Commissioner of Taxation v Wood [2023] FCA 574; 116 ATR 34 (Stewart J) (2 June 2023)

by Stephen Lee – Denning Chambers

Issue

Whether a payment made to settle litigation qualifies as a deduction from assessable income under s 8-1 of the Income Tax Assessment Act 1997 (Cth).

Facts

From 1998 to 2011, Mr Wood, the taxpayer, was employed by a company he and his wife controlled (C Pty Ltd) to provide consultancy services to another company (A Pty Ltd). A Pty Ltd paid consultancy fees to C Pty Ltd under a consultancy agreement. C Pty Ltd, in turn, paid a salary to Mr Wood.

In 2011, the arrangement came to an end, and Mr Wood took up employment with an unrelated company.

Later, A Pty Ltd sued Mr Wood and C Pty Ltd for damages for $2.4M alleging that Mr Wood had, unbeknown to A Pty Ltd, negotiated a number of unauthorised transactions whilst performing the consultancy services in 2006 or 2007. The claim was for misleading and deceptive conduct, breach of fiduciary duty, breach of contract and breach of statutory duty.

Mr Wood and C Pty Ltd disputed the allegations and filed a cross claim, and Mr Wood separately threatened a defamation claim arising out of statements made to Mr Wood’s new employer concerning A Pty Ltd’s allegations. C Pty Ltd went into liquidation.

In December 2013, a Settlement Deed was entered into between Mr Wood and A Pty Ltd, by which Mr Wood was to pay A Pty Ltd $200,000.00 in return for dismissal of the action, without admission. On the same day, a separate Deed of Release was entered into requiring A Pty Ltd to pay Mr Wood $180,000.00 in return for a release of the defamation claim. It was agreed that one could be set off against the other and Mr Wood paid $20,000.00 on 29 January 2014.

The Commissioner disallowed Mr Wood’s claim to deduct the sum of $200,000.00 in the year ending 30 June 2014. The Commissioner disallowed Mr Wood’s objection, and Mr Wood sought review in the AAT. The AAT overturned the Commissioner’s decision and allowed the deduction. The Commissioner appealed on a question of law to the Federal Court, which dismissed the appeal.

ITAA 1997:

Section 8-1 ITAA 1997 provides (inter alia):

“8-1 General deductions

1. You can deduct from your assessable income any loss or outgoing to the extent that:
   1. it is incurred in gaining or producing your assessable income; …
2. However, you cannot deduct a loss or outgoing under this section to the extent that:
   1. It is a loss or outgoing of capital, or of a capital nature; …”

Stewart J’s Decision:

The Court observed, the relevant principles from Day’s case,[1] as follows:

• s 8-1(1)(a) refer to a relationship between the expenditure incurred and what is productive of assessable income, which is the connection for deductibility;
• “incurred in gaining or producing … assessable income” mean incurred “in the course of gaining or producing” income;
• It is necessary to read “losses and outgoings … incurred in gaining or producing the assessable income” as incurred “in the course of” gaining or producing that income;  outgoings may have an effect in gaining income, but losses cannot, as they simply reduce income;
• The statutory words “in the course of” do not require a direct connection between the expenditure and the derivation of income, but requires more than a causal (viz but for) connection.  No narrow approach should be taken;
• An outgoing may be referable to a year of income other than that in which it was incurred;
• A way of stating the question to be asked is: “is the occasion of the outgoing found in whatever is productive of actual or expected income?”;
• Essential to the inquiry is the determination of what it is that is productive of assessable income, and seeking to delineate between proper and proscribed conduct is not useful in answering that inquiry.

Stewart J held that the Settlement Sum was properly characterised as being incurred in the course of gaining or producing assessable income, even thought it was referrable to a year of income other than the year in which it was incurred.  At [42]-[46] the Court held that the occasion of the liability that was discharged was the work done by Mr Wood as employee of C Pty Ltd, under the consultancy agreement. It did not matter that the liability arose under a Settlement Deed some years after the employment had finished; it arose out of that employment. Mr Wood’s conduct in his employment was the source of income and the cause of the risk of liability. The Settlement Sum avoided the risk of a judgment for a much higher amount, which would have amounted to a much larger reduction in income for the 2006 and 2007 tax years.

It was irrelevant that his alleged conduct was wrongful or outside the scope of his employment.

The Commissioner submitted that s 8-1(1)(a) was not satisfied as there was no connection with the gaining of assessable income in the 2014 year.  Stewart J rejected this, saying at [44] that “a loss that is a reduction of past income can also qualify as a general deduction”.

The Commissioner further submitted that the $200,000.00 payment was an outgoing of a capital nature, because it preserved Mr Wood’s reputation in the finance industry. Stewart J rejected this at [52], because the payment was rather to be characterised as preventing litigation risk arising from his prior employment. It “arose out of the very activities the respondent performed in gaining assessable income”: [53]. The purpose of the Deed of Release was irrelevant.

The Commissioner has published a Decision Impact Statement on 21 February 2024 in relation to this case. The Commissioner’s view is that, “this decision has limited application beyond its own factual circumstances”.  The Commissioner is also of the view that the “decision does not represent a departure from established principles concerning section 8-1, and cases concerning the application of these principles always turn on the facts of the particular case”.

Commissioner of Taxation v Carter [2022] HCA 10; 274 CLR 304 (6 April 2022)

by Stephen Lee – Denning Chambers

Issue

Whether a disclaimer executed by a beneficiary after 30 June is effective to retrospectively expunge a present entitlement to income from a trust estate as at 30 June.  That is, the issue was one of timing.  Is a beneficiary’s present entitlement to be determined immediately prior to the end of the year of income, or can events after the end of the year of income affect or alter that position?

Facts

The Whitby Trust was a traditional family discretionary trust, settled on 27 July 2005. The Trustee was a corporate trustee, controlled by Mr Carratti. The Primary Beneficiaries were Mr Caratti’s five children, some of whom were the respondents to the appeal. 

By 30 June 2014, the Trustee had failed to appoint or accumulate the income for that year. The Trust Deed included default distribution clauses, such that no income remained with the Trustee.  On 27 October 2015, the Commissioner issued amended assessments to each of the five children for one-fifth of the income of the Whitby Trust for the 2014 year on the basis that they were “presently entitled” to the income of the trust for that year. The respondent beneficiaries then executed deeds of disclaimer on 3 and 4 November 2014 disclaiming any and all right, title and interest in the income for that year.  Those disclaimers were ineffective. Further disclaimers were signed on 30 September 2016.

The Commissioner contended that the disclaimers did not apply retrospectively to disapply s 97 of the Income Tax Assessment Act 1936 (ITAA 1936).  The respondents sought review in the AAT.  On review, the AAT accepted that the most recent disclaimers were ineffective because the earlier disclaimer amounted to a tacit acceptance of the gift of income for the 2014 year, and in any event held that a disclaimer made after 30 June 2014 could not retrospectively affect the children’s “present entitlement” as at 30 June. The Full Court of the Federal Court held that the disclaimers were effective, the earlier disclaimer was not a tacit acceptance of the default gift and the disclaimers could and did have the result that, retrospectively, the beneficiaries did not have a present entitlement to the 2014 income as at 30 June 2014.  The Commissioner appealed to the High Court. The High Court allowed the appeal, holding that the latest disclaimers were ineffective as the Commissioner’s right to tax the beneficiaries was based on their “present entitlement” to the income as at 30 June 2014.  A joint judgment was delivered by Gageler, Gordon, Steward and Gleeson JJ. Edelman J concurred but for different reasons.

Legislative and Trust Framework:

Section 96 of the ITAA 1936 provides that “Except as provided in this Act, a trustee shall not be liable as trustee to pay income tax upon the income of the trust estate”.

Section 97(1) ITAA 1936 relevantly provides that:

“Subject to Division 6D, where a beneficiary of a trust estate who is not under any legal disability is presently entitled to a share of the income of the trust estate:

1. the assessable income of the beneficiary shall include:
   1. so much of that share of the net income of the trust estate as is attributable to a period when the beneficiary was a resident; …”

Sections 98, 99 and 99A also operate by reference to the facts, events and legal relationship in existence at the end of the income year.

The Whitby Trust conferred a familiar discretionary power on the trustee to distribute income to any beneficiary “at any time before the expiration of any Accounting Period”, being 30 June or to accumulate all or any part of the income (cl 3.7). The Trust Deed also contained (cl 3.7) a familiar default beneficiary clause that “If in relation to any Accounting Period, the Trustee has made no effective determination … in respect to any part of the income of that Accounting Period immediately prior to the end of the last day of that Accounting Period, then the Trustee shall hold that income in trust for [a formula which here referred to the Principal Beneficiaries as were then living].”  This clause was to ensure that the income, if not otherwise dealt with, was distributed.

High Court’s Decision:

It was argued for the taxpayers that the disclaimers had effectively removed all entitlement to the income, retrospectively. The High Court rejected that argument. Their Honours regarded the question as simply one of statutory construction, particularly of s 97.

In the joint judgment at [21], it was important that s 97 is directed to identifying the position immediately prior to the end of the year of income. Their Honours referred to with approval the Court’s decision in Bamford,[2] which itself approved the Court’s earlier decision in Harmer. [3] It was said in Harmer that a beneficiary would be presently entitled if and only if:

“(a) the beneficiary has an interest in the income which is both vested in interest and vested in possession; and (b) the beneficiary has a present legal right to demand and receive payment of the income, whether or not the precise entitlement can be ascertained before the end of the year of income and whether or not the trustee has the funds available for immediate payment.”

The Court observed at [24] that the taxpayer’s submission would lead to uncertainty which may not be resolved for years. At [26], it was acknowledged that there may be apparent unfairness of this result, but that was addressed by the Parliament in that s 97 speaks of the “net income” of the estate, not distributable income, and of “present entitlement” not receipt.

Thus the joint judgment held that when s 97(1) refers to present entitlement, it refers to the present legal right of a beneficiary to demand and receive a share of the distributable income of the trust estate. That entitlement is determined immediately before the end of the relevant income year, that is just prior to midnight at the end of the year of income: [19]-[20]. This “cannot be altered after the end of the income year”: [23].  The disclaimers were not effective to “retrospectively expunge” the rights of the Commissioner against the respondents: [27].

The taxpayers argued that this would be inconsistent with the principle that the donee of a gift is required to assent to a gift for it to take effect. Their Honours said that their conclusion was consistent with that principle, because of the presumption of assent, which is a presumption of law: [29]-[30].

Edelman J differed on this point, saying that in equity assent is not necessary to constitute a valid trust and hence irrelevant to the notional allocation of income: [38]-[40]. His Honour otherwise agreed with the joint judgment.

This provides a salutary lesson for trustees of discretionary trusts (and beneficiaries of such) to make decisions about income before the end of the financial year.

[1] Commissioner of Taxation v Day (2008) 236 CLR 163.[2] Commissioner of Taxation v Bamford (2010) 240 CLR 481.[3] Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264 at 271.

Automotive Invest Pty Ltd v Commissioner of Taxation (2024) 419 ALR 324; [2024] HCA 36 – Divergence in the Contemporary Approach to Statutory Construction

By Richard Schulte – Hemmant’s List

Introduction

The decision in Automotive Invest Pty Ltd v Commissioner of Taxation [2024] HCA 36 exposes a divergence in the contemporary approach to statutory construction amongst some judges of the High Court.  Outwardly, the case addresses the question of “purpose” within the framework of the A New Tax System (Luxury Car Tax) Act 1999 (Cth) (LCT Act). The issue was whether the display of luxury and collectable cars at the “Gosford Classic Car Museum”, which operated as a car dealership, constituted a use of a car “for a purpose other than a quotable purpose” thereby triggering a tax liability.

