FEATURE ARTICLE -
CPD Papers, Issue 72 - Mar 2015
May I thank the Committee for the 2015 Bar Conference for doing me the honour of asking me to speak to you this afternoon.
The topic of my paper is the relief for misleading or deceptive conduct1 that was formerly available pursuant to section 87 of the Trade Practices Act 1974 (Cth) (“TPA”), and that is now found in section 237 of the Australian Consumer Law (“ACL”).2
I am therefore putting to one side the most common form of relief in such a case, being a claim for damages under section 82(1) of the Trade Practices Act 1974 (Cth) (“TPA”), and now contained in section 236 of the Australian Consumer Law (“ACL”).
The particular species of section 87 relief that I will be addressing is an order setting aside or varying a contract that has been impaired by misleading or deceptive conduct (a fact pattern that has recently been described as “the backbone of the body of cases in which s 52 came to be applied”).3 The contract might be a purchase of land, or of a business, or an investment in a financial product, or exceptionally, a service. The misleading conduct typically concerns the quality or attributes of the thing purchased, and the loss alleged is often that the thing purchased was worth less than the price paid, or that trading, investment or other consequential losses have been suffered.
The remedy that the paper is concerned with is the making of an order that sets aside the plaintiff’s contract as a remedy for the misleading or deceptive conduct that has induced entry into it.
The particular focus of the paper is when and why orders of this kind are to be made today. In particular, I will consider to what extent, and how, the principles of the general law of rescission are said to be relevant in determining whether to grant statutory rescission, and in determining the terms of any such order.
The first part of the paper suggests that if we step back and compare the statutory language on the one hand, and the key principles of the common law and equity that regulate the rescission of voidable contracts on the other, the natural conclusion is that the general law must be irrelevant.
The second part of the paper will suggest that, notwithstanding judicial exhortations for the courts to leave behind the familiar coastline of the common law, the courts in fact continue to rely upon the general law in determining whether to exercise the statutory discretion to rescind.
The third part of the paper will outline an alternative approach to the question of when statutory rescission should be granted. It will be suggested that the better approach is to focus not upon the general law of rescission, but upon precise what loss and damage has been suffered because of the contravening conduct. On this approach, the principles of causation that regulate liability for misleading or deceptive conduct are of central importance. In the final part of the paper, we will therefore consider those principles and how they are to be applied when statutory rescission is sought.
The statutory provisions
Before going further, we should recall the statutory provisions with which we are concerned. They are as follows:
Chapter 2âGeneral protections
18 Misleading or deceptive conduct [formerly section 52 TPA]
(1) A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
(2) Nothing in Part 3â1 (which is about unfair practices) limits by implication subsection (1).
…
Chapter 5âEnforcement and remedies
Part 5â2âRemedies
236 Actions for damages [formerly section 82(1) TPA]
(1) If:
(a) a person (the claimant) suffers loss or damage because of the conduct of another person; and
(b) the conduct contravened a provision of Chapter 2 or 3;
the claimant may recover the amount of the loss or damage by action against that other person, or against any person involved in the contravention.
(2) An action under subsection (1) may be commenced at any time within 6 years after the day on which the cause of action that relates to the conduct accrued.
237 Compensation orders etc. on application by an injured person or the regulator [formerly section 87 TPA]
(1) A court may:
(a) on application of a person (the injured person) who has suffered, or is likely to suffer, loss or damage because of the conduct of another person that:
(i) was engaged in a contravention of a provision of Chapter 2, 3 or 4; or
(ii) constitutes applying or relying on, or purporting to apply or rely on, a term of a consumer contract that has been declared under section 250 to be an unfair term; or
(b) on the application of the regulator made on behalf of one or more such injured persons;
make such order or orders as the court thinks appropriate against the person who engaged in the conduct, or a person involved in that conduct.
Note 1: For applications for an order or orders under this subsection, see section 242.
Note 2: The orders that the court may make include all or any of the orders set out in section 243.
(2) The order must be an order that the court considers will:
(a) compensate the injured person, or any such injured persons, in whole or in part for the loss or damage; or
(b) prevent or reduce the loss or damage suffered, or likely to be suffered, by the injured person or any such injured persons.
(3) An application under subsection (1) may be made at any time within 6 years after the day on which:
(a) if subsection (1)(a)(i) appliesâthe cause of action that relates to the conduct referred to in that subsection accrued; or
(b) if subsection (1)(a)(ii) appliesâthe declaration referred to in that subsection is made.
…
243 Kinds of orders that may be made
Without limiting section 237(1), 238(1) or 239(1), the orders that a court may make under any of those sections against a person (the respondent) include all or any of the following:
(a) an order declaring the whole or any part of a contract made between the respondent and a person (the injured person) who suffered, or is likely to suffer, the loss or damage referred to in that section, or of a collateral arrangement relating to such a contract:
(i) to be void; and
(ii) if the court thinks fitâto have been void ab initio or void at all times on and after such date as is specified in the order (which may be a date that is before the date on which the order is made);
(b) an order:
(i) varying such a contract or arrangement in such manner as is specified in the order; and
(ii) if the court thinks fitâdeclaring the contract or arrangement to have had effect as so varied on and after such date as is specified in the order (which may be a date that is before the date on which the order is made);
(c) an order refusing to enforce any or all of the provisions of such a contract or arrangement;
(d) an order directing the respondent to refund money or return property to the injured person;
(e) except if the order is to be made under section 239(1)âan order directing the respondent to pay the injured person the amount of the loss or damage;
(f) an order directing the respondent, at his or her own expense, to repair, or provide parts for, goods that had been supplied by the respondent to the injured person;
(g) an order directing the respondent, at his or her own expense, to supply specified services to the injured person;
(h) an order, in relation to an instrument creating or transferring an interest in land, directing the respondent to execute an instrument that:
(i) varies, or has the effect of varying, the first mentioned instrument; or
(ii) terminates or otherwise affects, or has the effect of terminating or otherwise affecting, the operation or effect of the first mentioned instrument.
