Clutha v Millar [2002] NSWSC 642 | Case summary

4834/00 CLUTHA LTD (IN LIQ) V FREDERICK WILLIAM MILLAR & ORS (NO.3) JUDGMENT 1 HIS HONOUR: This judgment is supplementary to my judgment in Clutha Ltd (in liq) v Millar [2002] NSWSC 362 ("Clutha No 1"). 2 In Clutha No 1 I decided that Clutha's pleaded case in negligence against the first to seventh defendants (directors of Clutha at the relevant time) was statute-barred. This was because the proceeding was commenced on 30 November 2000, and the statement of claim asserted negligence by failure to prevent the company from incurring debts during the period from 30 September 1994 to 14 February 1995, while it was (according to the pleading) insolvent. I regarded the pleading as an assertion that measurable loss occurred from 30 September 1994, outside the six-year limitation period for an action based on a cause of action in tort. Therefore I held that the proceeding was statute-barred. 3 In response to that judgment, Clutha by its liquidator applied to amend the statement of claim to confine the allegation of negligence to the period from 1 December 1994 to 14 February 1995, a period falling just within the six-year limitation period. In Clutha Ltd (in liq) v Millar (No 2) [2002] NSWSC 523 ("Clutha No 2") I held that the Court did not have jurisdiction under the Supreme Court Rules to grant leave to the plaintiff to amend in this fashion, and that if there had been jurisdiction to do so, I would have declined the application in the exercise of my discretion. 4 I concluded that the proper course was to dismiss the proceeding against the first to seventh defendants, but I did not make that order. Instead, after handing down my judgment in Clutha No 2, I stood the matter over to hear submissions with respect to costs, and also submissions on behalf of the tenth and eleventh defendants as to whether the proceeding should be dismissed against them and against the eighth and ninth defendants (who have not yet been served with the statement of claim). 5 When the matter came before me on 25 June for those purposes, counsel for Clutha drew my attention to Argyropoulos v Layton [2002] NSWCA 183, a judgment handed down by the Court of Appeal after I delivered my judgment in Clutha No 2. He submitted that Argyropoulos was contrary to my decision in Clutha No 1 and that I should hear further submissions in light of it. Counsel said he also wished to draw my attention to Sheldon v McBeath (1993) Aust Torts Reports para 81-209, another decision of the Court of Appeal, which had not been cited to me in earlier argument. 6 I granted leave to Clutha to re-open its case to make submissions on those two Court of Appeal decisions, and I granted leave to the defendants to make submissions in reply. My jurisdiction to entertain further submissions on the Court of Appeal cases is not in doubt: Autodesk v Dyason (No 2) (1992) 111 ALR 385, 387 per Mason CJ. 7 Clutha relies on the two Court of Appeal judgments to challenge the reasoning in paragraphs 29 to 34 of Clutha No 1. In paragraph 29 I held that the pleaded duty of care was a continuing one, extending through the September/February period. I rejected the plaintiff's contention that there was a distinct cause of action accruing each time the company incurred a new debt. I did so for two reasons. First, I found that upon its proper construction, the statement of claim did not plead a separate cause of action for every debt incurred during the September/February period (paragraphs 30-31). Secondly, I held that it was not open to the plaintiff to plead a separate cause of action for the incurring of each debt, given the nature of the case in negligence (paragraphs 32-34). I relied on some observations by Glass JA in Hawkins v Clayton (1986) 5 NSWLR 109 at 124-5. 8 Glass JA's remarks (which I shall refer to as the "additional loss" test) have been the subject of conflicting submissions in the re-opened case. It may be useful to set out the relevant passage again. His Honour said: "… [N]o fresh cause of action accrued to the beneficiary when he suffered further loss of income during the six-year period of limitation. Assuming a continuing duty of care, a fresh cause of action will only arise if a fresh breach causes loss going beyond the loss resulting from the barred cause of action. Such a fresh cause of action was established in Adams v Ascot Iron Foundry (1968) 72 SR (NSW) 120 where the plaintiff being statute barred in respect of lung disease caused by negligence before the limitation period was able to prove subsequent negligent exposure to dust which rendered his condition worse than it would have been as a consequence of the statute barred negligence. The evidence here fails to establish a fresh breach inflicting superadded loss for the following reasons. The assumed breach of duty occurring before the limitation period of six years was the failure to take care to locate the beneficiary. Since the evidence showed a continuing omission to take steps which would have led to the discovery of his whereabouts, there is some difficulty in postulating a succession of breaches of duty arising from the continuing inaction. Do they occur at yearly, monthly, daily or hourly intervals? Nevertheless, if it be assumed in favour of the argument that there was a continuing breach of a continuing duty there is an insurmountable obstacle with respect to proving aggregation of the damage otherwise suffered. The loss of income flowing from the putative breach of duty within the six-year period viz after November 1976 was no different from the loss of income which would have been recoverable in an action for the earlier breach of duty had it not been statute barred." 