Discussion
107 The submissions for the applicants attempted to bring the circumstances of the case within established principles in respect of the imposition of liability for economic loss. Accordingly, the applicants' submissions emphasised factors said to create a relationship between the Department and the applicants such as to give rise to a duty of care, being: - (i) the long-term relationship between Mr Hine and the Department, in which he had previously worked as a sole trader contracted directly by the Department to work on its properties, (ii) the fact that Mr Hine's change in status from a sole trader to a body corporate (CPR Property) and from a direct contractor to a subcontractor was the result of a decision by the Department for the purpose of its administrative convenience only, but for which Mr Hine would have continued to work as a contractor to the Department protected by a direct contractual relationship, and the Department's knowledge of the same, (iii) the Department's knowledge that the business of Mr Hine and, it may be inferred, CPR Property, involved work only on the Department's properties, (iv) the terms of the head contract, specifically cl 16, by which the Department is said to have assumed responsibility for determining whether or not Willowdene or Transfield could use CPR Property as a subcontractor, and (v) the Department's knowledge that its exercise of power under cl 16 would cause loss to the applicants.
108 The applicants said that, in these circumstances, a duty of care was owed as proposed. By reference to the factors identified as relevant in Perre v Apand Pty Limited (1999) 198 CLR 180; [1999] HCA 36 at [106], the applicants submitted that the loss to the applicants by reason of the breach of duty was foreseeable. The liability was not indeterminate but related to the class of subcontractors the subject of cl 16 only. There was no question of autonomy involved as there was a contractual obligation to issue a direction only in accordance with the terms of cl 16. The applicants were vulnerable to the risk of loss by reason of the Department's conduct because they worked on the Department's properties only and the subcontracts from Willowdene and Transfield permitted termination without cause.
109 The applicants' ultimate submission (set out at [132]-[133] of the written submissions on their behalf) was that:
There is no reason why a remedy in tort cannot be fashioned to overcome the injustice suffered by CPR Property and Mr Hine in the present case. Indeed this was what the Courts have done in the context of the disappointed beneficiary cases: see White v Jones [1995] 2 AC 207; Hill v Van Erp (1997) 188 CLR 159 at 235…
The Court need not expand the law of negligence to a general class of cases, as has occurred in the aforementioned cases. The present case is fact specific and arises in the way in which the three parties have chosen to conduct their affairs.
110 Again, despite the persuasiveness of the way in which the submissions for the applicants were put, I am unable to accept them. The case is not within any established category in which liability for negligence is imposed. The fact that the harm suffered by the applicants (loss of profits from the business of CPR Property) was a reasonably foreseeable consequence of the issue of the directions under cl 16 of the head contract does not mean that the respondents are liable in the tort of negligence to the applicants. Accordingly, and as McHugh J said in Perre v Apand at [94], further inquiry is required. Once that inquiry is undertaken it is apparent that the claim confronts numerous legal and factual difficulties.
111 The first difficulty relates to the imposition of a duty of care. The applicants' submissions acknowledged the observation of Gummow and Hayne JJ in Graham Barclay Oysters Pty Limited v Ryan (2002) 211 CLR 540; [2002] HCA 54 at [145] that:
…the co-existence of knowledge of a risk of harm and power to avert or to minimise that harm does not, without more, give rise to a duty of care at common law. The totality of the relationship between the parties, not merely the foresight and capacity to act on the part of one of them, is the proper basis upon which a duty of care may be recognised.
112 The applicants' submissions, however, did not provide a complete or realistic assessment of the relationship between the applicants and the respondents. This is not a case where the respondents exercised some statutory power to the applicants' detriment. The relationship between the respondents and the applicants was purely commercial. The Department owns a vast number of properties across NSW. It needs to have them maintained and repaired so that it can fulfil its statutory functions. In so doing the Department expends public money for a public purpose. But that does not bring any public law element into the Department's relationship with those who deal with it in providing services of maintenance and repair. In the context of this proceeding, the Department is no different from any other person or body which has a very large property portfolio and seeks the commercial services of third parties to keep the portfolio in good order and repair. It follows that the legal analysis cannot be affected by any generalised notion that government agencies should somehow be better or fairer than private entities in their commercial dealings with third parties.
