IDENTIFICATION OF THE LOSS
51 The fundamental question in the appeal is whether his Honour correctly approached the identification of the loss suffered by the fund and, if not, how it ought be ascertained. He reasoned that if Jaja's true financial position as found by him had been made known to the fund as at August 1999, Jaja would have had to stop trading immediately and could not have continued to participate in the scheme. And, he held that the fund could not have supported a company which was hopelessly insolvent by imposing a condition that Jaja obtain a guarantee from QBE in the sum of $220,000 which might give some protection to the fund, since the guarantee would not have been available to the general body of creditors. Accordingly, he found that if on either 27 or 30 August 1999 the fund had become aware of Jaja's true financial position, it would have immediately ceased Jaja's participation in the fund.
52 His Honour then reasoned that if Jaja had ceased to be a participant in the fund it would have become liable immediately for claims that could have been made against the fund as at late August 1999. Accordingly, his Honour said that the fund had to prove what claims it would have been exposed to at that time and then compare its position to that in which it found itself in February 2000 when Jaja failed to account to one or more of its clients. The critical passage in his Honour's reasoning is as follows:
'It seems to me that the Fund needed to establish those facts so that it could establish its damages. Its damages must be the additional sum which it was called upon to pay by reason of its allowing Jaja to continue to participate in the fund after 30 August 1999 and up to and including either 23 February 2000 or 29 February 2000.
The fund had an existing liability to Jaja's clients as at 27 or 30 August 1999. It had to discharge that liability. By relying on the audited financial statements, it allowed Jaja to continue to participate in the fund up until the time that Jaja advised that it was insolvent in February 2000. The true measure of the fund's loss is the amount by which its liability increased to Jaja's clients between August 1999 and 23 or 29 Feburary 2000.
The measure of damages must be the difference between the fund's liability as at 27 or 30 August 1999 and its liability as at February 2000.' (emphasis added)
53 His Honour held that the fund had failed to prove what 'its existing liability', as he termed it, was as at 27 or 30 August 1999 and therefore it failed to prove the difference in its position had the incorrect representations not been made by Lane Moller and Mr Young and correct representations made instead.
54 The principal submission put by the fund on the appeal became that its economic interest infringed by the misleading and deceptive conduct or negligence of Lane Moller and Mr Young was the incurring in February 2000 of the actual liability it had to the persons who in fact made claims under cl 15 of the deed (Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 533). The fund could only incur a loss when a person made a claim on the fund under cl 15 that Jaja had failed to account. The fund disputed the characterization which his Honour used in the passages we have emphasized that the fund had 'an existing liability' as at late August 1999. The fund might then have had a contingent liability to pay some amount, but its liability could only ever become actual if claims were made by persons who satisfied the criteria in cl 15. There could be no loss or damage suffered until the fund was called upon to pay claims that were properly brought against it. And that could only occur when there had been a failure to account. Up until then, any group of potential claimants would exist with others who had paid money but could not claim, (because for example they had travel insurance: see cl 15.1(c)). Those comprising the group would change in Jaja's creditors' ledger each time one of them received the travel services for which he, she or it contracted or when someone new contracted for such services. Then, a new group of Jaja's customers differently composed would replace the old and different contingent liabilities may arise in the fund.
55 However, unless and until a person had actually suffered a failure to account, there was no basis for his Honour to hold that there were 'existing liabilities of the fund as at August 1999'. The provision of the erroneous financial information by Lane Moller and Mr Young allowed Jaja to continue trading and to incur new debts, as it did, for example, with Mount Lilydale College, after August 1999. Those persons, to whom the obligations were incurred, would be able to bring a claim when and only when there had been a failure to account to them. The persons who had rights to bring claims, if any, in August 1999 had, for the most part, disappeared by February 2000. New series of creditors with new rights were substituted as each day passed.
