After a week's trial, the takings were substantially lower than had been represented, but the purchaser elected to affirm the contract, and sued the vendor for damages for deceit. He was successful both at first instance and on appeal. However it appears from the judgment of Asprey J, with whom Sugerman and Walsh JJ agreed, at 562, that the question of the reasonableness or otherwise of the purchaser's course of action was not made an issue at the trial and therefore not considered by the Full Court. In my view, that case is authority for the proposition that an election to affirm a contract, made with knowledge of an actionable misrepresentation, will not necessarily break the chain of causation and disentitle the representee to damages in respect of losses suffered in consequence of the election to affirm.
In Henjo Investments (supra), which was a Trade Practices Act case, Lee J said the following at 553:
"Under the general law, a person who affirmed the contract induced by deceit would lose the right to rescind but not the right to recover damages for the tort of deceit. The act of affirming the contract would make no difference in itself to the right to recover damages for the misrepresentation inducing the contract: see S Gormley and Co Pty Ltd v Cubit [1964-5] NSWR 557. There would, however, be an obligation upon the party affirming the contract to take reasonable steps to mitigate the loss resulting from the deceit. The actual or imputed affirmation may be treated as the point at which it becomes unreasonable for consequential damages to continue to accrue if no steps to mitigate the loss are taken thereafter or if affirmation of the contract was not the reasonable course to have followed: see Mr Figgins Pty Ltd v Centrepoint Freeholds Pty Ltd (1981) 36 ALR 23 at 60; T N Lucas Pty Ltd v Centrepoint Freeholds Pty Ltd (1984) 1 FCR 110 at 118; 52 ALR 467."
In the light of these authorities, I think that the respondent was entitled to recover damages in respect of the losses resulting from his construction of the shopping centre if his election to construct it as required by the contract was reasonable in all the circumstances, and not an unreasonable decision involving folly or error on his part.
In order to evaluate the reasonableness or otherwise of the decision to affirm the contract and build the shopping centre, one must consider what the suggested alternative ¾seeking rescission and restitution ¾ would have involved. Clause 21 of the contract required any difference or dispute arising out of its terms, or touching the interpretation of its provisions, to be referred to arbitration, but there might have been an argument as to whether an arbitrator ever has the power to award rescission as a remedy. An action for rescission could have been brought, but the Director might have applied for a stay pursuant to the Commercial Arbitration Act 1986, s53, on the basis that the dispute should have been referred to arbitration. The respondent could have made an application under the Land Titles Act 1980 for the removal of the caveat, but that might have involved complicated arguments as to whether the Director had an estate or interest in the land sufficient for him to have lodged a caveat, and as to the circumstances in which he was able to resume land. If there was doubt as to the right of the Director to maintain the caveat, the Director might have applied for an injunction restraining the respondent from selling the land until the shopping centre was built. There might have been a dispute as to whether rescission was available as a remedy after the respondent had become the registered proprietor of the land, in the light of Seddon v North Eastern Salt Co Ltd [1905] 1 Ch 326. Success in any legal proceedings would have depended on the respondent's parents giving evidence as to Mr Lieberknecht's representations, coming up to proof, and being believed after cross-examination. The Director would no doubt have denied that the representations were made, as he did in the proceedings before the learned trial judge. The respondent had not been present at the conversation between Mr Lieberknecht and his parents. There would no doubt have been a dispute as to whether his parents were his agents, and a dispute as to whether the misrepresentations (if made) involved a breach of the Director's duty of care to the respondent, given that he was not present and did not hear Mr Lieberknecht speak. Any legal proceedings were likely to be robustly defended, given what Mr Ellis SC referred to in argument as "the State's piggish attitude". The respondent had engaged estate agents in August 1988 and had the property advertised for sale, but without success. Given all of those circumstances, I think it was reasonable for the respondent to decide to build the shopping centre, sell the shops, and let them pending their sale. In my view, the Director left him no realistic alternative. It follows that ground 1 should be dismissed.
Mitigation of damage
The respondent was obliged to take all reasonable steps to mitigate his loss, and was not entitled to recover damages for any loss which he could have avoided by taking such reasonable steps. The burden of proving a failure to take reasonable steps to mitigate damage lies on the defendant. See, for example, Watts v Rake (1960) 108 CLR 158 at 159. In Pilkington v Wood [1953] Ch 770 at 777, Harman J took the view that "the so-called duty to mitigate does not go so far as to oblige the injured party … to embark on a complicated and difficult piece of litigation …". That comment concerned a proposed action against a third party, but it illustrates the attitude the courts should take in evaluating whether instituting legal proceedings was a step that an injured party was obliged to take. Because of the circumstances that I have referred to in relation to the ground of appeal concerning causation, I do not think seeking rescission and restitution was a step that the respondent was obliged to take. It follows that ground 2 should also be dismissed.
Conclusion
For these reasons, I would dismiss grounds 1 and 2, and adjourn the appeal for argument as to ground 3, which relates to the quantum of damages.
16
0