113 The cases in this area of liability for pure economic loss emphasise certain basic matters about the way in which our social and legal relations are structured. Contrary to the applicants' submissions, the issue of individual autonomy looms large in this context. McHugh J framed the issue this way in Perre v Apand at [100]:
In determining whether the defendant owed a duty of care to the plaintiff, the ultimate issue is always whether the defendant in pursuing a course of conduct that caused injury to the plaintiff, or failing to pursue a course of conduct which would have prevented injury to the plaintiff, should have had the interest or interests of the plaintiff in contemplation before he or she pursued or failed to pursue that course of conduct. That issue applies whether the damage suffered is injury to person or tangible property or pure economic loss. If the defendant should have had those interests in mind, the law will impose a duty of care. If not, the law will not impose a duty.
114 At [102] in Perre v Apand McHugh J continued as follows:
…indeterminacy and conduct legitimately protecting or pursuing a person's social or business interests are merely factors which negative the existence of a duty. That is an important limitation on their utility as a principle for determining whether a duty exists. Recognition of that limitation also answers the criticism that indeterminacy of liability and conduct legitimately protecting or pursuing a person's social or business interests are not useful criteria in determining duty because they are not relevant to all cases of pure economic loss. On the contrary, they are useful because, when they apply, they provide valid reasons for rejecting a duty. It hardly needs to be said that, when they are absent, no duty, or even a prima facie duty, automatically arises.
115 The fundamental basis on which these propositions are founded was clearly disclosed by his Honour's observations at [114]-[116] in Perre v Apand which warrant repetition in full given the facts of the present case:
[114] One of the central tenets of the common law is that a person is legally responsible for his or her choices. It is a corollary of that responsibility that a person is entitled to make those choices for him or her self without unjustifiable interference from others. In other words, the common law regards individuals as autonomous beings entitled to make, but responsible for, their own choices. The legal doctrines of duress, undue influence and criminal liability are premised on that view of the common law. In any organised society, however, individuals cannot have complete autonomy, for the good government of a society is impossible unless the sovereign power in that society has power in various circumstances to coerce the citizen. Nevertheless, the common law has generally sought to interfere with the autonomy of individuals only to the extent necessary for the maintenance of society. In the law of liability for economic loss, we have a notable example of the common law's concern for the autonomy of individuals. In Hill v Van Erp [(1997) 188 CLR 159 at 211], I pointed out that:
"Anglo-Australian law has never accepted the proposition that a person owes a duty of care to another person merely because the first person knows that his or her careless act may cause economic loss to the latter person. Social and commercial life would be very different if it did. Indeed, leaving aside the intentional tort cases of wrongful interference with another person's legal rights (inducing breach of contract, intimidation and conspiracy, for example) a person will generally owe no duty to prevent economic loss to another person even though the first person intends to cause economic loss to another person. In our free enterprise society, no one questions the right of the trader to increase its advertising or cut its prices even though that action is done with the intention of taking the market share of its rivals."
[115] The immunity from liability referred to in that passage is a consequence of the common law's concern for the autonomy of the individual and its desire to give effect to the choices of the individual by not burdening his or her freedom of action. Nor is the immunity confined to traders. As long as a person is legitimately protecting or pursuing his or her social or business interests, the common law will not require that person to be concerned with the effect of his or her conduct on the economic interests of other persons. And that is so even when that person knows that his or her actions will cause loss to a specific individual. Thus, a consumer owes no duty to a trader not to cause loss to that person by withdrawing custom. However, where other indicia of duty are present, the cloak of immunity cannot extend to conduct which cannot be fairly described as a legitimate pursuit or protection of a person's interests. What then is not a legitimate protection or pursuit of one's interests?
[116] Competitive acts not prohibited by law are legitimate unless they fall within the ambit of one of the economic torts to which I referred in Hill v Van Erp. Ordinary competitive conduct imposes no duty to protect others from economic loss. At the other end of the spectrum, conduct involving deceit, duress or intentional acts prohibited by law could seldom, if ever, be regarded as done in the legitimate protection or pursuit of one's interests. However, it does not follow that, other indicia of duty being present, a person will always lose the immunity given to protect the autonomy of the individual merely because his or her conduct has been done in breach of law. It would be curious if breach of s 52, or a provision of Pt IV, of the Trade Practices Act 1974 (Cth) automatically meant that the defendant owed a common law duty of care to all those that he or she knew would be affected by the breach. Between the extremes are acts whose legitimacy will no doubt affect minds differently. They are likely to involve sharp or ruthless conduct. Perhaps no more can be said in the abstract than that the line of legitimacy will be passed only when the conduct is such that the community cannot tolerate it.
