Travel Compensation Fund v Tambree & Ors

[2005] HCATrans 474

[2005] HCATrans 474

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S54 of 2005

B e t w e e n -

TRAVEL COMPENSATION FUND

Appellant

and

ROBERT TAMBREE T/AS R. TAMBREE AND ASSOCIATES

First Respondent

PHILLIP ROSEBY T/AS P.J. ROSEBY & CO

Second Respondent

RENEE JULIE FRY

Third Respondent

TREVOR FRY

Fourth Respondent

ROBYN JOAN FRY

Fifth Respondent

GLEESON CJ
GUMMOW J
KIRBY J
HAYNE J
CALLINAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON TUESDAY, 2 AUGUST 2005, AT 10.18 AM

Copyright in the High Court of Australia

__________________

MR J.E. MARSHALL, SC:   May it please the Court, I appear with my learned friends, MR N.F. FRANCEY and MR M.J. O’MEARA.  (instructed by McCabe Terrill)

MR P.B. WALSH:   If the Court pleases, I appear for the first respondent.  (instructed by Burston Cole & Co)

MR R.E. DUBLER, SC:   May it please the Court, I appear with MR H. SONMEZ for the second respondent.  (instructed by Phillips Fox)

GLEESON CJ:   There is a certificate from the Deputy Registrar saying that no appearance has been filed on behalf of the third, fourth and fifth respondents.  The solicitor for the appellant has sworn affidavits on 6 April, 13 May and 28 July 2005 deposing that the third, fourth and fifth respondents have been served with the appeal documents at their last known address.  Yes, Mr Marshall.

MR MARSHALL:   Your Honours, the legal issues for determination in this appeal involve the two‑stage test for causation.  The approach to causation questions when there is an act of a third party which is involved in the loss, and whether the conduct of Ms Fry can be viewed as abnormal or extraordinary, given the way those expressions are used in the cases.  The latter two issues arise from paragraphs 155 and 139 of the judgment of the Court of Appeal.

KIRBY J:   But do you accept the basic proposition that was made during the special leave hearing that we are here in the course of interpreting and applying the statute?

MR MARSHALL:   Absolutely, your Honour.

KIRBY J:   That is really the essence of what we are at and any common law analogies are simply of help in flushing out what the Parliament of Australia has provided.

MR MARSHALL:   Your Honour, insofar as the claim is made under the Fair Trading Act which is directly equivalent to the Trade Practices Act, that is exactly so and we say that the two‑stage test as proposed in the Court of Appeal can have no bearing on that question at all and the Court of Appeal should have approached it consistent with cases in this Court as to the approach when dealing with section 82 of the Trade Practices Act.

KIRBY J:   I realise you want to put the poison in the well of the two‑stage test but in a sense – and you will come to this, no doubt – the common sense test which has been what the courts have said is the common law test involves some notions of what is fair and what is just which is in a way the second stage of the two‑stage test.

MR MARSHALL:   There is a claim at common law in negligence, as well as under the Fair Trading Act in this case, and we had succeeded before Justice Austin on both and failed on both in the Court of Appeal.  So the question of the test at common law being relevant when considering the statutory considerations, it may be only relevant, but there is actually independent claim in negligence, which we also failed on.

KIRBY J:   Is that before us?

MR MARSHALL:   Yes.

KIRBY J:   I see.  We just cannot avoid all these endeavours by courts to stand on the top of a pin and explain what causation meant.

MR MARSHALL:   No.  Well, it is sufficient for our purposes of course to win only under the Fair Trading Act, but we would say that we should win both.  Relevantly, the facts of this case mean that one does not have to delve too much into the notions of fairness and other matters that might arise when one is considering some perspectives of the common sense test.  In summary on the facts, at the trial before Justice Austin, the Travel Compensation Fund claimed from the respondent accountants damages ‑ ‑ ‑

GUMMOW J:   Well, it comes down to this period, does it not, between the termination of the licence and the activity of the Fair Trading Department to implement that by actually padlocking the premises.

MR MARSHALL:   Yes, it does.

HAYNE J:   Well, then can I understand what the factual findings are, both at trial and on appeal?  Is there a finding that if the accounts had been properly prepared in the one case, if the accounts had been properly audited, the other case, the business conducted by Ms Fry, whether under her own name, a trading name or through a corporation, would have been shut down, not just before it was on 20 April 1999, but before the loss-making transactions were made?

MR MARSHALL:   There is a finding that goes to that effect, but it is put on two limbs and it is a finding which is made by Justice Austin and by the Court of Appeal.  Can I take your Honours – can I answer that by saying yes, but there is a qualification to it because either the business would have been shut down, or there would have been a capital buffer or a bank guarantee.  So the finding is one or other of those would have taken place and that either one, whichever it be, would have prevented the losses which in fact occurred being occasioned by the TCF.

HAYNE J:   But is it not essential that we understand that factual finding, or those factual findings before we launch off onto the head of the pin that Justice Kirby has adverted to.

MR MARSHALL:   Well, I was going to take the Court to those facts.

HAYNE J:   I understand that.

MR MARSHALL:   Even before the final factual conclusion there is a little bit of background which I did wish to take the Court to about the context in which the Travel Compensation Fund makes payments.

GUMMOW J:   You refer to this in your reply, do you not?

MR MARSHALL:   I do, yes, your Honour.

GUMMOW J:   The nature of the exposure of the Fund.  Whereabouts in the reply do you pinpoint it?

MR MARSHALL:   I pick that up primarily in paragraph 10 and, in my submission ‑ ‑ ‑

GUMMOW J:   That is it.

MR MARSHALL:   It is important to understand that the Travel Compensation Fund is a fund which does effectively two different things.  One, it organises who can be a participant in the fund, and it has a regulatory function there and it authorises someone to be a participant or it terminates their participation.  The other thing it does is if there is a default by a travel agent then it makes compensation payments.  The compensation payments broadly are made under two particular clauses of the trust deed.  The clauses are set out by Justice Austin.  The whole trust deed has been provided to the Court this morning.  I do not think your Honours will need to have the whole trust deed, but the relevant provisions are set out at page 111 of the appeal book and they are explained a little bit later. 

Under clause 15.1 there is a mandatory payment in certain circumstances and that is where the loss is as a result, generally speaking, of a default by a participant.  That means because a participant – to be a participant one must have a licence and once one’s participation ceases, the licence is automatically suspended by operation of a Travel Agents Act.

KIRBY J:   Could you give me the statutory background to this document?

MR MARSHALL:   Yes.

KIRBY J:   I notice that it is an interstate document, the participants being other States.

MR MARSHALL:   Yes.  Your Honour, the background I set out briefly in paragraphs 7 to 9 of our primary submissions but the travel agents in New South Wales are regulated by the New South Wales Act but it forms part of a national scheme for the regulation of travel agents and there are either identical Acts in all of the States and Territories but in South Australia there is a very minor difference, so it is not quite an identical Act, but for all relevant purposes it is an identical scheme.  The scheme involves the one fund, the Travel Compensation Fund, which has a trust deed as its constituent document.

So the person who is a participant is the licensee and that it is the mandatory payments under clause 15.1.  As Justice Gummow noted, the issue though really turns upon the payments which were made under clause 15.2.  Clause 15.2(b) allows discretionary payments to be made in circumstances where the fund would not be required to make a payment under clause 15.1.  In other words, the fund can in the exercise of proper discretion compensate claimants, or travellers, who have made payments to a travel agent who do not receive their travel, even though the travel agent may at the time of the actual payment not be a licensed travel agent.

Now, that particular aspect of clause 15.2 was explained, in my submission, in a very important piece of evidence.  The findings are contained at page 146 of the appeal book.  This is the evidence of Mr Brattoni who was then the chief executive.  I am reading from paragraph 122:

Claims were dealt with by the Management Committee either under clause 15.1 –

and that is the clause I am taking your Honours to.  Then about line 12:

Mr Brattoni gave evidence explaining how the Trustees exercise their discretion under clause 15.2.  He said that cases under clause 15.2 normally involve unlicensed agents.  Commonly –

and I do emphasise that –

participation in the Fund is terminated and then the Department of Fair Trading takes steps to terminate the travel agent’s licence and close the business.  That is what happened in the present case.

That is what happened in the present case.  Now, that finding that that is what happened in the present case is significant.  I should explain something; that is, that the closing down – as I think Justice Gummow noted – is not carried out by my client, the Travel Compensation Fund.  That is a separate function carried out by the Department of Fair Trading.  It can only do so after certain regulatory processes have been undertaken and there is necessarily, in the case of a travel agent who persists in trading, a period between the termination of participation, which effects a suspension of the licence, and then the Department of Fair Trading being able to act following that to close the business down.

KIRBY J:   Is that because in terms of legal personality your client is an interstate creature, or is it a statutory authority of the State of New South Wales?

MR MARSHALL:   In each State, but relevantly in New South Wales, it is the function of the Department of Fair Trading to carry out the licensing and closing down aspects of the process.

KIRBY J:   But is it a statutory authority in each State?

MR MARSHALL:   Yes.

KIRBY J:   So the one body is made up of authority given to it by different States.

MR MARSHALL:   I think I have misanswered your Honour’s question.  In terms of my client, which is the Travel Compensation Fund, it is actually trustees of the Fund and it is entitled to sue under its name, the Travel Compensation Fund, it is one entity relevantly, but in New South Wales – and it carries out one function which is a function mandated by the trust deed and provisions of each of the State legislation.  But in New South Wales, where Ms Fry is concerned, the Travel Compensation Fund cannot close her down.  It could not do the function of putting the locks on the doors.  That was a function given by statute to the New South Wales Department of Fair Trading.

KIRBY J:   I understand that.  I am only – my mind has stopped – puzzled by this creature which is created in a sense by the statutes of multiple States.

MR MARSHALL:   The Travel Compensation Fund?

KIRBY J:   Anyway, there is no constitutional point raised in this case, so we can no longer ‑ ‑ ‑

MR MARSHALL:   No.  The judgments – I will explain the way in which the trust deed comes about.

KIRBY J:   Yes, but mine is an anterior question.  This creature which is before us now in your appearance is before the trust deed.  But anyway, do not let us trouble about it.  It is a sort of transubstantiation point.

MR MARSHALL:   Then the point that I would return to in paragraph 122 at page 146 is that there is a time period between termination of participation and when the business can be closed and, as his Honour found, that is what happened in the present case.  In considering claims which fall in that period, which is the period of unlicensed trading:

the Trustees look to the date of termination of participation in the Fund and the date of any payments made after that termination.  If the trustees form the opinion that members of the public with whom the travel agent dealt would be unlikely to know, when they paid their money to the agent, that they were surrendering their money to an unlicensed operator, and there was no unusually long period of time between the termination and the payment of money to the agent, the Trustees would be likely to exercise their discretion in favour of the claimant.

So that in the circumstances of this case, Travel Compensation Fund was exposed to having to properly consider its function of making compensation payments and it did make compensation payments to people who had made travel payments to Ms Fry’s business in the period where she was unlicensed.  The point of that is that the Travel Compensation Fund is in fact exposed to that risk as well as the risk of having to compensate in respect of the licensed travel agent, and that is ‑ ‑ ‑

KIRBY J:   But only where your client exercises its uncontrolled discretion to do that.

MR MARSHALL:   Yes, and that was a separate issue.  There was a separate issue which was raised at first instance in the Court of Appeal about that.  I do not know if both respondents raised it but certainly one ‑ ‑ ‑

GUMMOW J:   It is paragraph 204, is it not, in Justice Austin’s judgment?

MR MARSHALL:   Yes, but that issue is not raised any longer.

GUMMOW J:   One of the arguments was, was it not, that the exercise of the discretion broke the causation?

MR MARSHALL:   That is so and that was ‑ ‑ ‑

GUMMOW J:   That was rejected.

MR MARSHALL:   It was because of the proper exercise of discretion of the fact, yes, that is right.  So it does not become an issue in this appeal. 

GUMMOW J:   Your client is really a collection of individuals who are trustees.

MR MARSHALL:   Yes, that is right.

GUMMOW J:   Paragraph 4 is the answer, is it not, in Justice Austin’s judgment, as to what this strange creature is?  It is section 52 of the New South Wales Travel Agents Act that entitles this collection of individuals who are just trustees to sue in this name, “Travel Compensation Fund”.

MR MARSHALL:   That is so, and there is a similar provision in each of the other ‑ ‑ ‑

GUMMOW J:   Yes.

MR MARSHALL:   So then Ms Fry, in order to obtain and maintain a licence, had to be admitted as a participant in the Fund and had to renew her participation.  In order to do that, she had to have accounts prepared and audited.  These are accounts that were required by the Travel Compensation Fund and that the accounts and the audit certificate were required by the Travel Compensation Fund was known by the accountants.  There are relevant findings at page 130 of the appeal book.

GUMMOW J:   Which paragraph?

MR MARSHALL:   Paragraph 82 in the third‑last line:

It noted that the financial statements had been prepared for distribution to, inter alia, the Trustees of the TCF for the purpose of fulfilling their requirements.

Then again at 170 in paragraph 186 at line 45:

When he provided his audit reports for the 1997 and 1998 financial statements and applications, Mr Roseby knew that the TCF would rely on those reports.  That is evident from the text of the reports themselves.

Then the text of one of those audit report certificates appears at page 221 which is found at paragraph 36 of the judgment of the Court of Appeal.  About halfway down there is a statement that:

The proprietor responsible for the financial statements and she has determined that the accounting policies used and described in Note 1 to the financial statements and the accounting disclosures contained therein are appropriate to the requirements of the Corporations Law as it applies to large corporations –

then relevantly:

the Trustees of the Travel Compensation Fund . . . I have conducted an independent audit of the financial statements in order to express an opinion on them to Renee Julie Fry . . . the Trustees of the Travel Compensation Fund . . . 

The financial statements have been prepared for distribution to the Proprietors, the Trustees of the Travel Compensation Fund . . . for the purpose of fulfilling the requirements . . . the Travel Compensation Fund –

So that the accountant knew that that is what the audit certificate was for and the auditor obviously knew that was what his own certificate was for.  In my submission, that is of some significance because, if one is looking at the scope of the obligation, it is to enable the Travel Compensation Fund to consider questions relevant at the time of renewing participation.  One of the questions relevant is whether the Travel Compensation Fund should either end the participation or call for security or call for a capital injection and so that those ‑ ‑ ‑

GUMMOW J:   Did it have power to do that?

MR MARSHALL:   I am sorry?

GUMMOW J:   Where was its power to call for a bank guarantee, for example, or a bank bond?  In the trust deed?

MR MARSHALL:   Yes.

GUMMOW J:   Whereabouts?

MR MARSHALL:   It is also referred to in the actual judgments below as well, and there is an observation in paragraph 34 at page 220, about line 20:

would be induced thereby to permit Ms Fry to participate and/or remain in the scheme and/or remain in the compensation scheme under the Act without the imposition of a condition.

Particular conditions are referred to in paragraph 159 of Justice Austin’s judgment at the foot of page 160, about line 50:

Before any decision was made, the participant would be given an opportunity to address the meeting.  The trustees would then make a decision and communicate it to the participant.  The usual types of remedial action included bank guarantees and capital injections.

KIRBY J:   The respondents seem to make a point that such an injection of capital would not have occurred in the case of the Frys.  Does that meet your objection, or do you say the failure to get it would have been the very sort of thing that would have alerted you to the fact that they could not raise the capital?

MR MARSHALL:   It does meet with some objection from us because it seems inconsistent with the position that was adopted below.  On that point, at page 268 of the appeal book, just above paragraph 111, there is a subparagraph numbered 6.  This is part of the Court of Appeal’s recording of Mr Roseby’s submissions and apparently below the submission was put that:

it was submitted that even if the accounts had been properly prepared and accurate, and properly audited to show the true position, it was likely Ms Fry would have met any conditions TCF required -

So that the position which is recorded there is inconsistent with the position which is advanced here.  But in any event, the Court of Appeal dealt with it on – and the trial judge dealt with it on both hypotheses, either that the security would have been provided, or if not provided, termination would have occurred earlier, and on either of those the losses would not have been sustained.  I will be taking the Court to those findings in more detail, but they are set out primarily in paragraphs 151 to 153 in the Court of Appeal.

HAYNE J:   Just on this aspect of duty that you have taken us to most immediately before this last set of questions, the common law duty found was a duty of care to someone known to be relying on the accuracy of the report, is that right?

MR MARSHALL:   Yes.  In effect, yes.

HAYNE J:   That finding of duty necessarily involves, does it not, some normative determination?

MR MARSHALL:   I am not sure it is a normative determination.  It might be but it could be a scope of protecting someone from particular risk.

HAYNE J:   But the loss alleged by TCF, if made out, is a loss – I am trying to find a neutral term – following upon reliance, reliance upon reports that were prepared knowing they would be relied upon.

MR MARSHALL:   Yes.

HAYNE J:   What I am searching for is whether the argument against you is injecting normative considerations at two levels of debate but in a manner that is inconsistent, one with the other.

MR MARSHALL:   That could be so.  I had not, myself, appreciated that that might be the way it was put against us.  There is not actually an issue of duty.

HAYNE J:   I understand that but it is the consequence of the absence of issue of duty which is the consequence that I explore, but I have flagged the point and there we are.  There may be nothing in it.  There may be.

MR MARSHALL:   I think that part of it comes from consideration of cases where one has the action of a third party involved.  The respondents would have against us that where there is deliberate action of a third party, which is a more direct cause, that relevantly means there is break in the chain of causation.

GUMMOW J:   This is your paragraph 18 in reply, is it not, where you encapsulate what is an important point, I guess, the three‑party situation?

MR MARSHALL:   Yes, it is.  Subsequent to doing this document I had gone back to the passage of your Honour Justice Gummow in – I think it is I & L which picks up something of Lord Hoffmann in Environment Agency v Empress on the question of – and this is really, in a sense, why I went to this Environment Agency v Empress - when one is dealing with causation.  At this stage I am going from Environment Agency v Empress Car Co (Abertillery) Ltd [1999] 2 AC 22 at 31E:

These examples show that one cannot give a common sense answer to a question of causation for the purpose of attributing responsibility under some rule without knowing the purpose and scope of the rule.

So that when one is considering the claim under the Fair Trading Act and Trade Practices Act one needs to understand the scope and purpose of the Trade Practices Act section and when one is considering the claim from the purposes of the common law claim one needs to understand the scope of the duty.  The examples which were given – it was from Chappel v Hart at page 256 – the examples that were given were:

Does the rule impose a duty which requires one to guard against, or makes one responsible for, the deliberate acts of third persons?  If so, it will be correct to say, when loss is caused by the act of such a third person, that it was caused by the breach of duty.  In Stansbie v Troman . . . 

“In general . . . even though A is in fault, he is not responsible for injury to C which B, a stranger to him, deliberately chooses to do.  Though A may have given the occasion for B’s mischievous activity . . . 

Tucker LJ went on to comment:

“I do not think that Lord Sumner would have intended that very general statement to apply to the facts of a case such as the present where, as the judge points out, the act of negligence itself consisted in the failure to take reasonable care to guard against the very thing that in fact happened.”

So that when one is considering the causation question at common law, one needs to have something in mind about the content of the duty and the fact situation in which the requiring the accounts became significant.  The Travel Compensation ‑ ‑ ‑

KIRBY J:   That is turned against you because it said the very thing here is a licensed travel agent trading, but if they are not licensed that is not the postulate.

MR MARSHALL:   That is how it is put against us but that is not ‑ ‑ ‑

KIRBY J:   It sounds a pretty good argument, really.  You have to meet it.

MR MARSHALL:   The answer to that, in my submission, is that it does not appreciate the obligation of the Travel Compensation Fund was not just to compensate people who dealt with licensed agents.  It was also to compensate people who dealt with agents ‑ ‑ ‑

KIRBY J:   Who had been licensed and who then became unlicensed.

MR MARSHALL:   ‑ ‑ ‑ who had been licensed in the period between losing the licence and shutdown.  That is a risk which was always a risk my client was exposed to because of clause 15.2 of the trust deed.  It is against both risks that the Travel Compensation Fund asked to have proper and accurate accounts because it does not matter to the Fund whether a travel agent defaults before or after the licence is lost.  It only matters to the Fund whether the Fund needs protection against potential default of ‑ ‑ ‑

KIRBY J:   But that can only go so far.  An auditing or accounting report in the year 1972 cannot be blamed for what happens in the year 2005.

MR MARSHALL:   Absolutely, but these were very close ‑ ‑ ‑

GLEESON CJ:   The argument against you seems to assume that people go broke clinically.

MR MARSHALL:   Exactly.

GUMMOW J:   And the purpose of the Travel Agents Act is to preserve, or at least assist in some way, public confidence in the travel agent industry so that people will deal with them on the basis that when these collapses occur, which are untidy things, citizenry can look to the Fund.

MR MARSHALL:   Yes, that is right.  In particular, the finding which is in paragraph 22 of Justice Austin’s judgment, which I had just taken the Court to, that commonly this happens.  It is not as if this is an abnormal or bizarre set of circumstances that a travel agent would continue unlicensed until shut down.  There is actually a finding that this has happened commonly in this period between losing a licence and being closed down by the Department of Fair Trading.