9 In Clutha No 1 I chose to follow and apply the "additional loss" test on the grounds that I found Glass JA's reasoning, with respect, to be cogent, and that it had not been overruled by the majority of the High Court in Hawkins v Clayton (1987) 164 CLR 539. I said (at paragraph 33) that the only doubt cast upon his Honour's remarks were in some tentative observations by Deane J (164 CLR at 589, extracted at paragraph 28 of my judgment), which I found to be inapplicable to the case before me. 10 Clutha contends that some passages in the judgment of Priestley JA in Sheldon, and some passages in the judgment of Santow JA in Argyropoulos, show that on a proper analysis of the plaintiff's negligence claims, a separate cause of action in negligence arose when each debt was incurred by the company during the September/February period. To make out that case, Clutha must say that the "additional loss" test in respect of breach of a continuing duty of care is not the law. Clutha has not been given leave to argue that I misapplied the "additional loss" test in Clutha No 1, and I do not intend to re-visit my conclusions as to the application of the test. To understand the observations upon which Clutha relies, it is necessary to consider the facts and decisions in the two Court of Appeal cases. Sheldon v McBeath 11 The plaintiff/respondent, a building owner, sued the architect for breach of contract and negligence in connection with the erection of his house. The case was referred to a referee, who reported that the building works contained serious defects, relating to the foundations and footings. The footings were not founded on hard shale material and brick piers had not been properly constructed. These defects led to differential settlement of the structure. The judge at first instance, Giles J, held that the architect was contractually bound to supervise the construction of the house from commencement to completion and handover. He was therefore required to inspect such an important matter as the construction of the footings, and he failed to do so. 12 The main issue on appeal was whether the proceeding was time-barred under the Limitation Act 1969 (NSW), which imposes six year limitation periods for actions founded on contract and tort. The footings were constructed during December 1982 and January 1983. The architect approved the builder's claims for payment for the foundations and signed progress certificates in December, January and February. Practical completion of the building was reached on about 6 September 1983. The owner went into possession on 9 September 1983 and the architect signed the certificate for final payment to the builder on 11 September 1983. The defects in the building structure became apparent within the ensuing 12 months, but the proceeding was not commenced until 30 June 1989. 13 As to the time bar for contract claims, the owner argued that although the architect's failure to supervise the construction of the footings occurred outside the limitation period, the duty of supervision was a continuing one and a further breach occurred within the six years when the architect negligently advised that the building was practically completed. As to the time bar for tort claims, the owner contended that he first suffered damage within the six year period, when he accepted the building as being practically completed, or even at a later stage when significant cracks became apparent. The owner also relied upon the architect having a continuing duty of care which gave rise to further acts of negligence within the six years. 14 In the Court of Appeal Priestley JA (with whom Mahoney JA agreed) dealt only with the contractual aspect of the appeal on the limitation point, and found it unnecessary to express any opinion about the application of the limitation period to the tort claim (at 62,075). He found that the architect's promise to supervise the construction of the building was one that continued throughout the period of the architect's supervision from commencement to completion and handover (at 62,073). Handley JA disagreed, treating the architect's promise to supervise as a promise to do definite acts (such as inspection of the footings, and the signing of progress certificates) at particular times, rather than a continuing contractual duty. 15 Priestley JA saw the question as whether the architect's promise was more properly construed as "I'll inspect the footings and foundations before they are covered up" or "I'll inspect the foundations and footings during the course of my supervision of the construction from commencement to completion and handover" (at 62,072). He preferred the latter answer, and saw Handley JA as opting for the former. On the analysis preferred by Priestley JA, since the architect failed to inspect the footings before they were covered up, outside the limitation period, he continued to be under a duty to inspect them until completion and handover, which took place within the limitation period. 