A common element of most franchise litigation is that one party caused another party loss through specific conduct. This is often described as either breach of the franchise agreement, a representation that is misleading or deceptive, unconscionable conduct, breach of the Franchising Code or conduct that demonstrates a lack of good faith. However in some instances the party suffering the loss is not entitled to the entirety of the loss experienced because of their own conduct. Although not a franchise dispute Chand v Commonwealth Bank of Australiademonstrates how a party otherwise entitled to compensation can lose the ability to recover for the loss suffered.
In June 2006, Chand invested $2 million in various Colonial First State (CFS)wholesale investment funds (CFS Investments). This investment was initially funded partly by Chand’s own funds and partly with funds from an existing margin loan facility, under which, the CFS investments were held as security. In June 2007, Chand increased his CFS Investments.
The CFS Investments were regarded as high risk and were highly geared. On 12 July 2007, the value of the CFS Investments was approximately $3 million, with approximately $1 million of which being Chand’s personal funds.
On 25 September 2007, Chand lodged an application to redeem the entirety of the CFS Investments (Redemption Request).
Prior to lodging the Redemption Request, the value of the CFS Investments amounted to approximately $2.9 million, which would have resulted in Chand receiving approximately $1 million with the balance of $1.9 million representing the loan balance.
Chand did not receive a response from the lodgement of the redemption request was aware that the redemption request usually took 10 days to process. Chand checked his accounts and found that the request had not been actioned. Chand contacted CFS on 5 November 2007 to follow up. He was told during that contact that the Redemption Request had not been received.
At that stage the investments were valued about the same with no loss suffered. Chand gave evidence that he needed to reacquaint himself with the markets to ensure the most optimal exit date prior to issuing a further Redemption Request. Chand therefore made a decision not to issue a further Redemption Request.
From 13 December 2007, as a result of the Global Financial Crisis (GFC), the value of the CFS Investments steadily fell and by 30 July 2008, the redemption value had fallen to approximately $275,000.
Chand lost a substantial part of the money he had invested and brought proceedings against the Bank alleging breach of contract, negligence, unconscionable conduct and misleading and deceptive conduct for the failure to action the Redemption Request.
The trial judge made a number of findings of fact including:
- Chand knew of the breach of contract (being the failure to redeem the CFS Investments on requests) by 5 November 2007. This was the date Chand accepted the Redemption Request would not be acted upon due to non-receipt;
- Chand made a deliberate decision to remain in the market and try to obtain a redemption higher then would have been available on 25 September 2007;
- It was unreasonable for Chand to expect CFS to remain at risk of the consequences of the breach for any significant period and the deliberate decision to stay in the market relieved CFS of its continuing exposure for the consequences of its breach; and
- It was open to Chand to make a further redemption request in the same form but he chose not to do so.
Accordingly, the trial judge held that Chand was not entitled to anything more than nominal damages for the Bank’s breach of contract because no actual loss was suffered during the period September 2007 to 5 November 2007 and the prospective loss, being the substantial loss on the CFS investments as a result of the GFC, could have been avoided by Chand if he had issued a further Redemption Request or resent the original Redemption Request.
Chand through his conduct after 5 November 2007 was the only real cause of the loss suffered. The trial judge highlighted that Chand had unreasonably failed to mitigate any loss by not giving instructions to sell the investments as soon as losses started to be suffered instead he continued to hold the investments despite margin calls being made.
THE COURT OF APPEAL
The Court of Appeal upheld the decision of the trial judge.
The Court of Appeal agreed with the trial judge that there was no actual loss at the date of breach,being when the Redemption Request was sent but not actioned rather there was a prospective loss, which may have been suffered.
When considering whether it was appropriate for CFS to be liable for the ultimate loss that accrued as a result of events after the breach, it was appropriate to consider whether Chand’s conduct was an intervening act breaking responsibility for what otherwise would have been a loss suffered by CFS's conduct.
The Court of Appeal held that Chand’s decision to stay in the market and not issue a fresh redemption request was an intervening act which made Chand ‘the author of his own misfortune,’ as it was deliberate, freely made and informed (having regard to Chand’s knowledge of the nature of the investments and the market generally).
The market fell between 13 and 20 December 2007 but Chand elected to remain in the market to see if the investments would rebound rather than crystallise loss by selling the investments. By making the decision that he did, Chand’s free, deliberate and informed decision to stay in the market resulted in the loss that he suffered rather than CFS's failure to action the Redemption Request.