Three key features of statutory rescission under sections 237 and 243 of the ACL
The first point to make is that, and has been remarked before, these provisions do not in terms confer on courts a power to rescind an agreement, in the sense of setting aside the contract ab initio and unwinding its consequences.4 However, it is now uncontroversial that the provisions do indeed have that meaning, and do permit a court to administer the remedy of rescission.5
The language of sections 237 and 243 makes clear that the statutory remedy possesses three core attributes.
First, and unlike the right to compensation conferred by section 236, the grant of relief pursuant to section 237 of the ACL is entirely at the discretion of the court.6
Second, in order for the discretion to be enlivened, the claimant must prove not only that there has occurred misleading or deceptive conduct in contravention of section 18 of the ACL (or other relevant conduct, being that identified in section 237(1)(a)(i) &(ii) of the ACL), but also that he or she has suffered, or is likely to suffer, loss or damage “because of” the contravening conduct.
Third, sub-section (2) of section 237 mandates that if an order for rescission or variation of a contract is to be made, “the order must be an order that the court considers will: (a) compensate the injured person, or any such injured persons, in whole or in part for the loss or damage; or (b) prevent or reduce the loss or damage suffered, or likely to be suffered, by the injured person or any such injured persons”.
Each of these three features of the statutory remedy were emphasised in what is probably the most oft quoted discussion of it, that of Justice French (as his Honour then was) in Tenji v Henneberry & Associates Pty Ltd (2000) 98 FCR 324 (Full Ct). His Honour said this (at 333):7
Loss or potential loss causally linked to contravention conditions the exercise of the remedial powers under s 87 and their exercise must be directed to compensate for that loss. The same may be said, limited to actual loss, for the award of damages under s 82. The conditions for the exercise of power under s 87 having been satisfied and the compensatory outcome identified, the grant of such relief is discretionary as is the particular kind of order under s 87(2) that may be made. The exercise of that discretion and the choice of order may then be affected by other considerations.
We will shortly see how one of the “other considerations” that French J went on to identify as affecting the exercise of the discretion to set aside or to vary a contract was the principles of rescission applicable under the general law.
Before looking at what his Honour and other courts have said about that, we will first briefly note some of the key principles applicable to rescission ab initio under the general law.
Key features of rescission ab initio in the general law
Under the general law, if the making of a contract or a gift has been impaired in some relevant and sufficient way, the innocent party has, in some circumstances, a right to rescind the transaction ab initio. The principles were developed by the courts of law and equity in England and Australia well before the enactment of the Trade Practices Act 1974 (Cth). They continue to operate today, including, of course, in many fact patterns falling outside the reach of the ACL.
When we speak of the making of the transaction having been impaired in some relevant and sufficient way, we are concerned with conduct such as fraudulent, negligent or innocent misrepresentation, duress or undue influence, breach of fiduciary duty, and in some special classes of case, non-disclosure and mistake.
The right that is given to the innocent party in some cases is to rescind the transaction ab initio. The Latin “ab initio” means “as from the beginning”. That language describes the remedy. Rescission ab initio involves the extinction of all executory (unperformed) contractual rights and obligations, the creation in favour of the rescinding party of rights to the restitution of benefits conferred under the contract, and the arising of corresponding obligations to make counter-restitution of benefits received. An indemnity may also be granted for obligations entered into under the rescinded agreement. The effect of the remedy is, therefore, to restore both parties, guilty and innocent, to the position that each occupied before the contact, or the case may be, gift, was concluded.
The logic of the remedy as it is understood today is that the plaintiff’s consent to the transaction having been impaired, the plaintiff is entitled to have the transaction unwound, so as to restore the status quo ante: the status quo before the contract or gift was entered into.
The objective of the remedy is, therefore, often said to be “restitutio in integrum”. That is another Latin tag, this time from Scots law, meaning, literally “restitution to the whole”: the restitution of the parties to the position that obtained prior to the transaction.
The function and purpose of the remedy is, therefore, not the compensation of the victim of the relevant vitiating conduct. It is, instead, the restoration of both parties to the pre-contractual position, whatever that may be. After the unravelling of a transaction by its rescission the plaintiff might be left with either a windfall gain, or with an uncompensated loss.8
In Australia, although not in England, there is a qualification to the principle that rescission is always concerned with unwinding the transaction so as to restore the parties to their pre-contractual position. In Australia, after the decision in Vadasz v Pioneer Concrete (SA) Pty Ltd (1995) 184 CLR 102, it is possible, in exceptional cases, for a court to order the partial rescission of a transaction: setting aside only part of it, and therefore in substance re-formulating the parties’ agreement.9
Importantly, upon rescission, both plaintiff and defendant are generally entitled to exclusively proprietary claims to property transferred, and, with some exceptions, to exclusively personal claims to money paid.
The remedy is an extreme one. It breaks apart contracts, re-distributes property, and can entirely up-end settled expectations, even many years later. The remedy is, accordingly, constrained by a number of so-called “bars” to rescission. These are usually identified as follows:10
(a) restitution in integrum has become impossible;
(b) the rights of the third parties have intervened, such that rescission will be denied because of its prejudicial effects on third parties (the exemplar case is where the defendant has received property that he has on-sold to a bona fide purchaser for value);
(c) affirmation of the contract — so that the right to rescind has been lost by election or waiver;
(d) delay — in the sense of laches, and which operates with particular force for certain kinds of transaction;
(e) some special rules that apply in the case of shareholders seeking to rescind their contract of allotment with the company — the rule in Oakes v Turquand (a shareholder cannot rescind his contract with the company once winding up has commenced);
(f) some special rules that apply in the case of innocent misrepresentation.