The majority (Edelman, Steward, and Gleeson JJ) concluded that the cars were held for sale, with the museum functioning as a novel technique to attract purchasers such that there was no liability to tax.  Whereas the minority (Gageler CJ and Jagot J) considered that the museum served as a distinct use apart from the purpose of sale, making the cars subject to luxury car tax.

Whilst not specifically referenced by either the majority or the minority, unsurprisingly, the Court has adopted the contemporary approach[1] to interpreting legislation.  That is, with the benefit of context, the task of construction begins and ends with the statutory text. Constructional choices between one meaning and another usually turn on coherence with the statutory objects or policies rather than “linguistic fit”.[2]

Broadly, the decision of the majority as compared to the minority reveals points of divergence in the application of the contemporary approach.  The purpose of this note is to identify some of the points of difference and briefly explain the guidance practitioners can take from the decision.

The Majority’s Approach

The majority first considered the circumstances of the introduction of luxury car tax, looking at both the history and the explanatory memorandum.[3]  Emphasis was placed on the design attributed to the tax as explained in the EM.[4] 

As expected, the text of the LCT Act is exposed in detail.  The majority identified the things that influenced their approach to statutory construction. 

First, a feature of the LCT Act is the presence of an internal aid to construction of the “operative provisions” by the use of “explanatory sections”, which can only be used in certain ways.[5]  For example, the explanatory sections can only be used to determine the purpose or object underlying the operative provision.[6]

Second, the majority considered that the LCT Act was drafted to speak to the public using ordinary language and communication.  In applying the ordinary rules of interpretation to that language, it was an important contextual point that the LCT Act created a tax in the course of commercial activity.  That recognition informed two further observations that influenced interpretation.  First, that it is always important to look “at the substance and reality of the matter” and that a “commonsense and commercial approach” should be applied to the LCT Act.[7]

The ordinary language of the LCT Act was on one hand concerned with “intended purpose” and on another, also concerned with “actual purpose”.[8]  The constructional choice was whether the reference to “purpose” was to the objective or subjective purpose of the person whose purpose was in issue.[9]

The Commissioner argued that the references to the word “purpose” was to “objective purpose” ascertained by inference from how the cars were in fact used, to the exclusion of evidence given by the taxpayer.[10]

To expose the “constructional choice” as to the meaning of “purpose”, the majority differentiated between “motive”, “means” and “purpose”.[11]  With that understanding, it was possible to characterise the relevant person’s purpose or end at the proper level of generality, as distinct from any motive for that purpose or the intended means of achieving that purpose.[12]

The majority then looked at three different ways that “purpose” might be ascertained. 

First, it was considered that “purposes” of their nature had to be attributed to a person and was subjective in the sense that it belonged to a subject.  A person’s purposes could only be proved by their direct evidence, or by inference from the circumstances, or both.[13]

Second, the majority recognised that the law is sometimes concerned with the “purpose” of a legal construct such as the “reasonable person”.  In those circumstances, a person cannot give direct evidence of the purpose of the “reasonable person”.  That “purpose” can only be established by inference from the circumstances as to the purpose that such a reasonable person in the relevant position would have had.[14]  

Third, “purpose” is determined by reference to the object which some act is “apt to  achieve”.  Objective purpose can be determined by reference to what a reasonable person engaging in the act would expect to achieve.[15]

The majority then reasoned that “purpose” in the text of the LCT Act was the taxpayer’s purpose.  “Purpose” was neither the purpose of a reasonable person nor the purpose of a reasonable person in the position of the taxpayer that was “apt to achieve”.[16]  Primarily, this approach was justified by use of the words “you” and “intention” permitting the conclusion that the provision was directed at the taxpayer’s purpose.[17]

That approach was then applied consistently (and conventionally) to subsequent references to “purpose”.  Absent express language to justify a change, there was no justification to switch from the taxpayer’s purpose to the objective purpose of a reasonable person in the position of the taxpayer.[18]  In terms of proving the point, evidence of the circumstances in which the actual use occurred was not necessarily more probative than the sworn or affirmed testimony of a witness in inferring actual purpose.[19]

Without specific reference to it, the majority applied section 15AA of the Acts Interpretation Act 1901 (Cth), interpreting the LCT Act in line with its purpose of taxing luxury cars at the point of final consumption. This pragmatic approach aligned with commercial realities and the legislative objective of the LCT Act. 

The Minority’s Approach

The minority provide a strict study consistent with the proposition that the task of construction begins, as it ends, with the statutory text.[20]  As compared to the approach of the majority, there is no reference to the explanatory memorandum, historical context or how those matters might affect constructional choices.  That must necessarily be, because for the minority such context was not necessary to assist in fixing the meaning of the statutory text.   

For the minority, constructional choices were focused on ordinary or grammatical meaning (literalism) as opposed to seeking coherence with statutory objects or policies.  It was said: “the LCT Act must be construed not in accordance with some superimposed policy reflecting the general scheme of the LCT Act but in accordance with the terms of its provisions.”[21]

For the minority, the issue was not “purpose”, but rather “use” for a purpose other than that exclusively permitted without the imposition of tax.[22] That was a question of fact answered by an “objective characterisation of the purpose or purposes of the use itself viewed from the perspective of an independent observer.” That question was not answered merely by ascertaining the subjective state of mind of the taxpayer.[23]

The literal analysis of the minority meant the threshold to engage liability for tax was very low.  All that needed to be shown objectively was that a car was being used for a purpose other than for sale.  Using the car in a museum negotiated that threshold.

Conclusion

Both the majority and the minority followed the approach that statutory construction begins and ends with the text.  The real difference in their approaches concerns when and how “context” is deployed.  The minority eschewed any real resort to context preferring a literal meaning that was plain and coherent.  The majority deployed context immediately.  Construing the LCT Act in “context” resulted in meaning being given to language that was more granular and nuanced as compared to a literal meaning.

For practitioners advising on the operation of legislation the guidance is clear.  There is a divergence in approach evident in the High Court.  As can be seen from the decision in Automotive Invest that divergence can produce profoundly different outcomes.  Prudence dictates that to reveal those possibly different outcomes it is not enough to simply explore the “the contemporary approach” but resort must also be had to a strict literalism in navigating statutory construction.  

[1] See Pierce, Statutory Interpretation in Australia, 10ed, Chapter 2.[2] See SZTAL v Minister for Immigration and Border Protection (2017) 262 CLR 362 per Gageler J [37]-[39].  To similar effect, see Kiefel CJ, Nettle and Gordon JJ [14].[3] [2024] HCA 36, [60].[4] [2024] HCA 36, [61].[5] See Part 5, Division 23, LCT Act.[6] Section 23.10(2)(a) LCT Act.[7] [2024] HCA 36, [105].[8] [2024] HCA 36, [106].[9] [2024] HCA 36, [109].[10] [2024] HCA 36, [109].[11] [2024] HCA 36, [110].[12] [2024] HCA 36, [111].[13] [2024] HCA 36, [113].[14] [2024] HCA 36, [115].[15] [2024] HCA 36, [117].[16] [2024] HCA 36, [143].[17] [2024] HCA 36, [126]-[128].[18] [2024] HCA 36, [131].[19] [2024] HCA 36, [134].[20] [2024] HCA 36, [4]-[16].[21] [2024] HCA 36, [55].[22] [2024] HCA 36, [9] and [19].[23] [2024] HCA 36, [55].

Century Mining Pty Limited v The Commissioner of State Revenue [2024] QSC 143 (4 July 2024) (Treston J)

by Samantha Amos – George Street Chambers

The Supreme Court has now clarified the limits of what constitutes a ‘marine cost’ for the purposes of calculating deductions from the gross value of a mineral for royalty purposes.

Century Mining Pty Limited exported zinc concentrate and silver mined from its operations at Century Mine in Lawn Hill from the Port of Karumba. Due to the physical limitations of the port, Century Mining loaded the minerals at the port onto on a transhipment vessel, the MV Wunma, which then transported the minerals to ocean-going vessels which were berthed in a roadstead anchorage just outside of the port limits.

Century Mining claimed that the costs of the MV Wunma were freight costs within the definition of ‘marine cost’ under s 54 of the Mineral Resources Regulation 2013 (Qld). The costs included not only diesel and operating costs, but dredging costs of the port and Norman River and port fees (at [11]). Section 54 provides that the value of minerals must be worked out by working out the gross value of the mineral under Part 5 and subtracting specified amounts including the marine cost for the mineral.

The Commissioner disallowed the claimed costs on objection. Century Mining appealed to the Supreme Court under ss 69 and 70 of the Taxation Administration Act 2001 (Qld).

Her Honour Justice Treston dismissed the appeal. Her Honour found at paragraph [92] that freight and insurance costs relating to the transport by water to a port outside of the State does not include those costs to transport the mineral to the point of loading on the ocean-going vessel and does not apply to activities occurring at or prior to the point of loading on the ocean-going vessel. Freight and insurance costs must be just that, costs of freight and insurance, costs ‘relating to’ freight and insurance are not covered by the definition.  ‘Marine costs’ are those are proven to be freight or insurance costs and being those costs which are activities occurring, or risks arising, after the mineral is loaded onto the ocean-going vessel.

The appeal period expired on 1 August 2024, with no appeal filed.

James Kent, author of the celebrated Commentaries on American Law, is often spoken of as the American Blackstone. The High Court of Australia has cited Chancellor Kent, describing him as one of the “great commentators”.[1] The Hon Robert French AC has described Kent as one of the “great American legal scholars”.[2]  The late Justice McPherson regarded Kent as a disciple of the common law.[3] Given such accolades, and that it is nearly two centuries since Kent’s Commentaries were first published, it is timely to examine who Chancellor Kent was and his influence on Anglo-Australian law.

Life and Career

James Kent was born on 31 July 1763 in what is now Putnam County, in upstate New York.[4] Kent’s father was half farmer, half lawyer. Kent’s mother died when he was seven. From a young age, Kent boarded with his maternal grandfather in Connecticut, in a house that would later be torched to the ground by the British during the Revolutionary War. Kent went to Yale College from 1777 to 1781, graduating among the first of his class.

During a hiatus in classes due to the Revolutionary War, Kent read the fourth volume of Blackstone’s Commentaries on the Laws of England. He decided upon a career in law. Kent commenced an apprenticeship in Poughkeepsie, New York with the State’s Attorney-General, whose next-door neighbour was John Jay. John Jay would later become Chief Justice of the United States and Governor of New York.

Kent was admitted to the New York Bar in 1785, at the age of twenty-one. He commenced legal practice in a partnership in Poughkeepsie. He also married in 1785, a union that endured until his death in 1847.

“Kent has continued to be cited by Australian courts and commentators.”

When business was slow, Kent engaged in prodigious self-study and moved in Federalist Party circles, where he built a connection with the likes of John Jay and Alexander Hamilton.

Kent was a member of the New York State Legislative Assembly at various times between 1790 and 1797.  

