Unit 11 Pty Ltd v Sharpe Partners Pty Ltd

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FEDERAL COURT OF AUSTRALIA

Unit 11 Pty Ltd v Sharpe Partners Pty Ltd [2006] FCAFC 43

COURTS – practice and procedure – striking out of pleading – statement of claim based on breach of duty of care, breach of statutory duty and breach of contract by auditor struck out because causative link between breach and loss said to be speculative or conjectural – statement of claim included a claim for compensation for loss of opportunity or loss of chance – principles of causation – whether reasonable cause of action disclosed by statement of claim.

Superannuation Industry (Supervision) Act 1993 (Cth)
Trade Practices Act 1974 (Cth), ss 74, 52, 82

Fair Trading Act 1999 (Vic) ss 9, 159, 159(1)
Fair Trading Act 1985 (Vic) s 11

Rules of Federal Court O 11 r 16

Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170 referred to
Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 followed

Allianz Australia Insurance Ltd v GSF Australia Pty Ltd (2005) 215 ALR 385 cited

Athey v Leonati [1996] 3 SCR 458 referred to

Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 cited

Bailey v Namol Pty Ltd (1994) 125 ALR 228 referred to

Bond Corporation Pty Ltd v Theiss Contractors Pty Ltd (1987) 14 FCR 215 cited

Chappel v Hart (1998) 195 CLR 232 referred to
Craig v East Coast Bays City Council [1986] 1 NZLR 99 referred to

Environment Agency v Empress Car Co (Abertillery) Ltd [1999] 2 AC 22 cited

Galoo Ltd (in liq) v Bright Grahame Murray (a firm) [1994] 1 WLR 1360 referred to
Gavalas v Singh (2001) 3 VR 404 referred to
Harris Scarfe Limited (Receivers and Managers Appointed) (in liq) v Ernst & Young (Reg) [2005] SASC 113
Henville v Walker (2001) 206 CLR 459 followed
Howe v Teefy (1927) 27 SR (NSW) 301 followed

I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited (2001-2002) 210 CLR 109 considered

Janssen-Gilag Pty Limited v Pfizer Pty Limited (1992) 37 FCR 526 referred to
Johnson v Perez (1988) 166 CLR 351 referred to
Lenijamar Pty Ltd v AGC (Advances) Ltd (1990) 27 FCR 388 referred to
Man Nutzfahrzeuge Atkiengesellschaft v Freightliner Ltd [2003] EWHC 2245 (Comm) (7 October 2003) referred to

McKellar v Container Terminal Management Services Ltd (1999) 165 ALR 409 cited

Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274 referred to
Naxakis v Western General Hospital (1999) 197 CLR 269 referred to
Sasea Finance Ltd (in liq) v KPMG (a firm) [2000] 1 All ER 676 referred to

Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 referred to
Sew Hoy & Sons Ltd (In Receivership and in liquidation) v Coopers & Lybrand (1996) 1 NZLR 392 referred to
Southern Cross Airlines Holdings Ltd (in liq) v Arthur Andersen & Co (a firm) [1998] 84 FCR 472 referred to
Takaro Properties Ltd v Rowling [1986] 1 NZLR 22 referred to
Travel Compensation…

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Details
Case
[2006] FCAFC 43
Decision Date

CaseChat Overview and Summary

Unit 11 Pty Ltd filed an appeal against the decision of Sharpe Partners Pty Ltd in a case involving allegations of misleading and deceptive conduct by the auditor. The primary dispute centres on the auditor's failure to investigate and verify statements made by Flood, which Unit 11 claims should have been reported to Noonan and Lovell. Unit 11 argues that the auditor had an obligation to disclose any inaccuracies or irregularities in Flood's statements, and that their failure to do so resulted in significant losses. The court was tasked with determining whether the auditor's omissions were legally causative of the losses suffered by Unit 11.

