Federal Court of Australia|1993-05-10|Before: Heerey J

Re Garraway Metals Pty Ltd v Comalco Aluminium Limited [1993] FCA 219; (1993) 114 ALR 118 (10 May 1993)

Damages - breach of contract and contravention of Trade Practices Act - money wrongfully withheld under contract - money paid away and lost as a result of contravention of Trade Practices Act - damages for loss of use of money - whether lost trading profits recoverable - appropriate quantification.

Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310

Bain v Fothergill (1874) LR 7 HL 158

Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64

Hadley v Baxendale [1854] EngR 296; (1854) 9 Ex 341, 156 ER 145

Hungerfords v Walker (1987) 44 SASR 532

Hungerfords v Walker [1989] HCA 8; (1988) 171 CLR 125

London, Chatham and Dover Railway Co v South Eastern Railway Co (1893) AC 429.

McElroy Milne v Commercial Electronics Ltd (1993) 1 NZLR 39

Newman Industries Ltd (1949) 2 KB 528

President of India v La Pintada (1985) AC 104

Victoria Laundry (Windsor) Limited v Newman Industries Ltd (1949) 2 KB 528

Wadsworth v Lydall (1981) 1 WLR 598

Walker v Hungerfords (1987) 49 SASR 93

Wallis v Smith (1882) 21 Ch D 243

Garraway Metals Pty Ltd v Comalco Aluminium Limited

MELBOURNE, 17 September, 22 and 26 October, 4 and 6 November, 7 and 14 December 1992, 26 March and 16 April 1993

Counsel for the applicant: M B Phipps QC and J D Elliot

Counsel for the respondent: P O'Callaghan QC and P Santamaria

Solicitor for the respondent: Arthur Robinson and Hedderwicks

1. There be judgment for the applicant against the respondent in

the amount of $405,383, in addition to the amounts for which

judgment has already been entered.

2. Libety to apply in relation to the question of costs is

reserved.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules

HEEREY J As a consequence of earlier rulings Garraway Metals has obtained judgment for two amounts, viz

(i) Short payment under the May 1988 agreement with Comalco for

can collection and processing: $538,070

(ii) Damages under s.82(1) of the Trade Practices Act 1974 (the

Act) for losses incurred in relation to the abortive establishment

of a can collection business in Tasmania: $210,000.

2. The two amounts neatly exemplify two categories of financial loss. The first amount is a debt. It is money due under the May 1988 agreement and wrongfully withheld by Comalco. The second amount represents damages for money paid away by Garraway Metals as a result of Comalco's contravention of the Act. I shall refer to the two amounts collectively as "the judgment funds".

3. This last phase of the trial raises the question whether Garraway Metals can recover as damages profits it says it would have made with the use of the judgment funds. Garraway Metals says the judgment funds would have been used in its business to eliminate its bank overdraft and to spend $150,000 on additional trading stock of scrap metal, together with ancillary items of plant and equipment.

4. The financial benefits it is said would have been as follows:

(i) Garraway Metals would not have incurred overdraft interest

totalling $234,345.

(ii) It would have eliminated its overdraft borrowings by February

(iii) It would have made additional investment in trading stock

between May and December 1988.

(iv) It would have generated a trading profit of $968,967. Each

$10,000 invested in the scrap business would have increased

trading profits by $16,400.

(v) Interest from money on deposit would have returned a further

$261,951.

5. In aggregate Garraway Metals claims, additionally to the amount of the judgment funds, $1,523,582.

6. Comalco accepts that it is liable to pay compensation for loss of use of money withheld from Garraway Metals or wrongly paid away by that company in accordance with the principles established by the High Court in Hungerfords v Walker [1989] HCA 8; (1988) 171 CLR 125. Subject to some disputed questions of calculation, Comalco accepts in principle that it is liable to reimburse Garraway Metals for interest expenses incurred and interest foregone. However, Comalco says it is not liable for profits which would or might have been made had the judgment funds been available to Garraway Metals. Comalco disputes Garraway Metals' claim that the judgment funds would in fact have been applied in the way suggested or that, even if they had, they would have produced the profits alleged. Comalco says that in any event the amounts claimed for loss of profit are, as a matter of law, not recoverable.