16 Having concluded that the architect was under a continuing contractual duty, Priestley JA continued (at 62,073): "Accepting, for the purpose of this argument, that the architect committed a continuing series of breaches of his duty to inspect, counsel submitted that each breach had the same consequence as the first, namely a failure to ensure that the builder remedied his breach, the nature of the breach never changed, and the same cause of action arose out of each breach . Section 14 (1) of the Limitation Act 1969, which provides that causes of action founded on contract or tort are "not maintainable if brought after … six years … from the date on which the cause of action first accrues to the plaintiff" was then called in aid and it was argued that even on the construction of the architect's promise adverse to the appellant, the cause of action had first accrued more than six years before the commencement of the proceedings. "I think the fallacy in this argument can be seen in the step in it that I have italicised above. The same cause of action does not arise out of each breach. Successive causes of action arise. Although each cause of action may be identical for practical purposes, each is distinct from the others. The successive causes of action arise day by day following the architect's initial breach and any one could be the subject of separate proceedings. Only actions on those causes of action that resulted from breaches of the promise more than six years before the commencement of proceedings by the owner are made not maintainable by the Limitation Act. All those within the six years are available to the owner as causes of action. It may be thought that there is no practical point in distinguishing between the successive causes of action except as they fall on one side of the time bar or the other, but they are as a matter of legal reasoning, all separate causes of action. Each one first accrues on the day of the breach. The argument in my opinion therefore fails." 17 These are the principal passages upon which Clutha relies. However, three points should be made. 18 First, Priestley JA's observations were all directed towards the limitation period for contract claims. As Handley JA pointed out in Argyropoulos at paragraph 5, a cause of action in contract accrues on breach, and time begins to run for limitation purposes irrespective of the accrual of any damage: citing Howell v Young (1826) 5 B & C 259, 265 [108 ER 97, 99]; Hawkins v Clayton (1986) 5 NSWLR 109, 122. A cause of action in tort accrues when measurable damage is first suffered even though further damage continues to accrue: citing Wardley Australia Ltd v Western Australia (1992) 175 CLR 514, 531; Scarcella v Lettice (2000) 51 NSWLR 302, 306; Cartledge v Jopling & Sons Ltd [1963] AC 758. 19 In my opinion, this well-established difference has not been diminished by recent cases on the relationship between causes of action in contract and tort. The fact that a plaintiff now may have concurrent causes of action in contract and tort does not mean that the causes of action are indistinguishable. Differences between the two causes of action are sometimes of great significance: see, esp. Astley v Austrust Ltd (1999) 197 CLR 1. In that case it was held that damages for breach of contract cannot be reduced by contributory negligence under apportionment of liability legislation, even though the plaintiff could have sued for negligence on the same facts and if he had done so, the apportionment legislation would have applied. Gleeson CJ, McHugh, Gummow and Hayne JJ said (at 22-3): "The proposition that, in the absence of express agreement, tort and not contract regulates the duty of care owed by a professional person to a person hiring the professional services is inconsistent with the historical evolution of professional duties of care which, until recently, could be the subject of action only in contract. Moreover, the conceptual and practical differences between the two causes of action remain of "considerable importance" [citing Aluminium Products (Qld) Pty Ltd v Hill [1981] Qd R 33 at 52]. The two causes of action have different elements, different limitation periods, different tests for remoteness of damage and … different apportionment rules." 20 The difference between a cause of action in contract accruing upon breach, and a cause of action in tort accruing when the breach causes damage to be suffered, has an important impact on the analysis of breach of a continuing duty. Where the continuing duty is contractual, it may be plausible to say that the continuing failure to discharge it gives rise to a series of causes of action, while the failure continues. This is because contractual causes of action accrue upon breach, and it seems artificial and unacceptable to say, in the case of a continuing failure to discharge a continuing contractual duty, that the only breach that has occurred is the failure to perform the duty when it first arose. In the tort of negligence, where damages are the gist of the action, even if it were correct to say that breaches repeatedly occur so long as the failure to discharge the duty of care continues, it would not follow that a series of separate causes of action would accrue. One must look to see when measurable damage is first suffered. It is that measurable damage that completes a cause of action in negligence, and the cause of action arises once it has occurred, even though further damage continues to accrue. 