If the party seeking to rescind can establish one of the grounds for rescission and none of the recognised bars to rescission applies the claimant is (or should be) entitled to rescind as a matter of right. Whether rescission will be granted is not at the discretion of the court, and that is so whether rescission occurs at common law, or according to equitable principles.
Statutory rescission and the general law — in different orbits?
Having briefly reminded ourselves of some of the key features of the remedy of rescission under the general law, we can see, immediately, how different that landscape is from the shape of statutory rescission as a remedy for misleading or deceptive conduct.
Whilst a longer list could be drawn, seven distinctive points of difference seem to stand out.
First, the terms of section 237 and 243 make clear that the victim of misleading or deceptive conduct has no right to an order in the nature of rescission. Whether such an order will be made, and its terms, are at the discretion of the court.
That is quite different from the position under the general law. Once a relevant vitiating factor has been proved, if the defendant does not establish the existence of one of the established bars to rescission, the remedy is not to be granted or withheld at the court’s discretion. Rescission is available as of right.
Second, under the Australian Consumer Law, before the court is given a discretion to make an order setting aside a contract or gift, it must be satisfied of two things. First, the court must be satisfied that the claimant “has suffered, or is likely to suffer, loss or damage”. Second, the court must be satisfied that the loss or damage was suffered or likely to be suffered “because of” misleading or deceptive conduct on the part of a person (section 237).
In contrast, under the general law, the plaintiff seeking rescission does not need to establish that he or she has, or is likely to, suffer any loss and damage at all. Still less does the plaintiff need to show that he or she has, or is likely to, suffer loss or damage by reason of the misrepresentation, undue influence, or other circumstance conferring the right to rescind. What must instead be established is the presence of a vitiating factor conferring a right of rescission, and a sufficient nexus between the vitiating factor, and the transaction sought to be set aside. The relevant causal nexus is not between the impugned conduct and the plaintiff’s loss and damage.
Moreover, it is not necessary for the rescinding party to establish that the contract or gift was concluded “because of” the misrepresentation, undue influence or other vitiating conduct. Instead, each ground for rescission has its own particular principles of causation that fall to be applied. For example, in the case of fraudulent misrepresentation, or duress to the person, the fraud or duress needs only to be “a” cause that influenced the decision to enter into the transaction, but it need not be the sole or a determinative cause.11 A more stringent test of causation probably applies for non-fraudulent misrepresentation.12 In contrast, causation is not a relevant concept at all in determining whether a contract between a fiduciary and principal should be set aside for breach of fiduciary duty.13
Third, we saw that under the general law, rescission is a remedy directed at restoring the status quo ante for both parties. This involves not only the erasing of the contract between the parties as from the beginning, but also a giving and taking back on both sides of benefits that each party has conferred on the other under the voidable transaction.
In contrast, the Australian Consumer Law says in terms that if the court does make an order in the nature of rescission, it must be an order that the court considers will: “(a) compensate the injured person, or any such injured persons, in whole or in part for the loss or damage; or (b) prevent or reduce the loss or damage suffered, or likely to be suffered, by the injured person or any such injured persons”. The object of remedy as described in the Act is unilateral. The aim is to make whole the victim of the prohibited conduct. In contrast, under the general law, the remedy is bilateral. The aim is to restore both parties to their pre-contractual position.
Fourth, under the general law, rescission is, usually, an all or nothing process. Save in the exceptional case where a court can be persuaded to order partial rescission, under the general law, there is usually either a complete setting aside of the contract and mutual restitution of benefits received, or no rescission at all. In contrast, the Australian Consumer Law specifically permits a court to declare that only part of a contract to be void or void ab initio (section 243(a)). More radically still, the legislation allows the court to declare that this was the case from any point in time. Under the general law, rescission operates retrospectively to the beginning of the impugned transaction and to no other point in time. Further, the Australian Consumer Law (section 243) permits a court to order that a contract is void or void ab initio, without making any further or consequential order, such as mutual restitution of benefits received. That is impossible under the general law. Hand in glove with the right to extinction of the voidable contract, is the right to restitution of benefits conferred under it, and a corresponding obligation to restore benefits received.
Fifth, even under the expansive approach taken in Australia, there is so far no recognised jurisdiction for a court to vary the terms of an agreement between the parties, by reason only of the presence of a factor that would permit its rescission. Under the general law, remaking of parties agreement is regarded as antithetical to the judicial function.14
Sixth, we noted that rescission vests title to property transferred under a voidable transaction. There is, in particular, no recognised right to claim instead a money sum equal to the value of property transferred, or to tender back, as counter-restitution, money in lieu of property received. The Australian Consumer Law imposes no such limitation. Its terms do not require restitution at all, and still less that title to property be returned. Indeed, under section 243(d), a court may undo the effects of misleading or deceptive conduct by way of “an order directing the respondent to refund money or return property to the injured person”: but there is no equivalent express power in the court to order the injured party, who is seeking rescission, to refund money or to return property.15
Seventh, finally, it may be noted that the Australian Consumer Law does not mention any of the established bars to rescission under the general law, as reasons for not granting relief: or indeed as being relevant to it at all.
Having undertaken this brief survey, the natural conclusion, is, I suggest, two-fold.
The first conclusion is that the remedy of rescission conferred by the Australian Consumer Law has really nothing at all in common with rescission under the general law.
The second conclusion is that because section 237 and 243 give to the Court a pair of statutory scissors that allow contractual bargains to be cut-up and re-made, we might expect to see the courts making orders radically different from those that would be made under the general law.
