An extract from The Global Damages Review - 2nd edition

Overview

In Australia, monetary relief is available under common law, equity and statute. Determining whether a plaintiff is entitled to a damages award and the quantum of that award will require consideration of those three sources of law, the type of claim being made and the remedial purpose of the award.

i Common law

At common law, damages generally serve a compensatory purpose for the defendant's tort or breach of contract. The monetary remedy normally aims to place the plaintiff in the position he, she or it would have been in had the breach of duty not been committed.

ii Equity

Both equitable compensation and an account of profits are generally available for breaches of equitable obligations. Equitable compensation can be distinguished from damages by the characteristics unique to it, including its discretionary nature. An account of profits focuses on the gains made by the defendant via breach of the relevant equitable obligation rather than on the plaintiff's loss.

iii Statute

Statute will often also provide a monetary remedy. The extent to which common law or equitable principles apply to such a claim is a question of statutory construction. The questions of construction that the court will need to consider will be whether and to what extent the statutory provisions modify the operation of general law principles. As such, the measure of relief will be dependent on the particular statutory provision.

iv Non-compensatory damages

Punitive, gain-based and liquidated damages also may be available in exceptional circumstances where compensatory damages are deemed to be an inappropriate response to the breach.

v Punitive and exemplary damages

Punitive damages are occasionally awarded for certain wrongs recognised by common law to punish the wrongdoer and deter the commission of future wrongs, but the traditional view is that they are not available for breaches of equitable obligations.

vi Restitutionary damages

The availability of a gain-based award in response to a common law wrong has occasionally been recognised, most often in cases where the defendant tortiously interfered with the plaintiff's right to goods or land. The term 'restitutionary damages' is sometimes used as a label to describe all such awards for common law wrongdoing, but it has also been suggested that it is necessary to distinguish between two measures of gain in this context: one based on the immediate transfer of value to the defendant that is entailed by the wrong and one based on the consequential profits that accrue to the defendant as a result of the wrong, which is sometimes labelled 'disgorgement'. While both measures of gain have also exceptionally been awarded for breach of contract in England, Australian courts have been reluctant to allow for gain-based recovery for contractual breach.

vii Liquidated damages

At common law, liquidated damages are available where parties contract for a fixed amount of damages to be payable for a breach of contract in circumstances where the predetermined amount is a genuine pre-estimate of the loss likely to flow from the breach rather than a sum intended to punish or deter the breach. Equity may also deem a sum payable on the happening of an event other than breach ('the primary stipulation') as 'penal' and hence irrecoverable where it is 'out of all proportion' to the interests protected by the primary stipulation, or where it 'is properly characterised as having no purpose other than to punish'.

Recent case law

i Re HIH Insurance Ltd (in liq) [2016] NSWSC 482 (HIH Insurance [2016]) and Re HIH Insurance Ltd (in liq) [2017] NSWSC 380 (HIH Insurance [2017])

Prior to the Supreme Court of New South Wales decisions in HIH Insurance [2016] and HIH Insurance [2017], the elements for establishing causation in cases concerning loss arising from misleading and deceptive conduct claims involving securities remained unclear. Competing lines of argument were often put before courts about the extent to which reliance had to be established: was direct reliance on misleading and deceptive statements required, or was indirect reliance sufficient? The latter view relies on a concept of market-based causation to establish causation irrespective of whether plaintiffs had relied directly on misleading and deceptive statements. It contends that a causal link is established where the price of securities is affected by the misleading or deceptive information.

The facts of the case

HIH Insurance [2016] and HIH Insurance [2017] related to multiple claims by investors who acquired shares in HIH Insurance Limited (HIH) at an artificially inflated market price. HIH was a public company listed on the ASX. It was placed into liquidation in 2001 and admitted that its FY1999 financial statements, FY2000 interim financial statements and FY2000 final statements contained representations that were misleading and deceptive. These representations 'conveyed to the market an overoptimistic impression of HIH's financial position and prospects'. The statutory causes of action required investors to show that they had suffered loss 'by' the contravening conduct, in this case the misleading and deceptive financial statements.