KIRBY J:   Well, that seems a much more helpful way to analyse what “by” means in the statute, to ask, “Well, what is the purpose of this Act?” rather than incantations about common sense, because I know I have common sense, I have abundance of it, but I am not so sure about other judges.  Therefore, common sense is very much in the eye of the beholder.  I do not think it is a very helpful test at all.  It is designed to mask what is really going on.  That of course is why the two-stage test is postulated to be honest about what is going on.  You look at the facts, you look at the “but for” and you say, “In all the circumstances, is it appropriate to assign liability?”

GUMMOW J:   This is sort of Caparo at the other end of the spectrum.

KIRBY J:   Indeed it is.

GUMMOW J:   It has a stake through its heart.

KIRBY J:   It is a little stiletto.  It still lives.  It needs a bypass.

MR MARSHALL:   What I would want to say though is the facts of this case really, when one properly understands the finding in Justice Austin’s judgment at paragraph 122, which the Court of Appeal does not refer to and did not take into account, it makes a very big difference because the Court of Appeal’s judgment seems to assume that there is a black or dark bright line, however one wants to put it, between the moment one is licensed and the moment one is unlicensed ‑ ‑ ‑

GUMMOW J:   They thought there was a Holmesian bright line ‑ ‑ ‑

MR MARSHALL:   It seems to be that you can just do it like that, there is an instantaneous difference.

GUMMOW J:   ‑ ‑ ‑ in this world of practical commercial affairs and practical commercial maladministration and collapses.

MR MARSHALL:   Mr Francey, who appeared at the trial, reminds me that when one is considering a travel agent who goes from being licensed to being unlicensed to being shut down there is quite likely to be – and he has done quite a lot of these recovery cases – people who have come into the travel agent before the licence is revoked and paid their deposit, two or three days later they come in to pay the balance, and in that period of time the travel agent may have gone from being licensed to being unlicensed, and although the evidence is not in the appeal books here, there was in fact one such person – Ms Connelly I think it was – who had paid part of their money before 23 February – I think on 21 February – and the balance later in February, so that that person dealt with the travel agent across both periods.

KIRBY J:   You are adding a little bit to the record, are you, a little bit of prejudicial material?

MR MARSHALL:   Well, I am adding it as a hypothetical that is likely to exist ‑ ‑ ‑

KIRBY J:   You say that that can happen?

MR MARSHALL:   I say it can happen, yes.  That is as far as I can take it, given what is before this Court.

GUMMOW J:   You use this common sense expression “some incantation”.  Justice Kirby, rightly to my mind if I may say so, takes you up on that, but have you had regard to what was said by three members of the Court in Allianz 79 ALJR 1079 at 1095, starting at paragraph [96] where we endorse what Justice Santow had to say and then said some further things with reference to what Justice McHugh had said in March v Stramare?

MR MARSHALL:   Yes.

GUMMOW J:   We finished up by saying, when you looked at the Act in Allianz, its purpose was quite hostile, so to speak, rather than beneficent.

MR MARSHALL:   Yes.  I was going to come to that right at the end to say that, in my submission, the difference between what policy matters might inform the question of “by” or “causation” when dealing with the Trade Practices Act picked up in paragraphs [99] and [100] of Allianz and then in paragraph [101] starts “On the other hand, the subject, scope and purpose of the1995 . . . Motor Accidents Act” is quite different.  So this material is entirely in our favour in this appeal.

GUMMOW J:   What it bears out – and it all develops perhaps from what Lord Hoffmann was saying – is that you cannot just use this phrase as an incantation.

MR MARSHALL:   It needs to be perhaps – the word I was going to use is “focused”.

GUMMOW J:   You say that is right and, when looked at more closely, you come out ahead, both at common law and under the statute.

MR MARSHALL:   Yes, and I say that looking at the scope and the purpose of the rule, it focuses – it does not limit the common sense test, it does not enlarge it, it just focuses it, because one needs to know the purpose of the inquiry.

GUMMOW J:   The problem with March v Stramare is – and perhaps it is a child of its time – it is rather loosely expressed in the joint judgment and Justice McHugh’s judgment, which is more tightly expressed, seems to me to stand the test of time and hence Allianz.

MR MARSHALL:   Yes.  I had just taken the Court to the findings about the known reliance and the purpose was also for the purpose of the Travel Compensation Fund.  At that stage, I need to correct something that does appear in our written submissions because it is on the topic. 

In paragraph 13 of our primary submissions, I had said in the last part that it was Mr Tambree who provided the accounting services to TSIPL and Mr Roseby who was the auditor.  I have been picked up on that.  That is actually strictly not correct.  They provided the accounting services and audit certificate to Ms Fry’s business and Ms Fry traded as a Travel Shop International.  Later she carried on through TSIPL.  The mistake I made was not a mistake that Justice Austin made, nor a mistake that the Court of Appeal made – they were well aware of the factual difference and it made no difference to them – but I stand corrected.

HAYNE J:   Does anything turn on the interjection of the corporation?

MR MARSHALL:   In my submission, no, and the second respondents, having picked me up, do not seem to make anything of the point. 

KIRBY J:   Does anything turn on the fact that you say there are two causes of action, the negligence and the common law, and the claim under the Fair Trading Act?  At least possibly there are two different tests of causation.  The Act must address attention, as Allianz says, to the purpose and scope of the statute of Parliament, whereas the common law has a more general purpose and leaves more to judges to work out what the consequence of the breach is.

MR MARSHALL:   Arguably, yes, and that is perhaps one of the issues.  Insofar as the claim is put under the common law negligence claim, that issue does arise.  I think the answer is yes, your Honour.

KIRBY J:   If you succeed on the statutory claim, then there is no need to consider the common law claim, is that correct?

MR MARSHALL:   Yes.  In a sense part of the difficulty with fully arguing the common law aspect is that the respondents do not seek to support the two‑stage test at all.  In their written submissions they say in fact ‑ ‑ ‑

GUMMOW J:   The Court of Appeal said that it adopted it.

MR MARSHALL:   It did in paragraph 150; it said that.  They say that it did not or that, if it did, it was not dispositive.  That is the way it is put.

GUMMOW J:   Well, they do not seem to have put on a notice of contention.

MR MARSHALL:   No, but in a sense, to take up something that Justice Kirby has put, to fully deal with the question of what other than the common sense test should be the test at common law, I do not have a contradictor and I do not have any argument as to which cases are to be revisited.  The respondents do not say they wish to revisit March v Stramare or any of those cases.

KIRBY J:   They point out the Court of Appeal listed all the usual suspects.  They had all the cases that have been referred to in this Court.

GUMMOW J:   No, they did not. 

MR MARSHALL:   No, they actually did not.

GUMMOW J:   There is a whole lot of cases on section 82 that were not referred to, and that is why special leave was granted so far as Justice McHugh and I were worried.

MR MARSHALL:   Certainly insofar as the Fair Trading Act claim is concerned, the court below did not seem to deal with it.  I mean, it appreciated that there are a line of cases dealing with how “by” is interpreted and made reference – the fact that the cases were referred to is apparent from the list of cases appearing in the headnote but there is no analysis of how those cases might operate on the trade practices claim.

KIRBY J:   Can I take you back just momentarily to Marks.  There is a discretion, is there not, under provisions such as section 87 of the Trade Practices Act and under the Fair Trading Act?  It says “may”.  It is a discretionary remedy, is it not?

MR MARSHALL:   No.

GUMMOW J:   It is section 82.

MR MARSHALL:   Yes.  There is the other section which is a discretionary remedy.  Parts of 87 give wider discretions as to remedy, but this is a claim straight for damages under the equivalent of section 82 of the Trade Practices Act and there is no relevant discretion there or under 68 of the Fair Trading Act.

KIRBY J:   So it cannot be suggested that issues such as the “ought” question come up under the discretion to grant or withhold relief?

MR MARSHALL:   I would say they definitely cannot, not when one is dealing with this.

KIRBY J:   That does not seem to be argued to the contrary in this case.

MR MARSHALL:   By my opponents, no.  They only – no, they do not.  I am travelling through the findings that are relevant ultimately.  The accounts and the audit certificates were found to be negligently prepared and to contain misleading information.  There are concurrent findings below.  They are not challenged here.  I have set out the reference to the findings in paragraphs 16 and 17 of our primary submissions and in the footnotes.  I do observe that there was an observation in the Court of Appeal that the accounts and audit certificate could be said to be seriously misleading.

The next question was did the Travel Compensation Fund rely on the accounts?  There are concurrent findings by Justice Austin and in the Court of Appeal that Travel Compensation did rely upon the accounts and those findings were upheld, as I say, in the Court of Appeal.  Those reliance findings are not challenged in this Court.

HAYNE J:   What is their content, rely to do or not do what?

MR MARSHALL:   The evidence is – I would prefer to take your Honour to the summary of the way it was dealt with in the Court of Appeal rather than the way Justice Austin dealt with it, but Justice Austin did deal with it at some length by setting out the evidence as to what would or would not have happened. At page 285 of the appeal book starting in paragraph 151:

As Austin J found, eligibility for participation in the scheme and for the grant of a licence depended upon the financial viability of the applicant.  To determine this; TCF relied upon the information submitted by the applicant.  The form provided for self‑assessment.  Self‑assessment in excess of ten points led to automatic renewal.  But for the negligence of Mr Tambree and Mr Roseby, Ms Fry’s licence would not have been automatically renewed in 1997 and 1998.  Had the accounts been properly prepared or properly audited Ms Fry’s financial position would have been reviewed and almost certainly conditions imposed for renewal.

HAYNE J:    The nub of it is 153, is it not?

MR MARSHALL:   Yes, it is.

GUMMOW J:   Then the stumble is at 154.

MR MARSHALL:   Yes.  That is right and the reliance would:

either a bank guarantee or an injection of capital –

those alternatives, if they:

had not been forthcoming . . . would have been withdrawn –

If they had been met there would have been “capital buffer” and so that one way or other the actual losses would not have been suffered and I do endorse what Justice Gummow said.  The fumble is in – well, I would add 155 as well as 154.

GUMMOW J:   Yes, and following.

MR MARSHALL:   Yes.

KIRBY J:   But does not the sentence that follows, the “should” question:

It is a matter of public importance –

indicate that they were merely saying that you ask the “should” question because that takes you to what are the purposes of the statute and the purposes of the statute include the public importance, that accountants do not prepare these things as a charade, they have to prepare them for the purposes of the Act.  Is that not a way of reading what their Honours are saying?

They were not being completely original in saying that in causation questions the “but for” test takes you a long way along the road but there still then is the question of whether the law assigns responsibility in a particular case.  You can call that a “should” or you can use the fiction and say that the law is doing it, judges just find it, but then they ask, “Well, what is the answer to that second stage” and then they say, “Well, on the one hand there is the public importance that accountants have to prepare these things carefully”.

MR MARSHALL:   I think, with respect, that is the way the respondents put it against me.

KIRBY J:   What is wrong with that?  You surely do not say that the “but for” test is enough, that the mere fact – you see, that is the logical fallacy of post hoc, propter hoc, that because something happened earlier therefore it caused what happened. To decide whether it caused you have to look to the purpose and policy of the law in the particular area, even if you do not admit it.

GUMMOW J:   That is denied by the sentence in paragraph 155, about the fifth sentence:

However, in my opinion, by no test could it be said –

That is saying “by no test”.

MR MARSHALL:   Yes.  Not common sense, not “but for”, not – that is how it is put in reading and I suppose, as one has to, it does say “no test”, it does not just say “the two‑stage test” but ‑ ‑ ‑

GUMMOW J:   Well, that is the reason you fail.  That seems to be the reason you fail.

MR MARSHALL:   It seems to be, and that question, or the question implicit in it is flawed, in my submission, and I have elaborated on that in our written submissions.  It just does not ask the right question.  It is just completely the wrong question.

KIRBY J:   And you use that “common sense” word again.

MR MARSHALL:   I was not going to ‑ ‑ ‑

KIRBY J:   I just do not know what it means.

MR MARSHALL:   No, no ‑ ‑ ‑

KIRBY J:   It is a fiction.

GLEESON CJ:   Before becoming agitated about the solution to the problem, it may be important to define the problem.

MR MARSHALL:   Yes.

GLEESON CJ:   What is the problem that arose in this case?  Everybody agrees, as I understand it, that if loss had been suffered while Ms Fry remained licensed your client would be entitled to recover damages from the respondents.  The problem is thought to arise entirely by reason of the circumstance, that in between losing her licence and finally being shut down by external forces, Ms Fry tried to trade out of her insolvency.  Is that the problem?

MR MARSHALL:   Yes, it is.  That is what is put against us, yes.

GLEESON CJ:   Trying to trade out is a fairly normal response to insolvency.

MR MARSHALL:   I have to say this.  My friend the second respondent’s counsel says that there is no evidence that she was actually trying to trade out of insolvency; that is perhaps an inference that one would draw when people do carry on.  I put it in my submissions as saying she was trying to recover from the collapse.  That, in my submission, really is not an answer but I was only saying that because your Honour was putting it to me and I was agreeing, and I still do agree, but I was really alerting your Honour to the fact that he says that, “Well, you can’t really say it’s proved that she was trying to trade out of insolvency.  All we know is she traded in that period.”

Relevant to the question that your Honour the Chief Justice is putting are some of the findings which are set out in paragraphs 103 to 108.  In effect, it is my submission that she engaged in a bit of a ruse in that period.  She had been found out, in effect – this is pages 138 to 140 of the appeal book – she had been found out on a tip-off.  Someone was going to convene a field audit.  That led to a conversation between a representative of the Travel Compensation Fund and her father, and her father said, about line 26:

Mr Fry:  “Because we’ve got all these creditors and we are resigning from the Fund anyway.  But don’t worry there won’t be any clients’ funds outstanding after we resign from the Fund.”

In my submission, that leads to the proposition he is going to try and trade his way out in the next few days.  He did then – well, she did then hand in her licence on 18 February and in due course, about a week later, or just on a week later, the Travel Compensation Fund accepted her position and terminated her participation.  But it turned out that throughout this period she continued to trade, and it is at line 40 at page 140 at paragraph 110:

Essentially, Ms Fry and Mr Fry were continuing to operate the business, subject to “back office” changes produced by their purported transfer ‑ ‑ ‑

KIRBY J:   Why is not a way of interpreting that is that she was just a wilful person who was doing dishonest things?  How can you blame the auditor and the accountant for that?

MR MARSHALL:   It would depend upon whether that was a risk that we were exposed to, that they were – that the accounts which we obtained from them were designed to enable us to take security to protect us from that kind of default, any kind of default by the travel agent.

KIRBY J:   Is there any evidence that that was your normal practice if you had a cautionary advice from an accountant and auditor, or that was left to inference, was it?

MR MARSHALL:   No, there was direct evidence as to what would have happened had the accounts been properly prepared.  The direct evidence given was that a bank guarantee or a capital injection would have been sought, and that is the findings.  In answer to Justice Hayne’s question, the findings were that had the accounts been properly prepared, either of two circumstances:  the conditions would have been imposed and she would have met the conditions – meeting the conditions would have meant there was plenty of money to pay out these very claims – or if she had not met the conditions her termination would have been much, much earlier based on the 1997 accounts and none of these losses would have arisen.

KIRBY J:   Your point is that that is not an atypical development in this field of operations?

MR MARSHALL:   Not only not atypical, one which is referred to at page 146 as “Commonly”.

KIRBY J:   And that is what the statute is aimed to protect citizens from and to keep a viable Fund?

MR MARSHALL:   Well, it is to give us full compensation and as – yes is the answer, but I will develop that in a little bit more detail by reference to something from the Chief Justice in I & L Securities v HTW Valuers and also from the judgment in Allianz which Justice Gummow has just referred to.

HAYNE J:   This brings me back to the point I sought to explore with you a little earlier.  If the finding is as at paragraph 153 of the Court of Appeal, that if the accounts had been done properly, there would have been “a chain of regulatory events that would have prevented the losses being suffered” ‑ ‑ ‑

MR MARSHALL:  

or, alternatively, would have provided a means for meeting them without recourse to the TCF.

HAYNE J:   Yes, I understand that. 

MR MARSHALL:   Yes. 

HAYNE J:   What does it matter what circumstances attended the making of the loss in using transactions if the hypothesis for consideration is that, if the accounts had been properly prepared and audited, the business would either have been properly capitalised or shut down before these loss‑making transactions were made?  What is the relevance attached to the circumstances in which the loss‑making transactions are occurring, licensed, unlicensed, any other circumstances?

MR MARSHALL:   Can I say first of all that I entirely adopt what your Honour is putting.  It makes no difference.  But can I say the argument is put against me only to say what is wrong with the argument against me.  The argument against me is that prima facie it makes no difference, but if the trading unlicensed is so abnormal and so extraordinary, perhaps it breaks the chain of causation.  My response to that is, as a matter of fact it could not possibly be viewed as so abnormal or so extraordinary given the finding of Justice Austin which was completely overlooked by the Court of Appeal.  So at a factual level it is completely irrelevant.

GUMMOW J:   What is the paragraph of that finding?  I know you took us to it but I have just ‑ ‑ ‑

MR MARSHALL:   It is at page 146, paragraph 122.

GUMMOW J:   Thank you.  Yes, “Commonly participation”.

MR MARSHALL:   Yes, and then the next part:

That is what happened in the present case.

So that is the first part of the answer.  The second part of the answer is to say – I do not like to give examples but may I please give one?  It is in the valuer’s negligence cases the valuer provides a report for the lender to consider what security it takes.  If the security is inadequate, no valuer can ever come to court to say, “Well, hang on, the borrower did not repay you not because he ran out of money, but the borrower did not repay you because he simply decamped from the country with his assets”.  That would be no answer to the valuer. 

The responsibility of the valuer is to provide a valuation that would give the bank the basis for forming an opinion as to the amount of security necessary to protect itself from default by the borrower, any kind of default:  accidental default, wilful default, default because something might have destroyed the business like an earthquake or a flood or the insurance might not have paid, any kind of default by the borrower.  Here the protection that the TCF wanted by gaining information as to the accounts was whether they needed to require bank guarantees or other matters to protect themselves against any kind of default, because the Travel Compensation Fund was exposed to any kind of default.  It was exposed to default by unlicensed trading as well as default by licensed trading.  That it was exposed to that was – it had always been exposed to those kinds of risks and had always exercised its discretion in the way described by the chief executive and based upon the findings in paragraph 122.

So that the very loss which was potentially going to happen and commonly happens did happen here.  Therefore, it could not be said that it was abnormal or extraordinary.  But I would adopt the answer to Justice Hayne’s question by saying it is irrelevant but even if it was relevant, we have a complete answer to it.  I hope that does answer your Honour’s question.

KIRBY J:   Is that the answer to the 1968/2005 problem, that it is not overstretching the obligations in law of the accountant and auditor which could be involved if it was a very ancient audit but this is within the very period which it was the purpose of the statute to ensure would be done carefully?  It is causally related because it is sufficiently temporarily related.

MR MARSHALL:   Yes, definitely.  The finding was that it was reliance on the very one in 1997 which showed everything was okay.  Had the 1997 accounts been properly prepared, steps would have been taken then and there.  I will take your Honour ‑ ‑ ‑

KIRBY J:   The answer to the ancients of post hoc, propter hoc is if it is very, very post, if it is very proximally post, it is okay, there is no logical fallacy.

MR MARSHALL:   It is because it is reliance on the specific thing that was sought.  The very thing that the Travel Compensation Fund sought was accurate accounts and that purpose of knowing accurate accounts was known by the people providing them, that they would be relied on specifically by the Travel Compensation Fund.  The purposes of the Fund are a matter of record and why it would want these accounts are a matter of record and the functions of the Travel Compensation Fund are a matter of record and therefore they must be within the reasonable contemplation – if one looks at it from a negligence point of view or a scope and policy point of view, they must have been in the reasonable contemplation of the accountants that the Fund would want these accounts for the purpose of doing the very thing that the Fund does, namely determine whether or not to impose conditions.

KIRBY J:   But the suggestion of the respondents is that the purpose of the statutory scheme is to protect the Fund from risks and loss but it is not to protect the Fund from the unlawful and contrary to the statute actions on the part of a person who swans off and acts in a completely irresponsible way by continuing to perform functions, although she has handed in her licence.

MR MARSHALL:   They say that but they say that completely ignoring the crucial finding that we are exposed to that very kind of loss and always have been.  The Travel Compensation Fund does require us to compensate in the very circumstances of someone wilfully trading unlicensed before they are physically shut down.

KIRBY J:   You say the error of the Court of Appeal was accepting that factual finding, it nonetheless said there is a second step, which is that you have to ask whether the auditor and accountant should be liable in such circumstances.

MR MARSHALL:   Close to what your Honour said, I would say that the Court of Appeal did not accept that finding because they proceeded in ignorance of the finding.  There is no reference to that finding in their judgment.  They proceeded as if there was not a finding, and the Court of Appeal proceeded as if there was no finding of the kind at page 146.  In my submission, had that finding been at the forefront of the minds of the Court of Appeal justices we would not be here.

HAYNE J:   Is the Fund engaged if a licensed travel agent simply embezzles the funds and goes to Patagonia?

MR MARSHALL:   Yes, absolutely.  That is one of the major risks why the Fund was set up in the first place, because travel agents did embezzle funds and go to your Honour’s example, Patagonia.

KIRBY J:   But the auditor is not liable unless there is some flaw in its audit that failed to reveal that this was about to happen.

MR MARSHALL:   Well, the auditor would be ‑ ‑ ‑

HAYNE J:   Many such claims are promoted against auditors for failing to recognise the fact of embezzlement, are they not?