116 McHugh J returned to the same theme in Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515; [2004] HCA 16 at [78] in these terms:
In Hill v Van Erp [(1997) 188 CLR 159 at 211], I pointed out that "Anglo-Australian law has never accepted the proposition that a person owes a duty of care to another person merely because the first person knows that his or her careless act may cause economic loss to the latter person". Speaking generally, a person owes no duty to prevent economic loss to another person even though the first person intends to cause economic loss to that other person. This particular immunity from liability reflects the common law's concern with the autonomy of the individual and its desire to give effect to the choices of the individual by not burdening his or her freedom of action. Thus, as long as a person is legitimately protecting or pursuing his or her commercial interests, the common law does not require that person to be concerned with the effect of his or her conduct on the economic interests of other persons.
117 These observations are significant for the resolution of the present case. The Department was entitled to make business arrangements for the maintenance and repair of its properties as it saw fit. It was also entitled to change its arrangements from time to time assuming no other legal constraint (such as a contract) confined it. The change that it made to its arrangements in or about 2002, to use contractors across large areas and not to contract directly with multiple individual contractors, was an administrative re-arrangement of its affairs. It was a re-arrangement the Department was entitled to make. The Department was entitled to act in what it perceived to be its own best interests, no doubt having regard to its statutory and other obligations. It would be strange if action that the Department was able to take in its own best interests and without regard to the interests of the multiple individual contractors could be a factor indicating the existence of a duty of care owed to any one or more of those multiple individual contractors.
118 Similarly, Mr Hine was entitled to arrange his business as he saw fit. Presumably the fact that he worked exclusively for the Department as a sole trader and then under the auspices of CPR Property was the result of a business decision that he made about the form of operation he considered to be in the best interests of his business. In making that decision it must be inferred that Mr Hine weighed up for himself both the benefits and the risks. One obvious benefit is ease of management of a single client. Another might be a low risk of bills not being paid. One obvious risk is that if the single client decides not to use the services of the business then the business will cease unless and until replacement clients can be found. Whatever the risks and benefits these were matters that Mr Hine was able to weigh up. In our society Mr Hine was free to make his own choice as to the best way for him legitimately to pursue his own interests. My inference that the Department knew that Mr Hine and later CPR Property worked exclusively on the Department's properties does not alter the fact that it would be odd to treat as factors in favour of the imposition of a duty of care matters which, properly analysed, are nothing more than an expression of our law's acceptance of an individual's legal right to pursue legitimate business and commercial interests generally without regard to the impacts on others.
119 For the same reasons I am unable to accept that the applicants were vulnerable to harm from the respondents' conduct in the relevant sense. Again, I adopt the words of McHugh J in Perre v Apand at [118] as follows:
If the plaintiff has taken, or could have taken steps to protect itself from the defendant's conduct and was not induced by the defendant's conduct from taking such steps, there is no reason why the law should step in and impose a duty on the defendant to protect the plaintiff from the risk of pure economic loss.
120 Gleeson CJ, Gummow, Hayne and Heydon JJ put the issue this way in Woolcock at [23]:
"Vulnerability", in this context, is not to be understood as meaning only that the plaintiff was likely to suffer damage if reasonable care was not taken. Rather, "vulnerability" is to be understood as a reference to the plaintiff's inability to protect itself from the consequences of a defendant's want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant.
121 The fact that the applicants only worked on the Department's properties and could do nothing if the Director-General exercised the power under cl 16 of the head contract did not make them vulnerable in the relevant sense. Mr Hine chose to structure his business in the way that he saw fit and, presumably, to maximise his own commercial interests. He must be taken to have made a business decision to work only on the Department's properties based on his own perception of the benefits and risks of having a single large client. Far from that decision making him vulnerable in the relevant sense, the decision shows Mr Hine's exclusive control over his business undertaking and his associated level of risk and vulnerability to changes in circumstances. Our social and legal system gave Mr Hine the autonomy to arrange his business as he saw fit. Mr Hine could have protected himself from the Department acting with a lack of reasonable care by not working for the Department or by expanding his client base so that the loss of one client could not destroy the entire business. Similarly, it also could be said that the applicants had no control over the contractors' decision to give them work. Or that the applicants had no control over the Department's appointment of contractors. Or that the applicants had no control over the Department's allocation of work to contractors. All would be true as the applicants had no control over many things. But that does not make them vulnerable in the sense of being unable to protect themselves from harm.
122 Once these factors are put to one side (as I consider they must be, consistent with principle) the only matter left is the existence of cl 16 of the general conditions of the head contract. The first and obvious point is that cl 16 is in a contract between the Corporation and the contractors (specifically, Willowdene and Transfield). It is not apparent that Mr Hine knew about cl 16 before he received the directions or in any way relied on the clause in the arrangement of his business affairs. In these circumstances it is not clear how the presence of cl 16 in the head contract gave rise to any legal relationship (such as the existence of a duty of care) between the Corporation or the Department and the applicants.