56 Lane Moller and Mr Young argued that the approach of the trial judge was correct although it was accepted that his Honour erred in using the expression 'an existing liability' to describe the fund's relationship to Jaja's clients as at 27 or 30 August 1999. They argued that cases such as Gates v City Mutual Life Assurance Limited (1986) 160 CLR 1 at 12, 14; Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 526 and Kenny & Good Pty Limited v MGICA (1992) Limited (1999) 199 CLR 413 at 428 [28]-[29] supported the approach taken by the trial judge. Thus, Mason CJ, Dawson, Gaudron and McHugh JJ in Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 526 said in respect of utilisation of the common law measure of damages in assessing the amount recoverable as economic loss under s 82(1) of the Trade Practices Act 1974 (Cth):
'In a case such as the present, it may safely be assumed that the plaintiff is entitled to recover "a sum representing the prejudice or disadvantage [the plaintiff] has suffered in consequence of his altering his position under the inducement" … of the misleading conduct or "or the actual damage directly flowing from" … that conduct, to take up and adapt well-known statements of the measure of damage applicable in an action of deceit.' [footnotes omitted]
57 However, close attention to their Honours' judgment demonstrates that it does not support the proposition for which the respondents here contend. Their Honours continued, (175 CLR 514 at 527):
'Economic loss may take a variety of forms and, as Gaudron J noted in Hawkins v Clayton ((1988) 164 CLR 539 at 600-601), the answer to the question when a cause of action for negligence causing economic loss accrues may require consideration of the precise interest infringed by the negligent act or omission. The kind of economic loss which is sustained and the time when it is first sustained depend upon the nature of the interest infringed and, perhaps the nature of the interference to which it is subjected (see Cane, Tort Law and Economic Interests (1991) at 16-17). With economic loss, as with other forms of damage, there has to be some actual damage …. Prospective loss is not enough.' (emphasis added)
58 That case dealt with whether a limitation period had commenced to run upon the entry into a contract to indemnify upon which the plaintiff was later called upon to pay (see 175 CLR 514 at 519). The Court rejected the argument that the plaintiff had suffered actual loss immediately upon entry into the indemnity. The entry into the indemnity was alleged to have been induced by false representations as to the financial stability of a third party which amounted to misleading and deceptive conduct in contravention of s 52 of the Trade Practices Act 1974 (Cth) (see: 175 CLR 514 at 521). The plaintiff commenced the proceedings outside the limitation period that ran from the time at which the contract of indemnity was made, but within the limitation period running from the time on which it was called upon to pay. The joint judgment noted that before the indemnity could be called upon it was necessary that the third party had failed to satisfy a liability which it owed and that rights against the defaulting party had to have been fully exercised by the person calling on the indemnity.
59 As Mason CJ, Dawson, Gaudron and McHugh JJ said, the indemnity was not one of a kind which generated an immediate non-contingent liability to pay upon execution of the instrument. They said that it was neither a promise to meet a liability of the promisee to make a payment nor a promise to pay a debt owing by a third party to the promisee (referring to the discussion by Barwick CJ in Wren v Mahony (1972) 126 CLR 212 at 225-229). In Wardley, the indemnity was characterized as being one:
'… which created a liability on the part of the respondent to the Bank to make payment if and when the Bank's relevant "net loss" was ascertained and quantified (see Bradley v Eagle Star Insurance Co Ltd [1989] AC 957 at 966, though there the policy required that the existence and amount of the liability to a third party be established by action, arbitration or agreement), subject to the making of a demand for payment by the Bank. The liability was, therefore, … contingent and executory. The likelihood, perhaps the virtual certainty, that there would be a loss in light of Rothwell's actual financial position as it stood when the indemnity was executed, did not transform the liability into an actual or present liability at that time .' (175 CLR 514 at 524-525; emphasis added)
60 It is significant that their Honours, in the passage just cited, referred to the virtual certainty of loss in light of the debtor's actual financial position. The facts are analogous to those found here by the trial judge. The result, however, was that if, as a result of a defendant's negligent misrepresentation, or contravention of s 52 of the Trade Practices Act 1974 (Cth), a plaintiff enters into a contract which exposes him or her to a contingent loss or liability, the plaintiff sustains no actual damage until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred (175 CLR 514 at 532-533). Their Honours held:
'The conclusion which we have reached with respect to the time when the plaintiff first suffers loss in respect of contingent loss or liability accords with the comment of Gaudron J in Hawkins v Clayton (1988) 164 CLR at 601):
"[I]f the interest infringed is an interest in recouping moneys advanced it may be appropriate to fix the time of accrual of the cause of action when recoupment becomes impossible rather than at the time when the antecedent right to recoup should have come into existence, for the actual loss is sustained only when recoupment becomes impossible."(Emphasis added.)
Gaudron J went on to point out (ibid at 602):
"It would be too simplistic to restrict analysis of economic loss merely to a consideration of reduced value or increased liability."
The conclusion which we have reached is reinforced by the general considerations to which we referred earlier. It is unjust and unreasonable to expect the plaintiff to commence proceedings before the contingency is fulfilled. If an action is commenced before that date, it will fail if the events so transpire that it becomes clear that no loss is, or will be, incurred. Moreover, the plaintiff will run the risk that damages will be estimated on a contingency basis, in which event the compensation awarded may not fully compensate the plaintiff for the loss ultimately suffered. These practical consequences which would follow from an adoption of the view for which the appellants contend outweigh the strength of the argument that the principle applicable to the cases in which the plaintiff acquires property (or a chose in action) should be extended to cases where an agreement subjects the plaintiff to a contingent loss. In such cases, it is fair and sensible to say that the plaintiff does not incur loss until the contingency is fulfilled.'