What I think is interesting is that the authorities themselves are against both of these conclusions. We will turn to that next.
Gravitational pull of the common law
At this point, we need to turn back to the reasons of Justice French in Tenji v Henneberry & Associates Pty Ltd (2000) 98 FCR 324 at 333 (Full Ct), and to complete the passage quoted earlier. His Honour said this:
Loss or potential loss causally linked to contravention conditions the exercise of the remedial powers under s 87 and their exercise must be directed to compensate for that loss. The same may be said, limited to actual loss, for the award of damages under s 82. The conditions for the exercise of power under s 87 having been satisfied and the compensatory outcome identified, the grant of such relief is discretionary as is the particular kind of order under s 87(2) that may be made. The exercise of that discretion and the choice of order may then be affected by other considerations. The making of an order under s 87(2)(a) declaring a contract to be void may be based upon a number of factors including those which would affect the grant of analogous relief in equity. But, while relevant, they are not determinative. The question whether there has been a disaffirmation or a commitment to the performance of the contract by the party suffering loss will generally be relevant. The question whether the party would have decided to continue with the purchase, even if aware of the true position, may also be relevant although, as has been pointed out, that does not determine the availability of equitable rescission.
Thus, his Honour concludes that the exercise of the discretion to declare a contract to be void may be based upon the factors that affect whether rescission would be granted or withheld in equity, and that these factors are relevant, but are not determinative.16
The same point was made by Gummow J in the leading decision of Marks v GIO Australia Holdings (1998) 196 CLR 494 at 535, where his Honour said that the “principles regulating the administration of equitable remedies afford guidance for, but do not dictate, the exercise of the statutory discretion conferred by s 87”.17 Similarly, in JAD International Pty Ltd v International Trucks Australia Ltd (1994) 50 FCR 378, 380, the Full Court held that:
The power of the Court to grant relief under the statutory provision [s 87] is wider than the power of the equity court to grant rescission: the bars to rescission in equity, such as affirmation and the non-availability of restitutio in integrum, are no more than discretionary matters that the Court will take into account in deciding whether in a given case to grant relief under the statutory provision: see Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 39 FCR 546 at 564—571;…Platz v Creative’s Landscape Design Centre Pty Ltd (1989) ATPR 40-980 at 50,312—50,313, approved on appeal in Creative’s Landscape Design Centre Pty Ltd v Platz [1989] ATPR at 50,686.
Once we are told that the general law is “relevant”, but not determinative, and that it provides “guidance”, but does not dictate the result, we are left, it seems to me, with a puzzle. The puzzle arises because, as we have just seen, in the case of a claim to set aside a contract ab initio, the general law and the statutory remedy seem to be in substance, in entirely different orbits.
Accordingly, when we ask the question of how relevant is the general law to be, and how is to be taken into account in any given case, it becomes, I suggest, very difficult to know where we are to find a principled answer. It is very difficult because nothing in the language of legislation, looked at as a whole, points us toward the general law at all. The purpose and logic of the remedy seems to be quite different.
The problem arises in two ways. Firstly, when it appears that one of the bars to rescission recognised under the general law would apply (if the claimant sought to enforce his rights under the general law), what weight, if any, should the court give to the fact when administering the statutory remedy? Second, to what extent should the court have regard to the outcome that would obtain if the transaction was rescinded under the general law, in determining the terms of the order to be made under the statute?
It seems that during the first twenty or so years following the passing of the Trade Practices Act 1974 (Cth), the answer to question just posed was that the statute should follow the common law quite closely, but that thereafter, the position began to change. In Diane Skapinker’s valuable article published in 1995, the learned author said as follows:18
“Early judicial comments regarding the scope of the court’s powers under s 87 were fairly tentative and tended to stress that, in the exercise of its powers, courts ought not to depart from established common law principles…Gradually, over the years, judicial statements about the scope of s87 have become bolder as to the courts have recognised the potential of s 87 for doing justice between the parties in the wide variety of cases falling within s 52. As the courts have analysed the differences between common law misrepresentation and liability under s52 and between common law damages and damages under s 52 so they have appeared more willing to throw off the shackles of the common law in relation to remedies generally”
Two years later, President Mason’s reasons in Akron Securities v Illife (1997) 41 NSWLR 353, 364-7 (CA) contained probably the most memorable call to the Courts to throw off the shackles of the common law. A number of persons had made tax-effective investments in a scheme that involved the breeding of horses. The scheme failed, and the corporate investment vehicle sued the investors to enforce obligations to pay monies due from them. Mr Iliffe and two other investors succeeded in defending that claim by establishing that they had invested in reliance upon a non-fraudulent misrepresentation that a third party stood behind a minimum investment guarantee that had been given to them. The trial judge rescinded the investment agreements ab initio. The company appealed. President Mason, with who Priestly JA agreed, concluded that the learned primary Judge had committed an “appealable error”, either because he regarded rescission ab initio as the automatic remedy, or by failing to consider whether another form of relief was more appropriate (at p 368). The correct order was more nuanced (at page 369-70). President Mason’s reasons for overturning the decision of the trial Judge included the following passage (at pp 364-7; citations mostly omitted):
Early case law took a narrow approach to s 87 of the Trade Practices Act 1974 (Cth), with courts fearing to move far from the familiar coastline of traditional common law and equitable approaches. But it is now clearly established that s 87 is to be given no restrictive interpretation. In the words of Gummow J in Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31 at 37—38:
… whilst contractual rights subsist … between the parties their relationship is not governed simply by the general law as to vendor and purchaser. The legislation regulates the existence and exercise of what would otherwise be the rights at general law and, in addition, itself creates new rights and remedies … [It] should be no inhibition to giving effect to what, on its proper construction, is provided for in the legislation, that the result may be to achieve consequences and administer remedies which differ from those otherwise obtaining under the general law ….