123 I also do not see cl 16 as a provision by which the respondents assumed any responsibility towards the class of existing or potential subcontractors. My inferences that the Department must have anticipated the almost routine use of subcontractors by the contractors and that many of the trade contractors with whom the Department used to contract directly would continue to work on its properties as subcontractors are insufficient to constitute the clause as having that legal consequence. The clause simply vests a conditional power in the Department to prohibit the contractor from using a particular subcontractor on the specified grounds. It is a power of the Department as against the contractor. It is not a power carrying with it a duty owed to the subcontractor.
124 I cannot see any similarity between the present case and the "disappointed beneficiary" cases. As apparent from the discussion in Hill v Van Erp (1997) 188 CLR 159, in such cases the primary relationship is between a solicitor and a client where there is an established duty of care. Breach of the duty causes no loss to the testator. The loss is that of the disappointed beneficiary. But the interests of the testator and beneficiary are common. The testator's purpose in retaining the solicitor is to ensure their will is effective to dispose of the estate as the testator wishes. In these circumstances the courts have imposed a duty of care upon the solicitor in favour of the intended beneficiary. In the present case, by contrast, the contractual relationship is with the contractor. It is difficult to see why the Department owed any duty of care to the contractor in respect of its exercise of powers under cl 16, let alone the subcontractor. Further, the interests of the parties are not common. The Department wants to ensure its properties are maintained for the best price possible. The contractor wants to ensure the price enables it to get a reasonable return. The subcontractor also wants to obtain a reasonable return for the work performed. The Department's purpose in retaining the contractor is not to ensure the subcontractor gets work and can profitably run a business. It is to ensure the work gets done properly and for a reasonable price. These facts cannot be characterised as analogous to the will cases or any other recognised category of case in which a duty has been found to exist.
125 In terms of the factors identified as relevant in Perre v Apand and Woolcock, I accept that the issuing of the directions under cl 16 involved a reasonably foreseeable risk of harm to the applicants. Mrs Trudgett and Mr Schultz both agreed that harm to the applicants was obvious. Understandably they did not agree that the Department intended harm to the applicants. Harm was a mere consequence of the Department's decision that it had to act to protect its interests and the public money it manages. I accept their evidence. I also accept that this is not a case where liability would be indeterminate. The only persons within the class to whom the duty is owed would be those subcontractors exposed to an exercise of power under c 16. Nevertheless, I consider that imposition of a duty of care would impose an unreasonable burden on the autonomy of the Department (adopting the language of McHugh J in Perre v Apand at [133]). My reasons are those given above. I also do not accept that the applicants were vulnerable as required, also for the reasons given above.
126 In conclusion, in circumstances where the Department was pursuing its legitimate interest in ensuring the integrity of its systems for work and that public money was not either being misappropriated or at risk of misappropriation, I can see no reason to accept that the Department "should have had the interest or the interests of the [applicants] in contemplation before [it] pursued…that course of conduct" (Perre v Apand at [100]). Accordingly, I do not accept that the respondents owed any duty of care to the applicants.
127 The second difficulty relates to the content of the duty of care said to arise. If I am incorrect in the conclusion that no duty existed, then I should also observe that I cannot see any basis for the conclusion that the duty of care imposed upon the respondents an obligation to do more than cl 16, in terms, required. In this regard the applicants submitted that the duty of care required the Department to undertake a proper investigation of the matter, including giving Mr Hine an opportunity to be heard before issuing the directions. Clause 16, however, contains no such obligations. As discussed, the clause requires only that the view of the Principal's Representative meet the description of "reasonably regards" and relate to one of the nominated classes (incompetent, negligent or otherwise unsuitable). The clause does not impose any obligation on the Department to investigate a matter either at all or in a particular way or to a particular standard.
128 I have accepted that the issue of a direction carries with a representation that the view of the Principal's Representative has been reached by some rational process and on some rational basis (by reason of the reference to "reasonably") but this does not necessarily require an investigation of any kind. What is rational or "reasonable" depends on the circumstances as perceived at the time. The clause certainly does not involve as any form of necessary pre-condition which affords a right to be heard. The legal source of these asserted obligations is not apparent. They extend well beyond cl 16 which is said to be the critical factor in the imposition of the duty of care by reason of the alleged assumption of responsibility by the Department. Accordingly, and assuming that my rejection of that argument above is incorrect, I cannot see why the duty of care would impose obligations extending beyond the scope of that said to give rise to the duty in the first place.