21 It follows that as a matter of analysis, Priestley JA's observations, expressly confined by him to contract claims, should not be extended to claims for negligent breach of a continuing duty of care, where analysis points to a different conclusion. 22 Secondly, if Priestley JA had intended that his observations would apply to claims for negligent breach of a continuing duty of care, one would have expected him to refer to and deal with Glass JA's observations in Hawkins v Clayton. Glass JA's observations are inconsistent with the view that failure over time to discharge a continuing duty of care gives rise to a series of causes of action, in the absence of a fresh breach causing additional loss. It seems likely that Glass JA's observations were before the Court, for they were cited by Handley JA, but they were not referred to by Priestley JA. It is appropriate to infer that this was because he did not regard them as having any relevance to the point he was making about contractual claims. 23 Thirdly, the scope and applicability of Priestley JA's observations may be affected by the way the issues were presented in argument. In the passage quoted above, his Honour began by accepting, for the purposes of argument, that the architect committed a continuing series of breaches of his duty to inspect. On that assumption, he disagreed with counsel's contention that the same cause of action arose out of each breach - not surprisingly, given that it is the breach of duty that generates a cause of action for breach of contract, rather than any damage or loss. In the present case, the defendants would vigorously resist any assumption that by failing to prevent Clutha from continuing to incur debts during the September/February period, they committed a continuing series of breaches of their duty of care. 24 In light of these matters, my view is that Priestley JA's reasoning in Sheldon does not affect my reasoning and conclusions in Clutha No 1. On the other hand, there are observations in the judgment of Handley JA, applying Glass JA's "additional loss" test to the tort claims, which provide some support for my reliance on Glass JA's approach, notwithstanding that Handley JA's judgment was a dissenting judgment as to the contract claims. 25 It was unnecessary for Handley JA to deal with Priestley JA's reasoning on the contract claims, because of his finding that the architect's promise to supervise was a promise to do definite acts at particular times, rather than a promise giving rise to a continuing contractual duty. However, unlike Priestley JA, Handley JA went on to deal with the tort claim. For the purpose of doing so, he treated the architect as having failed to discharge his duty of care in respect of several particular events, namely failure to inspect the foundations, certifying progress payments for the foundations, advising practical completion, and certifying final payment to the builder (at 62,081). He did not treat the case as one of a continuing failure to discharge a continuing duty of care, and therefore strictly speaking Glass JA's "additional loss" test, expressed to apply in the case of continuing failure to discharge a duty of care, was not directly applicable. However, he quoted the central part of Glass JA's observations as a statement of "the applicable principles" (at 62,082) and held (at 62,083) that even if there was a continuing duty of care, the architect was guilty of fresh breaches when he negligently advised that practical completion had occurred and approved final payments to the builder, within the limitation period. Argyropoulos v Layton 26 The plaintiff was injured in a motor accident on 10 March 1989. He first instructed the defendants, who were solicitors, in relation to that accident on 16 March 1989. On 30 August 1991 he deposited funds with the defendants and instructed them to commence proceedings for damages against the driver of the other vehicle involved in the accident. No proceeding was commenced, and the three-year primary limitation period applicable under s 52 (4) of the Motor Accidents Act 1988 ( NSW) expired on 1 January 1993. However, the court had power under s 52 (4) to grant leave for an action to be commenced within the extended period. The defendants' retainer did not lapse with the expiry of the limitation period, and on 11 June 1993 the plaintiff instructed the defendants to commence proceedings for leave. No such application was ever made. 27 On 4 June 1999, having by that time lost all other remedies, the plaintiff commenced a proceeding against the defendants for negligence. The principal issue on the appeal was whether the plaintiff's action against his former solicitors was statute-barred. The trial judge held that it was. On appeal, the Court of Appeal unanimously held that the negligence of the defendants involved two distinct causes of action, only the first of which was statute-barred. 