MR MARSHALL:   And recognised ‑ ‑ ‑

KIRBY J:   Nobody wants to lose anything nowadays.  Everybody wants to find somebody else responsible.

MR MARSHALL:   Well, that is ‑ ‑ ‑

KIRBY J:   That is what Justice Ipp keeps saying in his reports.

MR MARSHALL:   That is all so, but this in the context of my client specifically requiring these accounts and the accountants to know that we are relying upon them.  It is very different to finding a deep pocket somewhere, who really has no anterior connection with you.  This is someone whose accounts were specifically for our purpose, and I did take your Honours to the evidence to show that they well realised that the accounts were for our purposes, and I have shown your Honours what the purposes were, to consider imposing terms to protect itself against the two forms of compensation payment.

There are a few more findings, but one more particular factual finding that is of some relevance, at paragraph 119 of Justice Austin’s judgment, page 143.  What it illustrates is the two functions, one of the Travel Compensation Fund, in terminating participation and the other function of the Department of Fair Trading.  There is a finding that both bodies acted reasonably and, in my submission, that finding carries either expressly or implicitly the finding that there was no unreasonable delay in the shutdown period.

Then to the specific findings on reliance made by the trial judge.  They commence at paragraph 179 from page 168 of the appeal book.  The first part of 179 records a submission of the first respondent that these payments made by the TCF were voluntary – these are the ones made under clause 15.2 – and then there is the finding that is related to the discretion.  Then further, at about line 32:

The renewals permitted her to continue to trade, and then to informally transfer the business to TSIPL, and later to have the business transferred again to DMV Travel, while she and her father continued to deal with clients in much the same way until the business was physically closed down.

The word “permitted” there is focused upon in the second respondent’s submissions, it is said there to be an error.  It is submitted against me that the trial judge used the word “permitted” in the sense of made legal.  It is not used in that sense.  The trial judge did not fall into that error.  He only meant “enabled” in the sense of allowed a set of circumstances, he did not mean made lawful, and all of the second respondent’s submissions which focus on that word “permitted” have, in my submission, misunderstood what the trial judge was saying.

The next significant finding is in paragraph 191.  It is in page 173 of the appeal book.  It starts by disagreeing with the submission, which is in 190, but then:

If one takes the evidence of Mr Whitaker, Mr Pitts and Mr Given –

these were the officers of the Travel Compensation Fund called to give the evidence as to how they relied upon the accounts –

which I accept, it can be seen that remedial steps would, in all probability, have been taken by the TCF and the Department of Fair Trading substantially earlier than they were in fact taken.  A proper audit would have put the TCF in a position to deal with the misleading financial disclosure late in 1997 or early in 1998 –

remembering that in fact it did not get to deal with it until early 1999:

In terms of the common sense meaning –

so his Honour has not misdirected himself:

Mr Roseby’s conduct of the 1997 audit was a cause of the losses, because it allowed a state of affairs to develop in which Ms Fry and Mr Fry were able to continue to trade and expose the clients of the business to losses.

The word “allowed” there is also criticised in the same vein, it is said that his Honour fell into error because he made lawful – he did not make lawful when one looks to the Act.  That is not what his Honour meant.  His Honour was just using the word not in he sense of made lawful, allowed as in the factual finding.  In fact, “it allowed a state of affairs to develop” that is a very significant finding.

Paragraphs 195 and 196 on pages 174 and 175 of the appeal book - this starts really with a submission that there was not sufficient reliance but his Honour notes:

This submission does not take into account the evidence of Mr Whittaker, Mr Pitts and Mr Given.  The effect of their evidence is that if proper financial disclosure had been made in 1997, Ms Fry’s point score would have been minus 6 and the TCF would have imposed a requirement for a bank guarantee or an injection of capital leading to termination of the licence if this funding was not forthcoming.  Either funding would have been provided and so a capital buffer would have been created for the protection of clients, or participation in the Fund would have been withdrawn and Ms Fry’s licence cancelled.  If funding had been provided for the purposes of the 1997 renewal, it would then have been increased for the 1998 renewal so that, by February 1999, there would have been a capital buffer –

of the amount there:

$292,000, an amount adequate to meet the claims in fact made.  Mr Roseby’s deficient audits in 1997 and 1998 were a cause of this capital buffer not being required and obtained.

Then his Honour considers, on the other hand:

If the TCF’s funding requirements were not met for the 1997 renewal, and consequently Ms Fry’s participation in the Fund and her travel agent’s licence were withdrawn in 1998, no one can be sure that Ms Fry and her father would not then have engaged in unlawful trading causing losses.  But there is no evidence that would lead me to conclude that unlawful trading and losses would be more likely than not.  The issue is purely one for speculation.  What is tolerably clear is that proper discharge of his auditing duties by Mr Roseby would have led to a chain of regulatory events that would have prevented the loss in fact suffered by the TCF.

I should pause to note that something is made of that paragraph against us in the written submissions of the second respondent.  It is said that we must fail because we ran a loss of a chance case or we are trying to run one in this Court – we are not – and it is said that we must fail because we have not proved that there would have been no losses in the counter hypothetical.  That cannot be right.

What was attempted to be proved by the second respondent at the trial was that there would have been some losses and perhaps to the same magnitude, and the trial judge found that whether there would have been any losses was a matter of speculation.  That is all that we would ever need but we do not even need to go that far and we make reference in our reply submissions to Bennet v The Minister on the point.

The next relevant finding is at 198 right at the end:

The evidence shows that on the balance of probabilities, and applying the common sense test of causation, Mr Roseby’s deficient audits were a cause of the loss in fact incurred by the TCF.

Then, finally, at 200, line 44:

However, the evidence does show, on balance, that if Mr Roseby had conducted proper audits and thereby put the TCF in a position to commence its appropriate and usual regulatory procedures in 1998, the losses suffered by the TCF would have been avoided.

KIRBY J:   This shows the, if I can say so respectfully, the danger of throwing this cloak of common sense over everything.  There does not seem to have been attention by his Honour to the statute, its purposes and the way in which the solution and findings that he was making contributed to the achievement of those purposes.  What he was saying may have been relevant to the common law claim but is it somewhere else?  Did his Honour somewhere else refer to the purpose and structure of the statute and how this view of “by” is the way in which it achieves its object instead of missing it?

MR MARSHALL:   There are two things I would say in response to that, your Honour.  First of all, his Honour the trial judge in 172 said that in his Honour’s view Wardley Australia Ltd v Western Australia effectively said that for section 68 of the Fair Trading Act one does apply the common sense test and his Honour, in effect, applied Wardley.

KIRBY J:   I am not being critical of his Honour.

MR MARSHALL:   No, no, I appreciate that.

KIRBY J:   His Honour is just doing what hundreds of judges have done, but we must admit it is not a very helpful test.

MR MARSHALL:   I am not sure that I would accept that it is unhelpful.

KIRBY J:   You do not want to accept anything that casts doubt on common sense, but it is just so nebulous.  It is really motherhood writ large, except that this tends to be fatherhood, because most of the people who say what the common sense is are male judges.

MR MARSHALL:   Even accepting all of that, the findings of his Honour are direct factual findings.

KIRBY J:   I understand that and I understand how you can say, well, it is packaged in the language of common sense, but it is equally applicable to the language of “by”.

MR MARSHALL:   Well, yes, and his Honour appreciated – and in the sense, whilst his Honour does not address the policy considerations referred to in Allianz directly, his Honour did appreciate that he was directly considering the word “by” and believed these factual findings were of importance to and determinative of the question “by”.

GUMMOW J:   Where does he say that?

MR MARSHALL:   That he is applying “by”?

GUMMOW J:   Yes.

MR MARSHALL:   In 172 in the third line:

TCF must prove that it suffered loss or damage “by” Mr Tambree’s misrepresentations.

HAYNE J:   And that is amplified, is it not, at 174 where his Honour concludes that because there was reliance upon the conduct that established the “by” connection?

MR MARSHALL:   Yes, and in our primary submissions we have submitted that in the area of ‑ ‑ ‑

GUMMOW J:   His Honour referred to that paper by Justice French too at paragraph 174.

MR MARSHALL:   Yes.

GUMMOW J:   Which, from my memory, fully canvasses the things we have been discussing.

MR MARSHALL:   Yes, but picking up from what you are saying, the “by” part of it, reliance is of special significance when one is considering reliance upon misleading and deceptive conduct.  It is a very important consideration in the causal connection, and that is a matter which we have addressed in paragraph 32 of our written submissions and, in view of the subsequent paragraphs, the special significance of the reliance.  Also we have referred to that in paragraph 41(b) of our primary submissions, so that just as factual findings, they are very important.  They show reliance.  Whether one calls them common sense and attracts some criticism by doing so, does not ‑ ‑ ‑

GUMMOW J:   Well, his Honour was only doing what the Court said he should do.

MR MARSHALL:   Yes, yes.

GUMMOW J:   He cannot be criticised, poor fellow.

MR MARSHALL:   But even if one were to look at it now and say, well, should it have been ‑ ‑ ‑

GUMMOW J:   He would be criticised if he had done something else.

MR MARSHALL:   Yes, but the findings are what my client needs to succeed and should have succeeded in the Court of Appeal.  Then one comes really to the reasons, if any, why we ultimately – I was going to say, the findings that I have just taken your Honours to are from the trial judge.  The findings in the Court of Appeal I did take your Honours to earlier.  They start at relevantly ‑ ‑ ‑

GUMMOW J:   I would have thought there was something to be said for the proposition that on any theory of causation you should win.

MR MARSHALL:   Yes.

GUMMOW J:   The question is why you should not, but it was put the other way round when it got to the Court of Appeal.

MR MARSHALL:   Yes, and in our written submissions we did look at the particular views.  It variously said if you apply that test we must win and we did that in several places in our primary submissions, so that ‑ ‑ ‑

GUMMOW J:   Perhaps one can really decide this case without ruminating too much on theoretical matters.

MR MARSHALL:   Yes.  In fact, given ‑ ‑ ‑

GLEESON CJ:   Particularly if you begin with an accurate appreciation of why the loss to your client was suffered.  The loss to your client was not suffered because of illegality.  The loss to your client was suffered because of insolvency.  The question is whether the circumstance that the insolvent trading involved some illegality produces a different consequence.

MR MARSHALL:   I would wish to say yes to that but there is no direct proof of insolvency, as the second respondent points out.

GLEESON CJ:   The finding was that if the accounts had been prepared properly, there would have been either a shutdown of the business or further capital would have been required.

MR MARSHALL:   Yes, and if the capital had been provided, it would have been available and these losses would not have been incurred.  Implicit in that is a finding of insolvency.

GLEESON CJ:   It would not have been available if somebody had embezzled it.

MR MARSHALL:   Yes, that is right.

GLEESON CJ:   What are the competing possibilities as to how these clients were not able to get their money back?  One is that there was no money.  The other possibility is that somebody made off with it.

MR MARSHALL:   The Frys were here and there were Mareva orders obtained against them and assets were frozen, and that is referred to in parts below.  I am only just alerting your Honour to the fact that there is strictly no direct proof of insolvency.  There is no direct finding of insolvency perhaps is the way – which is a point taken against us.  We say that that does not matter but I just wanted to say that.

KIRBY J:   The case is not entirely dissimilar to a case which was decided by this Court in the 1950s or 1960s, Thorne v Leask Timber, where a person sued a crane owner, which at the time of his injury was unlicensed, and sought to use that for the purpose of showing a breach of the statutory duty which sounded in damages, but the Court said it is true it was not licensed, it is true that that might have been a breach of regulation laws, but it was not causally related to the happening of the accident.  A licensed or unlicensed person could have caused the accident.  The licensing was something entirely different and extraneous.  I will look at that case over lunch but it seems to be a similar issue.  It is just the licensing was not causally relevant in your submission to the way the losses then happened.

MR MARSHALL:   But the losses happened.  Some of the losses were before the licence was surrendered and the termination – sorry, before her participation in the Fund was the subject of a resignation which led to an acceptance of the resignation and therefore the suspension of the licence.  Some losses were before, some were after.  The occasion that she resigned really is not causative at all.  What happened was losses occurred as a result of her trading as a travel agent and they occurred between one point in time and another and partway through that period her licence was revoked.  But the licence being revoked is a mere happenstance in effect.

KIRBY J:   It was not revoked.  She handed it in, did she not?

MR MARSHALL:   No, she sent a letter resigning from the Fund.  That letter of resignation was accepted.  The acceptance of the resignation terminates her participation.  The termination of participation in the Fund by operation of section 16(2) of the Act deems there to be a suspension of the licence.

GUMMOW J:   We had better be aware of this.

MR MARSHALL:   I think I had mapped that out in our submissions.  Then after the suspension by operation of the Act on 24 February, or whatever, 23 February, she then traded on until physically shut down in April ‑ ‑ ‑

KIRBY J:   Is it a criminal offence to trade whilst unlicensed?

MR MARSHALL:   Yes.

GLEESON CJ:   Where do we find the most convenient statement in the judgments of the regulatory scheme?

MR MARSHALL:   I tried to collect them in paragraphs 7, 8 and 9 of the primary submissions in the footnotes.  There are paragraphs 19, 20 and 4 of Justice Austin’s judgment, then paragraphs 2 and following of the Court of Appeal’s judgment, but they are in different places, which is why I tried to pull them together in paragraph 7 through 9 of the ‑ ‑ ‑

GUMMOW J:   What was that decision of Justice Lehane’s about - Travel Compensation Fund in 72 FCR?  Have we been given that?

MR MARSHALL:   No.

GUMMOW J:   It is referred to by Justice Austin in paragraph 22.

MR MARSHALL:   Yes.  There are several issues in that case.

GUMMOW J:   I am just wondering if it sets out precisely how the legislation works.

MR MARSHALL:   I think it may do.

GUMMOW J:   Yes, I would not be surprised.

MR MARSHALL:   But what had to be considered there was a question as to the validity of the deed and whether or not – one of the issues was the validity of the trust deed in that case, and whether – that is right, it is whether the regulation actually was a conforming regulation but it was found that it did and was and, as his Honour notes, there was an appeal under a different name.  That is all that it would be relevant to, is that background.

Can I say then that the reason it seems that we have been unsuccessful in the Court of Appeal is either because of the adoption of the two-stage test or because of the reasoning in paragraph 155 of the Court of Appeal, and ‑ ‑ ‑

GUMMOW J:   Insofar as this two-stage test that is said to be sourced in the writings of Professor Stapleton, I am not sure it is.  I think she may be verballed.

MR MARSHALL:   Not in the way that it is formulated by Justice Ipp in Ruddock v Taylor and applied here.  I would say not ‑ ‑ ‑

GLEESON CJ:   Is a version of it now enshrined in legislation?

MR MARSHALL:   It is not exactly the same, but it is very similar.

GLEESON CJ:   Contained.

MR MARSHALL:   Yes.

GLEESON CJ:   Is a version of it in legislation?

MR MARSHALL:   Yes, it is in ‑ ‑ ‑

GLEESON CJ:   Where would we find that legislation?

MR MARSHALL:   It is in the Civil Liability Act and ‑ ‑ ‑

GUMMOW J:   Have we been given some of that?

MR MARSHALL:   What I did was I provided to the Court copies of the report.  I did not give your Honours the whole report, but part of Justice Ipp’s ‑ ‑ ‑

GUMMOW J:   I thought it was section 5D(4).

MR MARSHALL:   Yes, it is.

GUMMOW J:   Now, have we been given that text?

MR MARSHALL:   No, I have not given that to your Honours ‑ ‑ ‑

GLEESON CJ:   The Civil Liability Act (NSW)?

MR MARSHALL:   Yes.

GLEESON CJ:   What year?

MR MARSHALL:   2002.

GLEESON CJ:   Thank you.

MR MARSHALL:   But the way in which it became part of the Civil Liability Act is in part explained in the Review of the Law of Negligence Final Report, which I had provided to your Honours.

GUMMOW J:   Subsection (4) has this word “should”, does it not?

MR MARSHALL:   Yes, but in a sense that is a Civil Liability Act issue, and it would seem that the reason why the legislation is now in the form that it is in is because of what Justice Ipp has concluded in his report, in particular at page 109 in paragraph 7.26 his Honour started by saying:

Despite this appeal to commonsense, it is accepted that causation has two aspects –

and then again in paragraph 7.41, ultimately leading to the recommendations for the form of the amendments on page 117 through to 119.

KIRBY J:   I think we might be being a bit unfair to Justice Ipp, because in that report he is merely saying what a lot of judges have said, that factual and temporal connection takes you so far and common sense is hovering over you, but to assign legal responsibility with all the burdens of the results of that, you need to take a further “ought” step.  I mean, I am sure Chief Justice Mason said this, maybe in March, that there is a second step and it is not always perhaps spelt out in that way, but facts can only take you so far.  They do not solve whether the law assigns legal liability in the particular case.  Is that not correct?  Have not many judges said that?  I remember reading them myself.

MR MARSHALL:   Certainly it has been said that policy considerations infused the common sense question, but, in my submission, no one has said that if you satisfy causation at a common sense test, or the directive factual, one can reverse that outcome by a direct application of normative value judgment considerations at large to any particular case.

KIRBY J:   Now, we may not have to come to that in this case.

MR MARSHALL:   No, but that is what ‑ ‑ ‑

KIRBY J:   But what I said to you earlier, I think, is the way Justice Ipp would answer that.  The common sense test incorporates notions which are common to common sense and to the common law.  Fairness, justice, equality of like cases, these are normative.  These are “ought” value questions.  I think that is what the respondents say in their submission that it has not always been flushed out and spelt out, but when you talk of common sense you are talking about a mixed factual and evaluative judgment.

MR MARSHALL:   Even accepting that, your Honour, and that is in a sense why it does not really arise in a way, because the findings here are so strong that any answer to those questions, if they did arise, would be in the favour of my client.

KIRBY J:   Well, I understand that and if you can make good the proposition that there were factual findings which were not disallowed by the Court of Appeal, but which were effectively determinative unless disallowed by the Court of Appeal, then the Court of Appeal has erred and we have to provide a resolution of that error.  But insofar as you are inviting us to get into the philosophical issues of causation, which are pretty unsatisfying, I just think you are being a bit unfair to Justice Ipp, because what he says in that passage you quoted does not seem to me to be heterodoxy.

MR MARSHALL:   Well, I accept what your Honour puts in the sense that I am not – and I am certainly not endeavouring to put it unfairly to his Honour, but all I am saying is that even accepting that the common sense test is infused with notions of policy ‑ ‑ ‑

GUMMOW J:   You have to know what the policy is.

MR MARSHALL:   Yes.

GUMMOW J:   And no one ever tells you.

KIRBY J:   Or know what common sense is.

MR MARSHALL:   Yes, and the way ‑ ‑ ‑

GUMMOW J:   Otherwise you are just repeating the abuse that this is said to answer, and you go round in a circle and it gets very wearisome.

KIRBY J:   Just like with common sense.

GUMMOW J:   Well, that is what I am saying.

MR MARSHALL:   Well, in my submission, the answer really is to be found in looking at the purpose and scope of the inquiry of causation and that is the way to find out how to ask the causation question, what is the purpose of the obligation imposed by the Trade Practices Act or what is the purpose of the duty of care, and that allows one to work from there, and what is the purpose of giving compensation under section 82?

GUMMOW J:   And that is certainly not adverted to by the Court of Appeal in giving some content to this word “should”.

MR MARSHALL:   Yes.

GUMMOW J:   Unsurprisingly, Justice Lehane did deal succinctly and thoroughly with the legislative context in the Travel Compensation Fund at 72 FCR 371 at 372 to 375. If you read that, you know where to start.

MR MARSHALL:   Your Honours, then in paragraph 155, insofar as that contains the ultimate reasoning of the Court of Appeal, in my submission, the reasoning in that paragraph is flawed.  We have set out the reasons why it is flawed in our written submissions.  It does not take into account the involvement of the third party and that is something that we have set out in paragraph ‑ ‑ ‑

GLEESON CJ:   Justice Sheller in that paragraph 155 was very impressed by an example, referred to from line 36 – line 42.  What do you say about that?

MR MARSHALL:   There are a few things that one can say – I have made some notes in the event of that question.  The example follows from the sentence before and, in my submission, one does not ask, “Did the accounts negligently prepared in misrepresentations cause her to continue legally?”  It is, rather, “Did they cause the loss?” and they may have caused the loss because the loss is perhaps a direct cause of a third party.  They caused the loss because, as I have outlined in paragraph 18, one needs to know whether the conduct of the negligent defendant has denied the plaintiff the ability to protect itself from the actions of a third party, and the question that Justice Sheller posed does not allow that.  The question would also be an apt question if it considered whether the conduct of the negligent defendant exposed the plaintiff to the actions of a third party, but the way the question is put is did the negligent defendant cause a third party to act in the way it did?  That is never the question.

In the example given by Lord Hoffmann taken from Stansbie v Troman, the person carrying out repairs in the house who left the door unlocked did not cause the thief to come in.  What he did was expose the plaintiff to the actions of the third party or denied the plaintiff the opportunity to protect itself.  But it did not directly cause the third party to come in and steal and that is where, in effect, the question that is posed by Justice Sheller proceeds on a wrong analysis.  It does not take into account that there are three parties involved.  It is in light of that analysis, in my submission, that overlooks the correct question that his Honour then proceeded to the example.

