s7(1) Law Reform (Contributory Negligence and Tortfeasor) Contribution Act 1947

First Respondent : Mr M J McCusker QC & Mr M M Mony de Kerloy

Second Respondent : Mr M J McCusker QC & Mr M M Mony de Kerloy

Fox v Wood [1981] HCA 41; (1981) 148 CLR 438

Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1989) 99 ALR 539

Tucker v Westfield Design [1993] FCA 176; (1993) 123 ALR 278

The Actions in this Court and in the Federal Court

The respondents claimed damages for breach of contract from the appellants, a firm of accountants. The cause of action was based on the following facts which the trial Judge, Templeman J, found to have been established.

In September 1988 the second-named respondent (to whom I shall refer as "Terry") entered into an agreement with the appellants (represented by Mr Gorey - to whom I shall refer as "Gorey") whereby he agreed to retain them as his accountants to investigate "the integrity and the reasonableness of the accounts and profitability of prospective businesses and [advice] as to the viability of purchasing any such prospective business ....". The retainer was of a general nature but was to include, if required, the investigation of accounts and the provision of advice as to the viability of any particular prospect.

Thereafter, Terry asked the appellants to investigate a certain retail paper selling business ("the Business"). In particular, in December 1988, Terry instructed Gorey, who was then a partner of the appellants, to investigate and verify financial statements (including a profit and loss statement for the period ending 13 November 1988) which had been provided to Terry by the owners of the Business ("the Vendors"). Terry also asked Gorey to advise whether he, Terry, could rely on the figures contained in those financial statements. Gorey subsequently advised Terry that that profit and loss statement could reasonably be relied upon as being accurate. Further, on 19 December 1988, Gorey told Terry that the Business was " .... clearly worth all that is being asked ....". In January 1989, Terry, through the first-named respondent ("Paper Sales") - a company controlled by him, proceeded to purchase the Business in reliance on representations made to him by the Vendors, and also in reliance on the advice he had received from Gorey. On 1 February 1989 Paper Sales took possession of the Business.

The advice that Gorey had so given was in fact incorrect. Templeman J found that the appellants, through Gorey, "were negligent in the discharge of the duties which they owed to Mr Terry in undertaking to advise him whether he could rely upon the figures in the profit and loss statement". His Honour found further, that the appellants' negligence caused the respondents loss. No distinction was drawn between the respondents in this respect, and no point was made of this in the appeal.

The purchase price of the Business was $150,000 of which the respondents paid $100,000. The Business had no value when it was acquired, and this led to the respondents suffering a total loss in respect of the $100,000 so paid.

The respondents claimed trading losses for each of the three years ending 30 June 1989, 1990, and 1991 as a further head of damage. In this regard Templeman J held that trading losses should be limited to the year ended 30 June 1989. The trading losses for that year amounted to $45,939.50 and this amount was awarded as damages under this head.

As part of the trading losses the respondents claimed the salary they alleged was payable to Mrs Terry by Paper Sales, but which in fact had not been paid. Templeman J disallowed this claim.

The respondents also claimed $70,929.12, being the legal costs incurred by Paper Sales in bringing proceedings in the Federal Court for the loss suffered by it as a result of purchasing the Business. In this action Paper Sales claimed that the Vendors and their accountant had caused it loss by misleading or deceptive conduct, in contravention of s52 of the Trade Practices Act 1974 (Cth), and obtained judgment in respect of its claim. Lee J ordered that the Vendors pay damages and taxed costs to Paper Sales. Those costs amounted to the sum of $70,929.12 in question. Notwithstanding that the respondents (as the appellants conceded) had acted reasonably in bringing proceedings against the Vendors and their accountant and "used all reasonable endeavours to enforce the judgment", only $5,000.00 of the judgment sum was recovered. Each of the Vendors and their accountant is in liquidation or bankrupt or insolvent. In the proceedings before Templeman J the respondents claimed the sum of $70,929.12 from the appellants by way of damages. His Honour found that this sum was recoverable by the respondents "on the basis that it was money properly spent by the[m] in mitigating their loss by prosecuting the Federal Court proceedings".

The appellants appeal against the judgment of Templeman J in two respects.