61 Under cl 15.1 of the deed, the fund had no actual liability and could suffer no loss until a claim was in fact made upon it to pay by a person who satisfied the criteria set out in that clause. Here, cl 15 subjected the fund to a contingent loss in August 1999. But, the fund did not incur loss until the contingency was fulfilled in February 2000 when actual claims under cl 15 were properly made calling on the fund to pay.
62 Whatever may have been the position of Jaja in August or September 1999, the fact is that Jaja did not fail then. His Honour and the respondents pointed to difficulties in establishing precisely what claim or claims may have been able to have been made on the fund at that time, had there been proper reporting revealing Jaja's hopeless insolvency. But, it is neither fair nor sensible to say that the fund incurred any loss then because the contingency of there being actual claims made upon it to pay under cl 15 had not been fulfilled (see 175 CLR 514 at 333). At that time, the fund suffered no loss. Its liability, in protecting members of the public, was to pay valid claims when under cl 15, and only when, a failure to account actually occurred.
63 Of course, the provision of accurate financial information and audit reports to the fund so that it could rely upon them in determining whether or not to take steps to protect the public in respect of the continued participation of a travel agent in the scheme was relevant. The purpose of the scheme is to protect the public against loss resulting from dealing with defaulting agents as Gleeson CJ explained in Travel Compensation Fund v Tambree (2005) 80 ALJR 183 at 191 [27]. And he said, when the fund called for audited statements, the kind of loss to the public, and the kind of loss to itself, against which it sought protection was loss that would involve an agent's failure to account. The Chief Justice there noted, whether claims on the fund were made under cll 15.1 or 15.2, there would always be conduct of a third party, described as a failure to account, in between the breach of statute or negligence, on the part of an accountant or auditor involved in providing financial statements to the fund, and the suffering of harm by the fund. He said:
'A travel agent's failure to account, whether the agent be licensed or unlicensed, will always be the occasion of the kind of loss suffered by the appellant in meeting claims under cl 15 of the deed. Typically, as in the present case, the failure to account will be related to financial difficulties in which the agent is involved. That is why agents are required to provide financial statements in support of applications to become, and remain, participants in the compensation scheme.' (80 ALJR at 191 [27])
64 In Travel Compensation Fund v Tambree (2005) 80 ALJR 183, the Court held that even though the fund had ceased the participation of the defaulting, and thereafter unlicensed, agent, the agent's activities in continuing to trade while unlicensed caused failures to account for which the fund was liable by reason of the negligent or misleading or deceptive audited financial statements prepared by the accountant and auditor in that case. As the Chief Justice continued (80 ALJR at 191 [31]-[36]):
'[31] This is a case of known reliance, and negligent misrepresentation. The aspect of trade and commerce which attracted the operation of s 42 of the Fair Trading Act was the conduct of the business of a travel agent, in a regulatory context that provided for a scheme of compensation for members of the public who suffer loss through failure to account on the part of defaulting agents. That scheme exposed the appellant to claims for compensation, and to the risk of loss by reason of payments made under cl 15 of the deed. Because of cl 15.2, and the way it worked in practice, as explained in the evidence, the risk to which the appellant was exposed included the risk of claims for compensation by people who dealt with a travel agent who was no longer a participant in the fund and was operating following loss of a licence - perhaps attempting to trade out of financial difficulties. To protect itself against that risk, as well as to protect the public, the appellant required information about the financial position of participating agents. It acted in reliance on that information in making decisions about continuing participation, including decisions as to whether to require further security or additional funding. The first and second respondents participated in the provision of such information, knowing that it was for the purpose of such reliance. The statute prohibited misleading conduct by them. They engaged in misleading conduct by the part they played in the provision of false financial information.
[32] Misrepresentation will rarely be the sole cause of loss. If, in reliance on information, a person acts, or fails to act, in a certain manner, the loss or damage may flow directly from the act or omission, and only indirectly from the making of the representation. (Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 356-357; Henville v Walker (2001) 206 CLR 459 at [14].) Where the reliance involves undertaking a risk, and information is provided for the purpose of inducing such reliance, then if misleading or deceptive conduct takes the form of participating in providing false information, and the very risk against which protection is sought materialises, it is consistent with the purpose of the statute to treat the loss as resulting from the misleading conduct.
[33] The compensation scheme was not limited to providing compensation for failure to account by agents who had current licences at the time of the failure to account. Clause 15.2 of the deed makes that clear. People whose businesses collapse may well attempt to trade out of their difficulties; and there may well be an interim period between termination of participation in the fund, with consequent loss of licence, and physical closure of a business by action of the regulatory authorities. The risk that an insolvent agent (as Ms Fry appears to have been) would keep trading until forced by the authorities to close down, and that claims would be made under cl 15.2, was part of the risk against which the appellant was seeking to protect itself when it considered the financial statements of Ms Fry.