GLEESON CJ:   A possible point of view might be that having regard to the evidence referred to on page 146, the loss that was here suffered was the very kind of thing that the accounts and auditor’s report were intended to protect your Fund against.

MR MARSHALL:   Yes, and I make that submission.  Yes.

HAYNE J:   The very kind of thing – characterisation fastens upon the particular role in the history of events that is played by the reports.

MR MARSHALL:   Yes.

HAYNE J:   The reports play the role in the history of events that they do because the connection that exists between the reports and loss is found in reliance.

MR MARSHALL:   Yes.

HAYNE J:   And reliance is at the centre of whatever is determined to be the scope, policy, objects, et cetera, of Fair Trading Act type consumer protection and similar legislation.

MR MARSHALL:   Yes, and that is perhaps why the prohibition is on misleading and deceptive conduct because people would rely upon it.

HAYNE J:   That is so.

MR MARSHALL:   In answer to the Chief Justice’s question, and it is the very thing – I think I have qualify, it is one of two very things.  One is trading – is the losses from a travel agent whilst licensed and one is the losses whilst unlicensed but yes, losses from a travel agent are the very thing, and this is one of the two very things ‑ ‑ ‑

HAYNE J:   But your subdivision again may mask again.  It may mask in this way, that the reliance is reliance leading to inaction; reliance leading to not putting the regulatory steps in force earlier.

MR MARSHALL:   Yes.  Exactly, yes.

HAYNE J:   The fact that some of this trading which occurred later, occurred whilst unlicensed, may be a fact to observe, but what is the relevance of that observation if first you have concluded that the consequence of reliance has been failure to prevent further trading?

MR MARSHALL:   Yes, I would adopt that, your Honour.  The Chief Justice’s question about the car example - there are three things that I would say about that.  The car example involves an instantaneous physical loss to someone and so that it is inept because on any given day it is possible for a person to get in a car and drive whether or not that person has a licence but, on the other hand, on any given day a person cannot go out and trade as a travel agent.  It requires an established business.

The losses which Ms Fry occasioned to these claimants were occasioned in a circumstance where she had an established business with a very substantial turnover at premises with an existing customer base.  She would not have been in a position to do that in 1999 had the accounts been properly prepared because she would have been shut down earlier.  So the car example it is easy.  Someone who wants to drive unlicensed gets in and goes in the car and that it is why it seems apt in the example given by Justice Sheller but it is not appropriate here because her trading unlicensed was as a result of a combination of factors and she had an established business.  She had an established specialisation in her business and an existing client base and there are findings to support that.

The car example also is different because it involves physical injury to a potential claimant as distinct from compensation for losing travel.  A more refined example would be to consider whether the injured person would receive compensation from the driver.  Because every vehicle has compulsory third party insurance the injured person will receive compensation and then, if one wants to take a car accident analogy which is apposite, if one were to assume a person is in a car waiting at traffic lights and there is a car coming from the opposite direction driven by a bank robber who runs a red light, crosses to the wrong side of the road and collides head on with a person waiting at the lights, that would be a deliberate and voluntary conduct and illegal.

If the airbag in the stationary car was negligently constructed and installed by the manufacturer and does not open, if it had opened only minor injuries would have been sustained, is the negligent airbag manufacturer to be excused of liability because the bank robber was driving illegally.  If one looks at it that way one has an airbag to protect against any number of different circumstances.  It does not matter whether the person who ran into you was merely negligent or whether they were driving illegally or driving illegally evading the police.

The examples do not cover those situations, whereas, in our situation here the risk of illegal trading is one of the very things that the Travel Compensation Fund is exposed to because of the terms of clause 15.2 of the trust deed and so for those reasons I would say the car example is not an apt example to explain the result in the case.

GUMMOW J:   Do the subrogation provisions in section 40 have any part to play in this scenario we have been ‑ ‑ ‑

MR MARSHALL:   No, not in the appeal and not here.

GUMMOW J:   No, but in understanding how the legislation works?  You would have been subrogated to the claims of the public, would you, against ‑ ‑ ‑

MR MARSHALL:   Ms Fry ‑ ‑ ‑

GUMMOW J:   That is as far as it would have gone, is it?

MR MARSHALL:   That is a different claim.  There was that claim brought but it failed for different reasons - either succeeded but did not – was not able to be recovered, I can no longer remember.  Very often the Fund will seek to rely upon section 40 and the subrogation rights and put itself in the position of the claimant and the claimant has the rights against the travel agent and there is an extended right that if the travel agent is a corporation the Travel Compensation Fund can not only recover by the so‑called subrogation right against the company but can recover direct against the directors.

That form of special statutory recoupment is not relevant for the purposes of this appeal because in this appeal there was no question of the TCF suing on that basis against these respondents.

GUMMOW J:   Yes.

KIRBY J:   Can I just mention that that passage in Chief Justice Mason’s reasons in March that I referred to where he expressly refers to the second question is at 515 of 171 CLR.  I do not suggest you detain yourself now, but he was not Archimedes.  It was not something entirely new.  It has been said many times.

MR MARSHALL:   Is that the passage starting “Commentators subdivide the issue”?

KIRBY J:   Yes, but after he refers to Fleming and Hart and Honore, he said:

It is said that, in determining this second question, considerations of policy have a prominent part to play, as do accepted value judgments.  However, this approach to the issue of causation (a) places rather too much weight on the “but for” test . . . and (b) implies . . . that value judgment has, or should have, no part to play in resolving causation as an issue of fact.

So he is critical of the second question but he identifies, and I think correctly, that it cannot be ignored.

GLEESON CJ:   Then he goes on to say, “it is all ultimately a matter of common sense”.

MR MARSHALL:   Yes, and adopts something from Fitzgerald v Penn which – there is one sentence from Fitzgerald v Penn at 277 which is ‑ ‑ ‑

GUMMOW J:   Yes, but Justice McHugh explains in his judgment this was just a cloak to shove difficult cases into the jury room and tell them to…..common sense, that juries tried these cases.  That is no longer so in a great many cases and daylight is shed.

MR MARSHALL:   As I read Justice McHugh’s judgment, his Honour was not advocating the common sense test at all.  His Honour was saying given some of the difficulties with the common sense test, as we have the judgment open ‑ ‑ ‑

GUMMOW J:   The one thing you can say about Hart and Honore, they are dealing with antique cases to a great degree which are tried by juries.  That is one of the facets of their writing a book which renders it not necessarily of great use in day‑to‑day commercial disputes.  Anyhow, you were taking us to Justice McHugh.

MR MARSHALL:   I was only going to say that at page 533, about halfway down, his Honour starts:

But now that contributory negligence is no longer an absolute bar, why should the courts continue to sanction the use of formulas which allow tribunals of fact, under the guise of using commonsense, to determine legal . . . values?

As I read what follows from that paragraph and the next paragraph, his Honour was not advocating the common sense test but rather, after referring to remoteness and causation, his Honour was proposing that in effect the matter should be looked at by considering the scope of the risk test, which is referred to at page 535, and either that should be done as part of causation or – I think his Honour was meaning probably as part of remoteness.  It is that passage which ends in effect after his Honour proposed the approach he would favour at 535, about point 4 on the page, as a scope of the risk test, his Honour points to the reasons in favour of it.  Then at the top of page 536:

Thus, the “scope of the risk” test enables relevant policy factors to be articulated and justified in a way which is not possible –

with reference to the common sense notions.  So his Honour is not supporting the common sense test.  He then makes reference to unexpressed value judgments.  It is that passage and stopping there that Justice Sheller quotes immediately before paragraph 139 of his reasons and then says:

As a value judgment I do not –

this is at page 280 of the appeal book.  In the Court of Appeal the words “which conceal unexpressed value judgments”, which is a criticism that his Honour is making the common sense test, is then picked up and the Court of Appeal says:

As a value judgment I do not think that what Ms Fry did following her termination of participation could be regarded as a normal occurrence.

In my submission, Justice McHugh was not making value judgments of that kind, which really should be a factual finding not a value judgment finding.  Whether it is normal is a matter of evidence, and depending on the circumstances.

GUMMOW J:   They all ended up in the same spot in March v Stramare, did they not, as to the outcome of the case?

MR MARSHALL:   Yes, as to the outcome, yes.

GUMMOW J:   Makes you wonder a bit.

MR MARSHALL:   Also in March v Stramare, whilst on that, at 536 at about point 6 or 7 on the page, halfway through the large paragraph, or two‑thirds of the way, it says:

Cases involving an intervening negligent act on the part of the plaintiff are no different in principle from cases involving the intervening act of a third party –

which is in a sense our case –

In the latter class of case, it is well established that a defendant will be held liable for intervening acts which are foreseeable if he or she has a duty to prevent them occurring –

then there is a reference to Stansbie.  In a sense, perhaps what the Chief Justice was saying, the very thing that happened here was something which these accounts, had they been properly prepared, would have enabled us to protect ourselves from.

So we would say that his Honour Justice McHugh’s observations there support our position.  They are not taken into account by Justice Sheller because his Honour stops, at 536 about point 2 on the page, does not pick that up, then says in paragraph 139:

As a value judgment I do not think that what Ms Fry did . . . could be regarded as a normal occurrence.

There are several things wrong with that.  First of all, one should not do that as a value judgment.  It is a question of what is the relevant evidence, and his Honour overlooked the findings that I have repeatedly taken your Honours to ‑ ‑ ‑

GUMMOW J:   You need to know what the values were, I suppose.

MR MARSHALL:   Yes, and whose values and for what purpose one would be applying those values.  But, in any event, it is contrary to the evidence.  The other thing that his Honour does is he asks whether it could be regarded as normal.  Well, even when one comes to considering a novus actus or things of that kind, the language of Lord Hoffmann in Empress is to consider things that are extraordinary and abnormal, not to consider whether something is normal.  So the wrong part of the test has been imposed there.

Then when one is considering what is normal, still whilst on March v Stramare, whilst the then Chief Justice, Chief Justice Mason, looked at the question of what was the ordinary course of things in pages 518 to 519, just above the conclusion, his Honour says:

As a matter of both logic and common sense, it makes no sense to regard the negligence of the plaintiff or a third party as a superseding cause or novus interveniens when the defendant’s wrongful conduct has generated the very risk of injury resulting from the negligence of the plaintiff or a third party and that injury occurs in the ordinary course of things.

KIRBY J:   What page is that?

MR MARSHALL:   That is just at the foot of 518 and over to 519.  The reference to “the ordinary course of things” must be understood in light of the facts.  The Chief Justice there had adopted the expression of the facts of Justice McHugh and that the facts were quite striking - they are set out at page 526:

At the time of the collision the plaintiff was intoxicated.

There was a finding that there was concentration around .18 per 100 millilitres –

it was unlikely that . . . was less than –

so I suppose that means it is .18 or higher.  Bearing in mind the legal limit that is a very high level of intoxication.  The driver –

it substantially impaired his ability to judge speed and distance, his eye functions, and his co-ordination and reaction times.  His Honour also found that the plaintiff’s ability to appreciate his own speed and his ability to see moving objects and to maintain adequate vision while attending to the controls of the car were impaired.

It is plain that he must have failed to take a proper lookout.  So that when one is considering the sorts of things which are the ordinary course of things, the then Chief Justice was contemplating that someone being exceedingly drunk, speeding, failing to take a proper lookout were within the ordinary course of things.  Therefore, when one considers a travel agent who happens to be trading at this point unlicensed, why would that be so far out of the ordinary course of things by parity of reasoning to the approach there as to what was the ordinary course of things.

Finally, if I could take your Honours to two further decisions.  First of all, Environment Agency v Empress [1999] 2 AC 22, which I have made a couple of references to, there Lord Hoffman dealt with the question of third parties and natural forces, starting at just under G.

GUMMOW J:   Do we need to read what his Lordship said there with what he has said since in the Kuwaiti Case?

MR MARSHALL:   Well, yes, I suppose so, but the ‑ ‑ ‑

GUMMOW J:   It seems to be a work in progress.

KIRBY J:   Causation always is.

MR MARSHALL:   One of the sentences I do like from Fitzgerald v Penn is:

If one is once to enter on a philosophic examination of the meaning of “cause and effect”, there is no telling where one ought to stop.

The question of third parties and natural forces, though, led to some observations at page 31 and the sorts of situation where one – the purpose and scope of the rule is relevant when considering the third party and if – and I have already taken your Honours to the example from Stansbie which appears in Justice McHugh’s judgment as well and also some other judgments.  Then at page 32E:

Clearly, therefore, the fact that a deliberate act of a third party caused the pollution does not in itself mean that the defendant’s creation of a situation in which the third party could so act did not also cause the pollution for the purposes of section 85(1).

We would say that we were exposed to this kind of risk because of the negligent accounts and the misrepresentations contained in it.  

CALLINAN J:   But none of these cases are dealing with statutory schemes, are they?

MR MARSHALL:   Well, this case actually was, because it is dealing with section 85 of the relevant Act there.

CALLINAN J:   But you have a special statutory scheme here which – and the whole purpose of the accounting and the auditing was to make the statutory scheme effective.

MR MARSHALL:   Including the trust deed.

CALLINAN J:   Well, you do not get the licence unless you can produce the right accounts and the right audit, and if you do not get the licence you cannot carry on the business.  You cannot represent that you are a licensed agent.  I would think a lot of the public would be sensitive to the need for a licence in view of the failures that provoke the introduction of the scheme.

MR MARSHALL:   Absolutely, and the need of a licence or imposing of conditions on the licensee such as the bank guarantee, yes.  That is the scheme of the Travel Agents Act and the trust deed, not just the Act alone.  But, yes, your Honour.

CALLINAN J:   Solicitors schemes, indemnity funds are exactly the same kind of thing.

MR MARSHALL:   They are very similar and there is one for real estate agents as well.

CALLINAN J:   And motor car dealers.

MR MARSHALL:   Yes, and often the conduct that is the subject of the need for compensation is dishonest conduct.

CALLINAN J:   And notoriety attaching to dramatic failures and losses has caused the schemes to be developed.

MR MARSHALL:   Yes, there is one - indeed, the collapse of Ansett has led to a very large claim presently before the Supreme Court of New South Wales relying upon the subrogation section that Justice Gummow asked about earlier.

KIRBY J:   To the extent that Justice Sheller and the members of the Court of Appeal were concerned about matters that have certainly been the subject of lively debate, that is, how far should auditors and accountants be responsible for everything that flows, given the amount of money they make in performing their functions and how far is it reasonable to attach to them all the consequences that happen in weeks, months and years ahead.  The answer you give is, “Well, don’t worry about that in this case.  A, we have factual findings and, B, they have not been set aside and corrected by the Court of Appeal within their powers and, C, those factual findings and the common sense of the situation make the point that this was the very sort of thing for which the scheme was set up, which is what Justice Callinan has just been saying.

MR MARSHALL:   Yes, that is so.  The only reason I was going to go to Environment Agency v Empress is in anticipation of the points made by the first respondent that it is said that the conduct of Ms Fry is to be regarded as  is it normal and extraordinary, but without specific reference to this case, and therefore a break in the chain of causation.

The reason why I take the Court to this case is that the words “of normal, extraordinary” were to be understood by the reference to the examples that Lord Hoffmann was giving and in that case wilful vandalism by someone causing pollution was regarded as ordinary vandalism and therefore not abnormal or extraordinary and there was no break in the chain of causation but the example of someone – a terrorist coming along and blowing up the whole dam would be regarded as if normal or extraordinary.

So that when one is considering if there is a break by abnormal or extraordinary conduct one needs to have regard to the sorts of cases where that has been postulated and the fact situations there have not led to the conclusions that it is abnormal or extraordinary, rather, it has led to the conclusion that this is, whilst wilful, whilst deliberate and whilst vandalism, not so unlawful – not so abnormal or extraordinary to break the chain of causation.  I would say that those cases inform – it is questions like that when one comes to consider the trading here, it is put against us that it is abnormal and extraordinary.  We would say it is not.  We have a finding which – I know I have laboured – 146, which is in our favour.

Then, in a sense, lastly, one comes to the policy of section 82 of the Trade Practices Act and the equivalent provision of the Fair Trading Act, and if I can go first to the decision of this Court in I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Ltd 210 CLR at 119 in the judgment of the Chief Justice at paragraph 26. About halfway through the paragraph:

It is attributing legal responsibility; blame. This is not done in a conceptual vacuum.  It is done in order to give effect to a statute with a discernible purpose; and that purpose provides a guide as to the requirements of justice and equity in the case.  Those requirements are not determined by a visceral response on the part of the judge assessing damages, but by the judge’s concept of principle and of the statutory purpose.

Then paragraph 33 at page 121:

I am unable to accept the respondent’s argument.  The relevant purpose of the statute –

it is the same provision, section 82, of course –

was to proscribe misleading and deceptive conduct in circumstances which included those of the present case.

We would say that is directly applicable here.

In aid of that purpose, the statute provided for compensation, by an award of damages, to a victim of such conduct.  The measure of damages stipulated was the loss or damage of which the conduct was a cause.  It was not limited to loss or damage of which such conduct was the sole cause.

That is the part of the paragraph I wish to refer to.  Then equally in the same judgment at paragraph 57 in the judgment of Justices Gaudron, Gummow and Hayne:

In light of these considerations, it is hardly surprising that it is now well established that the question presented by s 82 of the Act is not what was the (sole) cause of the loss or damage which has allegedly been sustained.  It is enough to demonstrate that contravention of a relevant provision of a Act was a cause of the loss or damage sustained.

The paragraphs which I have just referred to are specifically referred to in the decision which Justice Gummow raised earlier of Allianz Australia Insurance v GSF Australia in paragraphs [99] through to [100] and the point in a sense is a point that was made earlier.  That is the policy of the Trade Practices Act.  It is very different and the result would have been different had that policy perhaps been the policy of the Motor Accidents Act.  It was not the policy of the Motor Accidents Act.  This case here obviously does deal with section 68 of the Fair Trading Act which is not the same and so those policy considerations are not directly applicable here and for those reasons the appeal should be allowed.  There is a mistake in our written submissions in paragraph 53(b) the word “costs” has been omitted.  Apart from that, those are the submissions I have.

GLEESON CJ:   Thank you, Mr Marshall.  Yes, Mr Walsh.

MR WALSH:   Your Honours, this is a case factually out of the ordinary and that had to be established for the first respondent to succeed in the Court of Appeal.  This is really the case that Justice McHugh made mention of in Henville v Walker at page 493 where his Honour said there is an exception, as it were, for abnormal cases.  There can be the causal role in the coming to pass of harm or damage for the purposes of the Trade Practices Act but an intervening abnormal act can break that chain.  There his Honour said:

As long as the breach materially contributed to the damage, a causal connection will ordinarily exist even though the breach without more would not have brought about the damage.  In exceptional cases, where an abnormal event intervenes between the breach and damage, it may be right as a matter of common sense to hold that the breach was not a cause of damage.  But such cases are exceptional.

That is really, in my submission, what Justice Sheller found in the Court of Appeal.

KIRBY J:   In the headnote that somebody prepared within the Court of Appeal to the decision there is a statement:

A person would not normally terminate the licence, which enabled that person to conduct a travel agent’s business, and yet continue to conduct that business illegally.

Now, is that actually contained in his Honour’s reasons?  Does he say that in terms?

MR WALSH:   Yes, it is, your Honour.  His Honour commences dealing with that topic at paragraph 134 of the judgment, page 277.

KIRBY J:   But does that not apply in the face of the findings of the primary judge?  Did his Honour or the Court of Appeal set aside the finding of the primary judge that a person would not normally terminate it and then go on?  As I understand the evidence, which the primary judge seems to have accepted, persons do exactly that, and that that is not at all uncommon; it is done.

MR WALSH:   That is a finding from the evidence of Mr Brattoni that those sort of events are the events which occasioned the discretionary payment under clause 15.2 of the deed.

KIRBY J:   So there was evidence and that finding was made by the judge with the authority to make the findings.  Was it set aside by the Court of Appeal expressly?

MR WALSH:   No, it was not in terms set aside.

KIRBY J:   What authority did the Court of Appeal have to then venture upon making a factual finding without setting aside the factual finding of the judge and saying why they preferred their own factual finding to that which the judge made which was based on evidence that, at least arguably, seems to be reasonable and common sense in the world of miscreants.

MR WALSH:   Mr Brattoni’s evidence might be characterised this way.  He says clause 15.2 of the trust deed comes into operation when there are these messy unforeseen reasons that give rise to a loss.  They require the exercise of a discretion.

GUMMOW J:   Unforeseen?  Where does this word come from?

MR MARSHALL:   Perhaps the word “unforeseen” is not appropriate to be used there but ‑ ‑ ‑

GUMMOW J:   I think in this world it does happen.  That is why there is the legislation.  We can know that there have been collapses from time to time that are notorious.

MR MARSHALL:   The scheme of the deed commences on the assumption that losses will be compensated where they have been incurred by the operation of licensed agents, those who are participants in the Fund.  Clause 15.2 is a catch‑all to deal with other things.  It does not specifically set itself to deal with unlicensed trading.  It is to deal with those other things that do not fall within 15.1 and which as a matter of discretion, for whatever reason, as a matter of the trustees’ absolute discretion, they can make payments.  There could be a great many matters, many of which might be thought to be quite abnormal, which would occasion the trustees exercising their discretion to make a payment.  Ultimately, they will doubtless be concerned to have regard to the interests of consumers and to see that loss can be made good if it can. 

