– Westpac Banking Corporation v Jamieson & Ors 2015 QCA 50 (10 April 2015)
The Jamiesons borrowed and invested $5 million on the advice of a financial planner employed by Westpac (the Bank). Following the global financial crisis in late 2007 the Jamiesons suffered significant losses on the investment.
The Jamiesons were successful on some of their claims for negligence, breach of contractual duty of care and breach of section 12DA(1) Australian Securities Investments Commission Act 2001 (Cth).
One of several issues on appeal was the identification of what losses, if any, had been “caused” by the Bank. Applegarth J (with whom McMurdo P and Morrison JA agreed) analysed the problem by reference to:
(a) causation in fact;
(b) causation in principle, including:
i. the relevance of the so called “rule” in Potts v Miller (1940) 64 CLR 282 (pursuant to which damages are assessed as at the date of the transaction by calculating the difference between what was paid and the value of what was acquired) ;
ii. the check against overcompensation afforded by enquiry as to what the position would have been if the represented or supposed facts were true: per Downs v Chappell [1997] 1 WLR 426 at 444; Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 at 427.
(c) whether, on a “no transaction” case, Mr Jamieson was nevertheless obliged to prove what he would have done had he not made the subject investments.
Factual Causation
In the process of seeking financial advice, the Jamiesons had expressed that they would be willing to put no more than 10% of their net wealth at risk. The major part of the investment was in units in a “capital protected” managed investment fund. The loans were subject to interest, half of which was required to be paid on entry to the investment, and the remainder in a series of payments. That interest was itself the subject of a loan attracting interest. The critical findings of the trial judge, upheld on appeal, were that the Jamiesons would not have taken out the loans and invested in the fund:
(a) had they been told that interest would be payable on the deferred component of the interest to be paid on the $5 million loan;
(b) had the true extent of their exposure had been disclosed in cashflow terms, so as to inform them that their true risk of loss substantially exceeded 10% of their net wealth;
(c) had they been given the full terms and conditions of the investment and associated loans (which the trial judge found Mr Jamieson would have read).
The Bank argued that it had provided Mr Jamieson with sufficient information to have worked out the critical features of the transaction, including the matters in 4(a) and (b) above. Applegarth J rejected that contention and said:
…factual causation is not tested by constructing what Mr Jamison actually knew and by inquiring into the exposure and risk which he would have assessed based on that knowledge, left to his own devices. It is tested by inquiring what he probably would have done if he had been told by the Bank in the Statement of Advice and other documents what his true exposure was in cash terms and that his exposure greatly exceeded 10% of the Jamison’s estimated net worth: at [80].
See also Morrison JA at [18] to [19].
Thus, it was not to the point that there was sufficient information available to Mr Jamieson that he could have deduced the true extent of his exposure. The question was whether he in fact did so and whether the Bank’s failure to give him that information caused him to enter a transaction he otherwise would not.
The Bank further argued that the primary judge had failed to analyse the individual effect of each of the three breaches described in paragraph 4 above, but rather, had “rolled up” his conclusion on causation. Dismissing this argument, Applegarth J said that the causative potency of each breach could not be considered in isolation but in the context of the other breaches as found. If the Statement of Advice had set out the nature of the proposed transaction and its risks, then providing documents which contained greater detail probably would not have altered the decision to proceed. But because the Statement of Advice was an incomplete statement of the nature of the transactions and their risk, the Bank’s failure to provide documents which more fully explained these things was critical: at [85]; [91] to [96].
On those bases the Court upheld the primary judge’s finding that the Bank’s breaches were “a necessary condition of the occurrence of the harm” as provided in s.11 of the Civil Liability Act 2003 (CLA).
Causation: attribution of legal responsibility
This part of the judgment concerned the second limb of the test in s.11 CLA.
Applegarth J enunciated the test in this way:
[106] the essential “causation in law” question is this: the Bank’s breaches having in fact caused the loss, should the Bank have legal responsibility for that loss attributed to it? In the terms of the Civil Liability Act 2003 (Qld), why should responsibility for the harm which the Bank’s breach caused not be imposed upon it?
Applegarth J gave examples of situations where legal responsibility may not attach despite factual causation: losses incurred beyond a certain date, losses characterised as too remote or not foreseeable, losses resulting from extreme or unreasonable conduct by the plaintiff, or where there has been a supervening factor: at [102].
The Bank raised the following bases to avoid legal attribution of the loss which it factually caused:
(a) the Jamiesons received, in large measure, what they expected, so the recoverable loss should be restricted to no more than interest on capitalised interest (being the unexpected aspect of the investment);
(b) this result would accord with the rule in Potts v Miller.
(c) this would also accord with the principle that a person should not be compensated for loss they would have sustained had the representations been true.
As to the first argument, it was said that only the interest upon interest was caused by the Bank’s breaches. The remainder of the loss was caused by unsatisfactory performance of the investment due to market changes.
Applegarth J said that it would be artificial to address causation in this manner when the Jamiesons would not have entered the transactions at all but for the three critical breaches. They then would not have suffered the diminution in the value of the investment, or the interest payments. Further, the risk of loss that the Jamiesons sought to avoid, namely more than 10% of their net overall wealth, was the very thing about which they had engaged the Bank to advise. In those circumstances:
…it is hard to see why the Bank should not have legal responsibility attributed to it for the loss which its breaches caused. There is no principle, and nothing in the justice or equity of the particular case, as to why responsibility for the harm which the Bank’s breaches caused should not be imposed on it.