Firstly, it was submitted that the costs incurred by Paper Sales in the Federal Court proceedings were not costs incurred "in mitigation of any damages for which the appellant[s] would otherwise be found liable". It was argued, in effect, that there was no basis in law on which the respondents could recover those costs from the appellants.

Secondly, it was submitted that the respondents should have joined the appellants as parties to the Federal Court proceedings and it was not reasonable for them to have brought the action that they did in this Court before Templeman J. They relied in this regard on s7 (1) of the Law Reform (Contributory Negligence and Tortfeasor) Contribution Act 1947, which provides:

"7(1) Where damage is suffered by any person as a result of a tort

(a) judgment recovered against any tortfeasor liable in respect of that damage shall not be a bar to an action against any other person who would, if sued, have been liable as a joint tortfeasor in respect of the same damage;

(b) if more than one action is brought in respect of that damage by or on behalf of the person by whom it was suffered against tortfeasors liable in respect of the damage (whether as joint tortfeasors or otherwise) the sums recoverable under the judgments given in those actions by way of damages shall not in the aggregate exceed the amount of the damages awarded by the judgment first given: and in any of those actions, other than that in which judgment is first given, the plaintiff shall not be entitled to costs unless the court is of opinion that there was reasonable ground for bringing the action."

The appellants contended that Templeman J wrongly held that it was reasonable for the respondents to bring a separate action against the appellants.

The respondents cross appeal, also in two respects.

Firstly, they argued that Templeman J should not have limited the award of damages in respect of trading losses to losses suffered to 30 June 1989. It was contended that, in addition, his Honour should have awarded the trading losses suffered by Paper Sales for the twelve months ended 30 June 1990.

Secondly, they argued that Templeman J erred in omitting to include in the award of damages for trading losses Paper Sales' liability to Mrs Terry for the salary to which she was entitled for the period from 1 February 1989 to 30 June 1990.

Expenses incurred in mitigating loss are recoverable if those expenses were reasonably incurred, and if the amounts themselves are reasonable, and even if the resulting loss is, in the event, greater than it would have been had the mitigating steps not been taken: Simonius Vischer & Co v Holt & Thompson (1979) 2NSWLR 322; Lloyds and Scottish Finance Ltd v Modern Cars & Caravans (Kingston) Ltd (1966) 1 QB 764, Heytesbury Pty Ltd v Kelly, unreported; SCt of WA; Library No 970161; 15 April 1997.

The appellants argued, however, that the costs of the Federal Court action did not constitute expenses incurred in mitigating loss. Counsel for the appellants submitted that that action was not brought to mitigate loss, but to identify "which parts of that loss or damage are recoverable from each of several concurrent tortfeasors". He referred to Hudson & Neilson v Wiseman (1986) WAR 156 where the purchasers of a business suffered damage caused by breaches of warranty by the vendors and negligence by their accountants. The Full Court (at 161 to 162) said:

"The final question concerns the appropriate form of the judgment. With respect, there appears to us to be no basis for a joint judgment against the [vendors] and the accountants. Nor does it appear to us that several judgments in the same amount would be appropriate. The causes of action were quite distinct and appear to us to require separate treatment. We do not consider that this raises an independent question of mitigation of damage, as counsel for the [vendors] ultimately contended. It raises a question of quantification, although the problems are similar. The doctrine of mitigation has a two-fold function, both in its own right, independently of the rules of quantification, but also has been latent in many rules of quantification ..."

These remarks were made in a context in which the court was considering the form of judgment where both the vendors and the accountants had been sued, and it was not known how much would be recovered from the vendors pursuant to the judgment obtained against them. That, plainly, raised questions of quantification. The issue in the present case concerns the character of expenses incurred in bringing an earlier and separate action against the Vendors and their accountant in the Federal Court for the same damage caused by the appellants (who were concurrent tortfeasors). The appellants argued that those expenses were incurred only to quantify the loss, and not in the mitigation of damage. This raises a different question to that considered in Hudson & Neilson v Wiseman and, in my view, the remarks relied upon do not assist in its resolution.