But the fact that a loss occurs and the fact that there is a provision in the deed to deal with these otherwise troublesome and not specifically predicted losses does not make that occurrence a normal occurrence.  Clause 15.2 is there to deal with everything else that does not fit into 15.1, including the abnormal.  All that Mr Brattoni does is to say here are the circumstances in which we have regard to that clause, and payments for illegal trading and losses incurred as a result thereof can be one of those consequences and yes, they do happen from time to time, but the fact that something happens from time to time does not, in my submission, make it an ordinary event.

HAYNE J:   Can I understand a little better than I do what you mean by – or understand the Court of Appeal is meaning by this reference to normal occurrence and what significance is being attached.  Can I explain why the question is being asked.  Is the Court of Appeal classifying the occurrence as normal/not normal for a purpose of inquiring whether there is a causal link or is the Court of Appeal classifying the occurrence as normal/not normal for the purpose of deciding whether, despite there being a causal connection, liability should not attach for the damage described as abnormal?

MR WALSH:   I think, with respect, it must be the latter.  That is the only conclusion consistent with the words of Justice Sheller at paragraph 153 at page 285 of the appeal book.

HAYNE J:   The reason I ask it is you go then to 155:

by no test could it be said that the negligently prepared accounts . . . were causally related –

Justice Gummow has been good enough to point out to me that in Kuwait Airways [2002] 2 AC, particularly at 1090 to 1091, Lord Nicholls looks at this two‑stage inquiry.  Now, as I read what his Lordship is there saying, his Lordship says value judgments intrude properly in deciding whether liability should attach for causally connected losses.  The Court of Appeal here seems, if I may say so, to invert the inquiry, to be inserting value judgments, value inquiries, at the level of deciding is there causation, not should there be liability for that which is causally related. 

So at some point in your argument I would need to better understand what you say the proper role is for reference we find in 139 to normal occurrence.  Whether you deal with it now or later I will leave entirely to you.

MR WALSH:   The process of Justice Sheller’s reasoning on that point commences at page 275 of the appeal book, paragraph 135.  There his Honour asks in those terms, and that is after having had reference to March v Stramare and particularly the passage at paragraph 133 on page 276 headed “Novus actus interveniens”, having regard to that and the discussion in that passage of “a consequence not readily foreseeable by A” in the example given, Justice Sheller goes on at paragraph 134 to say:

In those terms, one must ask whether, even if the acts of Mr Tambree and Mr Roseby set the scene for Ms Fry’s ability, legally, to conduct a travel agency business in New South Wales and then to continue that business after she terminated participation in the scheme on 23 February 1999 –

I think there should be the word “did” immediately following there –

what she did thereafter transformed the outcome of Mr Tambree’s and Mr Roseby’s conduct into something of far greater consequence, a consequence not readily foreseeable by them.

So that is the way in which his Honour commenced the analysis of the problem that your Honour Justice Hayne pointed out.  Then at paragraph 135 – and there is of course then a further reference to March v Stramare where the Chief Justice had reference to the decision in M’Kew v Holland & Hannen & Cubits, the person who was injured by their rather heroic manner of descending the stairs, that notwithstanding the defendant was causally connected to the harm was said to be the abnormal, unusual intervening thing.  At the end of the paragraph quoted it says:

But in truth the decision proceeded from a conclusion that the plaintiff’s injury was the consequence of his independent and unreasonable action.

Following from that, his Honour goes on at paragraph 135 to ask:

can it be said that Ms Fry’s activity or conduct after 23 February 1999 severed the chain of causation?

KIRBY J:   Where are you now, which paragraph?

MR WALSH:   Paragraph 135 at the foot of page 277 of the appeal book.

KIRBY J:   Yes.

MR WALSH:   There then follows a lengthy extract from the Chief Justice’s judgment in March v Stramare at page 278 and then Justice McHugh at page 279.  At about line 44 on page 279, paragraph 138 of the judgment, Justice McHugh says:

Once it is recognised that foreseeability is not the exclusive test of remoteness and that policy-based rules, disguised as causation principles, are also being used to limit responsibility for occasioning damage, the rationalization of the rules concerning remoteness of damage requires an approach which incorporates the issue of foreseeability but also enables other policy factors to be articulated and examined.

Then there is reference to the phrase the “scope of the risk”.  Then in the next paragraph at line 54 the question is asked – again, this is still quoting from Justice McHugh in March v Stramare:

Is the consequence fairly to be regarded as within the risk created by the negligence?

KIRBY J:   That is Lord Justice Denning in Roe.

MR WALSH:   Yes.  It is against that consideration of the authorities that Justice Sheller then poses the question that Justice Hayne asked earlier:  is there an express consideration of what is normal and what is not?  At paragraph 139 of the judgment, page 280 of the appeal book, Justice Sheller goes on to say:

As a value judgment I do not think that what Ms Fry did following her termination of participation could be regarded as a normal occurrence.  A person would not normally terminate the licence which enabled that person to conduct a travel agent’s business and yet continue to conduct that business illegally.

GLEESON CJ:   That seems to be a value judgment about Ms Fry’s conduct rather than about the defendant’s responsibility.

MR WALSH:   Yes.  I think I have to live with the finding by Justice Austin at first instance.  It is paragraph 200 of his Honour’s judgment and at appeal book page 176 and then adopted very closely at least by Justice Sheller at paragraph 153 of his Honour’s judgment at page 285:

I am satisfied that a proper discharge of Mr Roseby of his auditing duties or by Mr Tambree of his duties as an accountant would have led to a chain of regulatory events that would have prevented the losses –

So I have to live with that finding, that is at first instance and in the Court of Appeal, that there is a finding of satisfaction of the necessary conditions to bring about a loss.  The question that arose is – and that is the one that his Honour goes on to deal with at paragraphs 154 and 155 – whether in the circumstances in this particular case policy considerations, value judgments, however one might describe that second stage of inquiry once one goes past the “but for” as a negative condition, having regard to those considerations and, as his Honour Justice Sheller says at paragraph 155:

However in my opinion, by no test could it be said –

that is, taking into the various value judgments, considerations and the like.

GUMMOW J:   Why?  What does the phrase “by no test” mean anyway?  It is certainly not causa sine qua non.

MR WALSH:   No.  It is difficult to – perhaps that has meaning in the context that as a test of causation at common law ‑ ‑ ‑

GUMMOW J:   It is really the preceding sentence but then that goes back into the judge’s findings of fact at first instance without controverting them.  It just seems to ride over them.

MR WALSH:   The heart of this appeal really seems to be centred on the conclusions at paragraphs 154 and 155 following the chain of reasoning commencing at paragraph 134 of his Honour’s judgment.  That is ‑ ‑ ‑

KIRBY J:   That may be so and I am not quite as hostile as others may be to the notion that there is a value judgment at the end of the road, but you have to make that value judgment on facts accurately found.  The problem for you, it seems to me, is that Justice Sheller’s statement about what would not normally be done is contrary to the evidence of Mr Brattoni which was accepted by the primary judge, for example, in paragraph 122.  He says there that members of the public will not know whether the person is unlicensed or not and that the period of time between the termination and the payment of the money to the agent may be very short.  In such circumstances, it is within the purpose of the scheme that the scheme should operate, as it did in this case, by the discretionary decision of the trustees, which you challenge but which is not challenged in this Court.  You have to found policy assessments on facts as they are found.

MR WALSH:   Yes.  His Honour did have regard to the question of causation in the context of the policy concerns of the Fair Trading Act which are relevantly, at least for present purposes, identical with those in the Trade Practices Act.  His Honour looks at those considerations, where his Honour recognises at the foot of 285 and over:

It is a matter of public importance that accountants should not, when asked to prepare financial reports of business entities, to be used by an agency such as TCF, act so negligently as to produce a misleading report.

KIRBY J:   That is in one side of the balance.  He is putting that against you.

MR WALSH:   Yes.  So his Honour has taken into account, although not explicitly doing so, the purpose of the Trade Practices Act and the Fair Trading Act.  One would think that in circumstances where the conduct complained of is negligently misleading accounts, the same policy considerations would come into operation as regard to common law whether there is causation or under section 82 – they will not always be the same – but in this instance the Court of Appeal and his Honour Justice Austin each proceeded on the assumption that the test was the same.

I have to be candid and say there is no consideration for the purpose before this Court by Justice Sheller of the purpose of the Travel Agents Act and the establishment of the Travel Compensation Fund.  His Honour appears to have confined himself to the purpose, so far as causation is concerned, behind section 52 of the Trade Practices Act or section 42 of the Fair Trading Act and negligent misstatements at common law and why tortious liability is fixed on them.

That, in my submission, is not in any way fatal to my client’s position, because when one goes back to the engagement in the first place, the purpose my client was to perform was to prepare a set of accounts, not to audit them but to simply prepare a set of accounts which were to be used in a licensing application.  There was interposed between him and the end user an auditor and he knew, because the TCF told him so, that it would not rely on his accounts alone.

KIRBY J:   You seem now to be cavilling the finding of breach.

MR WALSH:   No, I am not doing that.  I am just putting the question of what is foreseeable and the nature of the considerations to be taken into account in a factual circumstance where my client is, without argument, negligent and has contravened the statutory norm, but it is in a circumstance where he foresees that those accounts will be used for the purpose of obtaining a licence – that was the 1996 year.  Ultimately no complaint was made about those accounts.  It is only the 1997 and 1998 accounts that are the subject of any complaint by the TCF and in the judgment in the court below.

KIRBY J:   It seems to me that the way you have to argue your case to defend the Court of Appeal is to say, Justice Sheller at 139 said that people do not normally lose their licence or terminate it, hand it in, and then continue to act as a travel agent.  This is common sense.  Most people do not break the law, they do not break the criminal law, and his Honour was therefore entitled to make that finding, and to the extent that Justice Austin made a different finding, then Justice Sheller for the Court of Appeal is effectively overruling that different finding, though not saying so or saying why he does so, but just relying on the fact that that is not normal for people to hand in their licence and then go on trading and that as a matter of policy or the operation of this Act, that where they do so that severs the obligations of the accountant and the auditor because at that stage they are on their own.  They have breached the law, the policy of the Act, they are in the realm of criminal offences and at that stage their own headstrong actions take over, not the negligence of the accountant.

MR WALSH:   Yes.  To carry on with that to an extent, what my client does is put someone within the scheme – in this case, Ms Fry – and ‑ ‑ ‑

KIRBY J:   Yes, but the problem with the theory is that the Court of Appeal does not expressly overrule the finding by Justice Austin which are findings of fact, based on Mr Brattoni’s evidence, which are open to them; and secondly, as to cutting them off, you have to have a really strong event that terminates it and the evidence was that this is not at all uncommon and that this is one of the purposes of having the Fund and the legislation that sets it up.

MR WALSH:   But it is an illegal act.

KIRBY J:   So what?  The Fund is there to protect people who deal with travel agents when they are legal or illegal.  Sadly, there are many cases where they act illegally and the Fund has to be there, and is there, to have a consideration of whether, even in such cases, they should be given protection.  Citizens do not know.  As Justice Austin said, citizens cannot be certain the travel agent is licensed.

MR WALSH:   But, in my submission, my client is – illegal trading was not the thing that my client was in any way responsible for and his accounts were in no way connected with the concept of illegal trading.  For the purposes of causation and reliance, reliance ceased by the TCF the moment – when a licence was granted, there was no further reliance after that event – I do not say that brings causation to an end but that is the end of reliance and that is how the case against my client was ultimately pleaded in the third amended statement of claim.  This was put as a reliance case, and reliance was not made out.  The case against my client so far as the trade practices claim is concerned appears at page ‑ ‑ ‑

GUMMOW J:   I am not sure where we are now.

MR WALSH:   I am sorry?

GUMMOW J:   Why are you going to this archaeology?

MR WALSH:   Because it is said that is what my client caused in the pleadings.  It caused a state of events – and this is at page 51 of the appeal book.

GUMMOW J:   The trial judge tried the case and we have his finding.  Why are you going back to the pleadings?  Are you saying that the case was conducted away from the pleadings?

MR WALSH:   No, the point I am trying to make is when one looks at the position on the question of causation one has to ask what it was that my client caused, one has to ask what it was he was to do.  He was not there to prevent the very risk that came about.  He is not like, for example, the security guard whose very risk it is to prevent is an illegal action.  His job was simply to prepare a set of accounts for assessment.  He was not to be found to have caused the very thing that occurred, that is, an illegal action.

GLEESON CJ:   We had better come back after lunch to look at the question of what the Travel Compensation Fund compensated people for.  Is that a convenient time?

MR WALSH:   Yes, your Honour.

GLEESON CJ:   We will resume at 2.15 pm.

AT 12.46 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.17 PM:

GLEESON CJ:   Yes, Mr Walsh.

MR WALSH:   Before lunch your Honour asked me to address on the claims and payments that were actually made in the present case.  Those claims ‑ ‑ ‑

GLEESON CJ:   What I had in mind was what was the harm for which the Compensation Fund compensated people?

MR WALSH:   Justice Austin deals with that at paragraph 115 of the judgment at page 144 and onwards.  The process is described at paragraph 115.  The totality of the claims are set out at paragraph 116.  That is $143,050.  At paragraph 117 it is said that:

The TCF was faced with a large number of claims by people who expected to travel to Fiji or Bali in the very near future.

That is in the context that Ms Fry’s business was a travel agency business that specialised in trips to those two destinations.  It goes on to explain at paragraph 117 that people had paid money in the expectation that they were going there and bookings had not been arranged.  So what the TCF did was arrange through another travel agent to confirm the bookings, make good those arrangements, and then the TCF paid all of the money to the other travel agent.

GUMMOW J:   Well, that is a useful illustration of what the TCF is about.

MR WALSH:    Yes, and the flavour of what occurred is shown by a selection of claims that are dealt with at paragraph 120 on page 143.  In each case it is someone who had booked a trip or had a receipt, in any event had paid moneys, either in whole or in part for the purposes of a holiday to Bali or Fiji.  The totality ‑ ‑ ‑

GLEESON CJ:   There was no trust account?

MR WALSH:    I do not think there was a trust account in this case, no.

GLEESON CJ:   I see.  So people paid in advance for services and the money that they paid was not spent by Ms Fry on acquiring those services for them?

MR WALSH:    That is correct.  They had paid for holidays and the moneys had not gone towards those holidays.  So that was the loss – the loss is actually set out in schedule form at – it is a schedule to the third amended statement of claim which commences – the schedule commences at page 57 of the appeal book and goes on to page 59.  The totality of what was lost is the figure which appears in the fourth column from the left.

GLEESON CJ:   And what was Ms Fry’s explanation of this?

MR WALSH:   Many varied and confused – she appeared during the course of the trial.  There were questions asked by her of other witnesses who were called, in part with a view to establish, “Look, it was all a dreadful mistake”, or at least in the substantial part it was a dreadful mistake, and other folk to whom moneys had been paid had failed to account.  But at the end of the day Justice Austin rejected everything that Ms Fry raised in that regard ‑ ‑ ‑

GLEESON CJ:   Could it be that the moneys went into a bank account that was in debit?

MR WALSH:   It is just not known.  I do not think it is known on the evidence where the money went.  What is known is that each of these claimants made a claim over a period of time to the Fund and the Fund paid out a substantial sum of money.

GLEESON CJ:   There were accounting requirements in section 41 of the Act, but they do not include a trust account ‑ ‑ ‑

MR WALSH:   My recollection is a trust account is one of the conditions that can be ‑ ‑ ‑

GUMMOW J:   It is a condition of the licence, is it?

MR WALSH:   Yes.  It can be imposed but not always, by virtue of the intricacies of the point-scoring system when people are registered.  The better you are as a credit risk, the less conditions are imposed.  Clause 12 of the trust deed is the clause that gives the power to impose conditions.

GLEESON CJ:   When people paid in advance for services that were not obtained for them by Ms Fry, did they have to pay again for the same services and then make a claim on the Compensation Fund, or did the Compensation Fund itself pay for those services?

MR WALSH:   The Compensation Fund paid the other travel agent to pick up the tab, as it were, and do that which Ms Fry should have done.  That is explained at paragraph 117, I think.  That is how the claim came about, and each of those claims is set out there.  It is also worth noting I think at paragraph 116 of the judgment that only 13 of the claims that came in were claims for moneys paid prior to 23 February 1999.  So the vast majority of these claims are in the unlicensed period, there being 283 in total.

CALLINAN J:   Mr Walsh, I notice in paragraph 155 at page 286 that after she terminated her licence or her business, she – I think the court uses the word “seems”, but she continued to use the licence number for the activities of the company.

MR WALSH:   Yes.  It was a continuation of the confusion that had beset everything Ms Fry had done.

CALLINAN J:   It may be against you in the sense that if the licence had not been renewed on the basis of the imperfect accounting and auditing, that licence number would have been taken away, as it were, and the shop shut up much sooner.

MR WALSH:   There is no getting around that finding that she was still using the licence number in a variety of ways, indeed as she had been since November of the previous year.  The evidence also is that she ceased to trade as a principal in November 1998.

CALLINAN J:   The point, it seems to me, is that there was a licence number which was available as a result of the imperfect accounting and auditing.

MR WALSH:   Certainly the imperfect auditing and accounting set the scene for there being in place still a licence which would not have been renewed but for the imperfect accounting, yes.  I cannot get around that.

KIRBY J:   You try to get around it by saying it simply sets the scene or is background facts but the question is whether or not it had a causative effect.  Without the accounting and auditing that was done imperfectly it simply would not have happened so it sounds like a causative relationship.

MR WALSH:   Yes, which brings me back to the ‑ ‑ ‑

KIRBY J:   Unless there is some principle of law or some principle that we should declare to be the law that where there a person moves into criminal activity then they are to be taken as bringing it on their own head and you cannot blame other people who have gone before and are part of the “background facts”.

MR WALSH:   Yes.  That is a point I was trying to make before lunch and that is that it was not the job of my client to avoid the risk of criminal action.  My client was not like the security guard.

KIRBY J:   Yes, but we are told, and there is a finding by the primary judge to this effect, that criminal action of continuing to trade though unlicensed is not an uncommon complication of the very sort of thing for which the Fund has been established and for which it provides.

MR WALSH:   It is that important matter to which your Honours have rightly drawn attention that I wanted to return now.  A criticism is made of the way in which the matter proceeded before the Court of Appeal and Justice Sheller in his Honour not dealing with the factual finding that appears at page 146 of the appeal book, that is the one that flows from Mr Brattoni’s evidence.  The reason that occurred is that no one in the Court of Appeal told the Court of Appeal that that was an important factual finding.  It just was not a matter that was raised at all in argument.  That is why it was not addressed.  The finding that is there is perhaps, on a first reading, apt to mislead.  Justice Austin did not say at page 146, line 15 and following ‑ ‑ ‑

GUMMOW J:   Paragraph?

MR WALSH:   Paragraph 122 – did not say that it was common for struck off travel agents to continue to trade whilst unlicensed.  His Honour did not say that because that was not the evidence.  What his Honour is dealing with here is evidence that says when there was unlicensed trading this is how most commonly that unlicensed trading was dealt with.

GUMMOW J:   We do not have the benefit of the evidence, do we?

MR WALSH:   Not yet, your Honours do not, no.  If I could, with your Honours’ leave, tender two pages from the transcript of the cross‑examination of Mr Brattoni, and that will make good, I hope, the submission that I wish to make.

KIRBY J:   What does this go to?

MR WALSH:   If I could just tell your Honours what it goes to first and then perhaps the objection could be dealt with.  The first page that I have tendered is page 48 of the transcript ‑ ‑ ‑

KIRBY J:   I do not want to see it ‑ ‑ ‑

CALLINAN J:   It is not really a tender.

GLEESON CJ:   It is not a tender.  This is part of a record.  We are not dealing with evidence.  You will cause a great deal of unnecessary excitement if you go into…..that could be an unfortunate strain on some people.

KIRBY J:   His Honour is referring to my absolutely pristine insistence that we never receive anything in addition to the record.

GLEESON CJ:   You are supplementing the appeal book.

MR WALSH:   Yes.

GLEESON CJ:   And your opponent has indicated dissatisfaction with that.

MR WALSH:   Yes.

GLEESON CJ:   We will hear his source of dissatisfaction after you have told us what you want to make about it.

MR WALSH:   Yes.  If I could tell your Honours what these two pages go to.  The first page is evidence of Mr Brattoni explaining how the discretion is commonly exercised when it comes to dealing with unlicensed travel agents and claims against them.  That forms the basis of paragraph 122 of the judgment.  Over the page, which is page 140 of the transcript, commencing at line 15 and following, the topic of unlicensed trading is dealt with.  At line 24, in answer to a question, Mr Brattoni says:

unlicensed or discretionary type claims is less than 1 per cent . . . 

Q.       The 1 per cent is what, discretionary claims do you say?
A.       Yes, of the total log of claims paid.

KIRBY J:   Yes, but what does this matter?  It is provided there in the deed.  You contested that it could even be taken into account because you said this was a novus actus or something of that kind.  You lost that argument.  Now, you are trying to say well it is very, very rare, but it is there and it can happen and it is therefore something which could give rise to foreseeable consequences.