7. I have reached the conclusion that Comalco's contentions are correct. I shall deal first with the evidence advanced in support of Garraway Metals' claim and then consider whether the alleged loss of profit would be recoverable, even if it were established.

8. That part of Garraway Metals' business which involved the collection of used beverage containers (UBC) for Comalco has already been described in my earlier rulings. The other part of the business was dealing in non-ferrous scrap metal.

9. Garraway Metals bought and sold aluminium, copper and brass scrap. About 60 per cent of purchases resulted from "door trade", that is to say sellers who came to Garraway Metals' premises at Clayton and Kensington. Such door trade was attracted by advertisements in the Yellow Pages and signs at the premises. Typically purchases in the door trade were made from tradesmen, domestic builders and individual members of the public.

10. The remaining 40 per cent of purchases came from commercial sources: first, manufacturers and fabricators who produced off-cuts and other non-ferrous scrap as a by-product of their operations and, secondly, scrap metal dealers, particularly in rural areas. To acquire scrap from these commercial sources Mr Frank Garraway relied on his own knowledge and contacts in the trade. Also an employee, Mr A Hinchcliffe, spent approximately half of his employed time on the road buying scrap.

11. There were about 30-40 scrap dealers of comparable size to Garraway Metals in the Melbourne Metropolitan area. I infer that they operated in a broadly similar fashion. There was no suggestion to the contrary.

12. As to sales, Garraway Metals exported some extruded aluminium scrap to Japan in containers but otherwise sold non-ferrous scrap to four major scrap metal merchants, Simsmetal Ltd, Affinity Metals Pty Ltd, Intercontinental Metals Pty Ltd and Non-Feral Pty Ltd. Those companies operated secondary smelters and sold the recycled metal either locally or to overseas buyers. Australia is a net exporter of non-ferrous scrap.

13. The accounts of Garraway Metals for the financial years 1986 to 1991 revealed the following relevant items (figures to the nearest thousand dollars).

1986 1987 1988 1989 1990 1991

Sales 1206 1870 3616 6683 5021 2215

Purchases scrap 841 1364 2981 2112 1267 941

Purchases UBC 3458 2725 686

Gross profit 365 522 707 1121 1082 500

Operating profit 14 .5 .6 92 (153) (146)

14. Garraway Metals' banker was the Commonwealth Bank of Australia, Clayton Branch. During the relevant period a number of arrangements were made with the Bank. In April 1988 the then existing overdraft limit of $68,000 was increased to $150,000 for the stated purpose of financing the new contract with Comalco. This new arrangement was of course going to require additional working capital since henceforth Garraway Metals was to purchase UBC and obtain reimbursement from Comalco. The overdraft was secured by second mortgage over the home of Mr and Mrs Garraway. There was no floating charge over the assets of Garraway Metals.

15. In 1989 the Bank advanced $800,000 of which $100,000 was appropriated to pay out the existing housing loan for Mr and Mrs Garraway's home and $700,000 for them to purchase the factory at Clayton. A mortgage was given over that property to the Bank.

16. In 1990 there was a $50,000 advance as a small business loan. The purpose as stated to the Bank was "additional funds because of increased activity".

17. From 1988 onwards the overdraft was regularly in excess of the limit because of delay in reimbursement of funds from Comalco. Sometimes it went as high as $250,000. It was within the authority of the Manager of the Branch to allow these temporary excesses. His evidence was that the advance of $150,000 in April 1988 was the maximum that could be granted on the security then available. Mr Garraway preferred not to let the Bank have a floating charge over the assets of Garraway Metals. The Manager said in evidence that he had never been approached by Mr Garraway for any financing to provide capital for increasing the stock of scrap.

