Case 2.3 and "indirect causation"
2 Case 2.3 was based on contravention of s 995 of the Corporations Law. The appellants claimed that the DDC respondents had engaged in misleading conduct in providing to NCRH's board on 18 November 1998 their report to the effect that the members of the DDC were not aware of any material misstatement or omission in the prospectus.
3 Mr Saville did not see the DDC report, and was not misled by it. The appellants did not rely on any direct effect on his decision-making. On the reasoning in Case 2.3, the board was misled and the appellants suffered loss or damage by the contravention of s 995 because the board would otherwise not have issued the prospectus and the note issue would not have taken place.
4 This brought consideration of Digi-Tech (Australia) Pty Ltd v Brand [2004] NSWCA 58; (2004) ATPR 46-248; (2004) 62 IPR 212. McDougall J had held that it precluded the appellants from maintaining a case so structured.
5 In Digi-Tech (Australia) Pty Ltd v Brand Digi-Tech had provided revenue and profit projections to Deloitte; on the basis of the projections Deloitte had arrived at a valuation of products which were purchased as part of a tax-driven scheme; and a Mr Urwin (not from Digitech or Deloitte) had marketed the scheme to investors. In a claim against Digi-Tech the investors alleged that the projections were incorrect and their provision to Deloitte was misleading conduct, and sought to recover compensation for their entry into the scheme.
6 The case at trial was one of direct reliance on the incorrect projections. The trial judge found that the investors' reliance had not been established. It was held on appeal that this finding had been come to on an incorrect premise as to the effect of the representation of the projections, and that the issue should be remitted for retrial.
7 The Court (Sheller, Ipp and McColl JJA) went to deal with an alternative case first propounded on appeal, namely -
148 The appellants submitted that it was not necessary for a party seeking to recover damages to show direct reliance upon misleading conduct by the representor. They submitted that the misleading conduct might cause other persons to act in a way that leads to loss suffered by a plaintiff. They submitted that this approach gives effect to the words in s 82 of the Trade Practices Act 1974 (Cth), namely, 'suffers loss or damage by conduct of'. They relied on Janssen-Cilag Pty Limited v Pfizer Pty Limited (1992) 37 FCR 526 at 529-530, Wardley Australia Limited v Western Australia (1992) 175 CLR 514 at 525, Marks v GIO Australia Holdings Limited (1998) 196 CLR 494, Hampic Pty Ltd v Adams [1999] NSWCA 455 and Stockland (Constructors) Pty Ltd v Retail Design Group (International) Pty Ltd [2003] NSWCA 84.
149 The appellants put their case in this way. They said that if Digi-Tech had not produced misleading and deceptive forecasts concerning the revenue and gross margin of the products, Deloitte would not have produced a valuation to support the price of $72.5m. In the absence of that valuation, or any valuation supporting that price, the investment scheme would not have gone ahead and Mr Urwin would not have proposed the scheme to any of the investors. It was submitted that Digi-Tech's misleading conduct, thereby, caused Mr Urwin to act in a way that led to loss or damage to the appellants. They described this argument as the 'indirect causation theory'.
8 Their Honours spoke of the cases on which the investors relied, as to Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 citing a passage from the judgment of Mason CJ and Dawson, Gaudron and McHugh JJ at 525 which included that "by" in s 82 of the Trade Practices Act 1974 (Cth) -
… clearly expresses the notion of causation without defining or elucidating it. In this situation, s 82(1) should be understood as taking up the common law practical or common-sense concept of causation recently discussed by this Court in March v Stramare (E & M H) Pty Ltd , except in so far as that concept is modified or supplemented expressly or impliedly by the provisions of the Act.
9 Their Honours then said -
155 Stockland, like Janssen-Cilag, was not a case where the plaintiff claimed damage caused by entering into a transaction induced by misleading conduct. In both cases the misleading conduct had caused others to act to the direct prejudice of the plaintiff. That is to say, the chain of causation was as follows: firstly, misleading conduct by the defendant; secondly, an innocent party is induced by the misleading conduct to act in some way; thirdly, the innocent party's act, by its very nature, causes the plaintiff loss. On this basis, no act of the plaintiff contributes to the loss. The chain of causation is complete without there needing to be any act or omission on the part of the plaintiff.