The decision

Justice Brereton of the Supreme Court of New South Wales was tasked with determining whether shareholders who had not personally relied upon the misleading and deceptive statements could establish causation under the relevant statutes. The wording of these statutes was pivotal in considering whether indirect causation could be established.

Justice Brereton interpreted the word 'by' to express 'the notion of causation without defining or elucidating it'. He followed Chief Justice Mason's leading judgment in March v. Stramare, which stated that for a sufficient causal link to be established, it must be shown that the contravening conduct 'caused or materially contributed to' the loss.

Thus, Brereton J found that it was not necessary to prove each investor's individual reliance on the misleading or deceptive financial statement and that a causal link could instead be established by showing that HIH made misleading or deceptive representations in relation to its financial statements, the market was deceived into a misapprehension that HIH was trading more profitably than it really was and had greater net assets than it really had, HIH shares traded at an inflated market price and investors paid that inflated market price to acquire shares, thereby suffering loss. This causal link is referred to as indirect market-based causation.

Following on from the HIH Insurance [2016] decision, Brereton J considered the issue of quantum in HIH Insurance [2017]. Generally, the measure of damages in these types of cases is 'the difference between the price [the plaintiff] paid and the price they would have paid had the contravening conduct not occurred but all other factors had remained constant'. A complicating factor in calculating the quantum of loss was that shareholders had purchased shares while their market price was inflated by misrepresentations, but then subsequently sold some of those shares within the inflated period. Various approaches were suggested to Brereton J for consideration, including a 'last-in-first-out' (LIFO) approach, a 'first-in-first-out' (FIFO) approach and a proportionate approach. A proportionate approach requires treating the shares sold during the inflationary period as being proportionately drawn from the shares owned prior to the inflationary period and the shares acquired during the inflationary period. Brereton J held the LIFO method to be the favoured approach because it requires the shareholder to account for any inflationary benefit received on a share sale.

Indirect market-based causation and 'fraud-on-the-market' approaches

The principle recognised by Brereton J is similar but not identical to the well-established 'fraud-on-the-market' doctrine recognised by the United States Supreme Court in Basic v. Levinson. The key difference between the two doctrines is that, under the approach recognised in HIH Insurance [2016], there is no need to establish reliance. In contrast, the American doctrine provides plaintiffs with a presumption of reliance on the integrity of the market price of securities affected by the misrepresentation, which it is open to the defendant to rebut with sufficient evidence.

ii AHRKalimpa Pty Ltd v. Schmidt (No. 3) [2019] VSC 197 (AHRKalimpa)

In Australia, the status of equity as a body of law distinct from common law is the subject of an enduring debate. Some jurists contend that the two have fused, so that the principles applicable to one may alter those applicable to the other. Others assert this to be a fallacy, arguing that equity follows its own 'coherent body of principles'. In the recent AHKalimpa decision, the Victorian Supreme Court considered whether common law principles of causation reasoning apply in the determination and quantification of equitable compensation.

Facts of the case

AHRKalimpa concerned a joint venture to export cattle to Israel. One of the directors of AHRKalimpa, Mr Schmidt, hatched a scheme to redirect the export business opportunity to a separate company controlled by him. Subsequently, Schmidt stole AHRKalimpa's confidential information and diverted the export business to his new venture.

In a separate decision, the court found Schmidt had breached his fiduciary duties. The court then separately considered the quantum of equitable damages to be paid by way of compensation.

The court was required to decide whether the award ought to place the plaintiffs in the position they would have been in but for the breach of fiduciary duties, or whether consideration of the plaintiffs' inability to conduct the business without the involvement of Mr Schmidt meant that compensation should be limited to the value of a loss of opportunity arising from the defendant's breaches. Essentially, the court was tasked with determining whether or not equitable compensation is determined by reference to the common law principles of remoteness and foreseeability of loss.

The decision

In resolving the issue of causation, Justice Elliot distinguished the analysis of causation at common law from the applicable test for equitable compensation. While at common law a plaintiff must satisfy the tests for foreseeability and remoteness of loss, his Honour observed that a plaintiff seeking equitable compensation is only required to establish that a defendant's breach has 'caused' the loss. In other words, the plaintiff 'need only establish that the loss was caused “by”, “by reason of”, or “as a result of” the wrongful conduct'. Once a causal link is found, equity does not require an examination of foreseeability or remoteness. His Honour referred to the reasoning in Ancient Order of Foresters In Victoria Friendly Society Ltd v. Lifeplan Australia Friendly Society Ltd, that because equity is concerned with vindicating an equitable obligation that has been breached, the 'but for' test of causation is sufficient irrespective of other contributing causes.