In 1793, Kent ended his partnership in Poughkeepsie and moved to New York City, where he commenced legal practice on his own. This did not go well. In December of that year, Columbia College appointed him inaugural professor of law.  He remained in this post until 1797, delivering lectures in law.  Columbia College conferred a Doctorate of Laws on him.[5]

He maintained his practice, being admitted as a solicitor and counsel in Chancery in 1794. The customary examination was waived due to his reputation. In 1796, Kent was appointed master in chancery, which allowed him to give up his unsuccessful practice in the city. In 1797, Kent was appointed as the Recorder of New York City, a part-time judicial position.[6]

Then, in 1798, at the age of thirty-five, Kent was appointed a justice of the New York Supreme Court.[7] In 1804, he became Chief Justice at the age of forty-one.[8] This was a court of five justices, having original as well as appellate jurisdiction.

The Supreme Court had prior to that time not shown itself to be particularly impressive as a Court.[9] One of Kent’s major innovations in that Court was that, as Chief Judge Judith Kaye put it, “he introduced to New York the custom of writing opinions on significant matters and collecting them in official, state-sponsored reporters”.[10]  Kent would produce written opinions, supported by legal authorities, with the result that the other judges effectively had to produce their own written opinions, as a matter of pride. The first official reporter, in 1804, was one George Caines, but he was very quickly regarded as unsatisfactory and was replaced by William Johnson in 1805. 

Kent demonstrated erudition in judgment writing, relying on English precedents where appropriate, but also on many occasions French and civil law in order to justify the same result, thereby overcoming the resistance of the other judges to rely on the law of the country with whom America had lately been at war.[11] He described his judicial approach in memoirs in the following terms:

“When I came to the Bench there were no reports or State precedents. The opinions from the Bench were delivered ore tenus. We had no law of our own, and nobody knew what it was. I first introduced a thorough examination of cases and written opinions…

Between that time and 1804, I rode my share of circuits, attended all the terms, and was never absent, and was always ready in every case by the day. I read in that time Valin and Emerigon, and completely abridged the latter, and made copious digests of all the English law reports and treatises as they came out. I made much use of the Corpus Juris, and as the judges (Livingston excepted) knew nothing of French or civil law, I had immense advantage over them. I could generally put my brethren to rout and carry my point by my mysterious wand of French and civil law. The judges were Republicans and very kindly disposed to everything that was French, and this enabled me, without exciting any alarm or jealousy, to make free use of such authorities and thereby enrich our commercial law.

I gradually acquired preponderating influence with my brethren, and the volumes in Johnson, after I became Chief Justice, in 1804, show it. The first practice was for each judge to give his portion of opinions, when we all agreed, but that gradually fell off, and, for the last two or three years before I left the Bench, I gave the most of them. I remember that in eighth Johnson all the opinions for one term are ‘per curiam’. The fact is I wrote them all and proposed that course to avoid exciting jealousy, and many a per curiam opinion was so inserted for that reason.

Many of the cases decided during the sixteen years I was in the Supreme Court were labored by me most unmercifully, but it was necessary under the circumstances, in order to subdue opposition. We had but few American precedents. Our judges were democratic, and my brother Spencer particularly, of a bold, vigorous, dogmatic mind and overbearing manner. English authority did not stand very high in those early feverish times, and this led me a hundred times to attempt to bear down opposition, or shame it by exhaustive research and overwhelming authority. Our jurisprudence was, on the whole, improved by it. My mind certainly was roused, and was always kept ardent and inflamed by collision.”[12]

It is from judgments written during this period that Kent has gained the reputation of father of American commercial law.[13]

“English authority did not stand very high in those early feverish times, and this led me a hundred times to attempt to bear down opposition, or shame it by exhaustive research and overwhelming authority.”

In 1814, after sixteen years, Kent left the Supreme Court to take up appointment as Chancellor of New York, head of New York’s Court of Chancery (which was a separate court until 1847).[14] Chancery was a one judge court, though there were also masters. Appeal lay to the Court of Errors, as did appeals from the Supreme Court.[15] Kent introduced written opinions, and appointed Johnson as official reporter for Chancery, who retained his position as Supreme Court reporter. Kent’s equity opinions are collected in the seven volumes of Johnson’s Chancery Reports.[16]

Kent, in a letter, wrote about this period:

“… it is a curious fact that for the nine years I was in that office there was not a single decision, opinion or dictum of either of my two predecessors (Ch. Livingston and Ch. Lansing), from 1777 to 1814, cited to me or even suggested. I took the court as if it had been a new institution, and never before known in the United States. I had nothing to guide me, and was left at liberty to assume all such English Chancery powers and jurisdiction as I thought applicable under our Constitution. This gave me grand scope, and I was checked only by the revision of the Senate, or Court of Errors. I opened the gates of the court immediately, and admitted, almost gratuitously, the first year, eighty-five counsellors, though I found there had not been thirteen admitted for thirteen years before. Business flowed in with a rapid tide. The result appears in the seven volumes of Johnson’s Chancery Reports.”[17]

In this letter, he went on to say that he studied the English nominate Chancery reports, and he also discussed his approach in deciding cases. For example, “[M]y object was so to discuss a point as never to be teased with it again”.[18]    

Professor Langbein, writing about Kent’s style and influence as Chancellor, observed:

“Of Johnson’s three series of reports that chronicle Kent’s judicial work, the Chancery Reports were undoubtedly the most influential. Because Chancery was a one-judge court, Kent had the stage to himself. His judicial style was fully mature. Equity courts had emerged from the American Revolution under a taint for several reasons, including their association with unpopular colonial governors[19] and their jury-free civil procedure. Even in England, much of the detail of equity law, including trusts and succession, had only recently developed. Kent relished the opportunity to lay down the law on a fresh slate… Kent’s Chancery decisions exemplify his campaign to entrench English decisional law as the foundation of American law… Johnson’s Chancery Reports were the only specialized American equity reports of their time, greatly enhancing their influence in other American states.”[20]

As Chief Judge Judith S. Kaye put it, “chancery law of the United States may be said to have commenced with” Kent.[21] Kent paid deference to the Lord Chancellors.[22] One practitioner said of Kent, “We view him today as a sturdy pioneer toiling in a new and stony field, but sunburnt by the light that shone from the decrees of Nottingham, Somers, Hardwicke and Eldon”.[23]

“He built a connection with the likes of John Jay and Alexander Hamilton.”

The London Law Magazine summed it up by observing: “… it has been said of [Kent] … with respect to the Court of Chancery, as was said of Augustus with respect to the city of Rome, lateritiam invenit, marmoream reliquit.”[24]

It is not surprising that he has continued to this day to be customarily known as “Chancellor Kent”.

Kent left office in 1823, on attaining the then mandatory retirement age of sixty.   

Once again, Columbia College asked him to be professor of law. He lectured in law from 1824 to 1826.  The lectures formed the basis of his Commentaries on American Law, published as a series of Lectures in four volumes between 1826 and 1830.[25]  By the time of his death in 1847, he had worked on five revisions.[26]  Others updated the work after 1847, including Oliver Wendell Holmes who edited the twelfth edition published in 1873.  The fourteenth edition came out in 1896.

This was the first time an academic work had attempted to examine the American legal system as a whole.[27] The treatise was a commercial success.

Kent died in New York City, on 12 December 1847, in his Union Square apartment. He was 84.

Chancellor Kent’s Influence

In 1834, shortly after the release of the Commentaries, Joseph Story dedicated his Commentaries on the Conflict of Laws to Kent.  Part of the dedication was in the following terms:

“It is now about thirty-six years since you began your judicial career on the Bench of the Supreme Court of the State of New York. In the intervening period between that time and the present, you have successively occupied the offices of Chief Justice and Chancellor of the same State. I speak but the common voice of the Profession and the public, when I say, that in each of these stations you have brought to its duties a maturity of judgment, a depth of learning, a fidelity of purpose, and an enthusiasm for justice, which have laid the solid foundations of an imperishable fame. In the full vigor of your intellectual powers, you left the Bench only to engage in a new task, which of itself seemed to demand by its extent and magnitude a whole life of strenuous diligence. That task has been accomplished. The ‘Commentaries on American Law’ have already acquired the reputation of a juridical Classic, and have placed their author in the first rank of the benefactors of the Profession. You have done for America what Mr. Justice Blackstone in his invaluable Commentaries has done for England. You have embodied the principles of our law in pages as attractive by the persuasive elegance of their style as they are instructive by the fulness and accuracy of their learning.”[28]

But praise also came from the other side of the Atlantic. On Kent’s passing, the editor of Barbour’s New York Chancery Reports noted, “So highly are his works esteemed abroad, that the Lord Chief Justice of England, Baron Denman wrote to Chancellor Kent some years since, acknowledging the indebtedness of the legal profession throughout the world, to him, for his able Commentaries”.[29]

Justice BH McPherson, writing extrajudicially, observed:

“Kent set himself the enormous task of integrating the laws of each State of the Union with those of England, as well as comparing the result to the legal systems of France, Holland and other continental nations. In this, his underlying purpose was twofold. One was to offset the prevailing mood of hostility in the United States to the continued use of the common law as something English, by showing, as he sought to do, that like the common law those other systems were based on natural law and so arrived at similar results in practice. His other purpose was to demonstrate the systematic or ‘scientific’ character of the common law … For many years Kent’s Commentaries held the stage as the standard legal reference work in America. Its underlying foundation of English law and its accuracy meant that it was soon being accepted and applied in England, Canada and Australia.”[30] 

Justice McPherson noted that “An electronic search of the English Reports registered over 100 ‘hits’ before 1865.”[31] It is not known what precise search term was used. The present writer has done his own electronic search of “Chancellor Kent” in the Supreme Court Library’s English Reports database for cases prior to 1865, which produced 150 results where reference was made to Kent’s decisions or his Commentaries. The subject matters of the cases in which Kent was cited included maritime law, insurance, partnership, contract, sale of goods, the Statute of Frauds, conflict of laws, water rights, vendor and purchaser, war and prize, statutory interpretation, limitation of actions, administration of estates, marriage, priorities, lunacy, remedies, accounts and inquiries, pleading, real property, deeds, time, mortgage, pledge, fraud on creditors, treaties, enemy aliens, sovereign immunity from suit, territorial sovereignty over coastal bays and joinder of third parties.

The writer has also searched for “Chancellor Kent” in the ICLR database of the English authorised Law Reports from 1865 to the present. This returned 47 “hits”, across diverse fields.

Justice McPherson went on to comment that, “Between them, Kent and Story not only naturalised English law and consolidated its place in the United States, they also rationalized the use, understanding and teaching of it in the place of its origin. It would not be the last occasion when the words of disciples of the common law from beyond the seas would be read in England.”[32]

As an early example of Kent’s Commentaries being cited by Australian courts, Justice McPherson referred to Rusden v Weekes (1861) 2 Legge 1406, a constitutional law decision of the Supreme Court of the Colony of New South Wales.[33]

Kent has continued to be cited by Australian courts and commentators. An Austlii search of “Chancellor Kent” in the High Court of Australia database produced fifteen results, where a reference is made either to a case decided by Kent or to his Commentaries. A search of “Commentaries on American Law” in the same database produced nine results.  The same searches across all Austlii databases returned 111 results (for “Chancellor Kent”) and 61 results (for “Commentaries on American Law”).