It cannot be gainsaid that Paper Sales' purpose in bringing the Federal Court action was to recover or reduce the loss it had suffered in purchasing the Business. Although, in the process, the loss was quantified, the quantification was merely a step in the process undertaken by Paper Sales to recover or reduce its loss. Accordingly, in my view, the expenses so incurred by Paper Sales were incurred in the course of attempting to mitigate its loss so far as its claim against the respondents is concerned. This is consistent with the approach of Stephenson LJ in London and South of England Building Society v Stone (1983) 3 All ER 105 (at 121) who regarded the contention by a negligent valuer of a security that the secured lender should have enforced a personal obligation against the borrower as being an argument that the lender should have mitigated his loss.

Further, counsel for the appellants submitted that the respondents had no duty to the appellants (as concurrent tortfeasors) to bring proceedings against the Vendors; therefore, the appellants could not have complained had the respondents refrained from suing the Vendors. Accordingly, as the respondents had no duty to sue the Vendors, it could not be said that the expenses they incurred in suing the Vendors were part of the "duty to mitigate".

In my opinion, the argument that a plaintiff may only recover expenses so incurred when he or she has a duty to take mitigatory action is misconceived. In essence, although lawyers often refer to a "duty" to mitigate damage, this is an inappropriate use of language. As Sir John Donaldson MR pointed out in delivering the judgment of the Court of Appeal in The Solholt (1983) 1 Lloyd's Rep 605 (CA):

"A plaintiff is under no duty to mitigate his loss, despite the habitual use by the lawyers of the phrase 'duty to mitigate' he is completely free to act as he judges to be in his best interest. On the other hand, a defendant is not liable for all loss suffered by the plaintiff in consequence of his so acting. A defendant is only liable for such part of the plaintiff's loss as is properly caused by the defendant's breach of duty."

See also Darbishire v Warren [1963] EWCA Civ 2; (1963) 1 WLR 1067 (CA) at 1075.

It has frequently been held that a plaintiff need not take the risk of starting uncertain litigation against a third party: Pilkington v Wood (1953) Ch 770; Segenhoe Ltd v Akins & Ors (1998) ACLC 263; Unioil International Pty Ltd v Deloitte Touche Tohmatsu, unreported; SCt of WA, Library No 970352, 18 July 1997, per Ipp J at 105 to 107_._ But, ordinarily, if such an action is taken, and taken reasonably - albeit unsuccessfully, the expenses so incurred are recoverable on the basis that they were expenses reasonably incurred in the mitigation of loss: Lloyds and Scottish Finance Ltd v Modern Cars & Caravans (Kingston) Ltd at 782;

While Paper Sales had no "duty" to proceed against the Vendors, it was reasonable for them to have done so - as was conceded by the appellants. In the circumstances, it seems to me that, with respect, Templeman J properly regarded the costs of the Federal Court proceedings as expenses incurred in the mitigation of loss.

In any event, even if the Federal Court costs are not to be so regarded, they would, in my view, be recoverable by the respondents by way of damages for breach of contact. The general rule is that damages for breach of contract are recoverable for a loss of a kind "which was within the contemplation of the contract breaker or would have been within the contemplation of a reasonable person in his or her position" (per McHugh J in Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd [1998] HCA 38; (1998) 72 ALJR 937 at 942), provided, of course, that the breach of contract caused or contributed to the loss.

In my view, a reasonable accountant retained by a client to verify financial statements (on which the client intended to rely in purchasing a business) would know that, if the financial statements were misleading and the client thereby suffered a loss, there would be a strong likelihood that the client would sue the vendors. The reasonable accountant would also know that, if the vendors were unable to pay the costs of such an action, the client would suffer a further loss. In other words, in my opinion, the loss sustained by Paper Sales in respect of the costs of the Federal Court proceedings was within the reasonable contemplation of a person in the position of Gorey. Counsel for the appellants did not resist this proposition, but argued that the action of the respondents in suing the Vendors without joining the appellants in the Federal Court action was not reasonable. Counsel's argument was that the appellants should have been joined in the Federal Court action brought by Paper Sales against the Vendors; it was said that, had that occurred, the action in this Court against the appellants would have been unnecessary.