As to the Potts v Miller submission, Applegarth J noted that the rule “does not normally apply when either the misrepresentation continues to operate after the date of acquisition so as to induce the plaintiff to retain the asset or that the circumstances are such that the plaintiff is “locked into the property””: at [120].
Additionally, the Bank had not adduced evidence of the “true value” of the units in the Managed Investment Fund. It may have been less than the market value of the units at the date of acquisition because the market made an inaccurate prediction of their likely future performance. Further:
…any assessment of their “true value” in May 2007 would need to take account of the fact that Mr Jamieson was “locked in” to the transaction for three years. Their “true value” would take account of the risk that, even with the capital protection provision, the return on investment might be inadequate to meet the cost of borrowing. It would take account of the prospect of a return allowing interest cost to be funded and a profit derived from the investment: at [122].
It was apparent that the “true value” of the investment would be “invidious, if not impossible” to assess: at [125].
As to losses consequent on the fall in financial markets, Applegarth J rejected the Bank’s characterisation of these being due to “extraneous events”. His Honour said that “a fall in the market whereby there was no return on investment was one of the recognised risks, and one which Mr Jamieson sought the Bank’s advice to guard against”: at [128].
Putting the argument another way, the Bank argued that even if the representations made in the Statement of Advice had been true (and deferred interest did not attract interest), those market losses would still have been sustained. Applegarth J accepted that it may be useful in some cases to check the fairness of compensation to be awarded, by reference to what the position would have been had the represented or supposed facts been true. However, that enquiry could not assist in a no-transaction case: at [137] to [140].
Alternative Investments
The Bank had pleaded that if the Jamiesons had not entered the subject transactions, they would nevertheless have sought out and made an agribusiness investment by borrowing funds. The Jamiesons contended, on the basis of Downs v Chappell, that in general it is irrelevant to enquire as to what a claimant in such a case as this would have done if he or she had not entered the subject transaction. Applegarth JA rejected this proposition and said that in a case where a defendant demonstrates that a different, loss-making transaction would have occurred, it would not be impermissibly speculative on the part of the Court to act on that. It is simply the corollary of a “loss of opportunity” case often advanced by a claimant: at [143] to [145].
However, Applegarth J also dismissed the proposition advanced by the Bank that a claimant is necessarily required to plead and prove what it would have done had it not entered the subject transaction, in order to establish loss: at [143] and [146]. His Honour held:
Policy or pragmatic considerations suggest that a plaintiff should not necessarily be required to prove what else he or she would have done. A requirement for such proof increase the complexity and costs of litigation by exploring alternative transactions, including investments, which were not seriously considered….it would be a costly distraction to require the plaintiff to prove what would have been done…in a case where the plaintiff had no alternative transaction in mind: at [147]
Morrison JA cautioned that the enquiry into potential alternative transactions:
…must be controlled in a principled way so that parties’ resources are not wasted on speculative allegations in an attempt to extract documentary proof of some alternative transaction. Nor should the Court’s time be wasted on speculative pursuits. Any such contention [by a defendant] would have to be pleaded with specificity and proven rigorously… : at [22].
In particular both Applegarth JA and Morrison JA approved the reasoning of Leggatt J in Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 at [217]:
The evidential burden will be on the defendant, however, to show that if the misrepresentation had not been made the claimant would have incurred a loss. In seeking to discharge this burden, the defendant (unlike the claimant) does not have the benefit of the principle that if the financial outcome of the alternative transaction is uncertain the court will make reasonable assumptions in its favour (for example by allowing damages to be calculated on a loss of a chance basis) to assist in the proof of loss.
Unless the defendant can demonstrate with a reasonable degree of certainty, therefore, both the fact that the claimant would probably have suffered a loss from entering into an alternative transaction and the amount of that loss, the damages will not be reduced on that account. In this respect there is a disparity, but a principled one, between hypothetical transactions which would have made the claimant worse off and those which would have made the claimant better off.
Summary
Factual causation must be determined by assessing the effect of a defendant’s breaches not only individually, but also in combination.
Section 12 CLA provides that a plaintiff bears the onus of proving every element of causation. Despite that, it appears that courts will look to defendants to show some reason for avoiding legal responsibility for a loss factually caused by its breach.
The Potts v Miller approach to damages assessment will not usually apply where the claimant is locked in to the investment or induced to retain the asset by the defendant’s misrepresentations. A plaintiff is not obliged to frame its damages claim by reference to the rule. And a defendant urging the application of the rule must adduce evidence permitting the benefits and burdens of the asset acquired to be properly valued. This will be difficult, if not impossible, in many cases.
A plaintiff need not, in a “no transaction” case, plead and prove what it would have done had it not entered into the subject transaction. It is for a defendant to plead and prove an alternative transaction case. Despite the passage in Yam Seng describing this as an evidential burden, the comments by Applegarth J and Morrison JA indicate that the burden is a heavy one.
Holly Blattman