156 The Janssen-Cilag and Stockland category of claim is materially different to that which occurs when plaintiffs suffer loss because they, themselves, are induced by misleading representations to perform some act or omission by which they are prejudiced. The difference lies in the fact that in the first category of case no conduct on the part of the plaintiff forms a link in the causation chain. In the second category, the inducement of the plaintiff and his or her act or omission causing loss is an essential part of the chain. Without such inducement and a consequential act or omission on the part of the plaintiff there is indeed no linking chain between the misleading conduct and the plaintiff's loss.
157 This analysis demonstrates the fallacy of applying the so-called indirect theory of causation to this case.
158 On the assumption that Digi-Tech's forecasts as to the revenue and gross margin of the products were misleading and deceptive, that misleading and deceptive conduct resulted in Deloitte producing, in essence, a misleading and deceptive valuation to support the price of $72.5m. That valuation enabled the investment scheme to be put together and proposed by Urwin to the appellants. But to complete the chain of causation, there must be something linking the appellants' loss to their entry into the investment scheme. That link is the inducement of the appellants and their consequential act of entering into the transaction to their prejudice. Without that link, there is no proof that the misleading conduct caused the loss.
159 We accept Mr Sheahan's submission that, whatever might be the position in other contexts, in cases of this kind (misrepresentation inducing a transaction) the courts have required reliance by or on behalf of the plaintiff on the misrepresentation as being essential to the proof of causation as required by s 82(1) of the Trade Practices Act 1974. Persons who claim damages under s 82(1) on the ground that they entered into transactions induced by the misrepresentations of other persons must prove that they relied on such misrepresentations and, therefore, "by" that conduct, they suffered loss or damage. As Mr Sheahan pointed out, were it otherwise, representees could succeed even though they knew the truth, or were indifferent to the subject matter of the representation.
10 The appellants did not directly submit that Digi-Tech (Australia) Pty Ltd v Brand was wrongly decided in this respect. They submitted (i) that what was said in the passages I have set out was obiter because the Court held also that the "indirect causation theory" was not available to the investors because it had not been pleaded; (ii) that the present case was different because it was not one in which "the plaintiffs suffer loss because they themselves are induced by misleading representations to perform an act or omission by which they are prejudiced" (at [156]) but one in which "misleading conduct had caused others to act to the direct prejudice of the plaintiff" (at [155]); and (iii) that "in connection with a dealing in securities" in s 995 of the Corporations Law and the purpose of protecting investors in Parts 7.11 and 7.12 gave a wider scope to causation than "in trade or commerce" in s 52 of the Trade Practices Act and enabled recovery by investors who did not act directly in reliance on misleading conduct. They said that because s 1005 enables recovery for contravention of s 1024 of the Corporations Law (which requires the issue of a supplementary prospectus if there are material developments after the issue of the prospectus), there was recognition for the purposes of s 1005 of a kind of indirect causation, in that such a contravention will ordinarily not have been relied on by an investor who is unaware of the occasion for a supplementary prospectus.
11 I do not regard the Court's supplementary observation that the "indirect causation theory" was unavailable on pleading grounds as detracting from the considered statements in the passages I have set out. Nor in my opinion is there material difference between the Trade Practices Act and the Corporations Law in their legislative contexts, s 52 and s 995 both being directed to what may broadly be called consumer protection. The partly different phrasing of the norms of conduct in s 52 of the Trade Practices Act and s 995 of the Corporations Law are not to the point. The present question does not concern the norms of conduct but the provisions for recovery of loss or damage upon contravention, and there is relevantly identity between s 82 of the Trade Practices Act and s 1005 of the Corporations Law. Both are in terms of loss or damage suffered by contravening conduct, and the approach to causation should be the same. Section 1024 does not bring recognition of a kind of indirect causation. Satisfaction of the causation involved in "by" in s 1005 will call for regard to whether or not the investment would have been made if a supplementary prospectus had issued.