MR WALSH:   Yes.  But the reason I sought to raise these matters was against the eventuality that what appears in paragraph 122 of Justice Austin’s judgment leads to a conclusion that unlicensed trading – because the word “commonly” appears in line 15, is a common event.  The evidence is quite to the contrary.  Of all the aberrant behaviour by travel agents that gives rise to a claim against the Fund, the evidence of Mr Brattoni, the then Chief Executive, is that claims as a result of unlicensed trading and other discretionary claims amount to less than 1 per cent of the totality of the claims.  From that I simply seek to found a submission that this was not a common occurrence at all for Ms Fry to carry on unlicensed in circumstances where she had been found out, handed in her ticket and therefore it ‑ ‑ ‑

GLEESON CJ:   Found out doing what?

MR WALSH:   The sequence of events was that she had been threatened with an audit by the Travel Compensation Fund.  The auditor, Mr Whittaker, spoke with her father who said, amongst other things, “I think I have been a naughty boy”.  That led to the resignation from the Fund.  So, in the face of an audit coming, her father had confessed to irregularities.  The precise nature of those irregularities was not known.

HAYNE J:   Do you seek to revive the argument, rejected at trial, at paragraph 179 of the trial judge’s reasons about voluntary payment?

MR WALSH:   Paragraph 179?

HAYNE J:   Paragraph 179, page 168 of the appeal book.  The judge there rejects the voluntary payment argument.  Are you seeking to revive that?

MR WALSH:   No, and it is not an argument that I ran at trial.

HAYNE J:   What is the point that you seek to make except a point of prejudice or the like?  Where are we going?

MR WALSH:   The point to be made was I had understood it was put that paragraph 122 of Justice Austin’s ‑ ‑ ‑

HAYNE J:   What does the frequency of unlicensed trading have to do with this case?

MR WALSH:   Well, the case I seek to make is that this was a risk that was not reasonably foreseeable, was very remote, an abnormal risk arising from illegal trading and illegal trading to the extent it was otherwise earlier thought on the evidence to be a relatively common occurrence.  This simply goes to show that it is less than 1 per cent of that aberrant, but total aberrant, behaviour that gives rise to claims.  No more and no less than that.

GUMMOW J:   That is not quite what the answer says, is it?  The answer is not all that clear on page 140 of the transcript.

MR WALSH:   Yes, your Honour.  The 1 per cent is raised twice on page 140 at line L and again at line O.  That is as far as I wish to take that point.

GUMMOW J:   What is not clear is whether the discretion is always exercised.

MR WALSH:   I do not seek to ‑ ‑ ‑

GUMMOW J:   I do not think you can take it any further.

MR WALSH:   No, and I do not seek to cavil with his Honour’s finding at paragraph 122 about the way in which the discretion is exercised, simply to put it in the context of it being a rare exercise of discretion rather than a common event.  Unless I can be of further assistance, your Honours ‑ ‑ ‑

MR GLEESON:   Thank you, Mr Walsh.  Yes, Mr Dubler.

MR DUBLER:   Your Honours, the reason we say causation was not made out and the trial judge erred and the Court of Appeal was correct can only be answered by a detailed assessment of the facts found and the inferences to be drawn from the facts and the true, we say, findings of the trial judge.  That a case of causation could, depending on the evidence in this trial and the way in which it was run, or in similar type cases as this could have been made out.

The important reason why causation was not properly made out and the trial judge erred was because the findings and the particular facts here do not establish the causal link.  To make that good, I will need to go through, hopefully not in any way repetitious, of what we say are the important findings and the effect of those findings.

The first point we make, just to give the start of the chronology, is that there was a licence issued in June 1996 and trading pursuant to that licence in the name of Ms Fry.  That occurred and occurred for a period of time that had on no one’s argument any causal relationship to any acts or omissions of the respondents.  What next occurred – and perhaps if I give your Honours the relevant parts of the appeal book.  I want to deal with the important findings of the trial judge and just stick with that in a chronological sense.  At page 102, paragraph 2 there is reference to a number of entities that were associated with Ms Fry and Mr Fry, the evidence being that those entities at times traded as travel agents, yet at no times were they ever licensed or audited or known to the auditor. 

The next event of relevance is that in December 1997 is the first act or omission of the auditor.  We say at this point it is important to recognise that Ms Fry has been trading, that Ms Fry has other entities associated with her and relatives associated with her.  What occurs is that in December 1997 the first audit is lodged.  That audit allows a licence to be renewed in her name.  Dealing with it diagrammatically, at this point there is a fork in the road in terms of factual inquiry.  One fork of the road is to consider – and I will just go down that road for a moment – what did happen, what were the facts and why and to what extent were they explored on the evidence and to what extent are there facts found.

The other fork in the road is to consider what would have happened from December 1997 onwards if there had been a proper accounting.  Potentially causation, depending on how the case is framed, could have been made on either road.  Our submission is that before the trial, the way in which causation was sought to be put was based upon the proposition that the events which did occur could be materially sheeted home, that is causally sheeted home, to the audits of 1997 and 1998.  So that requires a close analysis of what did happen.  So what did occur is that in December 1997, based on that audit, the licence was renewed.

I should just pause at this point to draw to your Honours’ attention appeal book 135, so that it is understood a bit more what was involved in the audit.  At paragraph 95 there is explained the point system, that essentially the audit did not go to solvency as such, it went to financial creditworthiness and, importantly, there was a ratio required between capital and turnover.  The closest analogy may be, for example, a licence for a financial adviser or stockbroker.  There may be a requirement of sufficient capital, depending on the size of the business.  That was the nature of the audit here.  That was – and we accept – at that time a misleading audit and so it can fairly be said that after that point there was a licence issued in reliance upon that audit.

GUMMOW J:   Do we actually see the licence anywhere?

MR DUBLER:   I do not recall it, your Honour.

GUMMOW J:   Was it in evidence anywhere?

MR DUBLER:   I do not recall.  It is not in the appeal book.

GUMMOW J:   I would not be surprised if it was not.  I am just wondering who the licensee was, that is all.

MR DUBLER:   Ms Fry, I can tell you that, your Honour.

GUMMOW J:   Personally?

MR DUBLER:   Yes.  It did also include trading as the Travel Shop International.  That is the road then of what did occur right up until then we say relevantly would be 8 February 1999.  There have been two renewals and the licence then continues.  The story is then picked up at page 139 at paragraph 106.  At line 25 the evidence is that Mr Fry informed the Travel Compensation Fund that “we are resigning from the Fund anyway”.  So on 8 February 1999 there is an oral indication of resignation in the face of a potential field audit is the background.

GLEESON CJ:   Because we have all these creditors?

MR DUBLER:   Yes.  We do not shy away from that but I will deal with it.

GLEESON CJ:   Does that not mean insolvency?

MR DUBLER:   No, your Honour.  This is why we were all coming to – and I will come to the conclusion, if your Honour wishes, that the insolvency thesis is not made out on the evidence, there are no findings consistent with it, nor was it put as such.  That the next factual issue is that, at page 139, paragraph 108, on 18 February 1999 Ms Fry sends a letter advising that she wishes to resign.

GLEESON CJ:   Just before you go, in paragraph 106 it appears that the respect in which Mr Fry had been naughty was that he had not told the auditors about all his creditors.

MR DUBLER:   That is so, your Honour.

GLEESON CJ:   And the respect in which the auditors had been negligent was they had not found out about the creditors.

MR DUBLER:   That is so, your Honour.  The issue, if I can come to the conclusion bit again, jumping ahead of it, is whether it can be fairly be said, on the way in which the case was put and run, the evidence that was there and the findings made, that the insolvency or the financial lack of creditworthiness was a material matter or issue or cause of the trading with members of the public without a licence and not making good the funds deposited.

GLEESON CJ:   I do not want to nag about this insolvency, but in paragraph 107 there is a concern that Ms Fry would go bankrupt.

MR DUBLER:   Yes.

HAYNE J:   You can add to that page 138, lines 52 to 54:

negotiating to sell the business to a third party and use the proceeds to protect client balances –

In the hands of the uninformed third party, those statements are liable to the cruellest misconstruction about solvency, I would have thought.

MR DUBLER:   Yes.  Now, if I could continue the chronology.  On 18 February Ms Fry indicates that she wishes to resign as of that date.  The next step in the chronology is that, over the page at 140, there is an acceptance of the resignation, as it were, by resolution to terminate her participation on 23 February.  So we say at this point the background is one of a conscious withdrawal from the Fund over a two-week period, first foreshadowed on 8 February.

Thereafter at paragraph 110 on page 140 it is indicated that what happened was that Ms and Mr Fry make use of the name “DMV Travel” and the licence number and that there is continuation of work as a travel agent and receiving people who come through the door.  At paragraph 113, that continues until April 1999, where the doors are locked.  The proposition of the Frys at trial, as recorded in 114, was that they were wrongly prevented from continuing in trade, that they had a legitimate new licensee who was aware of their arrangements and that indeed the Travel Compensation Fund wrongly took action.  The judge there says that there is no evidence to support that, but that is what they said.

Next, just to make good the somewhat complicated scenario of what happened after 23 February, at pages 143, 144 and 145 of the appeal book, the evidence is that it may not have been for all of the matters but for a substantial number of claimants the licence purported to be used was also the DMV licence.  The evidence was that the moneys were deposited into the bank account of the Travel Shop International Pty Limited, which was neither the licensee nor ever audited.

GLEESON CJ:   How do you use a licence?

MR DUBLER:   There is the requirement to have one in order to trade or, to put it the other way, there is an offence created ‑ ‑ ‑

GUMMOW J:   Section 6.

MR DUBLER:   ‑ ‑ ‑ that if one trades without a licence that is an offence.

GLEESON CJ:   I wondered whether you would need it for trading.  In other words, do you have to quote your licence number to hotels or airlines, for example?

MR DUBLER:   I do not know the answer to it, but common sense would suggest there is a likelihood of it needing to be disclosed to customers and perhaps also to providers.  I would imagine so, but perhaps if that could be checked.  The matter is then summarised by the trial judge at paragraph 121:

I have expressed the finding that during 1999 the business formerly conducted by Ms Fry was conducted by TSIPL.  However, it appears from some of the claims information that on some occasions, bookings were taken by Ms Fry on behalf of DMV Travel as a licensed travel agent.  It is not clear from the evidence whether she had authority to do so.

Taking the evidence then to the conclusion, persons deposited money or gave cheques to Ms Fry or Mr Fry.  They went into the bank account of the Travel Shop International Pty Limited.  At times the old licence was used, at times the new licence was used, and the Frys asserted that they were entitled to rely on the new arrangement.  Then the members of the public, following upon the locks being placed on the premises, did not obtain their travel services and the Travel Compensation Fund arranged for a new travel provider.

So the question is, we say, relevant for the question of causation, whether or not it is a fair inference or an available inference on the evidence – we say there is an absence of finding about it – that the prior 12 months trading causally forms a reason for or contributed to this period of unlicensed trading or was it purely just the background?

GLEESON CJ:   Was there a criminal prosecution arising out of this?

MR DUBLER:   I am unable to say, your Honour; I am not aware.

HAYNE J:   Just as to quoting licence numbers and details that seem to be governed by Part 3 of the Act, sections 33 and following, which required some information, including in some circumstances at least the number of the licence to be mentioned in advertisements and the like.

MR DUBLER:   It needs to be understood, your Honour, that at trial there was a deal of financial information given and expert evidence given.  That is summarised by the trial judge.  That financial information went to whether or not the accounts were correct.  There was no financial information analysed or the subject of evidence as to the state of affairs at the date of 23 February onwards.  As I understand what your Honour the Chief Justice is suggesting, that one should take the approach of looking at the history of acceptance that they did not meet the financial requirements a year earlier and thereabouts as the basis for the inference that that was causally related or induced this collapse or trading while insolvent. 

It is our submission that the evidence fairly analysed does not support that inference.  There were no findings of the trial judge to support that inference, there was no submission.  It was not the way in which the case on causation was put that, for example, no financial evidence went to the state of distress of the business at the time.  There are different entities involved.  The Frys gave evidence.  There was no evidence from the Frys or a case sought to be put to the Frys that this was the last throes of a business in financial distress.

HAYNE J:   What is the effect then of the answers given by Mr Fry that if they were closed down clients would lose?  What is the effect of paragraphs 105, 106, et cetera, except the effect which you dispute?

MR DUBLER:   One answer is, your Honour, that the alleged sale did go through, according to the Frys.  Another answer is this, that it is an equally available inference on the evidence that this was opportunistic embezzlement, or even perhaps a less harsh word, opportunistic misappropriation, when confronted with the padlocks.  So that what occurred was from 23 February members of the public attended at Parramatta.  They deposited money and asked for a trip to Fiji.  Shortly thereafter the department said, “You’re not allowed to trade, nor indeed engage other contractors to provide travel services because that’s being in the business of a travel agent”.

That thereafter the money never was reimbursed, nor did they pay the Travel Compensation Fund back for money they paid to a third party travel, that, we say, all of that suggests fairly, your Honour, bearing in mind – I will come back to it in the way in which the case on causation was put – does not demonstrate or rebut the inference that this was an opportunistic venture by the Frys at that point in time to take the money, given that they were now shut down, when they thought that they could continue to trade, and not refund and that the best way of putting it, we would say, or that was not able to rebutted, is that the Frys voluntarily, consciously decided to take the opportunity to take that money at that time and that is the sum total of what we know.

HAYNE J:   That is, is the case you posit a case that there was enough money or liquid funds available to the Frys at the point of closure to meet the demands made on them?

MR DUBLER:   Yes, the way I would put it is this ‑ ‑ ‑

HAYNE J:   Why was that not a matter which, if it was to be in play, should have been put in play by direct and square questioning from your side of the Bar table, directed to the Frys to enable them to answer that quite serious allegation of theft?

MR DUBLER:   It escapes me whether or not that was totally left unexplored in the evidence.  But to answer your Honour directly, the onus was not on the respondents to make out the causal link.

HAYNE J:   I understand that, but there is a rather important element, I would have thought, of fairness that if you are going to make a case which puts the proposition as bluntly as the Frys had the money and stole it, you might possibly put that to them in cross-examination.

MR DUBLER:   Yes, that is perfectly correct, your Honour, but the way in which we would put the case, and I emphasise it was not the developed way it was run at trial, but the way in which we would put the proposition at this level is this, that the appellant is not able to rebut that as an inference.  We cannot, and as your Honour correctly points out, seek a finding of misapplication of moneys in the absence of that being something that was run by the respondents and a finding sought.

What we say is that if the appellants wished to make a case of the 12 months trading in the past and the lack of financial credit worthiness being the cause, they bore the onus on that.  They have to rebut the inference.  They have to go to the witnesses that were available.  They have to put to the Frys, they have to make out a case of motivation or encouragement or, as it were, the last throes of a business in financial distress.

Now, if that is their case on causation, it needs to be moved forward.  It needs to have an evidentiary foundation.  It needs to be put to the trial judge and a finding sought about it.  That is not what the trial judge, in my submission, accepted to be the case.  That is not what the trial judge relied upon as being the causal link that we say that faced with that evidence that I have gone through and the findings there which give mixed signals, that it is not able to be rebutted by the appellants at this Court that this was anything other than simply voluntary trading, consciously undertaken following a foreshadowed two week period of resignation of the old licence, the adoption of a new licence and a new name and then the locks were put on the premises and clients were not paid.  That is the status of the evidence, we say, fairly.

GLEESON CJ:   Or is this a case of novus actus interveniens, criminal theft?

MR DUBLER:   Yes, but there is another way of putting it.

GLEESON CJ:   Your argument is that this is not a case of a business failure followed by a brief and fairly messy period of attempting to trade out of insolvency.  This is a case in which the principals of the business simply helped themselves to the money and took off, and that is not something that the auditors were protecting the Fund against.

MR DUBLER:   Precisely, but I want to be fair to the point put to me by Justice Hayne.  We say that they have not rebutted that as an available inference on the evidence, including the evidence of the lack of financial creditworthiness, and a degree of evidence I think was put of subterfuge, but that at its heart there was voluntary illegality undertaken by the Frys at least to the extent of unlawful trading and that they did not make out nor substantially put a case to the trial judge of saying that this was the throes of a financially insolvent business.

GUMMOW J:   Did you put this to the Court of Appeal?

MR DUBLER:   Certainly, your Honour.

GUMMOW J:   Is it reflected in their judgment?

MR DUBLER:   What is reflected in the Court of Appeal judgment is essentially our submission.  There is not a lot of reasoning there.

GUMMOW J:   You say this is what paragraph 155 really means, do you?

MR DUBLER:   Yes, your Honour, in this way.  We said that the analogy with the motorist is fair because there is no evidentiary basis or fact‑finding basis or basis in the facts found for the suggestion that there was a continuity of business as being the real driving cause, that it was simply a licence at one time, that there were customers at a time after the licence and a conscious decision to trade under the wrongful belief or willingly in the belief that they did not have the licence and loss that then flowed.  In the absence of some argument, some hypothesis that is grounded fairly in the evidence or the findings of the trial judge, the causation cannot be made out.

I think I was criticised at an earlier time for the analogy with the motorist because we are dealing with a business, not a mere motorist, but I would say a bit more fairly perhaps would be the analogy of a taxi driver who has a business of ferrying people around, but if all that can be demonstrated on the evidence or it cannot be rebutted on the evidence that when the taxi driver’s licence is cancelled that there is substantially merely a conscious decision to continue to trade without the taxi driver’s licence, albeit in a business, it cannot be sheeted fairly home to the auditor of the accounts used for the licence previously.

GLEESON CJ:   Then what was the relevance of Mr Fry’s confession about being a naughty boy for not revealing all the creditors?

MR DUBLER:   I would have to accept that he did not believe he was in a position to meet all of the capital turnover ratio requirements to have the licence at that time, but it does not go higher than that.

GLEESON CJ:   He was not confessing to what some people refer to as a liquidity problem, a cash flow problem?

MR DUBLER:   This is why I say, your Honour, perhaps if these matters were explored squarely and the subject of findings squarely that that point would go away, there would be other ways in which this case could be run and a causal link made out but it was not, as I suggest, found by his Honour Justice Austin below that this was that type of case, that this was continuation of business following a liquidity crisis, or as your Honour I think postulated, a bank account that is $50,000 in debit and an attempt to trade out of that.

GLEESON CJ:   Who was Metro Travel?

MR DUBLER:   Metro Travel, your Honour, was what is called the ticket consolidator that sells wholesale airline tickets, so they stand between the airline providers and the travel agents.  In fact, they buy wholesale.

GLEESON CJ:   Were they the people who made complaint to the industry authority?

MR DUBLER:   Yes.

GLEESON CJ:   The complaint they made was that this business had liabilities which it had not discharged?

MR DUBLER:   Yes.

GLEESON CJ:   That appears on page 143, paragraph 119.

MR DUBLER:   Yes.

GLEESON CJ:   So what got Ms Fry and her father into trouble with the regulatory authorities was complaints by creditors that they had not been paid.

MR DUBLER:   Yes.  I cannot, I think, fairly get away from that type of evidence but what our submission is that whilst that goes some way, as it were, to joining dots to making out a case of causation it was not completed either at the evidence of trial or in the findings of the judge and that it would not be, with respect, the appropriate fair conclusion of this Court that the trading from 23 February 1999 onwards was, as it were, the dead hand of circumstance of the past 12 months weighing on the Frys and leading, as night follows day, or leading as things do or leading as businesses do collapse to the trading after 23 February.

The evidence is as I have outlined it in the appeal books and there is no doubt there is evidence of an inability to meet the capital turnover ratio and there is evidence ‑ ‑ ‑

GLEESON CJ:   No, it is not the capital turnover ratio.  Insolvency does mean that your liabilities exceed your assets.  Insolvency means that you cannot pay your debts as they fall due from the funds readily available to you and they could not pay the money they owed Metro Travel and others from the funds readily available to them.  That suggests, does it not, that they were insolvent?

MR DUBLER:   At that time that would suggest that.

HAYNE J:   What do you say, then, as to the judge’s conclusion about causation incorporated in paragraph 191 at page 173?  I assume you say it is in error but where lies the error?  What is the error?  Paragraph 191, page 173.

MR DUBLER:   The error is this, your Honour, that if the prior trading merely formed the historical background so a bare “but for” sine qua non basis for the Frys continuing to trade into the future that cannot suffice; that what is required is a finding, we would submit, with respect, that the audits and the trading that followed the audits materially contributed to the Frys continuing to trade after the licence was terminated.

It cannot be said that merely the audits which allowed a licence to be issued, which was then cancelled, allowed the Frys to trade after the licence because we know that that is not right at law, and the Frys would have known it equally, and that in context it is no more than a finding that there was an historical set of facts that had the involvement of the auditors in it and that then there was trading thereafter when otherwise, as a matter of bare “but for” reasoning, it would not have occurred, or it would have occurred in some different way.

So our submission is that it is not right to say the audits allowed that state of affairs; it did not – it was prohibited after 23 February – that there is not any disclosure of a hypothesis put or accepted by the trial judge that there was in the trading immediately before the causal reason of the Frys trading thereafter, as opposed to simply a voluntary conscious decision.  That is the main point of our ‑ ‑ ‑

GLEESON CJ:   Well, a possible interpretation of the last lines in paragraph 191 is that the compensation fund suffered the losses it suffered by reason of the fact that there were let loose on the public insolvent traders who were collecting funds from the public in advance of paying for services, for which they never paid.  Now, that might be an unnecessarily brutal way of putting it, and perhaps what appears in paragraph 191 is simply a less brutal way of expressing the same reality.