The difficulty with this submission is the conduct of the appellants themselves. In their defence to the respondents' statement of claim in the action heard before Templeman J, the appellants denied that Gorey had entered into the retainer agreement with Terry, denied that the advice sought by Terry from Gorey was "for his information and guidance in making an informed decision as to the commercial viability of purchasing the business", and denied liability generally. Indeed, Templeman J found it was not until Gorey gave his evidence in the Federal Court that Terry realised that the appellants had not carried out an investigation. As his Honour put it "the misleading account rendered by the [appellants] concealed that fact".

Counsel for the appellants attempted to resist the inference that the appellants themselves were largely to blame for the respondents not joining them as defendants in the Federal Court proceedings, by arguing that, at a relatively early stage, Gorey had provided a statement to the solicitors acting for the appellants. Although Terry said in evidence that he never saw this statement before the Federal Court hearing, the appellant's solicitors had had the statement earlier. Counsel for the appellants submitted that the statement should have caused the solicitors to realise, at that stage, that the appellants were liable to the respondents. In my view this argument cannot be accepted. Apparently the statement in question has "disappeared" and there is no evidence (and none was before Templeman J) as to what the statement contained. Thus, there is nothing to indicate that the material in the statement should have led the respondents' solicitors to appreciate that the appellants had committed a breach of duty. Further, the conduct of the appellants throughout the trial before Templeman J was that they were not liable to the respondents and, in the light of the fact that they maintained this attitude, I do not think that it lies in their mouth to complain that the respondents should have ignored their denials and sued them, and to argue that the respondents' failure to do so was unreasonable. In my view the situation is analogous to one in which steps intended to be by way of mitigation are taken at the instigation of the defendants. In Lloyds and Scottish Finance Ltd v Modern Cars & Caravans (Kingston) Ltd (1966) 1 QB 764 at 782-783 it was held that in such event it was not open for the defendants to assert that the steps were unreasonable.

In my view, the evidence discloses that the respondents proved a causal connection between the incurring of the expenses in the Federal Court and the breach of contract by the appellants, that the expenses incurred were reasonable, and that they were within the reasonable contemplation of the appellants or a reasonable person in their position. Therefore on the basis of the ordinary principles of contract law the respondents would be entitled to recover the loss claimed: Unity Insurance Ltd v Rocco Pezzano Pty Ltd at 942. Accordingly, I would dismiss this ground of appeal.

I turn now to the ground of appeal based on s7 of the Law Reform (Contributory Negligence and Tortfeasors) Contribution Act. Counsel for the appellants correctly stated the issue as being whether it was reasonable for the respondents to have sued the appellants in proceedings in this Court, or whether it was unreasonable for the respondents not to have joined the appellants as respondents in the Federal Court proceedings.

I have already expressed the view that the appellants' own conduct in denying liability was significantly responsible for Paper Sales not joining them in the Federal Court proceedings, and I have expressed the view that it was reasonable for the respondents to have acted as they did.

I also accept, as senior counsel for the respondents submitted, that it is by no means clear that, had Paper Sales joined the appellants in the Federal Court proceedings, the additional costs involved in those proceedings would have been significantly less than the costs of bringing separate proceedings in this Court.

In the circumstances, I would dismiss this ground of appeal.

Trading losses for the year ending 30 June 1990

I turn now to the cross appeal and, firstly, the issue whether the damages for trading losses should be limited to the end of 30 June 1989, or whether the trading losses should include the losses for the year ended 30 June 1990.

Lee J, in dealing with this issue in the Federal Court proceedings, (Paper Sales Australia WA Pty Ltd v Coppin, unreported; FCt of WA; WAG 129 of 1989 and WAG 88 of 1990; 11 September 1991) said:

"The assessment is governed by that which is reasonable having regard to the degree of connection between the loss suffered and the contravening conduct as well as the extent to which the loss could have been avoided (see Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1989) ALR 539 per Lee J at 556; York v Ross Lucas Pty Ltd [1982] FCA 180; (1982) 69 FLR 116 per Fisher J at 131 to 132; Munchies Management Pty Ltd v Belperio [1988] FCA 413; (1998) 84 ALR 700 at 712 -713)

His Honour proceeded to award trading losses for the years ended 30 June 1989 and 30 June 1990, and said:

"In the circumstances and notwithstanding that the bargain was affirmed and not rescinded, it is reasonable to treat losses incurred until 30 June 1990 as losses which retained a sufficiently direct connection with the deceitful conduct to be properly recoverable from [the Vendors ....].