One such case is Austin v The Commonwealth of Australia, where the High Court held invalid a special Commonwealth tax on the judicial pensions of State judges.[34] Gaudron, Gummow and Hayne JJ said:

“The provision of secure judicial remuneration at significant levels serves to advantage and protect the interest of the body politic in several ways. Secure judicial remuneration at significant levels assists, as the United States Supreme Court has emphasised, to encourage persons learned in the law, in the words of Chancellor Kent written in 1826, ‘to quit the lucrative pursuits of private business, for the duties of that important station’.”[35]  

Another is ICM Agriculture Pty Ltd v The Commonwealth, a case concerned with water rights, where French CJ, Gummow and Crennan JJ said:

“The common law position in relation to flowing water, which adapted Roman law doctrine, was settled in Embrey v Owen. Baron Park adopted the view of Chancellor Kent that flowing water is publici juris in the sense that no-one has ‘property in the water itself, but a simple usufruct while it passes along’.”[36]

And in PGA v R, the High Court held that a husband can be guilty of raping his wife.[37] French CJ, Gummow, Hayne, Crennan and Kiefel JJ said:

“In his lecture entitled ‘Of Husband and Wife’, Chancellor Kent, after referring to the incompetency at common law of a married woman to deal with her property as a feme sole, went on to contrast the position in equity and described the procedural consequences as follows:

‘The wife being enabled in equity to act upon property in the hands of her trustees, she is treated in that court as having interests and obligations distinct from those of her husband.  She may institute a suit, by her next friend, against him, and she may obtain an order to defend separately suits against her; and when compelled to sue her husband in equity, the court may order him to make her a reasonable allowance in money to carry on the suit.’”[38] (footnotes omitted)

Furthermore, in Maguire v Makaronis, a case concerned with rescission for breach of fiduciary duty, Brennan CJ, Gaudron, McHugh and Gummow JJ said, after referring to a passage in the judgment of Rich and Dixon JJ in Langman v Handover[39]:

“Rich and Dixon JJ went on to consider the decision to the same effect of Chancellor Kent in Fanning v Dunham. There the Chancellor held that, where a borrower seeks relief in equity (such as delivery up and cancellation) in respect of a security on the ground of illegal usury, the plaintiff must, before being entitled to relief, pay or offer to pay the principal and so much of the interest as is lawfully due.”[40]

The other High Court cases referred to in the Austlii searches, decided between 1905 and 2022, deal with subject matters as diverse as:

• Discovery in equity in aid of foreign litigation;
• Constitutional law;
• Representative proceedings in equity;
• Joint tortfeasors;
• Native title;
• When property passes in wheat delivered under a contract for its storage;
• Whether action per quod servitium amisit is limited to menial or domestic servants;
• Contingent remainders;
• Fraudulent preferences;
• Alienation of property to defraud creditors;
• Immigration;
• Spousal privilege;
• Pawnbroking.

The said Austlii searches across all directories produced law review articles and cases of other Australian courts and courts of New Zealand concerned with a wide range of topics.

Conclusion

On 2 December 1898, Lord Lindley, then Master of the Rolls, wrote to John B Cassoday, Chief Justice of the Wisconsin Supreme Court, as follows:[41]

“Dear Chief Justice:

I have read with great interest your sketch of Scott and Marshall. I knew little or nothing of Marshall’s life tho’ I valued his great judgments very highly. I always look upon him and Kent as two of the greatest judges of whom I know anything. They seem to me to be far greater men than Story although not so widely known here as he. Thanking you for your courtesy in sending me your Brochure, I remain,

Nathan’l LindleyMaster of the Rolls.”

Whether or not Kent was a greater man than Story, it is clear that Kent was a great jurist who made a significant impact on American law and left an indelible mark on Anglo-Australian law. His influence continues to be felt especially in the High Court of Australia.

[1]               Palgo Holdings Pty Ltd v Gowans [2005] HCA 28, 221 CLR 249 [16].

[2]               “United States Influence on the Australian Legal System” (2018) 43(1) U WA L Rev 11, 12.

[3]               BH McPherson, The Reception of English Law Abroad, 493 (Supreme Court of Queensland Library 2007).

[4]               In reciting Kent’s background, the writer has drawn on Langbein, “Chancellor Kent and the History of Legal Literature” (1993) 93 Colum L Rev 547 and on other references indicated below.

[5]               A decision later to be emulated by the University of Pennsylvania, Dartmouth and Harvard: Horton, James Kent: A Study in Conservatism 1763-1847, p229 (New Jersey: Law Book Exchange 1939).

[6]               Both appointments were made by Governor Jay.

[7]               He was appointed by Governor Jay.

[8]               He was appointed by Governor Morgan Lewis, who was an ardent anti-Federalist, unlike Kent (as the Governor knew). See William Kent, Memoirs and Letters of James Kent, LL.D.: late chancellor of the State of New York, pp120-1 (Boston: Little, Brown, 1898).

[9]               William Kent, Memoirs and Letters of James Kent, LL.D.: late chancellor of the State of New York, p58 (Boston: Little, Brown, 1898); Horton, James Kent: A Study in Conservatism 1763-1847, p100 (New Jersey: Law Book Exchange 1939).

[10]             Judith S. Kaye, “Commentaries on Chancellor Kent” (1998) 74 Chicago-Kent L Rev 11, 17.

[11]             Langbein, “Chancellor Kent and the History of Legal Literature” (1993) 93 Colum L Rev 547, 569-570; Horton, James Kent: A Study in Conservatism 1763-1847, p154 (New Jersey: Law Book Exchange 1939).

[12]             William Kent, Memoirs and Letters of James Kent, LL.D.: late chancellor of the State of New York, pp116-8 (Boston: Little, Brown, 1898).

[13]             Judith S. Kaye, “Commentaries on Chancellor Kent” (1998) 74 Chicago-Kent L Rev 11, 19; Horton, James Kent: A Study in Conservatism 1763-1847, p157 (New Jersey: Law Book Exchange 1939).

[14]             He was appointed by Governor Daniel D Tompkins.

[15]             The Court of Errors was constituted by the New York Senate, the Supreme Court and the Chancellor, by analogy with the House of Lords. Members did not sit on appeals from their decisions.

[16]             For more detail on the state of law reporting at the time, and Kent’s contribution to its development, see Langbein, “Chancellor Kent and the History of Legal Literature” (1993) 93 Colum L Rev 547, 571 to 584.

[17]             William Kent, Memoirs and Letters of James Kent, LL.D.: late chancellor of the State of New York, pp 157-8 (Boston: Little, Brown, 1898).

[18]             Ibid, 159.

[19]             In colonial times, governors occupied the office of Chancellor.

[20]             Langbein, “Chancellor Kent and the History of Legal Literature” (1993) 93 Colum L Rev 547, 583-4.

[21]             Judith S. Kaye, “Commentaries on Chancellor Kent” (1998) 74 Chicago-Kent L Rev 11, 23 citing John Horton, Kent’s biographer.

[22]             Horton, James Kent: A Study in Conservatism 1763-1847, p211-3 (New Jersey: Law Book Exchange 1939).

[23]             Carson, “James Kent: Picture of Man as Lawyer, Judge and Author Presented by Series of Documents and Letters in His Own Hand-Writing and Hitherto Unpublished” (1921) 7 American Bar Association Journal 662, 670.  

[24]             He found a city of bricks; he left it a city of marble. Horton, James Kent: A Study in Conservatism 1763-1847, p197 (New Jersey: Law Book Exchange 1939).

[25]             James Kent, Commentaries on American Law, 4v (New York: O. Halsted 1826-1830). The first volume was published in 1826, the second volume in 1827, the third volume in 1828 and the fourth volume in 1830. Kent dedicated the work to William Johnson: see vol 4.

[26]             He worked on what was to be the 6th edition, which was published in January 1848, shortly after his death.

[27]             Judith S. Kaye, “Commentaries on Chancellor Kent” (1998) 74 Chicago-Kent L Rev 11, 27.

[28]             Story, Commentaries on the Conflict of Laws, iii-iv (Boston: Hilliard, Gray and Company, 1834).

[29]             2 Barbour’s New York Chancery Reports 646. This tribute also records sentiments expressed at a meeting of the New York Bar, showing the high esteem in which Chancellor Kent was held by the Bar and the grief felt on his passing.

[30]             BH McPherson, The Reception of English Law Abroad, 490-1 (Supreme Court of Queensland Library 2007) (footnotes omitted).

[31]             McPherson, ibid, p491 n 126.

[32]             McPherson, ibid, p493.

[33]             For a discussion of this case, see Hon Robert French AC, “United States Influence on the Australian Legal System” (2018) 43(1) U WA L Rev 11, 13.

[34]             [2003] HCA 3.

[35]             At [159] (footnotes omitted).

[36]             [2009] HCA 51 [55] (footnotes omitted).

[37]             [2012] HCA 21.

[38]             At [45] (footnotes omitted).

[39]             (1929) 43 CLR 334 at 356.

[40]             (1997) 188 CLR 449, 476-7 (footnotes omitted).

[41]             Cassoday (1902-3) 12 Yale LJ 146, 148.

Many excellent articles and presentations have been written or given touching upon Donoghue v Stevenson [1932] AC 562. The attention so given is entirely appropriate. The decision, especially Lord Atkin’s judgment, has been cited on countless occasions and has had a profound influence on Anglo-Australian law. But it is also worthwhile to spare a moment to reflect on a decision cited by the House of Lords in Donoghue v Stevenson, and the Judge behind that decision. The decision was MacPherson v Buick Motor Co, 217 NY 382, 111 NE 1050 (NY 1916), and the Judge behind it was Justice Benjamin N Cardozo.

In MacPherson v Buick Motor Co, it was held by the influential New York Court of Appeals in 1916 that a manufacturer of an automobile owed a duty of care in tort to a consumer injured whilst driving the vehicle, notwithstanding the absence of privity of contract.

First, a little about the man, Benjamin Cardozo.

Life and career of Cardozo J

B enjamin Nathan Cardozo, of Sephardic Jewish/Spanish-Portuguese heritage, was born in New York City on 24 May 1870 to Rebecca Nathan and Albert Cardozo. He had a twin sister, and they had four other siblings. His grandfather had been nominated a Justice of the New York Supreme Court, but died before he took office. Benjamin Cardozo’s own father was in fact a New York Supreme Court Justice, but he resigned amidst a judicial corruption scandal. This had a profound effect on Benjamin, who was determined to restore his family’s name.

Benjamin’s mother died in 1879, when he was still quite young.

At age 15, Cardozo attended Columbia College, where he earned his Bachelor’s degree followed by a Master’s in Political Science. Then, in 1889, he attended Columbia Law School. He was by all accounts a brilliant student. After two years there, he passed the New York Bar exam in 1891 and began practising law in New York City alongside his brother. He remained in practice with Simpson, Warren and Cardozo until 1913. He gained an esteemed reputation in commercial law.

In 1913, having practised for about 23 years, Cardozo was elected to a 14 year term on the New York Supreme Court, due to start on 1 January 1914. But in February 1914, he was appointed as a temporary Judge on the New York Court of Appeals, the State’s highest court. In 1917, Cardozo J became a permanent member of the Court of Appeals. In 1926, he was elected to a 14 year term as Chief Judge of that Court.

After having served 18 years on the Court of Appeals, Cardozo CJ resigned in 1932 to take up an appointment as an Associate Justice of the Supreme Court of the United States. Even though he was a Democrat, he was appointed by the Republican President, Herbert Hoover. His appointment was met with universal acclaim. The Senate confirmed his appointment by a unanimous vote.

Cardozo J was on the US Supreme Court for six years, supporting a number of Franklin D Roosevelt’s New Deal initiatives, as a member of the so-called “Three Musketeers” along with Justices Brandeis and Stone.

He suffered a heart attack in 1937 and a stroke in 1938. He passed away, aged 68, on 9 July 1938, in Port Chester, Rye, New York State.

He had never married. He was a modest man of high principles, loved by his colleagues.