MR DUBLER:   Yes.  Well, could I take your Honour to suggest that that would be reading too much into that finding.  If I could take your Honour to page 244 of the appeal book.  At paragraph 68, we say, was fairly the way in which causation was put to the trial judge and the Court of Appeal, and the description there is harder to come within your Honour the Chief Justice’s description of letting loose people who are insolvent onto the public.

I have made the point, your Honour, that the Frys gave evidence, the opportunity was there, and we say it was not for us to demonstrate lack of insolvency, but that it was for the Fund to dispute the proposition that there was nothing more than unlawful trading going on here.  They had to get over that bare evidentiary burden to make out a hypothesis consistent with causal link.

GLEESON CJ:   The fact that they did not have a licence would not have mattered, would it, if they were solvent?

MR DUBLER:   But it could equally have led to the losses.  Could I go on to another point, your Honour?  Assuming even against me that one should find in that evidence of lack of creditworthiness a causal link or a material contribution being made, that is the period whilst licensed to the period unlicensed, assume that to be right.  The submission we make is that even if that be right, that is a risk always that comes with cancelling a licence, that in order in addition to make out a causal link, it needs to be demonstrated that the risk of trading unlicensed following the locks being put down, or following cancellation of the licence more correctly, was greater, that if there is only a temporal element, your Honour, that cannot make out the causation.

It needs to be because assuming there were proper accounts, and I will come to this in a moment, assuming there were proper accounts, at best, at some time earlier the licence would have been cancelled and following that the Frys, it needs to be considered to what extent was the TCF at risk of this less than 1 per cent of people who continue to trade after they have lost their licence.  That in order, we say, consistent with authority and principle, for the auditor to be responsible and be held liable for that trading when the licence is gone there would need to be demonstrated that earlier cancellation would have improved the chances or the prospects or the opportunity for the TCF to avoid loss.  If it is merely temporal then it is not enough because that is a risk that always would have come and would have flowed from a proper audit and an earlier termination of the licence.

KIRBY J:   That only deals with part of the problem.  There is also the issue of getting bank guarantees.

MR DUBLER:   Yes.  I will then go to that part of the submission, your Honour, and the factual scenario.  I think I indicated that there was a fork in the road.  One has to consider what did happen, and the thrust of our submission it varies that it would be a misinterpretation, with respect, of Justice Austin’s conclusion to suggest that there was a finding that this was insolvent trading or something of the type, that we say the finding was merely – because that is all the evidence and that is all the submission and that is all that the case was – was that it was a historical background and if you caused them to be in business for that period you have to be responsible for what they do thereafter.

That was also a summary of the case on causation recorded by the Court of Appeal.  The alternative scenario, and we say it was not one explored below, is that to what extent could the Fund have avoided the loss because of the regulatory requirements.  One needs to understand both the evidence and the findings on that, your Honour.  At appeal book 173, paragraph 192, there is an explanation of the regulatory scheme and how it works.  At this point there is an explanation or a summary of the evidence of Mr Brattoni that what occurs is that if the accounts reveal a deficiency in creditworthiness that there is a process of review, there is a process of committee meetings and that that inevitably takes time and the evidence was that if there was an audit report of November 1998 and it was found to be unsatisfactory termination could be expected to not be unlikely to have occurred before 18 February.

So that is the regulatory scheme that the judge refers to that comes from the 1998 audit.  Essentially, the evidence was the same, in both years the same process would have applied.

So the fork in the road begins at about December 1997, but if there were proper accounting records the evidence is that the TCF would have required $47,000 capital injection or guarantee, or up to $82,000 on a different scenario and that if by around – using the parity of the chronology here, by about 18 March 1998 if that had not been provided, there could have been termination.

Now, the submission put to the trial judge, and it was our submission below, was that the court could not be convinced on the TCF’s own case on causation that termination would have occurred any realistically significant period earlier.  That was the submission and that is what the judge is addressing from 192 onwards, that the way it was put – and I need to deal in reply with what my friend said about the submissions at the Court of Appeal. 

At appeal book 268 there is a recording of the submissions in the Court of Appeal and that was said to be inconsistent with the submission put to your Honours.  But there at point 6 on page 268 the submission was that in 1997 it was likely the Frys could have met the conditions, and that remains consistent with the case we put, because it went broadly like this, your Honour.  In 1997 the deficiencies were relatively small compared to the deficiencies in December 1998.  The evidence was that $47,000 would not necessarily have been a difficult sum.  So if we had obtained from the trial judge a finding that if there had been proper accounts, the 47,000 would have been provided, the evidence appeared to be fairly clear, that termination would have occurred at the same time.  That was the submission.

Now, it was rejected by the judge, but in highly qualified terms, which is then relevant to the case on avoidance of loss.  So at paragraph 193 the trial judge deals with that submission, which is nothing would have mattered anyway.  The judge says that essentially the 1998 scenario has to be seen in conjunction with the 1997 scenario, although his Honour does accept in the 1998 scenario on its own, there would not have been any difference.  But then the judge says if you combine the 1997 and the 1998 position together, his Honour makes this conclusion:

If there had been full disclosure of liabilities in 1997 either initially or in response to some investigations stimulated by the auditor, and then Ms Fry lodged an application for renewal in 1998 showing much larger turnover figures but no liabilities, it stands to reason that the TCF would have responded rather more quickly than Mr Brattoni’s timetable implies.

Now, this is important in understanding or appreciating what is said to your Honours to be important findings of avoidance of loss, that there was no finding about how much more quickly or what time frame, accepting that these are difficult matters, but simply a finding that there would have been some earlier movement by the TCF than 18 February 1999.

Now, in due course I will go to the Court of Appeal, but just quickly if I could mention that we submitted to the Court of Appeal that the trial judge was wrong.  We do not pursue that, but it needs to be understood when reading in context the findings of the Court of Appeal, that essentially when the judge said, “It stands to reason that”, we submitted to the Court of Appeal that that was going beyond fact-finding, that was speculating.  The Court of Appeal upheld the finding there by the trial judge, and we do not take it any further.  So we accept there is a finding there of some period earlier than 23 February 1999 there would have been a termination of licence.

HAYNE J:   Does it follow then that you accept the finding at 175, lines 10 to 16:

If funding had been provided for the purposes of the 1997 renewal, it would then have been increased for the 1998 renewal so that, by February 1999, there would have been a capital buffer in . . . an amount adequate to meet the claims in fact made.

MR DUBLER:   Yes.

HAYNE J:   Do you accept that?

MR DUBLER:   Yes, your Honour.  Our case essentially is that all of the findings of the trial judge do not make out a case on causation and I need to explain why in that sense.  So it comes down to this, your Honour.  There is no finding, nor could there have been, that the capital fund of 292,000 referred to by his Honour had a realistic chance or some chance or some meaningful prospect of being offered.  His Honour is making that comment in order to dismiss the submission put to him that nothing would have been of any difference.

So his Honour is making the finding that things would have been different in at least the “but for” sense because there would have either been 292,000 there or termination at some earlier time.  So that is the finding.  The issue for your Honours is to what extent does that make out some case of avoidance of loss, or a lost opportunity to avoid loss.

So we make two submissions on it essentially.  The trial judge was not faced with a submission by the plaintiff because that is not the way they ran the case, that the judge ought find that but for the negligence there would have been 292,000 there and therefore no loss.

Now, if that was put to the trial judge and squarely found by the trial judge, causation would have to be made out, but what the trial judge is finding is merely that either 292,000 would have been provided, but I do not have to assess whether that was realistic or just merely fanciful or, assuming if it was fanciful, there would have then been earlier termination.  Having concluded that at paragraph 193, I am able to make the finding at 196, and that is the context of the finding at 196:

If TCF’s funding requirements were not met for the 1997 renewal, and . . . participation . . . were withdrawn in 1998, no one can be sure that Ms Fry and her father would not then have engaged in unlawful trading causing losses.  But there is no evidence that would lead me to conclude that unlawful trading and losses would be more likely than not.  The issue is purely one for speculation.  What is tolerably clear is that proper discharge of his auditing duties by Mr Roseby would have led to a chain of regulatory events that would have prevented the loss in fact –

and we emphasise the words “in fact” ‑

suffered by the TCF.

I am sorry to labour the point but that needs to be understood as answering a submission going back to paragraph 192 on page 173 by the respondents below that nothing here would have made a jot of difference.  Termination if it had occurred with proper accounts would have occurred on 18 February or thereabouts.  It occurred on 23 February; it makes no difference.  His Honour deals with that and travels through and we accept - we do not dispute, we do not cavil with it – that it is found that in fact there would have been at least the difference of a response rather more quickly or the 292, but we do not think it is seriously suggested by anyone that that was in fact a realistic prospect.  So you are left with the finding at least as a matter of time.  A difference would have been there and the “but for” reasoning falls away.  That is the only finding.

The effect of that and if I am right about that, your Honours, is that the only advantage that the Travel Compensation Fund stood to make out of proper accounts is that they would have achieved some extra time before terminating this lady’s licence.

GLEESON CJ:   I am looking at the finding made by Justice Sheller on page 285, paragraph 153:

I am satisfied that a proper discharge of [the auditor’s] duties or [the accountant’s] duties as an accountant would have led to a chain of regulatory events that would have prevented the losses being suffered by the claimants or, alternatively, would have provided a means for meeting them without recourse to TCF.

What does that mean?

MR DUBLER:   Your Honour, that is nothing more than a restatement of the finding of the judge of 196 and perhaps combined with 195.  Again, it is the same submission.

GLEESON CJ:   A bank guarantee would be an example, would it not, of “a means for meeting them without recourse to TCF”?

MR DUBLER:   That is it, your Honour, so the last phrase deals with the capital buffer issue.  It comes down to this again.  Because in the Court of Appeal the submission was put that the trial judge erred in even finding a basal “but for” connection, that is did it make any difference whatsoever, the submission was put in the Court of Appeal that the trial judge was wrong about that and that there should be an overturning of that finding and it should be found that on proper accounts termination was just as likely to occur on 18 February 1999 or thereabouts instead of the 23^rd.  That submission did not find favour and it was dismissed at paragraph 153.

GLEESON CJ:   But we have got to the position, have we not, bearing in mind the issue with which we are here concerned, that it is accepted now that the auditors and the accountants were negligent in not discovering the existence of those creditors.  It is accepted that if they had discovered the existence of creditors, there would have been regulatory requirements such as requiring a bank guarantee to protect people dealing with this family from suffering losses.  There being no argument about that and it being the fact that people who dealt with the family suffered losses, what is the problem?  Unless you say it is criminal act, criminal conduct such as theft on the part of some individual or individuals, what is the problem about relating the negligence of the accountants and auditors to the losses suffered by the members of the public?

MR DUBLER:   Yes, because the way we put it in written submissions is that unless you are able to say that the loss which is trading – taking money from members of the public when you do not have a licence - that was the factual substrata - unless there is a hypothesis consistent with a proposition that the Frys doing that gained some material benefit or contribution from the earlier licence it cannot be said that that loss was by reason of the negligent audit.

GLEESON CJ:   From the point of view of a person who comes to deal with the travel agent the problem is not that the travel agent does not have a licence, the problem is that the travel agent is not in a financial position to apply that money for the purpose for which you are giving it to the travel agent.

MR DUBLER:   Your Honour, if that is the assessment of the findings of Justice Austin or a fair assessment of the evidence it is a causal link.  It is a hypothesis consistent with causality.  Our submission to your Honour is that that thesis of insolvency is not, with respect, found by the trial judge and is not fairly available on the evidence.  When the Frys were there, accountants were there and it was not put as the thesis on causation and it was not the evidence sought to be drawn from the witnesses.

There was a different case on causation put that did not involve assessing the reason why there was loss.  The position on causation, with respect, and it is as recorded in the Court of Appeal judgment - I might just drag that out in a moment – the position on causation was that because you were responsible – that is the auditors – for allowing them to be in business for a year in this period of trading that formed the background or the history to you trading without a licence or the person trading without a licence, you should bear responsibility for it and everything that flows thereafter.  One does not have to inquire the reasons, the precise reasons or some reasoning for why there was that trading.

That is why we say it was not found, nor does the evidence fairly contradict the submission that there was nothing more going on here in this case than the Frys opportunistically, consciously, voluntarily conducting its business without the licence that was formally the subject of an audit and if that be right we say the causal link falls alone.

GUMMOW J:   All this is explanatory of 155, is it not, in the Court of Appeal?

MR DUBLER:   Yes, your Honour, and just to make that proposition good, 153 – and I have said it in the written submissions and with respect to my friends – it is taken out of context, but the submission again that is being addressed here is the same submission that was put to the trial judge about it never could have mattered anyway and that is made clear because the Court of Appeal adopts the two part test.

GUMMOW J:   The second test has this great impact of illegality.

MR DUBLER:   Yes.

GUMMOW J:   That seems to be the dividing line, does it not?  If you look at 155:

Both Mr Tambree and Mr Roseby knew that the accounts . . . were to aid Ms Fry continuing in the scheme . . . in business as a licensed travel agent.

However, no causal relation to her continuing illegality.  End of case.

MR DUBLER:   Yes.

GUMMOW J:   Then there is your example about the wretched driver - end of case.

MR DUBLER:   Can I come back to my original point then directly to your Honour’s question?

GUMMOW J:   Yes.

MR DUBLER:   The original point was this, that if one starts in the Court of Appeal at paragraph 150 at page 284 it is clear that his Honour Justice Sheller is dealing with the first part of the two‑stage test which is, was there historical involvement, or can it be said at least on a “but for” test that there was a link, just in terms of time and place.  We submitted there was not.  We lost on that and that is the finding.

GUMMOW J:   I understand that.

MR DUBLER:   The second stage on illegality we would say this, your Honour, that the focus perhaps ‑ ‑ ‑

GUMMOW J:   The second stage seems to focus on the illegality.

MR DUBLER:   Yes.  Perhaps that does not fully capture the submission put to the court.

GUMMOW J:   That is what I am wondering. 

MR DUBLER:   Your Honour, this is a long judgment and we are here on appeal on the last paragraph.

GUMMOW J:   That is why you need a notice of contention.  You need a notice of contention I think.

MR DUBLER:   No, your Honour, with respect, because the ultimate finding ‑ ‑ ‑

GUMMOW J:   Well, the ground, as I read it, is all about illegality at the moment.

MR DUBLER:   Well, the ultimate finding is that by no test could it be said that the audit misrepresentations flowed from or were causally related ‑ ‑ ‑

GUMMOW J:   That has to be read with the sentence that precedes it.  It is a “However”, so it is qualifying something.  What it is qualifying is what goes before it.

MR DUBLER:   Yes:

were causally related to her continuing illegally in the business of a travel agent. 

That the other way of putting it, which is exactly the same, there was no causal relationship to the Frys continuing to trade once they knew they had no licence for which they got an audit.  It is essentially the same thing, your Honour.

GUMMOW J:   But that emphasis on illegality seems to feed from what was said at 139 about normality.

MR DUBLER:   Yes.  I would say that that should be seen in the context of there being, in essence, no thesis along the line of insolvent trading.

GUMMOW J:   Yes.

MR DUBLER:   So the judge, with respect, is dealing with the proposition that was our submission that you simply had people coming in every day from day to day and giving money to the travel agent, that after 23 February and after two weeks of organised resignation they consciously, voluntarily decided they would still take the money.

CALLINAN J:   Well, is it not the point that ‑ ‑ ‑

MR DUBLER:   That was abnormal or had nothing to do with everything in the past.  That is the main point, nothing to do with the past.

CALLINAN J:   The loss stems from the fact that they were trading, that they were trading as travel agents, not that they were trading illegally.  It may have been illegal and that may be entirely incidental, but the losses stemmed from the fact that they were trading as travel agents and they would not have been trading as travel agents if they had not been given a licence and a licence number.

MR DUBLER:   Your Honour, we would say that your Honour has to ask another question.  We put that in issue and lost at trial and the Court of Appeal, so what your Honour puts to me we have to accept, but the submission and why we won before the Court of Appeal is that we say your Honour has to properly ask the further question:  is it enough to merely be satisfied that trading after 23 February is related to audits that gave them the licence before?

CALLINAN J:   That may or may not be so, but getting back to what I was asking you, it seems to have been erroneous for the Court of Appeal to have placed the emphasis upon illegality, if that is in fact what the Court of Appeal did.  It seems to me at this point that it did in that paragraph to which you have just been referred.

MR DUBLER:   I would say in support of the Court of Appeal that they are synonymous because unlicensed trading ‑ ‑ ‑

CALLINAN J:   I do not know about that.

MR DUBLER:   ‑ ‑ ‑ is, by force of the Act, unlawful trading.

CALLINAN J:   But that is incidental, is it not?

MR DUBLER:   We accept, and we may be parting a bit of company with the first respondent, that if – either you call it an insolvency thesis or some other thesis consistent with the 12 months of trading for which we are responsible, clearly, if there is some thesis that says that that gave them encouragement, if that assisted, if that meant in a practical common sense way, which may excite attention, but if it can be said that the prior 12 months trading materially contributed to the Frys taking people’s money after 23 February, we probably should lose.  But, in my submission, there was nothing more before the trial judge other than the bare fact of conscious trading, knowingly no longer with the licence that previously they had obtained by dint of the audit.

HAYNE J:   What account does that argument take of the capacity of the regulatory authorities to stop the Frys trading?

MR DUBLER:   I think I could deal with that point this way, your Honour, that unless there is that material contribution or link between the prior 12 months trading and what happens after cancellation of the licence, the effect otherwise would be, unless you require that link, to make the auditor an insurer of everything that the person does thereafter.

HAYNE J:   You are not grappling with the question.  The question is obviously not clear enough.

MR DUBLER:   I am sorry.

HAYNE J:   The question is what account does your submission take of the capacity of the regulatory authorities to stop trading?  The auditors can be understood to have facilitated trading, but had the auditors done their job properly trading could have, the trial judge finds would have, been stopped.  Where does that fit into your submission?

MR DUBLER:   It comes down to this, that if there is, as it were, in the real world, the fact that there must be a period of time occasionally between cancelling the licence and the ability of a regulatory authority to shut down miscreants, that that risk – and I think that was at the forefront of my friend’s submission – must always be there for every travel agent and would be here – relevantly that risk would be present in this case, even if there were proper accounts.

In order to sheet home that period between termination and shutting down or enforcement by the department to the auditor, you have to be able to conclude that earlier termination would have decreased the risk of loss.  It needs to be able to be established that they missed the opportunity that was meaningful of an earlier termination.  I have sought to demonstrate that the findings of the trial judge were directed at our submission on a different point and that there was no finding, nor was it asked of, that earlier termination would have avoided the loss.  In fact – if I could just quickly go to it, your Honours have seen it – at paragraph 196 of the trial judge’s judgment, page 175, as far as his Honour was aware and able to say:

If the TCF’s funding requirements were not met for the 1997 renewal, and consequently Ms Fry’s participation in the Fund and her travel agent’s licence were withdrawn in 1998, no one can be sure that Ms Fry and her father would not then have engaged in unlawful trading causing losses.

So the risk is always there and the trial judge was not prepared to say that the risk was less if it happened even a year earlier, and the trial judge did not even find it would happen a year earlier, only some time earlier.  So that one cannot sheet home to the auditor losses that merely arise from the failure to shut down earlier.  It all comes down then to having to demonstrate, which we say the appellant cannot, that the earlier trading causally meant, actually by some hypothesis, whether you call it insolvent trading or some other name, it was more likely the Frys were going to get into trouble with members of the public in February 1999 as opposed to September 1998, November 1998, et cetera.

Your Honours, I am conscious of the time.  I wanted briefly – that is the factual scenario and we say causation cannot be made out, substantially the cause of those reasons of a proper understanding of the facts and the way the case was run.  I wanted briefly to make good some of the propositions by adverting to a couple of cases.  If I could do that very briefly and I will complete my submissions.  Could I firstly direct your Honours’ attention to the decision of Chappel v Hart (1998) 195 CLR 232. At page 244 at paragraph 27 his Honour Justice McHugh said:

Before the defendant will be held responsible for the plaintiff’s injury, the plaintiff must prove that the defendant’s conduct materially contributed to the plaintiff suffering that injury.  In the absence of a statute or undertaking to the contrary, therefore, it would seem logical to hold a person causally liable for a wrongful act or omission only when it increases the risk of injury to another person . . . If, however, the defendant’s conduct does not increase the risk of injury to the plaintiff, the defendant cannot be said to have materially contributed to the injury suffered by the plaintiff.  That being so, whether the claim is in contract or tort, the fact that the risk eventuated at a particular time or place by reason of the conduct of the defendant does not itself materially contribute to the plaintiff’s injury unless the fact of that particular time or place increased the risk of the injury occurring.

An example is given there at paragraph 29 of the mere fact that someone’s negligence may have caused a vessel to be delayed which then runs into a storm does not mean that that negligence caused the damage from the storm.

I appreciate that is a personal injury case and somewhat removed factually.  It is very hard of course to have cases with correct analogies, but could I suggest and hand to your Honours, because it is not on our list, the case of Alexander v Cambridge Credit Corporation (1987) 9 NSWLR 310. In that case, your Honours, that was an auditor’s negligence case.

GUMMOW J:   What was the short point on which it was reversed in the Court of Appeal?

MR DUBLER:   That there was no causal link.

GUMMOW J:   Why?