"Mr Terry accepted that his decision to continue the business beyond July 1989, when he was aware that it was running at a loss, was entirely his own. It is not the result of any advice from, or discussion with Mr Gorey.

In those circumstances, and with respect to Lee J, I consider that trading losses should be limited to the year ended 30 June 1989".

In Calleby Pty Ltd v Leros Pty Ltd, unreported; SCt of WA; Library No 970230; 30 May 1997, Steytler J pointed out that relief under s87 of the Trade Practices Act:

"Is not confined by the remedies which might be allowed, in the case of affirmation, at common law, [although] the fact remains that a court will ordinarily be guided by common law principles in this area."

The views so expressed by Steytler J were based on a full survey of the authorities and are consistent with the remarks of Heerey J in Jaldiver Pty Ltd v Nelumbo Pty Ltd, unreported; FCt of Vic; No 906 of 1992; 2 December 1992 (at 97) namely:

"The provisions in the Act should not be read down to conform with former common law or equitable requirements .... More particularly, conduct by an applicant which might at common law amount to an affirmation does not necessarily produce the result that losses incurred thereafter cannot be loss and damage suffered by conduct of the respondent ....

In my opinion the question is not one of affirmation, but whether it was reasonable or business like in the circumstances for the applicants to continue to conduct the businesses as they did or whether they had "hung on too long": Gould v Vagellas at 222-223 and 227-228 per Gibbs CJ, at 243 per Wilson J, Doyle v Olby (Ironmongers) Ltd [1969] 2QBD 158_."_

In accordance with the views so expressed (which, my view, should be followed) the issue is not whether Terry decided on his own initiative (and not in consequence of advice from Gorey) to continue the business beyond July 1989 when, it was running at a loss. The correct question is whether it was reasonable in all the circumstances for Terry to continue to conduct the business until 30 June 1990. Accordingly, that question not having been asked, this Court is at large in regard thereto.

In coming to the decision that he did, Lee J took into account a number of factors. He pointed out that at all times after Paper Sales took possession of the business, it ran at a loss. Nevertheless, even as at the date of trial in the Federal Court (July 1991), Terry considered that the business could be made profitable. Terry held the view that it was worthwhile to attempt to continue to develop the business by applying his management skills and by investing more capital. Lee J considered that "having been inveigled into the acquisition of the business, it was not unreasonable for Paper Sales to commit effort and capital for some months thereafter in an endeavour to ascertain whether the business could be given some worth, and notwithstanding that it had no value at the time of acquisition". His Honour was of the view that it was reasonable for Terry to have been hopeful that the commencement of proceedings in the Federal Court might lead to a resolution of the problem by a reversal of the bargain. In all the circumstances his Honour was of the view that it was reasonable to treat losses incurred until 30 June 1990 "as losses which retained a sufficiently direct connection with the deceitful conduct to be properly recoverable from [the Vendors] not being losses reflected in the difference in the price paid and the value of the business".

It is further to be noted that in a report by Gorey made to Terry in July 1989 he did not inform Paper Sales that the Business had previously made losses but said that the profit that had been made was less than that represented. Thus, although Terry knew in July 1989 that the Business was making a loss, he did not appreciate that it had made losses prior to the purchase thereof.

Terry testified that by the end of June 1989 "I had no way of knowing why [the Business] wasn't performing as it had been reputed or held out to perform". He had investigated all aspects of the sales and marketing operations and was satisfied that there were no mistakes or errors of commission in that area. He had critically reviewed the expenses of the Business and the profit margins that were being obtained on the goods that were being sold. By June 1989 he knew that the profit margins were less than those represented by the Vendors, and this was the problem area. By the time that Terry received Gorey's report at the end of July 1989, he knew that the business had not made "anything like the profit that the Vendors had represented to be the position". He also knew that the business was operating at a loss. Nevertheless, he explained "I had expectations that those unprofitable trends could be arrested and reversed". He said that this was based on the understanding that the profit margins on the cost of sales could be improved. Terry was plainly influenced by the fact that as late as July 1989 Gorey's report showed that the business had made a profit prior to the acquisition thereof by the respondents.