28 The first cause of action was based on the breach constituted by the defendants' failure to commence proceedings within the primary limitation period, that is by 1 January 1993. Any damages recoverable for breach of that duty (apparently in contract or in tort) would have been reduced because of the chance that the plaintiff still had, at the time of expiration of the primary limitation period, to retrieve the situation by successfully applying for leave to commence proceedings out of time. The second cause of action (again, apparently in contract or in tort) was based on the breach constituted by the defendants' failure to apply expeditiously for an extension of the limitation period, when they were instructed to do so on 11 June 1993. That breach caused the plaintiff to suffer loss additional to the loss caused by the first breach, because it was the second breach that finally deprived the plaintiff of his cause of action against the other motorist. Their Honours held that the claim in relation to the second cause of action was not statute-barred as the proceeding was instituted within six years of the relevant breach. 29 The primary reasoning of Santow JA (with whom Hodgson JA agreed) is as summarised above, and is to the same effect as the reasoning of Handley JA. In considering Sperling J's decision in Wilson v Rigg [2000] NSWSC 16, Santow JA asked (at paragraph 31) whether there was a separate cause of action for negligent failure to obtain leave, as distinct from the earlier cause of action for failure to proceed within the original limitation period. Having analysed various cases, he posed the question (at paragraph 40) whether there was one indivisible obligation breached, so giving rise to one cause of action, or two distinct (albeit related) obligations each capable of giving rise to separate causes of action. After examining the concept of a cause of action, and identifying factors which render one cause of action distinct from another, his Honour concluded (at paragraph 56) that there was a "once and for all" duty to commence proceedings before the expiration of the primary three-year limitation period, and a separate continuing duty to maintain a state of affairs whereby the proceeding could be brought outside the original limitation period by seeking and obtaining leave (applying the distinction explained by Dixon J in Larking v Great Western (Nepean) Gravel Ltd (1940) 64 CLR 221, at 236). It seems to me that Santow JA's remarks in paragraph 56 are directed towards contractual rather than tortious causes of action, for otherwise it would be hard to see why Larking's case was relevant. 30 That reasoning is of no assistance in the present case, because here there is no basis for saying that during the period from September 1994 to February 1995 there were two or more distinct stages, giving rise to different breaches leading to damages quantified in different ways. The question in the present case is whether a continuing breach of a continuing duty of care, by failure over a period of time to discharge the duty by taking appropriate action to prevent the company from incurring debts, constitutes a single cause of action or is to be segregated into separate causes of action, each arising when a new debt was incurred. 31 At various points in his judgment, Santow JA made observations that appear to be relevant to this question. Thus, in discussing Sperling J's reasoning in Wilson v Rigg, his Honour observed (paragraph 30) that Sperling J had not canvassed the argument that there was "a continuing breach of duty by the solicitor, one which occurred on each day after 1 July 1992 (the date the original three years expired under the MA Act)". At paragraph 40 he posed the question: "Are there here two distinct causes of action, or indeed continuous breaches with each day that passes?" He referred to the latter as "the alternative way of posing the question". 32 His Honour returned to the "alternative way of posing the question" in the following paragraphs: "49 Although "damage" is generally characterised as the "gist" of a cause of action in negligence, its essential ingredients also include a duty of care, and breach of that duty ( Williams v Milotin (1957) 97 CLR 465 at 474). Thus the cause of action derives from the facts to be pleaded and proven to establish these ingredients. 50 Moreover, one cause of action is rendered distinct from another, if there is any ingredient of the respective causes of action which is distinctive, though that ingredient be simply the repetition of a continuing breach by a negligent architect on successive days: Sheldon v McBeath (1993) Aust Tort Reports 81-209 at 62,073. The mere fact that the ingredient comprising "damage" might be similar or that "each cause of action may be identical for practical purposes" does not preclude the inference that the causes of action are distinct (per Priestley JA). 51 In Wilson v Rigg the failure to commence proceedings within three years involves a distinct ingredient, here that of "breach of duty", from the later failure to seek leave. Indeed, were it to matter, the damage for each distinct breach will differ, though can never exceed the total value of the cause of action, undiscounted. Thus ordinarily just after the expiration of three years, the damage for failure to bring proceedings would be substantially discounted by the probability that a prompt leave application should succeed in reinstating the proceedings, given its likely prospects of success. Thereafter continued failure to seek leave must aggravate the damage in the point where the prospect of leave becomes zero. At that point the damage is no longer discounted, but corresponds to the full value of the (lost) right of action. That occurs where the application is either never made or made so late as to render failure inevitable. 