A Court should not restrict the exercise of its discretion “by imposing upon itself technicalities which might defeat the policy of the section”…
In granting a remedy under s 87, the Court is not restricted by the limitations under the general law upon a party’s right to rescind for misrepresentation…
In short, the power conferred by s 87 is (in subs (1)’s own words) to make “such order or orders as the Court thinks appropriate”. Proven contravention of s 52 is the “passport to … extensive relief”…
There is no point in having a remedial smorgasbord if the table is not scanned at least briefly to see what is best on offer. In this, the task of a judge whose findings of detrimental reliance have presented the key to s 87 is not unlike that facing a trustee of a discretionary trust who has a power to distribute: cf Lutheran Church of Australia South Australia District Inc v Farmers’ Co-operative Executors and Trustees Ltd (1970) 121 CLR 628 at 639 and 652…
The principles surrounding the remedy of rescission for innocent misrepresentation are clearly available to give guidance in the exercise of the statutory discretion: see Munchies Management Pty Ltd v Belperio (1988) 84 ALR 700 at 708, 714; Henjo (at 564-565).
We are told, then, that only the timid Judge hugs the coastline of the common law, and that the enlightened Court should sail into deeper waters: seeking bespoke remedies moulded to the particular circumstances before the court.
It would be fair to say, however, that this call to sail section 87 into the deep waters of novel forms of relief has not been universally embraced. Indeed, in the majority of cases where the courts set aside a contract under section 87, the remedy awarded is not dissimilar from that which would apply if rescission had occurred under the general law. In Akron itself, whilst Priestly JA agreed with Mason P, Meagher JA would have dismissed the appeal (at pp 371, 373). Noting that “in the venture Mr Illife did not find his duties were delightful nor his privileges great” (at 373), and rejecting the charge that restitutio in integrum was impossible, Meagher JA said as follows (at 3272):
On his Honour’s findings, what is true of the whole venture is equally true of each ingredient in it: if the representation had not been made, Mr Iliffe would not have bought the weanlings or leased the mares or allowed Bernborough Breeding and Racing Ltd to manage his affairs or borrowed any money from the plaintiff.
In these circumstances his Honour made orders which, in effect, reversed the transaction: he “rescinded” the deal; he put Mr Iliffe back into the position he would have been in if no misrepresentation had been made. Granted his Honour’s primary findings, there is nothing surprising about this. His Honour gave judgment to Mr Iliffe in the appellant’s case against him, and allowed Mr Iliffe to recover from the appellant all moneys he had paid to it whilst giving the appellant credit for the distributions. His Honour had power to do all this under s 87(1A) of the Trade Practices Act 1974 (Cth).
Two earlier decisions that might be examples of Courts “fearing to move far from the familiar coastline of traditional common law and equitable approaches” were Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546 (Full Ct) and Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274 (Full Ct). Both of these cases have cast a long shadow over this area of the law, and will be briefly considered in turn.
In Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546 at 564-5 (Full Ct), the Full Court overturned the decision of the primary Judge to set aside the sale of the “New York Deli” in Double Bay as a remedy for the vendor’s misleading or deceptive conduct. The Full Court held that the purchaser’s delay, and “change of front”, should bar rescission and permit only damages to be awarded. In coming to this decision, the Full Court cited decisions concerning rescission under the general law in (at 564-5). As we saw earlier, affirmation of the voidable contract is a well-established bar to rescission under the general law.
Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274 (Full Ct) involved a successful attempt to rescind the purchase of the “Palm Terrace Restaurant” in South Australia. Fisher, Gummow and Lee JJ said that (at p 283):
“It is from a consideration of the position that would obtain from administration of the remedy of rescission (with ancillary orders), that one derives appropriate guidance as to the operations of ss82 and 87 of the Act upon the present case”.
The Full Court went on to consider the principles applicable to rescission under the general law in determining what orders should properly be made when setting aside the purchase under s87 of the TPA (at pp 283-286). Their Honours then observed that “Henjo Investments…at 564-5, serves to emphasise that in the exercise of the discretion in these matters given the court by s87, the equitable principles concerning rescission give safe, if not necessarily exclusive, guidance. Hence the attention to those principles we have earlier paid in these reasons” (at p 288). The court went on to refer to the principles applied in the general law of rescission in determining the orders that were appropriate under the statute (eg. pp. 289B, 290B, 291A-B).
To what extent have the more recent cases adopted the more liberal approach endorsed in Akron Securities, or the more conservative approach exemplified by the reasons in Munchies Management: in which significant weight is to be given to the general law when administering the statutory remedy?
There is no doubt that orders can be made under section 237 and 243 of the ACL, and its analogues, in circumstances where rescission under the general law would have been barred, and on terms that would never be permitted at law or in equity. This was underlined by the High Court in Marks v GIO Australia Holdings (1998) 196 CLR 494 at 510, 535, and reiterated in Tenji v Henneberry & Associates Pty Ltd (2000) 98 FCR 324 at 333 (Full Ct) (where French J said that whilst the availability of rescission in equity was “relevant” in was “not determinative”).19
However, there have been a number of decisions, particularly in New South Wales, that seem to indicate that in deciding whether to set aside an agreement procured by misleading or deceptive conduct, and if so on what terms, the courts today find assistance in the familiar coastline of equitable principles.