In addition to his many influential judicial decisions, he was a prolific extra-judicial writer. Amongst other works, he is particularly renowned for his work “Nature of the Judicial Process” (1921), designed for judges but which is standard reading for American law students.

MacPherson v Buick Motor Co

Donald MacPherson’s 1911 Buick collapsed on the road to Saratoga Springs when he was driving just 8 miles per hour. He was thrown out and injured. One of the wheels contained defective wood, and the spokes had “crumbled into fragments”. Mr MacPherson had bought the Buick from a retailer. The retailer had bought the car from Buick Motor Co. Buick Motor Co was the manufacturer of the vehicle, though it had purchased the wheel as a component part from Imperial Wheel Co of Michigan. There was evidence that the defect could have been discovered by Buick Motor Co had it carried out a reasonable inspection. The Supreme Court held that Buick Motor Co was liable in negligence to Mr MacPherson, which decision was upheld by the Supreme Court Appellate Division. By majority, the Court of Appeals held that the decision of the Appellate Division should be affirmed.

Previously, it had been the rule in New York, based on the English decision of Winterbottom v Wright (1842) 10 M & W, 152 ER 402, that a manufacturer’s liability for negligence only extended to purchasers with whom they were in privity of contract. That English case concerned a horse drawn carriage. The New York cases recognised an exception to that rule, where the product was “inherently dangerous”, the leading example of which was a case concerning poison which had been wrongly labelled as dandelion extract: Thomas v Winchester, 6 NY 397 (NY 1852). But as the trial judge had summed up to the jury in MacPherson v Buick, “an automobile is not an inherently dangerous vehicle”. The then Chief Judge also noted in dissent that an automobile moving at only 8 miles an hour “was not any more dangerous to the occupants of the car than a similarly defective wheel would be to the occupants of a carriage drawn by a horse at the same speed”.

In MacPherson v Buick, however, Cardozo J, in delivering the leading judgment, closely analysed the cases said to be authority for the exception, pointing out the inconsistencies and uncertainties to which the exception gave rise, and the illogicality of the distinction between products inherently dangerous and those which were dangerous because of negligent construction. He also referred to the need of the law to keep a-pace with developing technology. He considered that what those earlier cases in fact decided needed to be re-visited. He said:

“The question to be determined is whether the defendant owed a duty of care and vigilance to any one but the immediate purchaser… We hold, then, that the principle of Thomas v Winchester is not limited to poisons, explosives, and things of like nature, to things which in their normal operation are implements of destruction. If the nature of a thing is such that it is reasonably certain to place life and limb in peril when negligently made, it is then a thing of danger. Its nature gives warning of the consequences to be expected. If to the element of danger there is added knowledge that the thing will be used without new tests, then, irrespective of contract, the manufacturer of this thing of danger is under a duty to make it carefully. That is as far as we are required to go for the decision of this case. There must be knowledge of a danger, not merely possible, but probable… There must also be knowledge that in the usual course of events the danger will be shared by others than the buyer… If he is negligent, where danger is foreseen, a liability will follow.”

His Honour found those factual matters to be made out in that case. Cardozo J observed, “The dealer was indeed the one person of whom it might be said with some approach to certainty that, by him the car would not be used.” He noted more generally that “it is possible that even knowledge of the danger and of the use will not always be enough. The proximity or remoteness of the relation is a factor to be considered.” But proximity or remoteness were not a problem in the instant case when the above mentioned factors were present.

These pronouncements do not seem all that remarkable to the modern day Anglo-Australian lawyer.

Donoghue v Stevenson

It is not surprising that MacPherson v Buick should have been referred to, and cited by, the House of Lords. MacPherson v Buick was the first common law case dealing with the product liability owed to a consumer by a manufacturer of mass produced products and upholding a duty of care in negligence.

Lord Atkin had this to say (at pages 598-9):

“It is always a satisfaction to an English lawyer to be able to test his application of fundamental principles of the common law by the development of the same doctrines by the lawyers of the Courts of the United States. In that country I find that the law appears to be well established in the sense in which I have indicated. The mouse had emerged from the ginger-beer bottle in the United States before it appeared in Scotland, but there it brought a liability upon the manufacturer. I must not in this long judgment do more than refer to the illuminating judgment of Cardozo J in MacPherson v Buick Motor Co in the New York Court of Appeals, in which he states the principles of the law as I should desire to state them, and reviews the authorities in other States than his own. Whether the principle he affirms would apply to the particular facts of that case in this country would be a question for consideration if the case arose. It might be that the course of business, by giving opportunities of examination to the immediate purchaser or otherwise, prevented the relation between manufacturer and the user of the car being so close as to create a duty. But the American decision would undoubtedly lead to a decision in favour of the pursuer in the present case.”

This was high praise indeed.

The qualification by Lord Atkin in the penultimate sentences in that paragraph was unnecessary, because Cardozo J indicated at several points in his judgment, that the principle would not apply if there was, and was known to be, a reasonable opportunity for intermediate examination or examination before use.

Lord Atkin then continued to state the principle as it applied to English and Scots law (at page 599):

“… a manufacturer of products, which he sells in such a form as to show that he intends them to reach the ultimate consumer in the form in which they left him with no reasonable possibility of intermediate examination, and with the knowledge that the absence of reasonable care in the preparation or putting up of the products will result in an injury to the consumer’s life or property, owes a duty to the consumer to take that reasonable care”.

This was masterful in its reduction of the principle to one sentence.

Even if Lord Atkin only “drew support for his own approach” [1] from MacPherson v Buick, the latter decision still had an influence on the result as is evident from Lord Atkin’s glowing praise.

Of course, there is much more to Lord Atkin’s speech than a statement of and upholding of the principle of a manufacturer’s product liability to a consumer. It has been pointed out there are similarities between Lord Atkin’s neighbour principle and the judgment of Cardozo CJ in the case of Palsgraf v Long Island Railway Co, 248 NY 339 (1928). [2] But it is unlikely Lord Atkin was aware of that case, as Palsgraf was evidently not cited in argument, and it is not referred to in any of the judgments, in Donoghue v Stevenson.

Moving on to other Law Lords, the above passage from Cardozo J’s judgment was set out by Lord MacMillan (one of the other majority Judges in Donoghue v Stevenson) at [1932] AC 562, 617-8. That also speaks volumes.

Lord Buckmaster, in dissent in Donoghue v Stevenson, distinguished MacPherson v Buick on the basis that it was a decision that “a motor-car might reasonably be regarded as a dangerous article”: [1932] AC 562, 577. Lords Atkin and MacMillan did not agree with that interpretation of MacPherson v Buick, with Lord Atkin referring (as had Cardozo J) to the illogicality of the distinction between a thing dangerous in itself, and a thing which becomes dangerous by negligent construction (see pages 595-6 of [1932] AC). The fact that Lord Buckmaster felt the need to distinguish a decision from another jurisdiction is testament to the force of its reasoning.

Whether Cardozo J expanded the exception in Thomas v Winchester or laid down a new principle altogether does not matter. They are one and the same thing as a matter of practice. Cardozo J so expanded the “exception” to the point where the privity rule, if not “cut out and extirpated altogether”, was “left with the shadow of continued life, but sterilized, truncated, impotent for harm”: Nature of the Judicial Process, pp98-9.

Cardozo J’s legacy

What is remarkable about MacPherson v Buick Motor Co is not only the significance of what it decided, and the fact that it was the first case to so decide. It is also the fact that it was decided in 1916 barely two years after Cardozo J’s appointment to the Court of Appeals, whilst he was still a temporary judge, and the fact that it was a majority decision, in which Cardozo J’s judgment was given notwithstanding the strong dissent of the then Chief Judge, Willard Bartlett.

Indeed, Cardozo J’s boldness and eloquent writing style are amongst the reasons why Cardozo J/CJ’s judgments have had such a profound effect, not only in the United States but also elsewhere.

MacPherson v Buick is not the only occasion where the judgments of Cardozo J/CJ are cited by Anglo-Australian courts. An austlii search of “Cardozo” in the High Court of Australia directory alone produced a staggering 100 results, including his decisions from a wide range of contexts, as well as his extra-judicial writings.

A few of the more well known examples however are:

• Wood v Lucy, Lady Duff-Gordon , 222 N.Y. 88; 118 N.E. 214 (N.Y. 1917) (“The law has outgrown its primitive stage of formalism when the precise word was the sovereign talisman, and every slip was fatal. It takes a broader view to-day. A promise may be lacking, and yet the whole writing may be ‘instinct with an obligation,’ imperfectly expressed. If that is so, there is a contract”);

• Loucks v Standard Oil, 120 NE 198, 201 (NY 1918) (“The courts are not free to refuse to enforce a foreign right at the pleasure of the judges, to suit the individual notion of expediency or fairness. They do not close their doors, unless help would violate some fundamental principle of justice, some prevalent conception of good morals, some deep-rooted tradition of the common weal”);
• Beatty v Guggenheim, 225 NY 380 (NY 1919) (“A constructive trust is the formula through which the conscience of equity finds expression. When property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest, equity converts him into a trustee”);
• Wagner v International Ry Co, 133 NE 437 (NY 1921) (“Danger invites rescue”);
• Meinhard v Salmon, 249 NY 458, 164 NE 545 (NY 1928) (“A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honor the most sensitive, is then the standard of behaviour … the level of conduct for fiduciaries [has] been kept at a higher level than that trodden by the crowd”);
• Ultramares Corp v Touche, 174 NE 441 (NY 1932) (no duty of care where it would lead to “a liability in an indeterminate amount for an indeterminate time to an indeterminate class”);
• Baldwin v GAF Selig Inc, 294 US 511 (1935) (“The Constitution was framed under the dominion of a political philosophy less parochial in range. It was framed upon the theory that the peoples of the several states must sink or swim together, and that in the long run prosperity and salvation are in union and not division”);
• Palko v Connecticut, 302 US 319 (1937) (freedom of speech is “the matrix, the indispensable condition, of nearly every other form of freedom”).

As Lord Atkin shows us all by his example, we should not be reluctant to look to American authorities where relevant. There are many instances where Anglo-Australian law has been influenced by American law, and there is no reason why this should not continue to be so. This is not only at the common law level, but also at the statutory (including constitutional) level. For example, it is not widely known that the Judicature Acts 1873-1875 were influenced by the “Field” Code of Civil Procedure (NY) of 1848, which abolished the forms of action as well as the procedural distinction between suits in equity and actions at law. That followed upon the abolition of the Court of Chancery as a separate court in New York State in 1846. The Field Code preceded the Common Law Procedure Act of 1852.

The above is not to say that cross fertilisation is a one way street. Nor is it to say that we should always reach the same conclusions. But the way American lawyers have grappled with similar problems means that their jurisprudence has been and can continue to be of assistance in resolving disputes according to our own standards. As Cardozo J himself observed in of Loucks v Standard Oil, 120 NE 198, 201 (NY 1918), “We are not so provincial as to say that every solution of a problem is wrong because we deal with it otherwise at home”.

Dr Stephen Lee, Barrister

[1] Chapman, The Snail and the Ginger Beer: The singular case of Donoghue v Stevenson, Wildy, Simmonds & Hill, 2010, p42.

[2] Knapp, International Encyclopaedia of Comparative Law (Martinus Nijhoff 1983), p71.

By Stephen Lee

In an earlier article, I dealt with interest in equity, with specific reference to the administration of trusts, and claims against trustees and other fiduciaries. This article deals with interest in the context of decrees of rescission.