18. Since the claim of Garraway Metals seeks compensation for lost opportunity, it has to show that the opportunity in question existed and would in fact have been taken.

19. I am not persuaded as to this, at least to anything like the extent claimed. If the opportunity to make greatly increased profits by doubling stock existed, it must have been apparent to Mr Garraway at the time, given his experience in the trade. Garraway Metals' case now is that the only thing preventing it from exploiting that opportunity was the lack of money.

20. But there is no evidence of any contemporary recognition of the alleged opportunity. Mr Garraway did not raise the possibility with the Bank, notwithstanding the attractiveness of the opportunity as now presented. It may have been that the Bank would have been prepared to provide further funding, since extra security in the form of a floating charge over the assets of Garraway Metals had not yet been utilised. But the matter was never raised.

21. Moreover, with the funds that were available to Garraway Metals there was a steady and substantial decline in the amount of scrap purchased between 1988 and 1991; 1988 - $3 million, 1989 - $2.1 million, 1990 - $1.3 million, 1991 - $.9 million. So it does not seem to have been a case of Garraway Metals putting any available money into the purchase of scrap.

22. The proprietors of Garraway Metals put the company up for sale in May 1990 and for this purpose prepared an "Information Memorandum" for potential purchasers. This document included a section on "Future Potential" which speaks of "current export markets offer(ing) significant potential for expansion of both the quantity and type of metal exported". Apart from this generalised statement there is no suggestion that an opportunity existed for very substantial increases in profits by the simple means of investing in more stock. Although the case presented to the Court was one based on a hypothesis of increased sales to domestic purchasers, the potential for sales of this kind was not mentioned in the Information Memorandum.

23. Between the Comalco contract in May 1988 and the commencement of the proceedings in March 1991 Garraway Metals made no complaint to Comalco, or anyone else, that short payments by Comalco were depriving Garraway Metals of an opportunity to make substantial profits.

24. If there was recognition at the time of a sure opportunity for making profit by simply increasing stock, it seems unlikely Garraway Metals would have expended $210,000 on the Tasmanian venture from March 1989 onwards.

25. There is in any event a somewhat artificial air about this exercise. Mr Garraway is asked "If you had the $750,000 which the Court has now awarded you, what would you have done with it?" Mr Garraway replies, I do not doubt honestly, "I would have paid off the overdraft and bought more scrap". But in real life Mr Garraway would not have been presented with a decision in such terms. If Garraway Metals had received the proper amounts due under the Comalco contract and not spent money in Tasmania, no doubt the business would have, over the years 1988 to 1990, appeared more prosperous. Some of the money available might have been spent on more stock.

26. As will be explained later, Comalco did not raise a case (and the evidence does not suggest) that the Garraway family would have expended a significant part of the judgment funds for purposes unconnected with the business. It is quite possible that some of the alleged $150,000 out of the judgment funds received would have been used for the purchase of trading stock or associated plant. But if this happened, I think it would have been more out of force of habit than any recognition of a highly profitable opportunity which it now said existed.

27. I would be prepared to find that half the alleged amount of $150,000 would have been invested in Garraway Metals' business for the purpose of purchasing additional trading stock.

28. Garraway Metals' case asserts that the additional stock purchased could have been sold at the same rate of gross profit as its accounts showed for the 1989 financial year (18.2 per cent). It was also said that Garraway Metals turned over its stock of scrap approximately 24 times per year. This figure was based on scrap purchases for the 1989 year divided by the closing stock figure for that year, which was said to represent the typical cost of scrap on hand during the year.

29. To arrive at a net profit for the scrap side of the business the variable expenses for the 1989 year were adjusted by deducting amounts wholly referrable to the UBC side of the business (viz freight expenses) and salaries and expenses of managerial staff, which would be incurred in any event. The percentage of sales of scrap to total turnover for 1989 was 38.6 per cent. An increase in turnover from scrap would, it was said, increase the adjusted variable expenses by 38.6 per cent.