[34] The illegality of Ms Fry's conduct did not take it outside the scope of the risk against which the appellant attempted to obtain protection. That is made obvious by a consideration of the operation of cl 15.1 of the deed. A failure to account, by a licensed agent who is still a participant in the fund, could well involve illegality of some kind. There might be an issue, in a given case, about whether a loss to the appellant in such a case was causally related to misrepresentation by providing erroneous financial statements. If it were so related, however, it would be unlikely that illegality would be an answer to any issue of causation. Loss following reliance on negligently prepared financial statements often arises in circumstances of illegal conduct on the part of someone against whose default protection is sought. It could hardly be the case that the appellant could only recover damages from a negligent accountant or auditor in the case of a failure to account by an agent whose conduct involved no illegality.
[35] The answer to the problem of causation in the present case is to be found, not in a value judgment, but in an accurate identification of the nature of the risk against which the appellant sought protection and of the loss it suffered, considered in the light of the kind of wrongful conduct in which the first and second respondents engaged.
[36] The considerations discussed above in relation to the claim under the Fair Trading Act are of equal force in relation to the common law claims for negligence.'
65 In the present case, just as in Travel Compensation Fund v Tambree (2005) 80 ALJR 183, the fund sought the reports from Lane Moller and Mr Young, as accountant and auditor of Jaja, to protect itself against the risk of loss. Just as in the decision of the High Court, there was always a possibility that Jaja could trade illegally, without a licence. Here, the misleading and deceptive and negligently prepared reports in the 2000 renewal documents, were a cause of the fund continuing Jaja's participation in the compensation scheme. That exposed the fund to the very risk of loss at the time Jaja collapsed. When the loss became actual, by the making of claims which enlivened the fund's obligation under cl 15 of the deed, the fund suffered loss. Until that occurred, it suffered no loss.
66 The fund's liability under cl 15 to pay compensation to members of the public who had suffered from a travel agent's failure to account depended upon the circumstances at the time of the failure to account. The fact that, had accurate accounting or auditing information been given to the fund at an earlier time, the travel agent's potential liability to its clients, some or all or none of whom may have had the entitlement to make claims had failures to account occurred for a greater sum than the fund in fact actually became liable to pay, cannot affect the calculation of damages. That is because the fund could never sue for loss it had not suffered, or get the benefit of a reduction in liability to members of the public because the agent's financial position improved in the period between when the misleading or negligent accounting or auditing statements were made to the fund and when the travel agency failed to account.
67 As the joint judgment in Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 at 526 pointed out, the virtual certainty of loss is not loss under an obligation such as that created by cl 15 on the fund. And, in Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 at 457-458 [119]-[120] Kirby and Callinan JJ held that if a correct valuation had been given, there would have been no loss suffered by the mortgage insurer because it would not have provided mortgage insurance at all. They said that this approach gave content to, or defined, the contractual obligation to exercise reasonable care and the tortuous duty of care. It did this by having regard to the kind of loss or damage in respect of which the contract breaker or tortfeasor was required to exercise reasonable care.
68 In that case the valuation included a representation that the property was a suitable investment for trust funds, on the basis of the valuation, for a term of 3-5 years. Kirby and Callinan JJ said that the valuer had an obligation and a duty in giving the valuation to exercise reasonable care to enable the mortgage insurer to decide whether to enter into an insurance transaction at all. The obligation or duty was breached if an accurate representation would have suggested that the mortgage insurer should not have entered into the transaction (the other justices took a similar approach: 199 CLR 413 at 425-246 [19]-[21] per Gaudron J, 447 [83] and 449 [92] per Gummow J; but see per McHugh J at 431 [35]). The valuer was held liable for the whole of the loss which the mortgage insurer suffered, some of which resulted from a later fall in the property market.
69 Here, the position is different, since neither Lane Moller nor Mr Young had any contractual relationship with the fund. Nonetheless, at the time they provided the 2000 renewal information to the fund they knew that it would rely on that information for the purpose of considering the continued participation of Jaja in the scheme and any conditions which might be imposed on it. And, they knew the fund would be exposed to the risk of loss if Jaja failed to account at any time in the future were its continued participation in the fund permitted. Even if it were virtually certain that Jaja was hopelessly insolvent, the fund had no actual liability in August 1999 to anyone. Jaja had not then failed to account. Such a failure to account occurred only at the time of its collapse in February 2000.
70 The liability of the fund to meet claims made under cl 15 consequent upon that failure to account, and the satisfaction of the other requirements for a valid claim, occurred only after that collapse. And a cause of that liability being then incurred was the fund's earlier reliance in September 1999, in continuing Jaja's participation in the scheme, on the misleading or deceptive and negligent representations in 2000 renewal documents for which Lane Moller and Mr Young were responsible: Travel Compensation Fund v Tambree (2005) 80 ALJR 183.