It was seen in the previous article that interest in equity, including compound interest, can serve two goals, namely restitution for profit derived from the use of money and compensation for being held out of money. Those twin goals can be seen at work when rescission is sought as a remedy.

Take the case of a contract rescinded for misrepresentation. Where say the defendant is a vendor who exaggerated the worth of a business. On rescission the defendant will have to restore the purchase price at interest. The buyer may also have suffered trading losses, for which he is entitled to be indemnified, also at interest.

But in cases of rescission, it is not only the defendant who may have to pay interest. Sometimes the plaintiff has received money under or by reason of the contract and if so will have to restore that money with interest.

For example, when a constituent enters into a contract to sell property to or borrow money from a fiduciary, the constituent will commonly, as a condition of rescission, be required to restore that which was obtained pursuant to the contract at interest.[1]

Historically, either 4% or 5% was regarded as the appropriate rate, depending on whether the trustee rate or a mercantile rate was justified, and commonly simple interest was awarded.[2]  However, as in other contexts considered in the earlier article, more recent decisions moved away from the old 4%/5% rates, whilst still mindful of the need to distinguish between cases where a mercantile rate is appropriate and those where a lower rate should be applied. Modern courts may also be more willing to award compound interest when appropriate.

It is not useful to stay to analyse all of the old cases here. It would be surprising if the selection of the appropriate rate and the basis of the calculation simply turned on a distinction between who was the “innocent” party and who was the “wrongdoer”. That would be tantamount to admitting that an award of interest serves a punitive purpose.

On the contrary, the cases show that the ultimate enquiry is to seek what is just in the circumstances of the case which, in the rescission context, translates into doing what is “practically just” in order to achieve substantial restitutio in integrum. In approaching that ultimate question, once again particular regard should be had to one or both of the goals of (1) preventing a party from profiting from the use of the money (but not punishing a party for breach of fiduciary duty or unconscionable conduct) and (2) compensating (but not over-compensating) a party for being deprived of the use of the money. Equitable presumptions may assist in approaching these various tasks. But once again these presumptions do not replace the underlying enquiry.

It is no hard thing to conclude that a party who has deprived the other of money earned at least simple interest at least at the applicable trustee rate on the money, or that the party deprived would have earned at least that much on the money. The selection of the rate and basis of interest can be the result of inference based on slight evidence aided where applicable by presumptions. That should include a presumption that the plaintiff, had s/he not been deprived of the money would have made the most beneficial use of the money open to him/her.[3]  It should also include a presumption that the most beneficial use was made of money where it was obtained by fraud. But doing what is practically just does not always mean that interest will be ordered for the full amount or for the entire period between payment and repayment.

Three well known House of Lords decisions are examples of interest awards at the trustee rate. The first is Erlanger v New Sombrero Phosphate Company. [4]  The second is Adam v Newbigging.[5] The third is Spence v Crawford.[6] It is helpful to stay to consider these.

Erlanger v New Sombrero Phosphate Company

In Erlanger, the promoters of a company purchased a Crown lease of an income-producing island in the West Indies in 1871 (Sombrero Island), and sold it to the company some days later at double the price.[7] The syndicate had paid £55,000 for the island, and sold it to the company for £80,000 in cash plus £30,000 in shares. The purchase was approved by the board of directors, the membership of which had been arranged in such a way that proper scrutiny of the purchase transaction was unlikely to occur. It was subsequently ratified by a general meeting, attended by many of the investors who had subscribed for shares in the company following the issue of a prospectus. But they were not aware of the price that the vendors had themselves paid for the island, nor who the true vendors were. When the investors subsequently discovered the true facts, they caused new directors to be appointed, and the company sought to rescind the purchase.

At first instance, the Vice Chancellor dismissed the company’s bill without costs, but the House of Lords (delivering its judgment in 1878) upheld the decision of the Court of Appeal to set aside the purchase. As part of the decree, the syndicate was ordered to repay £80,000 with simple interest at 4% from the time of receipt of the money, and to give up the £30,000 worth of shares.[8] In return, the company had to reconvey the lease of the island and account for any profit derived from the island in the meantime. No reasons were given for the award of interest. It may not have been in dispute. But it is plain that an award of that much was justified, as it could be inferred or presumed that interest at 4% was or would have been earned. But it is interesting to ponder the question why the interest award was so limited.

The chief protagonist, Baron Erlanger, was a banker. He was the prime mover behind the syndicate and held the greatest individual stake in the venture. The other members of the syndicate were friends and acquaintances whom Baron Erlanger persuaded to put up money to buy the island with a view to on-selling it at a profit; and he managed the enterprise on behalf of the syndicate.[9] Whilst Baron Erlanger was privy to all decisions relating to the scheme or its execution, the rest of the syndicate was not.[10] Also, it is necessary to consider what cash profit was left in the hands of the syndicate members. Of the total sale price of £110,000, £55,000 repaid the syndicate for their outlay to buy the island. Of the £55,000 gross profit, £30,000 was received by share issues to the syndicate members. It is unlikely the company would have paid dividends, although some of those shares may have been on-sold and the sale proceeds could have been used to make further profits.[11] There were also costs involved in executing the scheme, including payments to solicitors and other agents. Therefore, only a small proportion of the £110,000 purchase price represented cash which the syndicate members could have used to earn further profits.[12] An award of mercantile interest against the syndicate on the £80,000 ordered to be repaid may well have made the syndicate pay more than the profit they derived, and punished them for their breach of fiduciary duty. Moreover, given that little was known about the most of the syndicate members, and they were not privy to the fraud, there was not enough to presume that they earned mercantile interest on even the cash profits they derived from the scheme. Even though such a presumption could be made against Baron Erlanger, who was a financier and masterminded the scheme, it is not clear how much cash profit he had received from the venture, as opposed to shares. He had also offered, at an early stage of the dispute, to give up to the company the profit he had made in cash and shares from the transaction; but the other members of the syndicate did not make a similar offer.[13] That, together with the delay until the House of Lords delivered judgment in 1878, after two hearings, may have contributed to the view that it would not have been just to award mercantile interest against Baron Erlanger let alone the whole syndicate.

Alternatively, compensatory reasoning did not justify an award of interest at greater than the trustee rate. It could readily be inferred or presumed that, if the true facts had been known and the company had not ratified the purchase, the company would have earned simple interest at the trustee rate on the money. But there was insufficient evidence to support anything more. The company, having been incorporated for the specific purpose of exploiting the phosphate on Sombrero Island, would either have been wound up or the objects of the company amended to allow for the company to carry on other activities. In the meantime, it was possible to infer or presume that truly independent directors would have invested the funds in authorised trustee investments at 4%.[14] It would have over-compensated the company to award 5% on £80,000.

Adam v Newbigging

In Adam v Newbigging, Mr Newbigging was induced in 1882 to become a member of a partnership by innocent misrepresentations as to the financial condition of the business.[15] The business subsequently failed. By a decision in 1888, the House of Lords held that Mr Newbigging was entitled to rescind the contract. It was further held that Mr Newbigging should have his capital repaid with interest at 4% from the times when the capital was brought in up to judgment, after deducting the sums drawn out by Mr Newbigging with interest up to the same time, and the Adams were to pay the balance to Mr Newbigging with interest at the same rate until payment.[16] Mr Newbigging had sought 5% interest. But this could not be justified on a profit-stripping approach. The business operated at a loss, and there was no other reason to believe that the Adams had made a profit from the use of Mr Newbigging’s money. There was no fraud from which one could presume that a profit had been made by the Adams.[17]

It was less obvious why the mercantile rate was not considered appropriate by taking a compensatory route. Mr Newbigging was in trade. The fact that this was his first business venture should not have altered that fact. Why was it not then presumed that he would (but for the misrepresentation) have made the best use of the money available to him, by entering into some other business of a similar kind? The answer could be that Mr Newbigging was still in the army, in India, when the misrepresentations were made and on the basis of which he was induced to give up his commission.[18] The Court may have considered that it could not infer or presume that he would have gone into business if the misrepresentations had not been made. He may still have stayed in the army. Mr Newbigging was unlikely to have testified that he would have given up his commission anyway. In those circumstances, it was correct to conclude that he would have earned interest at the trustee rate, not mercantile interest, if he had not purchased the business.

Spence v Crawford

Spence v Crawford, a Scottish appeal decided in 1939, involved rescission by a vendor.[19] Mr Spence, a holder of one half of the issued shares in a proprietary company, sold his shares to Mr Crawford, the other shareholder for £2,250. The purchaser induced the sale by fraudulently falsifying the accounts of the company. Of the purchase price, £900 was to be made up by Mr Crawford paying out a loan which the vendor had granted to the company, and £1,350 was to be paid in cash on deferred terms. The House of Lords held that Mr Spence was entitled to rescind. As part of the decree, Mr Spence was required (inter alia) to refund the £1,350 plus interest at 4% from the time of receipt, and pay a further amount to compensate Mr Crawford for a loss occasioned by reason of the transaction (arising in a respect that is not presently material to discuss), subject to Mr Crawford on the other side transferring back the shares and accounting for dividends received on the shares. The £900 did not come into play as it was actually repaid by the company, not by Mr Crawford.

Interest at 4% on the sale price of the shares (£1,350) was something which Mr Spence had offered to pay from the time of payment of the sale price, and the rate was agreed to by Counsel for Mr Crawford if Mr Spence were otherwise successful.[20] It is not clear if the compensation payable by Mr Spence, or the sums due by Mr Crawford on account of dividends, carried interest. These sums were also the subject of agreement, with the House of Lords leaving it to the parties to agree on the amounts due “including interest where properly payable”.[21] Whilst it is not clear, it seems that the parties may not have charged interest on the compensation and the dividends.[22]

Even though it was the subject of agreement, an award of interest on the £1,350 sale price was plainly justifiable lest Mr Spence be left unjustly enriched, if not also to compensate Mr Crawford for loss of use of the £1,350. It could certainly be inferred or presumed that 4% was earned by Mr Spence. But given the agreement of Counsel there was no need for the Court to consider whether a mercantile rate was justified. Most likely 4% was appropriate. The report discloses no evidence that Mr Spence was in trade. He did have his stake in the company that he had sold to Mr Crawford, but there was presumably no evidence that Mr Spence was otherwise in trade or that he had used the £1,350 to earn further profits. Given that Mr Spence was not a fraudster, but the innocent victim, it could not be presumed that he earned a mercantile rate.

Looking at matters from a compensatory angle, the report does not refer to any evidence that Mr Crawford (the purchaser) had borrowed to pay the £1,350. He may have funded at least the £1,350 out of the £4,067 in dividends he received on the shares the subject of the action for which he had to account and/or out of a similar amount he would have received on his own (previously held) shares. Mr Crawford was in trade, given his own previously held shares in the company. But it was not necessary to explore whether he would otherwise (but for the fraud) have invested the money in the company to earn further profits, and even if he would have done so he only would have earned one-half of the profits. Or perhaps it was not appropriate to award higher than 4% given the extremely low interest rate environment at the time. [23]

Mercantile Interest

It is now convenient to turn to some cases where mercantile interest was awarded. In two older cases where the vendor claimed rescission on the ground of fraudulent misrepresentation, the vendor was required to repay the purchase price received at 5%.[24] Whilst the reports of these cases are unclear, both seemed to involve income producing real properties. In those circumstances, it may have been inferred or presumed that the purchasers would have used the money in business if they had not made the particular purchases that were set aside; perhaps by buying an alternative business. It was not clear whether the purchaser had borrowed to fund the purchase price. So the decisions are justifiable by adopting a compensatory path to interest. There was nothing in the reports that would have justified a conclusion that the vendors (the innocent parties) made 5% on the purchase money.