The primary legal issue addressed by the court was whether the alleged failure of the auditor to report inaccuracies constituted a legally causative factor in the losses incurred by Unit 11. The court considered whether the allegations of causation were tenable and whether the loss was too remote from the acts and omissions of the respondents. The primary judge concluded that the alleged breach by the respondents did not legally cause the loss, as the loss was influenced more by market dynamics and the continued trading in high-risk investments. The court held that the allegations defied common sense and experience, as the factors influencing Unit 11’s decision to invest were not related to the alleged incompetence or untrustworthiness of Flood.

In reaching its decision, the court applied principles of causation and the requirements for a strike-out application at the pleading stage. The court determined that the allegation of causation should not be struck out unless it was clearly untenable on the pleading. The court found that the primary judge’s conclusion that there was no causative link between the auditor’s omissions and the loss suffered by Unit 11 was incorrect, and that the matter should proceed to trial. The appeal was allowed, and the orders made by the primary judge were set aside. The court granted leave to appeal, allowed the appeal, and ordered that the motion be dismissed, with the second respondent to pay the appellant's costs. The appellant was also granted leave to file and serve a further amended statement of claim within 14 days, and the second respondent was ordered to pay the appellant's costs of the appeal.

Orders

Orders of the court

1. Leave to appeal be granted.

2. The appeal be allowed.

3. The orders made on 20 May 2005 on the second respondent’s motion filed 11 February 2005 be set aside and the following orders made in lieu thereof:

“1. The motion be dismissed.

2. The second respondent pay the applicant’s costs”.

4. The appellant have leave to file and serve a further amended statement of claim within 14 days.

5. The second respondent pay the appellant’s costs of the appeal.

Background

Background to the litigation

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Evidence

Evidence Before The Court

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Decision

Reasons for decision

It is important to note that it is common ground, for the purposes of this appeal, specifically that Unit 11 does not allege that Flood has been guilty of any fraud or dishonesty. Instead, the case advanced for Unit 11 on this application is based on an allegation of misleading and deceptive conduct arising from the auditor’s omission to investigate and verify Flood’s statement without more. Unit 11 alleges that the auditor is bound by an obligation to report any irregularities or inaccurate statements by Flood to Noonan and Lovell. The pleading is that Flood made inaccurate statements to the auditors which ought to have been investigated and reported by them.JUDGMENT BELOW The primary Judge concluded, contrary to the specific allegations in the Third FASC, that, even if Noonan and Lovell had been fully informed of Flood’s misrepresentation as to the status of the litigation, there was no reason to find that Unit 11 would not have continued to carry on its business as it had done in the past. His Honour noted that the claim was only that Flood’s statement was inaccurate and it was not alleged that the statement was fraudulent or dishonest. He considered that this was not a case where there had been a failure by the respondents to inform the directors of a lack of honesty or trustworthiness of Flood but rather that there had been a statement made which was incorrect. In his Honour’s view, the Third FASC went no further on the question of causation in relation to this claim for loss than to assert that the auditor’s breach might have provided the occasion for the loss suffered, in the sense of a “but for” test, but that it was not legally causative of the loss. Applying “common sense and experience” to the claim as pleaded, his Honour determined that there was no causative link between the failure of the respondents to inform Unit 11 of the inaccuracy and the loss suffered, and that the loss was “too remote” from the acts and omissions of the respondents. The making good of the alleged causal link, in his Honour’s view, required too many speculative steps. His Honour stated that the allegations defied common sense and experience because the factors that influenced Unit 11’s decision to make the investments, which resulted in the loss, were not related to any relevant incompetence or untrustworthiness by Flood. The loss arose from the continued trading in high risk investments and as a consequence of the dynamics of the market.PRINCIPLES As a general principle, an allegation of causation should not be struck out unless it is clearly untenable on the pleading and the question of law is one that can stand independently of the facts giving rise to it. The purpose of a strike out application is to spare litigants the cost and inconvenience of a trial where there is manifestly no prospect of success. There are two matters that require consideration from the point of view of legal principle. These are the principles which should be applied to a strike out application at the pleading stage and the principles that apply to a determination of causation in circumstances, such as the present, of alleged negligent omission by auditors.

Ratio Decidendi

Legal Principle Established

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