MR DUBLER:   Because all that could be demonstrated was that the auditor’s negligence meant a company was in existence for longer than it would have been otherwise and the Court of Appeal held that that is not enough on causation, you need to demonstrate that somehow the auditor’s negligence brought about the losses, not merely ‑ ‑ ‑

GLEESON CJ:   Yes.  An analogy with the present case would be if the various people who paid money to the travel agents lost their money because some employee of the travel agents embezzled it.

MR DUBLER:   Yes, or a possible, again, causal way in which a case could be made out here is to say that the clients that went to the Frys after 23 February were aware of the Frys by reason of prior conduct, goodwill, knowledge of them whilst in that 12‑month period or something of that nature, but essentially this case is authority for the proposition that you need to demonstrate something more than mere timing.

GLEESON CJ:   You need to know why the clients, and ultimately the Fund, lost the money.

MR DUBLER:   That is it, your Honour, and we just say that that was left unexplored, that the case on causation below was that we were simply liable because we set the ball rolling.  Now, if that is made good, if your Honours accept that is the true effect of the trial judge’s version of the facts, we submit that nothing more can be shown that causally sheets us home.

GUMMOW J:   That is why the insolvency point is so important.

MR DUBLER:   Yes, your Honour.

GUMMOW J:   However it falls out, that is why it is important in the ‑ ‑ ‑

MR DUBLER:   And we accept that, that it could have been put in a different way of causation.  It could have been put to the Frys.  There could have been financial evidence given that sought to fasten on why should the auditor be responsible merely by giving an order for licence A for trading under different circumstances unless you can say that trading causally contributed to the trading after the losses.

Just very briefly, your Honour, in that judgment at page 334 – this is in the judgment of Justice Mahoney – just briefly to remind your Honours of the facts, that the facts were that it was accepted that the auditor’s negligence prevented a receiver being appointed in 1971, otherwise there would not have been trading thereafter which continued for three years.  That is why we make the point we an insurer for a significant period unless you have causality.  Then there was a claim for $145 million lost between 1971 and 1974.  In the judgment of Justice Mahoney at F his Honour says:

It may sometimes be argued that a breach exposes the plaintiff to particular dangers and that if what happens subsequent to the breach is loss from a danger of that kind, the loss may be seen as a result of the breach –

Perhaps just abbreviating matters, we would ask your Honours to note the passage to the end of the page and then briefly reading over the page at 335 – and this is ultimately our submission and either we stand or fall on it, perhaps – as Justice Mahoney said at 335:

In the end the company’s case has been that the loss it claims was caused by the breach because, and because alone, the breach allowed –

we say that is reminiscent of the wording of Justice Austin –

the company to continue in existence.  Some of the incidents flowing from its existence during 1971-1974 may be the results of the breach; some, for example, those flowing from earthquakes or the like, will not be.

GLEESON CJ:   Otherwise, the auditors would be the underwriters of the business.

MR DUBLER:   Yes, that is why we say again here, unless you can point to a causal link, it would not matter if the unlicensed trading continued for 12 months, 18 months.  Then it is echoed again at page 348 in the judgment of Justice McHugh, at the bottom of the page, the last sentence below G:

Cambridge’s case was that the auditors “could and should have acted in 1971 to close the company down and thereby prevent the situation from continuing”.  It argued that because of the auditors’ breach of contract, the directors kept the company in trade.  It contended that, if the auditors had taken the action that they should have taken in September 1971, the directors could not have caused the company to trade from September 1971 –

and thereby suffer losses and then his Honour Justice McHugh deals with that reasoning at page 359, just above D, the third whole paragraph:

In the proved circumstances of this case, I do not think that the issue of the certificates by the auditors constituted a cause of Cambridge’s loss of $145,000,000.  The existence of a company, as counsel for Cambridge conceded, cannot be a cause of its trading losses or profits.  Yet that is what the case for Cambridge comes to.  Except in the sense that the issue of the certificates induced the trustee not to take action against Cambridge and thereby permitted Cambridge to exist as a trader, the issuing of the certificates was not one of the conditions which were jointly necessary to produce the loss of $145,000,000.  To assert in these circumstances that the issue of the certificates was a cause of the loss in my opinion is to depart from the commonsense notion of causation which the common law champions.

Your Honours will have noticed that I have preferred to use the terminology “materially contribute” because the cases seem to suggest that that is the minimum.  If one does not have material contribution, no one can debate about what is required.  You could not say in even the context of the Trade Practices Act that one event was by reason of the misrepresentation.

Now, just two other matters briefly.  I think I promised to make good the point of the way in which the case on causation was submitted and put.  I have given your Honours a reference.  Perhaps if I could take your Honours to both references in the Court of Appeal judgment where it was summarised how causation was put, which, we would submit, helps explain the reasoning in paragraph 155.  At page 244 of the appeal books, at paragraph 68, I have taken your Honours to it, I will not read it, but there is a second summation of the way in which causation was put and that is at page 282 at 143.

In the present case, while neither Mr Tambree or Mr Roseby was responsible for the way Ms Fry conducted her business so as to cause loss to the claimants, the argument is that they were to blame for her being in business at all.

With respect, the submission before the trial judge – and he records the way in which he understood the case on causation to be at appeal book 172, paragraph 189, and it is fairly consistent with the way the Court of Appeal puts it:

As to causation, TCF’s case against Mr Roseby is that by reason of Mr Roseby’s conduct in auditing Ms Fry’s business in 1997 and 1998, the TCF renewed her participation in the Fund and thereby permitted her to continue to trade as a licensed travel agent until February 1999.

GLEESON CJ:   Incidentally, on your explanation of the basis of the reasoning of the Court of Appeal, why did they find that TCF was entitled to succeed in respect of the losses incurred up until the time of the cancellation of the licence?

MR DUBLER:   That as we understand – we submitted different but we now adopt the Court of Appeal reasoning ‑ ‑ ‑

GLEESON CJ:   Yes, but why?  Why, on your argument, was TCF entitled to recover in respect of any of the losses?

MR DUBLER:   Because as a matter of common sense we accept, and on the material contribution test we accept, that while Ms Fry was holding up to the public a document with a licence number validly issued, it can fairly be said that we contributed to that.

GLEESON CJ:   To what?

MR DUBLER:   Her being in business at that time, because the licence was required by the law; she could not trade without it.  She went to an auditor and said, “Audit my account so I can get this document”.  She did get that document by reason of the audit.  She must have intended to use it.  It is fair to say that the auditor contributed to her being in trade while she had that licence.

GLEESON CJ:   Even if she stole the money?

MR DUBLER:   I think we accept that, your Honour, because it does make sense to say that if you have materially contributed to a person being in business when they should not have been at that time, it comes with those consequences, but after the licence it does no – her trading – this is the point, your Honour.  Her trading, or viewed from her perspective, gains no contribution, no encouragement, no allowance, no permission to be in trade after 23 February, but prior to it does.

GLEESON CJ:   If you are right, then if whilst she still had her licence Ms Fry had embarked upon a program of deliberately embezzling money of her clients the auditors would have been liable.

MR DUBLER:   Yes, for this case we accept that submission.  On the basis that material contribution often is a very low test.  If it can be said fairly that what Ms Fry did at that point gained some encouragement from what we did negligently, it is fair to say that the consequences of what she did whilst in business should be attributed to the auditor, but it does highlight the extra strain, the impermissible strain, to the logic to say when she knew that her licence had been cancelled, when she knew that she was not conducting business with the public because she got her licence with the aid of an auditor, that nevertheless the auditor still remains liable.

I am sorry, your Honour, I think I was just about finished.  I was at appeal book 172, paragraph 189.  I think I had pointed out the first sentence.  The second sentence:

The TCF alleges that as a consequence, it suffered the loss constituted by meeting the Claimants’ claims.

There was no submission of financial distress or the like.  There was no submission of this prior trading pushing the Frys to keep going.  Bearing in mind the facts of resignation and any number of possibilities which on the case below was regarded as immaterial, it was simply that the ball had started to roll and we were liable for everything thereafter.  Unless there is anything else, your Honours.

GLEESON CJ:   Thank you, Mr Dubler.  Yes, Mr Marshall.

MR MARSHALL:   Your Honours, perhaps in the order in which some of the points arose, the transcript that was handed up by Mr Walsh, the second page, I am not aware of the whole of the material in the transcript, but the fact that there is 1 per cent of the claims paid does not really negate or qualify the findings of Justice Austin that one would need to know the total volume.  There could be hundreds of instances of that in a year and there is no notice of contention to challenge the findings which are recorded at 122 of Justice Austin’s judgment at page 146.  So, in my submission, that piece of transcript, although supplementing…..cannot take the matter any further.

With respect to the proposition that novus actus illegality was put, I will take the Court to where I found reference to that.  Mr Dubler has said that he put in the Court of Appeal that the novus actus was put not just on the basis of illegality but on the basis of theft, that the theft proposition - and there is a difference.  Of course it would be illegal to steal the money but there is also illegality from the fact that there was trading whilst unlicensed.

He did put the proposition as far as I can see that there was a novus actus by trading without a licence and therefore illegal.  There is nothing in the material in the appeal book or in the record of judgments to indicate that the proposition of novus actus was put on the basis of criminal theft.  Had it been put one would have expected it to be found.

The places where the novus actus points are dealt with by the trial judge are in paragraphs 190 and 191 of Justice Austin, and with respect to the other way novus actus was put was in paragraphs 202, and that was a completely different kind of novus actus, and that was also put, but again not on the basis of having criminally stole the money, and so the point that ‑ ‑ ‑

GUMMOW J:   Whereabouts is that?

MR MARSHALL:   In the appeal book relevantly at 177, in paragraph 202, there is an argument – well, it starts, I suppose, in 201, and the novus actus point there was on the basis that it was a discretionary claim, and that it was the exercise of the discretion of the Travel Compensation Fund which was the novus actus, and the fact that that was a novus actus submission is at line 25 on page 177, and the response to that is at 203 through to 205, but nowhere, in my submission, can it be found that a novus actus point was put on the basis that there was theft of the kind that Mr Dubler has put here.

As to the matter concerning the timing point that Mr Dubler made, he said there is no finding as to when earlier the Travel Compensation Fund would have acted.  That is not so.  There is a finding of Justice Austin in 191.  It is a finding that starts at page 173 and it is about line 10:

A proper audit would have put the TCF in a position to deal with the misleading financial disclosure late in 1997 or early in 1998. 

Now, that is quite different to the material that was put orally today.  I think it was put that it was some stage in early 1999.  Here late 1997 or early 1998 is the time that his Honour finds ‑ ‑ ‑

GUMMOW J:   But what do you say about the balance of that sentence looked at in the light of Cambridge Credit:

because it allowed a state of affairs to develop ‑ ‑ ‑

MR MARSHALL:   Yes, they were not stopped and the losses were of the kind which Mr Walsh has taken the Court to in answer to the question from the Chief Justice.

GUMMOW J:   But a receiver was not appointed in Cambridge Credit either.

MR MARSHALL:   No, but the losses were the routine type of losses one would expect.  They were payments by claimants to Ms Fry in the period which were not used, it seems, to pay the actual service providers and that is why the TCF had to compensate.  There is no evidence of other than – that is the evidence.  That is the nature of the claims that were made.  The claims were of a kind – there is no evidence to suggest they were thefts by anyone or thefts of the employee to pick up another example raised by the Court – so whilst the measures would have been taken either to have shut down the TCF so that none of the losses which in fact occurred would have occurred or there would have been the security in place by the way of the bank guarantee.  It is not a case where, as in Cambridge Credit, it was established, as I recall reading it, that there had been a substantial fall in the property market and so that that loss and the massive investment of Cambridge Credit in the property market was demonstrated and proved to be something quite different.  That is not this case.

The evidence in Cambridge Credit demonstrated precisely what was the cause of the loss and that it was not something in the nature that would be expected in a sense, whereas here payments of the kind – Mr Walsh did take the Court to – showed that they were the routine sorts of payments one would expect, and that is my submission in answer to the balance of it.

The next point was that with respect to the submission that is based upon the argument that there was no increase in the risk because of the continuing to trade, Mr Dubler took the Court to 196, but there is also the finding in 198 ‑ ‑ ‑

HAYNE J:   Sorry, can I just go back to the Cambridge Credit point?  Is there not this further aspect of the Cambridge Credit point?  As I understand TCF’s case, it was that had the accountants done their job properly, not only could TCF have acted but TCF would have acted in a way that would have prevented.

MR MARSHALL:   Yes.  Absolutely, your Honour, and there was direct evidence of that and those were the findings.  It would have acted in a certain way to avoid the ultimate losses that happened, yes, and it would be a distinction with the Cambridge Credit Case that I ‑ ‑ ‑

HAYNE J:   That may perhaps set Cambridge Credit apart, where the auditors reporting to the board and members of Cambridge Credit – it is the board and members who were in the position to act or not act, is it not?

MR MARSHALL:   Indeed – well, there was some – yes, and the finding was that the company itself did not rely upon the reports, as I recall having looked at this briefly yesterday.  It was only that the trustees would have acted.

HAYNE J:   Yes.

MR MARSHALL:   So that the board of Cambridge Credit did not rely in any sense on the auditor ‑ ‑ ‑

GLEESON CJ:   It was the security holder who would have acted.

MR MARSHALL:   Yes, someone completely different.  Justice McHugh notes that that is one of the surprising aspects of this case ‑ ‑ ‑

HAYNE J:   Reliance was not pleaded and asserted.

MR MARSHALL:   Certainly completely different reliance findings – I am grateful for the point that your Honour raises – are made here and that is a point of real distinction because that was a matter that Justice McHugh noted was at least odd and possibly more significant than odd that there was no reliance findings in the Cambridge Credit Case.

The point about the finding that perhaps it is said that we were no worse off because there may have still been trading unlawfully – and that is the reference to page 175 in paragraph 196 – what was put by the second respondent was the proposition that there would have been losses in any event.  When one came to deal with that, secondly, in paragraph 198 of the trial judge at page 175 and over:

It does not seem to me that Mr Fry’s activities –

and this is again Mr Fry –

assuming them to have been unlawful, made it improbable that proper auditing . . . would have avoided the TCF’s loss.  Whether, if regulatory intervention had taken place after a proper audit, Mr Fry would nevertheless have used one or more corporate entities to conduct unlawful trading, is a matter for speculation.  Whether, if he did so, he would have caused loss to anyone and whether, if so, the loss would have been borne by the TCF rather than (for example) trade creditors such as Metro, are matters for speculation upon speculation.

To say that we were no worse off is quite wrong.  The suggestion that there would have been some other losses was effectively criticised by the trial judge as speculation on speculation.  He did find that the losses we did suffer would not have been suffered.  Relevant to that is the passage from Bennett v Minister which we refer to in our reply submissions which is picked up – the passage from Bennett v Minister 176 CLR 408, and the relevant passage ‑ ‑ ‑

GUMMOW J:   Yes, that is really a shifting burden type of point.

MR MARSHALL:   Yes.  If that be right, the burden shifted to Mr Dubler’s client to show that we, in effect, would have been exposed to the same sorts of losses, and he failed.  He failed because the trial judge said that it was speculation on speculation.  Then the finding at 155 which has been sought to be supported on the grounds of the illegality proposition, the illegality which was referred to in 155 is the illegality by reason of trading unlicensed, not the illegality of stealing money.  It is at line 36:

causally related to her continuing illegally in the business of a travel agent.

That was all that was dealt with by the Court.

GUMMOW J:   I think we have that message.

MR MARSHALL:   Yes.

GUMMOW J:   The critical passage Justice Hayne reminds me in Justice McHugh’s judgment as to reliance is at 358E.  There is no need to take us to it.

MR MARSHALL:   On the question of the financial position of the group, so to speak, not just Ms Fry, my attention has been drawn by my learned instructing solicitor to some evidence which is recorded by Justice Austin and commencing in paragraphs 130 and 131 which are at pages 148 and 149.  This is the evidence of Mr Humphreys who was an expert accountant called.  He “criticised the 1997 and 1998 AFR’s”, which were the documents which had been submitted, and “He produced a restatement” – and then continuing, relevantly – and Mr Dubler made the point well, there were other entities, there was Fiji Resorts and so forth.  At the second line of text at 149, which is part of 130:

Since, however, there is (as I note elsewhere) evidence to suggest that one or more of TSIPL, Fiji Resorts and Bali Resorts may also have conducted travel agency business, he also produced a re‑statement of the financial accounts on a “group” basis to take into account those other entities.  He concluded that, while the 1997 financial statements showed positive net assets and proprietors’ funds, when adjusted they would show a material deficiency and a significant loss.

GUMMOW J:   Yes, that looks quite important.

MR MARSHALL:   Yes.  Then in 131, Mr Humphreys reached the same conclusion the following year, and then again, I am grateful to my instructing solicitor, he draws my attention to paragraph 67 in the Court of Appeal, which is page 244:

Austin J’s conclusions were again based on his full acceptance of the evidence of Mr Humphreys –

and the evidence of Mr Humphreys was again accepted and the Court of Appeal accepted all of that.  In fact, there was a part of it, which I have just lost for the moment, where Justice Sheller sets out and highlights some of the significant deficiencies in the accounting material over and above those outlined by Justice Austin.  That was in the note in our special leave submissions, but I took it out of our final ones here, but it is in there.  So that the evidence ‑ ‑ ‑

KIRBY J:   What is your answer in terms of principle?  I realise that you say it is not this case and that you have the anchor of factual findings, but the problem the Chief Justice raised about defects at an earlier stage in an audit and accounts and then subsequently an employee of the company the subject of the accounts and audit takes it into his or her head to go off and embezzle the money.  Now, what is the answer that you give to that sort of case that makes it fall outside the statute?  It does not seem just, if that is the word, or fair or common sense, dare I say it, to render the accountant responsible for that sort of criminality supervening later.

MR MARSHALL:   It will take a moment, but if I may just answer it as fully as I can on the run.  The accounts here were not just old accounts.  There were new accounts at every renewal and that the auditors here produced accounts in – sorry, the accountants produced the original accounts and the accountants produced the 1997 accounts and the 1998 renewals.  The 1997 accounts and the 1998 renewals were both the subject of audit certificates.  So these were not old accounts.  They were the current accounts relied upon specifically for renewing participation, and considering at the time of renewal whether to impose conditions under clause 12.2 such conditions could include injection of further capital.

Now, if a travel agent – and let us take a large one.  Let us just say hypothetically the Flight Centre had an employee embezzle an amount of money – $20,000, $50,000, $60,000 – the Flight Centre would be able to meet that.  They would not default on that.  If the employee stole $20,000, $50,000, $70,000, or the amount here $148,000, one would expect Flight Centre to be able to meet that out of its own resources, because we are not talking about a vast amount of money.

So when one considers the embezzlement example one needs to have in mind the magnitude of the embezzlement, because if it is an embezzlement of $100,000 say or the amount in issue here which I accept is nominal – we are in the High Court ‑ $148,000, a large travel agent with proper accounts, given the turnover, would be expected to be able to meet that.  If that was ultimately the thing that tipped it over, one would be looking at why that would be so.

However, if the example was an embezzlement and took basically millions of dollars which was critical, that might be a very different factual circumstance.

GLEESON CJ:   If you by misleading or deceptive conduct induce me to buy your farm and in 10 years time there is a drought and I suffer a loss, am I entitled to compensation from you under section 82?

MR MARSHALL:   That would depend on a lot of things, but probably – well, did I represent that it was in a totally drought-free area?

GLEESON CJ:   Well, have you become the underwriting of my pastoral activities for the rest of my life?

MR MARSHALL:   Not at all, but would not the question depend upon whether, by inducing you to buy my farm you bought something that at the time of the transaction you got something less than what the value that you paid for it ‑ ‑ ‑

GLEESON CJ:   I think all these issues were discussed in Henville v Walker.

MR MARSHALL:   Yes, and in a sense they were discussed in Wardley v Western Australia.  When one looks at that position of acquiring an asset, one needs to know whether the asset acquired was more or less valuable than the consideration that, in your Honour’s example, your Honour paid for my farm.  But completely different would be – I understand that the burden of your Honour’s question 10 years later is of course not but could be, depending upon some very special circumstances, possibly depending upon what I represented about it being drought-free, or perhaps if I had represented there was a dam that could make it all good.  One would need to know more about it, I think.

KIRBY J:   In any case, in this case that does not really arise because we are talking about accounts and an audit which is for a period, and the period

is a year that has passed and therefore it is not, as it were, going to of its character, nature, speak forever.  It is just speaking for that period.

MR MARSHALL:   Yes, that is so.

KIRBY J:   And perhaps what can be inferred from the state of the books for the immediate period thereafter.

MR MARSHALL:   Yes.

KIRBY J:   Of its nature it is going to be for a short term.

MR MARSHALL:   That is so.

KIRBY J:   Recurrent periods of auditing.

MR MARSHALL:   Yes.  I am not sure if I answered the Chief Justice’s question adequately, but that is the best I can give at the moment.

GLEESON CJ:   Thank you.

MR MARSHALL:   Nor your Honour’s question about the – but I think it does depend upon the size of the embezzlement in the example and often the natures of the representations that are made and what people might have done differently.

GLEESON CJ:   Thank you, Mr Marshall.  We will reserve our decision in this matter and we will adjourn until 9.30 tomorrow morning.

AT 4.22 PM THE MATTER WAS ADJOURNED