There are also a number of cases involving claims to set aside usurious bonds[25] or “catching bargains” with expectant heirs and reversioners,[26] where the plaintiff’s relief was conditioned on restoring monies obtained by way of loan together with interest at the then mercantile rate of 5%. In an 1898 Victorian catching bargain case, 6% was allowed having regard to the higher rates then prevailing in that Colony.[27] In cases where the borrower seeks rescission, a condition of relief is typically restoration of the money borrowed and interest. In this respect, it would not usually be reasonable to apply the trustee rate because the lender is in the business of lending money at commercial rates, and the borrower has had the benefit of the use of the money, a benefit which otherwise they would have had to pay for. In these circumstances, fair value for the use of the money (restitution measure) or fair compensation for the loss of the benefit of it (compensation measure) requires a commercial rate, in the older cases typically 5%.

In one case, the lender was not in the business of lending, but a mercantile rate was still appropriate because the borrower would have had to pay commercial rates to get the money on the market. [28] That was a case where a solicitor was a chargee of the client, and had acquired the property of his clients at a court-ordered sale in breach of the purchasing rule, and by using fraud and pretence.

The tenor of these loan cases was endorsed by the High Court in 1997, as shall be seen below.[29]

The next example of an award of mercantile interest is a 1917 English case.[30] There, a stockbroker, pretending to execute a mandate to buy shares in a specific company for a client, sold his own shares in that company to his client. The broker had acquired those shares in virtue of him having been a promoter in that company. The broker did not obtain the client’s fully informed consent. The client elected to rescind upon discovering the fraud, the shares having since fallen in value. The broker was ordered to refund the purchase price, together with interest at 5%, less a credit for dividends which the plaintiff had received in the meantime. In return, the plaintiff had to re-transfer the shares to the broker. Reasons were not given for applying the mercantile rate, but it was clearly correct. The stockbroker was in the business of stock speculation and he had also acted fraudulently. In the absence of countervailing evidence, it was therefore appropriate to presume that the broker used the purchase price in his trade and earned mercantile interest on it. It is not clear why compound interest was not ordered.

Alati v Kruger

Another example of mercantile interest is the well-known High Court decision in Alati v Kruger, a 1955 appeal from Queensland.[31] This was a case of rescission by the purchaser. Mr Kruger was induced to buy Ms Alati’s fruit business at a cost of £700 in reliance on fraudulent misrepresentations including one that the average takings were £100 per week. The takings immediately proved to be much less than that, but proceeded to get even worse in part because a supermarket opened across the road (a fact of which Ms Alati had been aware). In many weeks Mr Kruger made losses, even without allowing wages for himself. Upholding Mr Kruger’s prompt rescission of the purchase, the High Court ordered (inter alia) that Ms Alati (the vendor) restore the purchase price of £700, and Mr Kruger was to restore chattels and an inquiry was ordered into what sum if any Mr Kruger should pay to Ms Alati by way of allowance for stock-in-trade and other benefits received by Mr Kruger under the contract which could not be restored. The High Court ordered Ms Alati to pay interest at 5% on £700 from the date of payment until repayment (as had the trial judge).[32]

No reasons were given by either the High Court or the trial judge as to why 5% was selected as the rate of interest. Ms Alati had never actually received the £700, as Mr Kruger had paid the purchase money to the real estate agent, who paid £657 into Court after deducting agent’s commission.[33] It is hard to imagine that 5% would have been earned on those moneys in the court’s trust account. That payment into court was about one month after settlement of the purchase contract.[34] Therefore, Ms Alati did not profit from the use of the purchase money, and the award of mercantile or any interest could not be justified on the basis that she did. It could only be justified on the ground that Mr Kruger needed to be compensated for having been held out of the £700. The various reports do not say whether Mr Kruger had borrowed to fund the purchase. Nor do they refer to any evidence as to whether he was otherwise in trade. He had not run fruit businesses before. But Mr Kruger was in trade because of the purchase that he had been deceived into making. The case should probably be seen as one where it was inferred or presumed that Mr Kruger would have bought another (profitable) business if he had not made this purchase. In that way, he would have earned mercantile interest on his money but for this purchase, assisted by a presumption that he would have made the best use of the money available to him.

An interesting question is why compound interest was not ordered. The matter may not have been argued. The contract was made on 15 June 1954 and presumably settled about a month after that. The moneys were paid directly into Court by the agent around the time proceedings were commenced in July 1954. Judging by the High Court’s order, that is where the moneys remained until the High Court’s judgment on 29 November 1956. As Ms Alati never had the use of the moneys, it could not be presumed that she earned compound interest. As for Mr Kruger, there was presumably no evidence that he incurred borrowing costs at compound rates. Perhaps it was thought that there was insufficient evidence of the activity he would have carried on to support a presumption that he would have earned compound interest. It was probably also relevant that it was only a little over two years since Mr Kruger paid the purchase price.

Munchies Management Pty Ltd v Belperio

A somewhat unusual set of facts arose in a 1988 Full Federal Court case, Munchies Management Pty Ltd v Belperio.[35] This matter, which originated in the South Australian District Registry, concerned s 87 of the then Trade Practices Act 1974. It was a case, like Alati v Kruger, where the plaintiffs had purchased a business, in this case a restaurant, bar and cafeteria business, in reliance on misrepresentations from the vendor which were fraudulent in the Derry v Peek sense (although fraud was not necessary to be shown to make out a case for contravention of s 52). In setting aside the contract under s 87, the Full Federal Court required the refund of the purchase price, together with interest at 10% from the date of payment to the date of court orders. It did so because such orders “may properly be considered as reducing the loss or damage suffered within the sense of s 87 of the Act”.[36] But that does not mean that the case is unhelpful in regard to interest awards in equity; on the contrary, the Court seemed to regard it useful to derive assistance from rescission in equity in its approach to s 87.[37]

The Court did not describe the rate in terms of the language of mercantile versus trustee rate. The Court noted that this was the rate adopted by the trial judge.[38] Forster J (the trial judge) did not explain why he selected 10% either.[39] Yet the fact that interest was limited to 10% was squarely in issue in the appeal. At that time, interest rates were very high. In the writer’s view, this rate was the result of a choice that had to do with the somewhat unusual facts of the case and the legislative confines within which s 87 of the Trade Practices Act operated.

If the claim had been brought in equity, it could have been presumed that the vendor earned a commercial rate of interest on the money, as he had been fraudulent. However, a profit-stripping approach may not be appropriate for s 87. In like manner, it may not have been appropriate to presume in a s 87 case that the vendor earned compound interest. But even in equity, compound interest may not have been awarded anyway, for two reasons. First, the purchasers acted quickly in rescinding. The contract was dated 14 November 1986. Settlement occurred in January 1987. The purchasers rescinded on 24 April 1987. Proceedings were commenced on 12 August 1987. It appears that the purchase price was repaid with interest on about or shortly after 9 June 1988, the date of the judgment of Forster J. The vendors had therefore only been kept out of their money for 1.5 years. Second, about one-half of the purchase price represented the discharge of a chattel lease. This constituted a saving to the vendor, not ready cash. It was not explored whether the vendor saved itself compound interest.

On the other hand, one would have thought that a mercantile rate of interest was justified based on compensatory reasoning. The Belperio’s were in trade in the sense that they purchased the business the subject of the proceedings. They already had other business interests, namely residential property investments and a market garden.[40] They had borrowed virtually the entirety of the purchase price for the business, at rates of up to 17.5% and no doubt paid compound interest. It was found that the Belperio’s, to their knowledge, could not have serviced the borrowings out of the revenue from the restaurant business even if the representations had been correct. Those facts were enough to warrant an inference that the Belperio’s would have purchased some other business and would have earned profits for which a mercantile rate of interest was proper compensation.

The Belperio’s had sought the full amount of interest they had paid on the borrowings. This was sought either as damages under s 82 (by analogy to deceit) or by way of an indemnity for trading losses under s 87 (by analogy to indemnity in equity). That claim was rejected as lacking the appropriate causal connection or too remote:[41]

The indemnity thus was limited to detriments suffered as “a direct consequence of the fraud”; accordingly, supervening causes such as an error of business judgment by the plaintiff in the arrangement of his affairs by, for example, borrowing from a third party greater sums than he could repay or service, may take a loss beyond the scope of an indemnity: cf Gould v Vaggelas (1985) 157 CLR 215 at 221—2 ; 56 ALR 31; Yorke v Ross Lucas Pty Ltd 69 FLR at 136; Milner v Delita Pty Ltd (1985) 61 ALR 557 at 581…. [I]t is apparent that the purchasers made a decision to borrow a very high proportion of the purchase price in the knowledge that even if the representations as to the turnover of the business, upon which they relied, had been made good, the prospective profits of the business would have been insufficient to service the purchasers’ borrowings. The interest charges were a cost that the purchasers were prepared to bear and were not (in the sense we have earlier explained) an item of loss suffered by reason of or as a result of the falsity of the representations. The purchasers must have carried the hope that they had the capacity to meet these costs from their other resources or by improving the performance of the business.

The Belperio’s loss was ameliorated but only in part by the Court’s decision to award interest on the unrefunded purchase price, which was allowed at 10% simple interest. As noted above, neither the trial judge nor the Full Court explained the choice of 10% simple interest.[42] If it was appropriate to compensate the Belperio’s for losing the opportunity to make commercial profits from another viable business, or even to allow compensation for the borrowings, 10% seems below commercial rates at that time. The practice of the Federal Court at that time, when awarding interest under s 51A of the Federal Court of Australia Act 1976, was generally to apply the rates adopted by the courts of the State in which the Court sat.[43] There was no reason why a similar practice could not apply in cases under s 87 of the Trade Practices Act. But, at that time, the Supreme Court of South Australia adopted 18-19% as the rate for statutory pre-judgment interest.[44] The Supreme Court adopted 10% as the rate for overdue legacies, more akin to a trustee rate.[45]

In the writer’s view, the rate of 10% simple interest was adopted as a kind of “rough and ready” rule to mould the remedy to fit the facts. The Belperio’s were partly to blame because they borrowed too much. It was clear they could not get mercantile interest on the whole sum borrowed. The calculation of interest would be different if they had paid a lower price for another suitable business, and all the more so if they had borrowed a lesser proportion of the overall purchase price of that notional business. If they had to pay interest to a commercial lender on those borrowings in a lesser principal amount, the interest paid by them would be less than the interest they in fact paid. On the other side, there would presumably be a question of interest foregone on the increased cash they would have had to put in to lower the gearing of the investment. It could also be looked at in terms of the profits the Belperio’s could be expected to earn if they had bought another viable business. It would be very difficult to quantify all these imponderables as an exact science. In the writer’s view, what the Court did was take a lower rate, 10% simple interest, and apply it to the whole of the purchase price in fact paid instead of working out a discounted purchase price and applying a mercantile rate to that discounted amount. As part of that exercise, simple interest was probably sufficient to compensate the Belperio’s, especially given the brevity of the period between the settlement of the contract and repayment.

An alternative explanation is that it was inferred that the Belperio’s lost simple interest at the trustee rate, and 10% was regarded at that time as an appropriate trustee rate.