30. In summary, therefore, the case is that the volume of scrap trading could have been increased by at least 100 per cent if Garraway Metals had sufficient working capital to fund additional stock purchases. To double the level of scrap trading the company would have spent $120,000 on additional stock and would have purchased some additional plant estimated at $30,000 and incurred additional depreciation ($6,000). There would have been an estimated $50,000 in increased general fixed overheads. The increase in profit for 1989 is $246,029 calculated as follows:

Increase in sales income $2,582,001

Less increase in material purchases ($2,112,149)

Gross profit $469,852

Less increase in adjusted variable

expenses ($167,823)

Additional depreciation allowance ($6,000)

Additional overhead allowance ($50,000)

$246,029

31. Profits taken up to August 1992 would have produced $968,967.

32. It will be seen that Garraway Metals' case rests on a number of assumptions. The first of these is that the single financial year 1989 provides a fair basis for estimating the increased profitability which would have flowed from the injection of the judgment funds. I do not accept this. Accounting practice and common sense suggest that the inherent profitability of a business is best assessed by looking at a substantial period of trading so that exceptional features which might appear in one year do not give a distorted picture that might be unrealistically favourable or unfavourable.

33. In the case of Garraway Metals, not only does 1989 give a very limited view, but it is quite untypical when compared with the three preceding years. In 1989 there was an operating profit of (to the nearest thousand dollars) $92,000; but 1986, 1987 and 1988 produced profits of $14,000, $500 and $600 respectively.

34. The explanation given for using 1989 was that it was

"necessary to establish as near as possible a picture of the

business at the relevant time unaffected by the

underpayments from Comalco and the loss in Tasmania. The

years subsequent to 1988/89 are so affected. Years prior to

1988/89 do not show the business as it operated after the

new can contract came into operation in May 1988. Thus the

year ended June 1989 gives the best picture."

35. But in fact the 1988/89 year was affected by the underpayments from Comalco and, indeed, much more so than any other year. The underpayments were as follows:

May - June 88 $97,222.10

July 88 - June 89 $269,200.30

July 80 - June 90 $119,476.45

July 90 - September 90 $52,287.55

$538,186.40

36. And I do not follow the logic in excluding the years before 1989. What is relevant for present purposes is the profitability or otherwise of the scrap business and not the UBC business.

37. I think I can also take judicial notice of the fact that calendar 1988 and 1989 were times of general prosperity before the recent recession. On all the evidence I am not satisfied that calculations based on the 1989 financial year would give a fair view of the profitability of Garraway Metals for the purposes of the calculations used in its case.

38. Another assumption is the figure of 24 for stock turnover. This seems to depend largely, if not entirely, on the further assumption that the closing level of stock remained constant throughout the year so that one simply divides stock purchases for the year by the figure for closing stock. But the industry average according to Dunn and Bradstreet is 9.67 and two of Garraway Metals' witnesses gave a figure of 12 as typical for the industry. I am not satisfied that a figure in excess of 12 is reasonable.

39. Fundamental to the Garraway Metals' case is the further assumption that an increase in purchases would have produced a corresponding increase in sales. The more that is bought, the more that is sold. Figures for purchases and sales would be expected to march together.

40. However the historical progress of the business does not support the assumption. Mr David Boymal, a partner of Ernst and Young who was called as a witness by Comalco, produced a graph based on Garraway Metals' accounts as follows:

41. The figures for stock plotted in the graph are closing figures at 30 June. As has been mentioned, Garraway Metals' own case assumes that stock levels remained reasonably constant throughout the year. What the graph shows strikingly is that the suggested correlation between stock levels and sales did not exist. Moreover, if overdraft levels are treated as funds available, it shows that increase in available funds did not always result in increased sales, nor even in increased stock.

