The High Court recently considered, in European Bank Limited v Robb Evans of Robb Evans & Associates, the nature and extent of a "usual undertaking as to damages" given by a receiver in accordance with Part 28, rule 7(2) of the Supreme Court Rules 1970 (NSW). In doing so, it overturned the decision of the NSW Court of Appeal to reinstate the trial judge's finding that the receiver was liable for substantial losses suffered by a third party deprived of the funds which were at the heart of the dispute.
Robb Evans was appointed receiver of Benford Limited, a company incorporated in Vanuatu, by the Central District Court of California. Evans alleged that Benford had arranged for funds which were the proceeds of fraudulent activity in the US and amounted to about US$7.5 million to be transferred to an account opened in Vanuatu by European Bank Limited (a Vanuatu merchant bank) in the name of Benford. Evans maintained that these funds were subsequently deposited by European Bank into a Citibank account held in Sydney in the name of European Bank and that these funds were held on trust for Benford. However, his claims did not succeed. He appealed and, on giving the usual undertaking as to damages, the Court of Appeal ordered in May 2004 that an amount of about US$8.7 million be paid into court. Evans' application for special leave to appeal to the High Court was dismissed and, in March 2005, the Court of Appeal ordered that the relevant sum be paid to European Bank. European Bank then sought an order for assessment of the amount of compensation payable by Evans pursuant to the court undertaking he had given. At first instance on this aspect, the judge included the increase in the value of the euro against the US dollar during the period European Bank was deprived of the funds. This amounted to US$800,000.
Without a great deal of authority to assist him, Gzell J at first instance approached the question of the basis on which compensation was to be assessed as if he was dealing with a claim for damages for breach of contract. He accordingly sought to apply the rule in Hadley v Baxendale relating to remoteness of damage. Essentially, that rule entitles an aggrieved party to recover damages which were reasonably within the contemplation of both parties at the time the contract was made. His Honour considered that the rule in Hadley v Baxendale would not be offended on the facts if he ordered Evans to compensate European Bank for the relevant losses. This was because Evans knew that European Bank carried on the business of dealing in foreign currencies and earned income from interest rate differentials and that the payment into court would deny European Bank the opportunity to convert the funds in question from US dollars to other currencies in order to take advantage of market fluctuations.
The Court of Appeal disagreed with Gzell J's decision, in essence considering that the relevant loss was too remote to be compensable. Gyles AJA even went so far as to say that if the requested compensation was granted this would amount to Evans being required to underwrite European Bank in respect of "a hypothetical bet on a hazardous enterprise because it can show in retrospect that the bet would have been successful"
What the High Court found
However, in finding for European Bank, the High Court:
- issued a warning that reliance on the rule in Hadley v Baxendale must be only by way of analogy in cases dealing with assessment of compensation under "the usual undertaking as to damages";
- referred to the guiding principle in such cases that a party seeking an equitable remedy is required to "do equity", which relevantly includes giving an undertaking to submit to such order for payment of compensation as the court considers just;
- indicated that the court should not adopt a rigid approach, but one that is just and equitable and fair and reasonable, in all the circumstances and that, in most cases, the damages granted should be those which flow directly from the injunction and which could have been foreseen when it was granted;
- concluded by drawing a distinction between the inquiry: "whether a loss of the kind actually sustained could have been foreseen?" - the correct approach - and: "whether the actual loss suffered was foreseen at the time the undertaking was given?" - the approach unsuccessfully argued by Evans in the case. [Emphasis is the High Court's.]