In Campbell v Backoffice Investments Pty Ltd (2006) 66 ACSR 359 (NSWCA) Giles JA (with who Basten JA agreed on this point) cited Munchies Management with approval, stating that “In considering an order avoiding a contract under s 87 of the Trade Practices Act or s 72 of the Fair Trading Act ‘the equitable principles concerning rescission give safe, if not necessarily exclusive, guidance’”, before deciding that because “practical justice” could not be achieved in that case, so that restitutio in integrum was not possible, rescission should be denied: at [105] — [107]. Young CJ in Eq came to substantially the same conclusion: at [503] — [507].20
Land Enviro Corp Pty Ltd v HTT Huntley Heritage Pty Ltd [2012] NSWSC 382 is another example of the same approach. The matter formed part of a long-running dispute about the validity of certain agreements concerned with a proposed property development. In explaining why rescission under s87 would not be granted had a claim for relief otherwise been made out (which it was not), the Court placed significant weight on the circumstance that rescission would have been denied in equity. Each of the bars of affirmation, restitutio in integrum impossible, and the intervention of third party rights, were considered: at [905] — [926]. Stevenson J held that when exercising the statutory power to set aside a contract, the Court “will normally be guided by the principles applicable to the equitable remedy of rescission”. His Honour explained that:
[905]…the plaintiffs and Mr Zdrilic persistently, and over an extended period, engaged in conduct and evinced intentions which were consistent only with an affirmation of the agreements, thereby disentitling themselves to rescission.
[908] For that reason, and assuming that the plaintiffs otherwise had a right to rescind the Heads of Agreement and the Non-Dilution Deed, in my opinion they have lost that right by reason of their affirmation of the agreements.
[909] The position in terms of potential relief under s 87 of the Act is no different. The court, exercising its statutory powers will normally be guided by the principles applicable to the equitable remedy of recession: Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 535; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1998) 39 FCR 546 at 564; Tenji v Henneberry & Associates Pty Ltd (2000) 98 FCR 324. Where, as here, the plaintiffs have repeatedly affirmed their contracts, relief by way of rescission ought not be granted in equity or under s 87: Bullabidgee Pty Ltd v McCleary [2010] NSWSC 145 at [63]-[67].
The same approach is to be found in the reasons of Brereton J in Bullabidgee Pty Ltd v McCleary [2010] NSWSC 145 at [57] – [60] (on which Stevenson J relied). That involved a dispute about the sale of farmland in NSW. Brereton J said this:
Should the contract be avoided?
…
[57] As to discretion, it is well-established that, although affirmation may not necessarily be fatal to a claim for statutory avoidance under Trade Practices Act, s 87, and its equivalents, nonetheless the equitable principles concerning rescission provide safe if not exclusive guidance as to the exercise of the discretion given by that section [Yorke v Ross Lucas Pty Ltd (No 2) (1982) 45 ALR 299 ; (1982) 69 FLR 116, 134—5; Myers v Transpacific Pastoral Co Pty Ltd (1986) ATPR 40-673; Crisp v Australia and New Zealand Banking Group (1994) ATPR 41-294, 41,942; Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 39 FCR 546 at 564—5 ; (1988) 79 ALR 83, 102—3; Munchies v Belperio, 705, 714].
Brereton J went on to decide that the purchaser’s acts of affirmation made rescission inappropriate, even if a ground for relief under s87 had otherwise been made out (at [58] — [59]). On appeal, the Court of Appeal said that by their conduct the purchasers had not waived their right to seek relief by way of rescission (Bullabidgee Pty Ltd v McCleary [2011] NSWCA 259, [61]). However, like the learned primary Judge, the Court of Appeal emphasised the “guidance” that equitable principles afforded, saying (at [60]):
“There is no doubt (and the contrary was not argued) that equitable principles provide guidance in exercising the discretion given by the Fair Trading Act, s 72. No detailed legal discussion of that proposition in the circumstances is thus required. A central consideration is that of restitutio in integrum.”
In the end, Court of Appeal did not disturb the trial Judge’s orders, save that the deposit for the purchase of the farmland was to be returned.
These recent decisions appear to indicate that the Courts today are, in appropriate cases, willing to place considerable weight on the general law in determining whether to set aside a contract induced by misleading or deceptive conduct and if so, on what terms.
Moreover, the focus in the cases on whether restitutio in integrum is possible, and the fact that the orders made often resemble those would have been made under the general law,21 reinforces the impression that the courts today regard section 243 and its analogues as permitting (though not requiring) rescission ab initio as it exists in the general law; that is, as a remedy directed at unravelling the transaction back to the beginning, and restoring both parties to their original position.
Gravitation pull of the common law: conclusions
I would offer the following tentative comments by way of conclusion on the discussion so far.
First, for the reasons discussed earlier, as a matter of abstract logic, it is far from obvious why the general law of rescission should play any role at all in determining whether a contract should be set aside for misleading or deceptive conduct under the ACL or its analogues, and if so, on what terms. That is because the reason for the remedy as it exists under the general law, as well as its shape and object, appear to be fundamentally different to the statutory remedy administered under the ACL and its analogues.
My second comment is that the fact that the cases in fact adopt precisely the opposite approach is both explicable and justifiable. The approach adopted is explicable as a natural response to the Courts being given a very broad discretion to make a startlingly wide range of orders with little guidance as to how the powers are to be exercised. The approach is justifiable because it seeks to confine the exercise of discretion within bounds that are principled, and therefore predictable. One way to achieve that is to look to the well-developed equitable principles governing rescission — even if the statutory language does not itself mandate that approach.
My third comment is this. Whilst the particular circumstances of the case are always the central concern in the exercise of the discretion conferred by section 237 of the ACL, in my view the important question should not be what the common law or equity would or would not do in the particular fact pattern before the Court. Instead, the important question should be whether an order rescinding or varying the impugned contract is required to prevent or to reverse the particular harm suffered by reason of the contravening conduct. If the question is framed in that way, it turns the focus of inquiry away from the equitable principles of rescission, and toward the principles governing what losses are and are not compensable under the ACL. That inquiry turns, of course, particularly upon the principles of causation that underpin relief under sections 236 and 237 of the ACL. We will turn to that next, in the final part of the paper.