42. Evidence that was given by some senior executives from the major scrap companies helped to explain this pattern.

43. At any given time there is a finite amount of scrap available for purchase. Garraway Metals is in competition with other scrap dealers to purchase scrap metal. To obtain more of the scrap available Garraway Metals would have to increase its prices, which would result in other dealers following suit. To sell scrap Garraway Metals would be to a large extent governed by the prices offered by the major scrap dealers who in turn are constrained by world metal prices fixed largely by the London Metal Exchange. Thus the evidence of Mr Peter Freburg, the Managing Director of Non Ferral Pty Ltd, was that although from 1988 onwards his company had the capacity to purchase more scrap in general and in particular from Garraway Metals (who in 1988 provided only 2.7 per cent of Non Ferral's purchases) "every extra tonne to double the volume becomes more marginal (in probability)".

44. Therefore I am not satisfied that any doubling of purchases by Garraway Metals could necessarily have been achieved at the same price and sold with constant profitability.

45. In general, the problems with the assumptions on which Garraway Metals' case rests are corroborated by the actual historical performance of the scrap metal side of the business, and in particular the figures for the years before any problems arose with Comalco. I am not satisfied that assuming the injections of half the claimed amount, it has been shown that even an approximately quantifiable profit would have been made. There may have been some profit, but I am unable to go beyond that or find any rational basis for estimating what it would have been.

46. If I were persuaded that Garraway Metals would have invested $150,000 out of the judgment funds in the purchase of extra trading stock and associated plant and as a consequence achieved the profits alleged, the question would then arise whether those profits are recoverable by way of damages from Comalco.

47. The evidence relevant to this part of the claim is as follows. At the time of entering into the UBC contract in May 1988 Garraway Metals had no discussions with Comalco about the state of their general scrap business or their intentions in respect of it. Comalco was aware in general terms that Garraway Metals carried on a scrap business. Mr Michael Tonkin was in 1987 sent by Comalco to oversee the operations of Garraway. At the time Comalco was concerned about stock loss in the UBC business. He said in evidence that during this time at Garraway Metals' premises he saw trading in scrap metals for a significant amount of time each day. In the course of a confidential report to his employer he said that "Garraway personnel were often extremely busy with cash purchases and their general scrap business and were unable to check loads of cans as they came in". He said that "Sometimes you couldn't walk through the factory because it was piled high with scrap. Other times it would be empty." Mr Tonkin was not told anything by Garraway Metals' personnel as to the profitability of the scrap business. Other witnesses called by Comalco said that they were aware that Garraway Metals was in the business of general scrap metal dealing as well as performing UBC collection on behalf of Comalco. However there is no suggestion in the evidence that Garraway Metals explained to anyone from Comalco any need for working capital to expand the purchases of general scrap or indeed that there was any discussion at all about the needs or potential of the scrap business or its internal operations.

48. Comalco of course had no commercial interest in the scrap business and no reason to be concerned in its profitability, other than, perhaps, at the most basic level Comalco would naturally not wish the scrap business to be so unprofitable that it would endanger the viability of Garraway Metals and put at risk the efficient performance of the UBC contract. Evidence was not specifically directed to the state of Comalco's knowledge of the general scrap business at the time Garraway Metals were induced to enter into the Tasmanian venture. It is to be inferred therefore that Comalco's knowledge at that time, that is March to December 1989, was essentially the same as mentioned above.

49. Despite some modern scepticism in distinguished quarters (McElroy Milne v Commercial Electronics Ltd (1993) 1 NZLR 39 at 42 per Cooke P), Hadley v Baxendale [1854] EngR 296; (1854) 9 Ex 341, 156 ER 145 remains one of the great landmarks of the common law.