12 The appellants' reliance on the reference in [156] of Digi-Tech (Australia) Pty Ltd v Brand to the category of claim "when plaintiffs suffer loss because they themselves are induced by misleading representations to perform an act or omission by which they are prejudiced" was in my view misplaced. Their Honours were contrasting the kinds of claim, and were not restricting what followed to where there was direct inducement of the plaintiff; they were identifying the kind of claim in which inducement of the plaintiff played a part. The distinction drawn in Digi-Tech (Australia) Pty Ltd v Brand is between cases where conduct on the part of the plaintiff "forms a link in the causation chain" (at [156]) and where it does not. Where it does, there must be reliance on the misleading conduct in the manner next explained. Where it does not, there may be recovery if the act of the innocent party induced by the misleading conduct "by its very nature, causes the plaintiff's loss" (at [155]), but that is where the plaintiff passively suffers loss from another's act (as in Janssen-Cilag Pty Limited v Pfizer Pty Limited (1992) 37 FCR 526 at 529-530, where consumers were led by the misleading conduct to buy less of the plaintiff's product).
13 In saying that in a case of "misrepresentation inducing a transaction" reliance on the misrepresentation was required for proof of causation (at [159]), from the facts before them and their Honour's discussion they meant a case where the plaintiff was not a passive sufferer from another's act, but was someone who made a decision to enter into the transaction to which the representation was material. Their Honours did not mean direct inducement, but that the decision and the materiality to it of the representation was a link in the causal chain.
14 Since Wardley Australia Ltd v Western Australia there has been some withdrawal from the common law practical or common sense concept of causation, and emphasis on the purpose to which the question of causation is directed, see for example Allianz Australia Insurance Ltd v GSF Australia Pty Ltd [2005] HCA 26, (2005) 221 CLR 568 at [96]-[97] per Gummow, Hayne and Heydon JJ.
15 In Travel Compensation Fund v Tambree [2005] HCA 69; (2005) 224 CLR 627 Gummow and Hayne JJ said at [45] -
It is now clear that there are cases in which the answer to a question of causation will differ according to the purpose for which the question is asked. As was recently emphasised in Allianz Australia Insurance Ltd v GSF Australia Pty Ltd, it is doubtful whether there is any "common sense" notion of causation which can provide a useful, still less universal, legal norm. There are, therefore, cases in which the answer to a question of causation will require examination of the purpose of a particular cause of action, or the nature and scope of the defendant's obligation in the particular circumstances.
16 In the same case, referring particularly to Henville v Walker [2001] HCA 52; (2001) 206 CLR 459 and I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd [2002] HCA 41; (2002) 210 CLR 109, Gleeson CJ said at [30] -
In recent cases, this Court has pointed out that, in deciding whether loss or damage is 'by' misleading or deceptive conduct, and assessing the amount of the loss that is to be so characterised, it is in the purpose of the statute, as related to the circumstances of a particular case, that the answer to the question of causation is to be found.
17 There can be postulated, even where the representation was material to the plaintiff's decision to enter into the transaction, that loss or damage is suffered by misleading conduct because the plaintiff would not otherwise have had the opportunity to enter into the transaction. The plaintiff would not have had occasion to make a decision. There is "but for" causation; is it sufficient?
18 In Henville v Walker, after noting that "by" in s 82 of the Trade Practices Act invokes the common law concept of causation but is not to be applied rigidly without regard to the terms of objects of that Act, and that causation in law is concerned with determining legal responsibility for a past act or omission, McHugh J said -
100 In some situations, the legal framework may require a finding that, despite a causal connection in a physical sense between the breach and damage, no causal connection exists for legal purposes. In other situations, the legal framework may require a finding that a causal connection exists even though no more appears than that the damage followed after breach of a legal norm.
101 In the first class of case, some act of the defendant may have set in train, or some omission of the defendant may have failed to set in train, a series of physical events that resulted in or could have avoided damage to another person or property. In this situation, the damage occurred because, given the act or omission, the laws of nature dictated the result. The physical connection between the defendant's act or omission and the damage suffered, and the materiality of the connection is usually apparent, although often enough it will require expert evidence to demonstrate the connection. In this situation, questions of causation usually present no difficulty, although questions of remoteness of damage may do so. Exceptionally, however, the policy or rationale of the legal norm that has been breached will require the court to disregard the physical connection and to make a finding of no causal connection.