So, all that the plaintiffs had to establish was that the defendants' conduct in misappropriating the businesses and stealing confidential information caused them to suffer a loss. The defendants' counterfactual scenario that the plaintiffs would be unable to continue the livestock export business without the assistance of Mr Schmidt was irrelevant to the causal inquiry because the equitable test for causation only requires a 'but for' link to be satisfied.

Causation in equitable compensation

Elliot J's decision in AHRKalimpa confirms that the assessment of quantum in cases seeking equitable compensation does not entertain considerations of what would or ought to have happened but for a breach of fiduciary duties. Rather than adopting a 'fused' approach that assimilates common law principles and equity when determining causation, equity applies a distinct approach that is only concerned with protecting plaintiffs against breaches of equitable duties.

iii Bauer Media Pty Ltd v. Wilson (No. 2)

While the above cases discuss the role common law and equitable principles play in determining the availability and quantification of damages, it is important to consider the extent to which statute modifies these principles.

In Australia, defamation legislation applies a cap to the maximum amount that can be awarded for general damages. General damages comprise lump sum awards for both pure compensatory loss and aggravated damages. They are limited to a prescribed amount that can only be exceeded 'if, and only if, the court is satisfied that the circumstances of the publication of the defamatory matter to which the proceedings relate are such as to warrant an award of aggravated damages'. However, an award for damages must still have an appropriate and rational relationship to the harm suffered by a plaintiff. In other words, the cap may be exceeded when a defendant's improper or unjustified conduct, or conduct in bad faith, justifies an award for aggravated damages. However, an award must still be proportionate to the harm suffered. The recent high-profile case of Bauer Media Pty Ltd v. Wilson (No. 2) considered the effect this cap has on damages for non-economic loss in defamation proceedings.

Facts of the case

In 2015, Bauer Media published several magazine and online articles alleging that Ms Wilson, a prominent Australian actor, was a serial liar. Ms Wilson commenced proceedings in the Supreme Court of Victoria alleging that the articles were defamatory and had caused her to suffer loss, which she identified to include disrepute, humiliation and loss of future work.

At trial, Ms Wilson was successful in receiving an award of A$650,000 for general damages, which included aggravated damages, and A$3,917,472 for special damages. On appeal, Bauer Media contested the quantum of damages. One of Bauer Media's grounds of appeal was that the trial judge had erred in exceeding the statutory cap for general damages.

The decision

Bauer Media argued that the proper construction of the statutory cap required the trial judge to award aggravated damages separately from pure compensatory damages, and that only aggravated damages may exceed the statutory cap. The substance of this submission was that where a court assesses pure compensatory damages to exceed the statutory cap, and considers aggravated damages to be warranted, a plaintiff will only receive pure compensatory damages in the capped amount, and then receive a separate award for aggravated damages that may exceed the cap.

The Court of Appeal rejected this argument, finding that neither the language of the legislation nor the intention of Parliament mandated, expressly or implicitly, a separate award for aggravated damages. Doing so would place courts in the 'impossible situation' of ascertaining the unquantifiable, being what should be awarded specifically to console a plaintiff's hurt feelings and compensate for their reputational damage. The court considered that a literal reading of the legislation provided that where a court awards aggravated damages, it is entitled to exceed the statutory cap in respect of both pure compensatory and aggravated damages.

It was further put by Bauer Media that some of the trial judge's findings in relation to conduct warranting aggravated damages should be set aside. Specifically, Bauer Media submitted that the trial judge erred in finding that it was not justified in defending the proceedings and it was improper for a defence of triviality to be run, that it had failed to apologise to the plaintiff, and that it had disclosed confidential information in publishing the defamatory material.

In setting aside these findings, the Court of Appeal reassessed damages for non-economic loss to be in the amount of A$600,000. The decision confirms that awards for general damages are made as a lump sum, and where aggravated damages are warranted, an award can exceed the statutory cap in respect of the whole of an award for general damages.