129 The third difficulty relates to breach. If, as I consider must be the case, the content of any duty of care (if one exists at all) does not extend beyond the terms of cl 16 of the head contract, then the Director-General and Principal's Representative did nothing more than exercise a power in circumstances where they were entitled to do so. Based on the information available at the time the Principal's Representative did reasonably regard CPR Property as unsuitable to perform the works on the Department's properties for the reasons given in the direction. The Director-General was entitled to act under cl 16 to protect the interests of the Department. The Director-General was not required to stand by and do nothing in order to ensure exploration of all or even any possible avenues by which the applicants could persuade the Department that the allegations against them were false.
130 The fact that the treatment of the applicants was different from the treatment of AB and Willowdene is insufficient to establish breach. It is true that AB was suspended on full pay and had a full right to be heard on all the allegations. Willowdene also continued as a contractor while the Ernst & Young investigation clearing Willowdene from wrongdoing was completed. Willowdene was given an opportunity to be heard in that investigation. In contrast, CPR Property was prohibited from working on the Department's properties. But the Department could not take immediate action against AB or Willowdene as it did against CPR Property because it was bound by legal obligations to them. It may seem unfair that the Department chose to act against CPR Property in these circumstances but unfairness at large is not the touchstone of breach. Breach is to be measured against the content of the duty of care found to exist. If a duty is found to exist then, as I have said, I cannot see how it could be other than co-extensive with cl 16. In that event, there was no breach.
131 The fourth difficulty relates to causation. Even if I am incorrect in respect of each of the above conclusions, there seems to me to be a fundamental flaw in the applicants' approach to the issue of causation. The plank in the argument that I consider flawed is the assumption that if Mr Hine had been given a right to be heard the Principal's Representative would not have reached the view he did, the Director-General would not have acted as he did, and the directions thus would not have been issued. The applicants said I would make that finding because (at least as I understand it) Mr Hine's evidence in this proceeding denying any wrongdoing had not been challenged and thus must be accepted. But, consistent with my conclusions above, this finding does not follow from the mere acceptance of Mr Hine's unchallenged evidence in this proceeding. The respondents chose not to challenge Mr Hine's evidence for their own forensic reasons (apparently because they took the view that the evidence was simply irrelevant and thus not worth contesting). The fact that the evidence has not been challenged in this proceeding (and thus, for the purpose of this proceeding, should be accepted given the proceeding's adversarial nature) does not mean that the Department would have accepted the evidence if it had been given in 2004.
132 I cannot reach any state of positive satisfaction (and certainly not on the balance of probabilities) that, if Mr Hine had been given the opportunity to explain his position to the Department in 2004 and before the directions were issued, the directions would not have been issued. For example, AB gave similar explanations to Mr Fordham but he did not accept some of them and findings of misconduct were made. The Department subsequently terminated AB's employment. It follows that I cannot accept that the asserted breach of the duty of care caused the applicants' loss.
133 The provisions of the Civil Liability Act 2002 (NSW), which I am bound to consider and apply, do not affect my conclusions. I have considered the general principles in s 5B. The references therein (ss 5B(2)(c) and (d)) to the burden of taking precautions to avoid the risk of harm and the social utility of the activity that creates the risk of harm, at least in the context of this case, support the conclusions I have reached. By this I mean that the burden of investigation and decision-making the applicants seek to place on the respondents under the posited duty of care is unreasonable having regard to the very large number of properties the Department owns and the large number of works contracts in which it must be involved as a result. The social utility of the Department acting in what it believes to be the public interest by protecting public money from the risk of misappropriation (even if it turns out to be incorrect) is high. The other principles in s 5C also simply confirm the views I have reached. Section 5D, about causation, raises a question about the admissibility of Mr Hine's evidence (see s 5D(3)(b)), that is Mr Hine's evidence about what he would have done was not against his interests. However, as I received no submissions about that issue I do not rely upon it or consider it further. Otherwise, given my findings above, I do not consider that "the negligence was a necessary condition of the occurrence of the harm" as required by s 5D(1)(a). It was not because I cannot find that the harm would not have occurred irrespective of the alleged negligence. Section 42 (principles concerning resources, responsibilities etc of public or other authorities) does not require any different or additional finding.
134 For these reasons I do not accept that the respondents have any liability to the applicants for breach of the alleged duty of care.