In my view, with respect, the facts justify the decision made by Lee J. In the circumstances I would uphold the appeal on this aspect. The trading losses incurred for the year ending 30 June 1990, without taking into account the salary payable to Mrs Terry, amounted to $58,334, and the damages awarded should be increased by this sum.

I turn now to the cross appeal concerning the damages claimed to be payable in respect of salary owing to Mrs Terry. Templeman J dealt with the matter by saying:

"In addition to trading losses strictly so - called, the [respondents] have claimed salary foregone by Mr Terry and his wife who both worked in the business for no remuneration.

I am not persuaded that this is a proper head of damages, since it does not represent an actual loss suffered by the [respondents]".

Before this Court, the respondents only claimed damages representing Paper Sales' liability in respect of Mrs Terry. The amount said by the respondents to be payable to Mrs Terry to the five months ending 30 June 1989 was said to be five twelfths of $16,335, ie, $6,806. The amount payable to her for the twelve months to 30 June 1990 was said to be $16,640.

The appellants did not dispute that the fact that Mrs Terry was not paid her salary did not disentitle Paper Sales from claiming for the liability it incurred in respect thereof - provided that such a liability was established. The existence of such a liability is a sufficient basis for the claim for damages: Lucas (TN) Pty Ltd v Centrepoint Freeholds Pty Ltd [1984] FCA 73; 52 ALR 467 at 500. The appellants argued that the evidence did not establish that at the time of the trial Paper Sales owed anything to Mrs Terry in respect of salary.

The main difficulty with regard to this claim is the way it was pleaded. According to the further particulars these amounts represented "salary foregone" by Mrs Terry. This suggests that Mrs Terry waived her right to claim the wages concerned. Senior counsel for the respondents submitted that this was a patent error on the part of the person who drafted the pleading and this "diverted" his Honour from the testimony which established that the salary was in fact owing. He pointed out that the evidence did not disclose that any salary had been "foregone".

The evidence on this issue was sparse. Only Terry testified in regard thereto. He said that Mrs Terry worked in the Business continuously from the beginning of February 1989 for three or four days a week. No payment was in fact made to her. Terry testified that the aggregate claims for "salary foregone" were based on a salary of $320 a week, that in turn being based on the clerical award rate at the time. In the course of Terry's evidence-in-chief the following exchange took place:

"Is it intended that the company will pay her that sum if it is able to recover? ---- The fact is she is entitled to it."

There was no cross-examination in respect of this testimony.

In the profit and loss account of Paper Sales for the five months ended 30 June 1989, a note was appended to the effect that the account excluded "remuneration to directors and officers for executive services rendered". There is something to be said for the argument that the only point of the note was to indicate that the remuneration in question (which included the salary payable to Mrs Terry) was in fact payable by Paper Sales, but was not being treated as a liability in the account because it had not yet been paid. A similar note appeared in the profit and loss account of Paper Sales for the year ended 30 June 1990. Additionally, in the latter account the cumulative amount owing in respect to remuneration to "directors and officers" was set out, that amount being the aggregate of the amounts in respect of salary for the 1989 and 1990 financial years.

Terry did not testify in evidence-in-chief that Mrs Terry had forgiven Paper Sales the debt owed by it to her and it was not put to him in cross-examination that she had forgiven the debt or had forgone the right to claim payment for it.

In my opinion, the only evidence being that Mrs Terry was "entitled" to her salary, and there being no testimony to support the proposition that she had forgiven or waived her claim, I consider that the appeal on this ground should succeed.

In my view the appeal should fail and the cross-appeal should succeed. I would therefore order that the award of damages be increased (from the amount awarded of $216,868.62) by $81,780, being the aggregate of the amounts of $58,334 (being the trading loss for the year ended 30 June 1990), $6,806 (being Mrs Terry's salary for the five months to 30 June 1989) and $16,640 (being the amount payable to her for the twelve months to 30 June 1990). The total amount of damages to which the respondents are, in my view, entitled is accordingly $298,648.62.

I agree with the reasons for judgment of Ipp J and to the orders proposed by him.

I have had the advantage of reading the reasons for decision proposed to be published by Ipp J. I agree with them and have nothing to add.