50. The plaintiffs operated a flour mill in Gloucester which was run by a steam engine. The crank shaft of the steam engine broke. The plaintiffs arranged with engineers at Greenwich to make a new shaft, but for this purpose it was necessary to send the broken shaft as a pattern. The plaintiffs contracted with the defendants, who were common carriers, to carry the broken shaft to Greenwich. The defendants delayed for seven days in delivering the shaft. The plaintiffs claimed that as a result there was a delay in the making of the new shaft and that for the period of the delay they lost profit which they would otherwise have made. It may be that at the trial at the Gloucester Assizes there was a conflict as to what was said by the plaintiffs' clerk to the defendants about the need for urgency (see Victoria Laundry (Windsor) Limited v Newman Industries Ltd (1949) 2 KB 528 at 537). However the Court of Exchequer Chamber proceeded on the basis of a finding that the only circumstances communicated by the plaintiffs to the defendants at the time the contract was made were that the article to be carried was the broken shaft of the mill and that the plaintiffs were the millers of that mill (9 Ex at 355).

51. In that setting the court held that the proper rule was:

"Where two parties have made a contract which one of them

has broken, the damages which the other party ought to

receive in respect of such breach of contract should be such

as may fairly and reasonably be considered either (i)

arising naturally, i.e., according to the usual course of

things, from such breach of contract itself, or (ii) such as

may reasonably be supposed to have been in the contemplation

of both parties, at the time they made the contract, as the

probable result of the breach of it. Now, if the special

circumstances under which the contract was actually made

were communicated by the plaintiffs to the defendants, and

thus known to both parties, the damages resulting from the

breach of such a contract, which they would reasonably

contemplate, would be the amount of injury which would

ordinarily follow from a breach of contract under these

special circumstances so known and communicated. But, on

the other hand, if these special circumstances were wholly

unknown to the party breaking the contract, he, at the most,

could only be supposed to have had in his contemplation the

amount of injury which would arise generally, and in the

great multitude of cases not affected by any special

circumstances, from such a breach of contract. For, had the

special circumstances been known, the parties might have

specially provided for the breach of contract by special

terms as to the damages in that case; and of this advantage

it would be very unjust to deprive them." (The figures (i)

and (ii) have been added to identify what are usually

referred to as the first and second limbs of the rule in

Hadley v Baxendale.)

52. The court pointed out that on the facts found the mere fact that the shaft was broken would not have conveyed to the defendants that the mill would stop. For example, consistently with the facts known to the defendants, the plaintiffs might have had another shaft in their possession or the machinery of the mill might have been in other respects defective. The special circumstance, namely that the new shaft was essential to resume operation of the mill, was never communicated by the plaintiffs to the defendants. The case was sent back for a new trial with a direction that the judge should direct the jury that upon those facts they ought not to take the loss of profits into consideration at all in estimating damages.

53. Most contracts impose an obligation on one of the parties to pay money, for example as the price of goods sold or as a charge for services rendered.

54. Where there is a breach of such an obligation, the innocent party may wish to recover, in addition to the money itself, compensation by way of (i) interest for loss of use of the money or (ii) damages for the benefit he would have obtained, or detriment avoided, by the use of the money. I shall refer to the latter as "damages for money not paid", an expression which is intended to include also money paid away by the plaintiff as a result of the defendant's breach as well as money wrongfully withheld.

55. As to the former, the common law showed a "disdain" for interest as a "relic from the days when interest was regarded as necessarily usurious": Hungerfords 171 CLR at 150. The common law position in England was that, in the absence of agreement or statutory provision, a court had no power to award interest as compensation for late payment of a debt: London, Chatham and Dover Railway Co v South Eastern Railway Co (1893) AC 429. It was thought this rule also applied to late payment of damages: Hungerfords 171 CLR at 138.

56. In the case of damages for money not paid there was "an even more rigorous attitude towards damages for non-payment of money": McGregor on Damages (14th edition) at 583, even though this approach was subject to criticism such as that of Jessel MR in Wallis v Smith (1882) 21 Ch D 243 at 257 where his Lordship said:

"It has always appeared to me that the doctrine of the

English law as to non-payment of money - the general rule

being that you cannot recover damages because it is not paid

by a certain day, is not quite consistent with reason. A

man may be utterly ruined by the non-payment of a sum of

money on a given day, the damages may be enormous, and the

other party may be wealthy."