An alternative approach — discretion to rescind and causation of loss
Before going on, it is as well to recall the basic principles that govern the statutory power to set aside or vary a contract in response to misleading or deceptive conduct.
First, the grant of that relief is at the discretion of the court.
Second, the claimant must prove not only that there has occurred misleading or deceptive conduct, but also that he or she has suffered, or is likely to suffer, loss or damage because of the contravening conduct.
Third, sub-section (2) of section 237 mandates that if an order for rescission or variation of a contract is to be made, “the order must be an order that the court considers will: (a) compensate the injured person, or any such injured persons, in whole or in part for the loss or damage; or (b) prevent or reduce the loss or damage suffered, or likely to be suffered, by the injured person or any such injured persons”.
The words “the loss or damage” in subsection (2) does not mean all of the loss that the plaintiff may have suffered. The words “the loss or damage” instead means loss or damage that has been suffered, or is likely to be suffered, by the party seeking relief, because of the contravening conduct found to have been engaged in.
Any order rescinding or varying a contract must therefore have the effect of compensating, preventing or reducing, all or part of that part of the complainant’s loss that has been suffered because of the misleading or deceptive conduct.
In exercising a discretion whether to make a rescission or variation order, and if so on what terms, a Court should therefore first answer the anterior question of precisely what loss or damage has been sustained because of the contravening conduct that has been established on the evidence.
This approach focusses attention on the principles that determine which losses are regarded as having been caused by contravening conduct, and therefore on the rules of causation that are to be applied.
In my view the course of decisions of the High Court has seen a significant, but sometimes overlooked, change in the way in which issues of causation are to be analysed in this context.22
The rule remains that the contravening conduct does not need to be the sole or dominant cause of the loss. Instead, the conduct must only be “a” cause,23 and to have materially contributed to the result,24 for a sufficient causal nexus to exist.25
However, when assessing difficult or borderline cases there is, I suggest, now a rejection of the proposition, associated with Wardley Australia Limited v Western Australia (1992) 175 CLR 514, 525 and other decisions, that the Court should apply “common law” concepts of whether from a “common-sense” perspective, contravening conduct has caused the loss complained of.26
The new orthodoxy is that the inquiry into whether a sufficient causal link exists is always context-dependent, and depends, critically, on what has been called “the rule by which responsibility is being attributed”.27 This mode of analysis has seen renewed focus upon the policy and purpose of the ACL as informing the decision whether contravening conduct is to be regarded as a “legally effective” cause of claimed losses.28
Despite the language used in some of the cases, in my view this does not involve a break from principles developed by the common law. Rather, it involves the application of new conceptions of causation now applicable under the general law, to the specific context of the ACL.29 The result is a renewed focus upon discerning the “policy” and “purpose” of the ACL as it applies to the particular facts in determining whether a sufficient causal nexus exists between the contravening conduct and the loss complained of. This methodology effectively replaces the rules that under the general law fall under the rubric of “remoteness of loss” and intervening causes.
The “policy” and purpose of the legislation has been described in several decisions. It has been said that the TPA (and by extension the ACL) “is a fundamental piece of remedial and protective legislation which gives effect to ‘matters of high public policy’’ and that it is “to be construed so as to ‘give the fullest relief which the fair meaning of its language will allow’”.30 The purpose of the provisions prohibiting misleading or deceptive conduct have been said to be “to promote, in the broad sphere of Australian economic activity (trade and commerce), informed commercial activity, not based on misinformation, but rather on accurate information”,31 and the “protection of people in trade and commerce from being misled”.32
It seems to me that this new, and rather nuanced, approach to causation under the ACL may be capable of providing a gateway toward a more principled approach to the question of when statutory rescission should be ordered in any given case.
I am not suggesting that whether rescission should be ordered should turn on whether the plaintiff can demonstrate that no contract would have been entered but for the contravening conduct, or that the Court should vary contacts so that they match the position that had been represented.
Instead, the question should be:
(a) what loss or damage has been and is likely to be suffered “because of” the misleading conduct: recalling that the conduct need only be “a” cause of the loss, and that the policy and purpose of the ACL is relevant in determining the extent of the loss is to be compensated;
(b) would an order for rescission (or variation) provide compensation, or prevent or reduce that loss or damage in whole or part (or would a money order better do so)?
(c) is it just in all the circumstances to make an order rescinding or varying the agreement, having regard to (a) and (b)?
An example of the reasoning just discussed is to be found in reasons in Awad v Twin Creeks Properties Pty Ltd [2012] NSWCA 200.33 In that case, the trial judge had declined to rescind the purchase of a block of land affected by misleading conduct, and had instead awarded damages. In coming to that conclusion, the learned trial Judge emphasised that he was not satisfied that but for the representation, the land would not have been purchased at all. He considered that the statements made merely affected the price paid. His Honour consider that to be a decisive reason for refusing rescission, and instead awarding damages. On appeal, this approach was held to be in error. Allsop P (with who Macfarlan JA and Sackville JA agreed) said as follows (citations excluded):
[43] I have some difficulty with this approach. Relief under the TPA, s 87, should be viewed not by reference to general law analogues but by reference to the rule of responsibility in the statute that is directed against misleading and deceptive conduct…. Involved in that rule of responsibility is the public policy of protection of people in trade and commerce from being misled, and the width of the powers given by the TPA that are apt to be employed in a manner conformable with the just compensation or protection of the representee. Whether or not to grant a form of rescission under s 87, or to limit a plaintiff to damages under s 82, is a question in the nature of a discretion to be approached by reference to the facts of the particular case, the policy and underpinning of the TPA and the evaluative assessment of what is the appropriate relief to compensate for, or to prevent the likely suffering of, loss or damage “by” the conduct…. An approach that is limited mechanically around a but for causation enquiry will be likely not to involve a full evaluative assessment of the appropriate relief.