The case re-affirms that the purpose of an award of interest is not to punish a wrongdoer, and that interest can be limited by reference to considerations of causation and remoteness. It also an example of interest being awarded to compensate a party for the cost of borrowing.[46]

Compound Interest

Some rescission cases will now be mentioned where compound interest was awarded. In a 1994 decision of the Full Federal Court, it was recognised that a purchaser of a truck induced by innocent misrepresentation could, on setting aside the sale, have repayment of the purchase moneys together with interest at 12.25% (a rate agreed at trial), calculated at compound rates, because the purchaser incurred compound interest on borrowings used to purchase that truck.[47] However, interest was not allowed for the whole period from the time of purchase in 1989, but only from the time of the election to rescind one year later. That is because the purchaser had the opportunity to use the truck in its business for one year, which offset any right to interest during that period.

A leading case where a fiduciary was required to pay compound interest as a condition of rescission was Maguire v Makaronis, a 1997 appeal from Victoria.[48] There, the High Court held that borrowers could rescind a mortgage for breach of fiduciary duty, but only on terms that they repay the loan amount together with reasonable interest. The loan was an interest-only loan by way of bridging finance to enable Mr and Mrs Makaronis to purchase a poultry farm. The mortgagee was Messrs Maguire and Tansey, the solicitors in the purchase transaction for Mr and Mrs Makaronis. The solicitors did not disclose to their clients that they were the mortgagees. Mr and Mrs Makaronis had believed that the mortgage had been given to the Commonwealth Bank. The bank was the ultimate source of the bridging finance, but the solicitors had interposed themselves in the transaction and gave guarantees to the bank. The Mortgage, which was dated in 1990, provided for interest at 24% reducible to 22% if paid on time. This was not out of line with prevailing interest rates at the time.

The High Court held that, as a condition of relief, the purchasers should pay the sum outstanding under the Mortgage together with interest at commercial rates as allowed from time to time by the Supreme Court of Victoria, calculated at half yearly rests. The matter was remitted to the Victorian Court of Appeal to work that out.

The solicitors had argued that the Mortgage rate of 22% should be applied. The Court rejected this argument. Even assuming that 22% was evidence of commercial rates in June 1990, “it is a matter of common knowledge that interest rates have fallen since”. If 22% were applied, there was a risk that the solicitors would profit. Brooking J, the dissenting judge in the Victorian Court of Appeal with whose reasons the High Court substantially agreed, adopted 9% calculated with half yearly rests based on the analogy of the trustee rate and what was obtainable from authorised trustee investments. As to that, Brooking J had directed an inquiry before the Senior Master. The High Court however thought that analogy was inappropriate and that such a rate could disadvantage the solicitors, and preferred commercial rates as allowed from time to time by the Supreme Court of Victoria calculated at half yearly rests.

In requiring Mr and Mrs Makaronis to submit to terms, the primary consideration for the High Court was the ascertainment of what was fair value for, or compensation for, the use of the money by Mr and Mrs Makaronis over a period of (by that time) seven years from June 1990, having due regard to the nature of the mortgage transaction of which they had received the benefit.[49] In working that out, the Court looked for what was “practically just”: that which would not allow the solicitors to profit from their breach of fiduciary duty, but also would not punish them for it or give the borrowers a windfall. The Court considered that a mercantile rate of interest was required, applying the analogy of the loan cases discussed above. Here, however, practical justice also required compound interest, presumably because the solicitors themselves would have had to pay compound interest to the Commonwealth Bank.

Discretion

Finally, doing what is just or “practically just” also means that interest is discretionary in the sense that the Court will do nothing that is unreasonable in the particular circumstances.[50] Examples where interest was declined or limited to achieve justice between the parties have already been given.[51] Delay could be relevant, but would not usually justify a refusal to award any interest unless it was so excessive as to be inequitable to allow interest.[52] In that respect, interest will probably stand or fall with the decision on whether delay requires a refusal of rescission.

It militates against interest and especially compound interest if the party claiming interest benefitted from the use of the money. This is hardly surprising given that one of the purposes of an award of interest is to compensate a party for having been kept out of money. Fuller v Meehan is an example of this, discussed in the earlier article in the context of constructive trusts as a proprietary remedy. [53] A rescission example is a 1985 English decision, O’Sullivan v Management Agency Ltd.[54]

Mr O’Sullivan was a musician. From about 1970, when he was 23, he entered into management, publishing and recording agreements with Gordon Mills and companies associated with him. Pursuant to those agreements, Mr O’Sullivan was to use exclusively the services of the defendants and assigned copyright in compositions and recordings for 50 years. The royalty payable to Mr O’Sullivan was less than would have been secured had he obtained independent advice (which he had not obtained). As a result of the relationship, he gained worldwide fame and enjoyed significant financial success, due in significant part to the endeavours of the defendants. Some ten years on, he claimed rescission of the agreements, and delivery up of the compositions and recordings. He succeeded, and the defendants were required to account for the profits made under the agreements, subject to an allowance for skill and labour including a profit element though less than the profit they would have derived if Mr O’Sullivan had received independent advice. The Court of Appeal allowed interest on the profits, but not compound interest (subject to an exception which was conceded).[55] Although the defendants had used the profits in trade, the profits were used to promote Mr O’Sulliivan and he enjoyed the fruits of that.

Conclusion

The cases discussed in this and the earlier article show that interest, like other equitable relief, is ultimately informed by the nature of the particular equity and what is “practically just”. These things will, of course, depend on the evidence. However, the power to award interest must be exercised for proper purposes. Those purposes are to prevent an unjust enrichment or to compensate for loss.

Stephen Lee, Barrister

Footnotes

1. It is beyond the scope of this article to consider allowances for occupation rent or improvements. But in principle, interest could apply to such allowances as well.
2. Kerr on Fraud and Mistake 6th ed 1929 (SE Williams ed) pp473-4, 476, 477, 481, 494; Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,320-2 .
3. In the writer’s view, this presumption ought not to be limited in its application to beneficiaries. In any event, parties against whom rescission is sought are constructive trustees.
4. (1878) 3 App Cas 1218.
5. (1888) 13 App Cas 308.
6. [1939] 3 All ER 271.
7. (1878) 3 App Cas 1218. For the decree see (1877) 5 Ch D 73,125.
8. Some of the shares seem to have been sold since, and the defendants had to account for the proceeds of the sales with interest at 4% from the time of receipt.
9. 1977) 5 Ch D 73, 75-6, 104-5.
10. (1877) 5 Ch D 73, 105.
11. But that was dealt with by the order referred to in footnote 7.
12. The syndicate members also lost the use of their cash (assuming they had not borrowed), but the correlative account of profits against the company would remedy that.
13. (1878) 3 App Cas 1218, 1222, 1253. It is also not clear from the judgment what Baron Erlanger had done with the profits after making the offer. He might have set it aside in an account bearing interest at 4%.
14. If it were resolved to wind up the company, it would not lie in the mouth of fiduciaries to contend that interest should only run until the time when the available surplus would have been ascertained and ready for distribution to shareholders.
15. (1888) 13 App Cas 308.
16. The orders are summarised at Newbigging v Adam (1886) 34 Ch D 582, 585.
17. Another innocent misrepresentation case where there was not enough to presume mercantile interest was earned by the defendant or was lost by the plaintiff is Root v Bradley [1960] NZLR 756, 763 which allowed 4% simple.
18. (1886) 34 Ch D 582, 589.
19. [1939] 3 All ER 271.
20. The purchaser could not have complained about loss of the £ 900, or the loss of its use. That was presumably a loan to the company on interest free terms intended to provide working capital for the company. The purchaser was perfectly free to call in that loan from the company at any time. Also, the purchaser no doubt received a benefit from that loan as he would have received dividends on his own (previously held) shares. He had held 2295 shares of his own prior to the transaction.
21. At p284.
22. See the table at p284.
23. Forrest Capie & Alan Webber, A Monetary History of the United Kingdom, 1870-1982 (George Allen & Unwin 1985), vol 1, Table III (10), pp494-5.
24. Donovan v Fricker (1821) Cas in Chan 165; Turner v Harvey (1821) Cas in Chan 169, both referred to in Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,321-2.
25. Referred to in Maguire v Makaronis (1997) 188 CLR 476-7, and Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,322.
26. Referred to in Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,320-2.
27.  Moloney v The Trustees Executors and Agency Co Ltd (1898) 24 VLR 297, 303.
28.  Popham v Exham (1860) Ir Chancery Rep 440, referred to in Maguire v Makaronis [1995] V Conv R ¶54-533 per Brooking J at p66,321-2.
29. Cf also the observations of Lord Goff in Westdeutsche Landesbank Girozentral v Islington LBC [1996] AC 669, 691C-F.
30.  Armstrong v Jackson [1917] 2 KB 822.
31.  Alati v Kruger (1955) 94 CLR 216.
32. (1955) 94 CLR 216, 239; [1956] St R Qd 306, 311.
33. [1954] QWN 40.
34. [1954] QWN 40; (1955) 94 CLR 216, 221.
35.  Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274.
36. (1988) 58 FCR 274, 288B.
37. (1988) 58 FCR 274, 288C.
38. (1988) 58 FCR 274, 291B.
39. [1988] FCA 189 [49].
40. (1988) 58 FCR 274, 277C.
41. (1988) 58 FCR 274, 285B-C, 290C-D. For a similar case, see Yorke v Lucas [1982] FCA 180 (decided under the law prior to s 51A of the Federal Court of Australia Act 1976).
42. (1988) 58 FCR 274, 291B.
43. See eg Elsinora Global Ltd v DCT [2006] FCAFC 156 [66]. But see now Practice Note CM 16. Section 51A of the Federal Court of Australia Act 1976 had been inserted by Act No. 165 of 1984, Schedule 1.
44. Supreme Court Rules (SA) 1987 rule 84.19 and Third Schedule. The Rules were dated 12th August, 1986, and came into operation on 1st January, 1987. Even if those Rules did not apply because of “accrued rights” reasoning, which is not certain as pre-judgment interest may be characterized as procedural, it is still unlikely that the practice of the Supreme Court under the prior 1947-1986 Rules would have been to award only 10% for statutory pre-judgment interest, if the case law in other states is any guide.
45. Supreme Court Rules (SA) 1987 rule 85.23.
46. In Haydon v Jackson [1987] FCA 491, the Full Federal Court cited Fitzgerald J’s observations concerning s 87 in Sanrod Pty Ltd v Dainford Ltd [1984] FCA 154, (1984) 54 ALR 179, 191: “… when money is paid in consequence of misleading conduct, the loss suffered by that conduct includes not only the money paid but also the cost of borrowing that money or the loss from its investment, as the case may be…”.
47.  JAD International Pty Ltd v International Trucks Australia Ltd (1994) 50 FCR 378.
48. (1997) 188 CLR 449.
49. For use of the concept of compensation, see also Re Dawson [1966] 2 NSWR 211, 218; Automobile and General Finance Co Ltd v Hoskins Investments Ltd (1934) 34 SR (NSW) 375, 391 per Long Innes J. See also Spence v Crawford [1939] 3 All ER 271, 279-80.
50. O’Sullivan, Elliott & Zakrzewski, The Law of Rescission OUP p402. See also Kerr, supra, p479, which suggests that that interest will not be allowed if there was negligence on the part of the claimant. That suggestion might be overbroad.
51. See eg JAD International Pty Ltd v International Trucks Australia Ltd (1994) 50 FCR 378.
52. Erlanger v New Sombrero Phosphate Company (1878) 3 App Cas 1218, 1282.
53. [1999] QCA 37.
54. [1985] 1 QB 428.
55. At 473-4.