This approach was adopted in another high-profile defamation case, Rush v. Nationwide News Pty Ltd, which, at the time of writing, is currently on appeal to the Full Court of the Federal Court of Australia.

iii Mann v. Paterson Constructions Pty Ltd

What the appropriate measure of damages is, where a claimant provides work or services pursuant to a contract, and that contract is breached or repudiated by the other party before payment is made, will be the subject of an appeal before the High Court of Australia in the coming year.

Currently, claimants have the ability to elect between contractual damages or a claim for restitution based on quantum meruit for a 'fair market value' of the work or services provided. These two forms of relief are based on different principles and will often yield different results. An entitlement to contractual damages will arise upon a breach of contract. What the innocent party may recover will be informed by the contract price, being the amount bargained for between the parties. Conversely, a claim for quantum meruit will arise where equity deems a repudiating party to have unjustly enriched itself by virtue of failing to make payment for work or services provided by another party, and that it would be unconscionable for that party to retain the benefit of the work or services. As set out in Sopov v. Kane (No. 2), claims of quantum meruit rest upon the legal fiction that the contract is void ab initio upon repudiation, so that any clause stipulating the amount of payment to be made no longer exists. In its place, a claimant's entitlement to payment will be determined by what the 'fair market value' of the work or services conferred to the other party is. This amount may well exceed the contractual value of the work or services.

Facts of the case

The applicants, Mr and Mrs Mann, entered into a written contract for the construction of two double-storey terraced houses with the respondent, Paterson Constructions Pty Ltd. After the first terrace house had been completed and handed to the Manns, but before completion of the second terrace house, a dispute arose over, among other things, moneys claimed for variations to building work. The Manns purported to terminate the contract and exclude Paterson Constructions from the site. In response, Paterson Constructions commenced proceedings in the Victorian Civil and Administrative Tribunal (VCAT), alleging that the conduct of the Manns constituted repudiation and purported to accept that repudiation. VCAT found that the Manns had wrongfully repudiated the contract and that, pursuant to Sopov, Paterson Constructions was entitled to recover payment for the works on a quantum meruit basis. That quantum meruit entitlement was calculated by reference to evidence from a quantity surveyor in the amount of A$1,606,313, whereas the amount that could have been recovered by contractual damages was A$971,000.

The appellant court decisions

The Manns appealed the decision of the VCAT before the Supreme Court of Victoria. Their primary grounds of appeal, that the VCAT had either misunderstood or misapplied the principles applicable to assessing the value of a quantum meruit claim, and that the proper test was to assess a value on the basis of what was 'fair and reasonable' and this required consideration of the contract price, were dismissed. Justice Cavanough held that the Court was bound by the decision of Sopov, which set out that where an owner's wrongful repudiation of a building contract is accepted by the builder, the contract is deemed void ab initio, and that where the builder elects to claim in quantum meruit, that claim is assessed independently of the contract by reference to the value of the benefit conferred on the owner.

The Manns appealed to the Victorian Court of Appeal. Relevantly, they contended that the trial judge erred in holding that the VCAT had correctly understood and applied the legal principles applying to the assessment of a quantum meruit claim by holding that a building contract is void ab initio upon the acceptance by a builder of an owner's repudiation and by failing to take into account the contract price. This ground was dismissed on the basis that the Court was bound by the decision in Sopov and that any departure from this decision could only be made by the High Court of Australia.

Significance of the decision

The High Court of Australia has granted special leave for the Manns to appeal the decision of the Victorian Court of Appeal. The appeal will consider (1) whether a party accepting repudiation of a contract is entitled to be paid upon a quantum meruit as an alternative to contractual damages, and (2) if a quantum meruit claim is available, should the contract price provide a ceiling to the quantum that may be recovered.

There are three likely approaches that the High Court will take:

  1. that a claimant is limited to a claim in contractual damages;
  2. that a claimant may choose between contractual damages and quantum meruit, and that the latter may exceed the former; and
  3. that while a claimant may choose between the two, the contract price will operate as a ceiling to the amount claimable by way of quantum meruit.