[44] If a defendant has contravened the norm of the statute and made misleading or deceptive representations that are operative to induce the representee to enter a contract, many factors may influence the question of relief. One of them could be the weight of the influence of the impugned conduct. It is not, however, a determinative factor upon which relief under s 87 turns. To view the matter thus is to constrict the exercise of power contemplated by the TPA. This is how the primary judge appears to have approached the matter. With respect, that was an error…
[46] In the circumstances here, if I be wrong in relation to the Peppers representation, I would allow the second aspect of the Awads’ appeal and make an order under s 87. The representation was operative; it was intended to be material; and it contributed to the decision to purchase. It was accepted that there was some loss or damage. It would be appropriate, in my view, to give relief conformable to the rule of responsibility and relieve the Awads of the purchase that they were induced to enter into by misleading or deceptive conduct, in particular where ascription of value is so difficult. Any such grant of relief would be subject to counter restitution being able to be made by them.
I would venture to suggest one further point. In my view, if it appears that the award of a money sum would adequately compensate the injured person for the loss suffered, and that is likely to be suffered in the future, that should be a powerful factor weighing against the making of any order for setting aside or varying the contract. In such a case, it can be said that the policy of the legislation suggests that no further relief is appropriate, for the object of the Act has been sufficiently achieved by a simple payment of money.
If, however, a money order would not truly compensate for the harm suffered or likely to be suffered (and including cases where quantification of the plaintiff’s loss in money terms is difficult),34 the question then arises as to whether an order for rescission, or an order varying the contract, would achieve that outcome. If it would, that may (depending on the particular circumstances) be a good reason for making an appropriate order.
This was the approach of Barker J in Metz Holdings Pty Ltd v Simmac Pty Ltd (No 2) [2011] FCA 981, [872] — [874], which concerned the sale of a lighting business induced by misleading representations. Barker J rejected the proposition that the purchaser’s delay and continuing in the business should bar rescission under the Trade Practices Act and explained the reasons for ordering that the sale be set aside in the following terms:
[874] To order damages, but not to order rescission and reverse the transaction would, I consider, simply leave the applicants with a business which, while they have done their best to operate it successfully and would continue to do so, would continue to suffer from the stain of the original contraventions of the TP Act. That would constitute an unjust outcome that fails adequately to compensate the applicants for their loss. In the result, I do not consider that the first applicants can be adequately compensated for the loss they have suffered unless the court orders rescission of the sale agreement and associated agreements.
The court went on to make orders for rescission adapted to returning both parties to their positions before the sale occurred (at [893]).
It will not escape your attention that in both Metz and Awad the Courts made the same kind of order that would have been made under the general law, had ground for rescission been established.
Conclusions: coherence and the common law
In conclusion, I would leave you with three ideas.
First, when advising a client who may have a claim for misleading or deceptive conduct, it is always important to consider not only a claim for damages, but also whether rescission, variation or other more exotic form of relief might be available, pursuant to section 237 and 243 of the ACL.
Second, it is important to remember that although the language of the legislation may not at first suggest that the general law is important, the cases have consistently said that the general law principles regulating rescission ab initio are relevant in considering whether rescission should be ordered, and the terms on which it should be ordered. A familiarity with the general law is therefore essential when examining the application of the statutory scheme.
Third, in considering this area of the law, it is important to have regard to the changes that are taking place in the principles of causation that demarcate the loss and damage for which relief is available. Clearly fixing the loss that is compensable is a key first step in forming a view as to what if any non-money orders should be made in cases of misleading or deceptive conduct.
In conclusion, it seems to me that in this field, coherence is best advanced not by following the common law, but by a clear appreciation of the differences between the statutory scheme and the parallel principles of our common law: and by remembering that when providing advice or making submissions, it is difficult to do better than the words of the section, and the policy and purpose of the legislation, however elusive they may at first appear.
Thank-you very much for your attention.
DB O’Sullivan QC
Queensland Bar Association Annual Conference
Sheraton Mirage, Gold Coast, 7 March 2015
Footnotes
[19] Examples can, accordingly, be found where contracts were set aside after their affirmation by the plaintiff (see, for example, Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd [2005] QSC 233, [639] (rescission available after affirmation); also, eg. Byers v Dorotea Pty Ltd (1986) 69 ALR 715, 722, 730 (affirmation does not necessarily bar relief under s87); Bantic v Boss Properties Pty Ltd [2000] VSC 121 [223]-[224] (incorporation of representation as a contractual term no bar)). Equally, if the justice of the case requires it, under section 237, the court may order that a contract be rescinded without making counter-restitution by the plaintiff a condition of him recovering back what he parted with under the contract: Macfarlane v Heritage Corporation (Aust) P/L [2004] QCA 183 (yacht sold for “trade dollars”). A court can, equally, order that a contract should be varied in a way that would be quite impossible under the general law: see, for example, The City of Sydney v Streetscape Projects (Australia) Pty Ltd [2011] NSWSC 1214, [352] (varying the terms of a contract to make it conform to a representation made and counter-part’s understanding of the effect of the agreement entered). Also, Diane Skapinker, “‘Other Remedies’ Under the Trade Practices Act -The Rise and Rise of Section 87” (1995) 21 Monash University Law Review 188, 214ff (as to orders varying an agreement).