52 In relation to any tort which is actionable without proof of injury, or in relation to a tort such as nuisance, where there is a continuing duty to abate, if the act which constitutes the tortious conduct is a continuing act, every continuance of that act gives rise to a fresh cause of action. Here though the cause in negligence is not actionable without damage as its gist. The failure to seek leave in time involves a continuing accretion to the damage suffered. This is as the chance or prospect of successful leave diminishes with each day's delay in seeking leave, till it becomes a practical impossibility. 53 On the other hand, if damage is inflicted only once, then there is only one single cause of action, completed when damage first occurs, notwithstanding a continuation of the breach of duty. Thus it is said that if a solicitor negligently allows a client's cause of action entirely to lapse, the client suffers injury only once, when the cause of action lapses, notwithstanding the recognition of a continuing duty to advise the client of the loss of the action: Australian Torts Reports [5-320 at 10,604]." 33 Clutha relied on these passages to support its contention that a separate cause of action accrued to it when each debt was incurred during the period from September 1994 to February 1995. In my opinion Santow JA's remarks should not be relied upon to produce the result contended for by Clutha, for the following four reasons. 34 First, it is evident from the text of the passages that the "alternative way of posing the question" was put forward tentatively, and was not the basis of Santow JA's decision. His Honour's primary reasoning was equivalent to the reasoning of Handley JA (which did not advert to the "alternative" analysis). Therefore Santow JA's observations on the "alternative" analysis are obiter dicta. 35 Secondly, Santow JA's remarks about continuing breaches accruing day by day relied on Priestley JA's observations in Sheldon v McBeath. As I have pointed out, Priestley JA's observations were confined to contract claims, which are analytically different from claims based on the tort of negligence. The differences between contract claims and claims based on negligence were noted by Santow JA at paragraph 52, quoted above. Reading his Honour's judgment as a whole, I do not believe that he intended to extend Priestley JA's "repeated and separate causes of action" analysis from contract to the tort of negligence. 36 Thirdly, although Handley JA's primary reasoning was substantially the same as Santow JA's primary reasoning, Handley JA again quoted the central part of Glass JA's "additional loss" test (as he had done in Sheldon). He observed (at paragraph 9) that as the judgment of the majority of the Court of Appeal in Hawkins v Clayton was reversed by the High Court, the validity of the principle stated by Glass JA in that passage was not clear, but if it was still valid, it was satisfied in the case before him. It seems that by dealing with Glass JA's observations in this way, Handley JA impliedly rejected the idea that failure to comply with a continuing duty of care gives rise to a series of separate causes of action in tort, in circumstances where the "additional loss" test has not been satisfied. 37 Fourthly, it appears to me that although he agreed with Santow JA, Hodgson JA did not endorse the "alternative way of posing the question" put forward tentatively by Santow JA. After expressing his agreement with Santow JA, Hodgson JA particularly agreed with what I have described as the primary reasoning of the Court, to the effect that failure by the defendants to carry out the instructions given to them in June 1993 to apply for leave, leading to the loss of the chance of obtaining that leave and recovering damages, constituted a cause of action that was not statute-barred. 38 Consequently, my view is that nothing in Santow JA's reasons for judgment in Argyropoulos should lead me to decline to follow, in a continuous duty case in tort, the "additional loss" test enunciated by Glass JA. Conclusions 39 I have decided that the two Court of Appeal judgments are not inconsistent with my reasoning in Clutha No 1, and that Handley JA's treatment of Glass JA's observations in Hawkins v Clayton (upon which I relied in Clutha No 1) reinforces my reasoning. Having reached that conclusion, it is unnecessary for me to consider whether my construction of the statement of claim (Clutha No 1, paragraphs 30 and 31) is open to challenge, or whether the plaintiff's further submissions on that matter go beyond its leave to re-open and make submissions on the two Court of Appeal cases. 40 There being no ground for withdrawing or amending my reasons for judgment, I intend to dismiss the proceeding against the first to seventh defendants, hear submissions as to costs, and also hear the submissions of the tenth and eleventh defendants. **********

Clutha v Millar

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