57. In Hadley v Baxendale itself, the court regarded non-payment of money as an exception, a well known "conventional rule" of which the parties must be supposed to be cognisant (9 Ex at 355), just like the rule which restricts the damages recoverable against a vendor who cannot make good title to land: Bain v Fothergill (1874) LR 7 HL 158.

58. A major turning point occurred in Wadsworth v Lydall (1981) 1 WLR 598. Plaintiff and defendant were partners in a farming partnership. They agreed to dissolve the partnership on terms that the plaintiff would give up possession of the farm on 15 May 1976 in return for a payment of 10,000 pounds by the defendant. Shortly before that date, the plaintiff, in the expectation of receiving the money, and because he had to find somewhere else to live, agreed to purchase another property. He gave up possession of the farm on 15 May but the defendant did not pay the 10,000 pounds until much later. The vendor of the plaintiff's new property gave him notice to complete. The plaintiff was compelled to pay interest to the vendor for late completion (335 pounds) and legal costs on a second mortgage given to secure the balance (16.20 pounds).

59. The Court of Appeal held that the interest and costs were recoverable as damages for the defendant's breach of contract in not paying the money when due. Brightman LJ said (at 602):

"In my view the damage claimed by the plaintiff was not too

remote. It is clearly to be inferred from the evidence that

the defendant well knew at the time of the negotiation of

the contract of January 1976 that the plaintiff would need

to acquire another farm or smallholding as his home and his

business, and that he would be dependent on the 10,000

payable under the contract in order to finance that purchase.

The defendant knew or ought to have known that if the 10,000

pounds was not paid to him, the plaintiff would need to

borrow an equivalent amount or would have to pay interest to

his vendor or would need to secure financial accommodation

in some other way. The plaintiff's loss in my opinion is

such it may reasonably be supposed that it would have been

in the contemplation of the parties as a serious

possibility, had their attention been directed to the

consequences of a breach of contract."

"If a plaintiff pleads and can prove that he has suffered

special damage as a result of the defendant's failure to

perform his obligation under a contract, and such damage is

not too remote on the principle of Hadley v Baxendale (1854)

9 Exch. 342, I can see no logical reason why such special

damage should be irrecoverable merely because the obligation

on which the defendant defaulted was an obligation to pay

money and not some other type of obligation. I derive

support for this view from obiter dicta in Trans Trust

SPRL v Danubian Trading Co Ltd (1952) 2 QB 297. I refer

first to a paragraph in the judgment of Denning LJ at p 306:

'It was said that the breach here was a failure to pay

money and that the law has never allowed any damages

on that account. I do not think that the law has ever

taken up such a rigid standpoint. It did undoubtedly

refuse to award interest until the recent statute (the

Law Reform (Miscellaneous Provisions) Act 1934 (Imp)):

see London, Chatham and Dover Railway Co v South

Eastern Railway Co (1893) AC 429; but the ground was

that interest was 'generally presumed not to be within

the contemplation of the parties': see Bullen and

Leake, 3rd ed. at p 51. That is, I think, the only

real ground on which damages can be refused for

non-payment of money. It is because the consequences are

as a rule too remote. But when the circumstances are

such that there is a special loss foreseeable at the

time of the contract as the consequence of

non-payment, then I think such loss may well be

recoverable. It is not necessary, however, to come to

a firm conclusion on this point, because I regard the

provision of a credit as different from the payment of

money and not subject to the special rules, if any

there are, relating thereto.'

'... I am not, as at present advised, prepared

to subscribe to the view that in no case can

damages be recovered for non-payment of money; I

agree with Denning LJ that in certain

circumstances such damages might well be

recoverable provided that the loss occasioned to

the plaintiff by the defendant's default was

reasonably within the contemplation of the

parties when the bargain between them was made.'

In my view the plaintiff in the instant case ought to have been

allowed the 335 pounds and 16.20 pounds damages which he claimed.

Those damages are pleaded as special damages. They are not,

for the reasons which I have given, too remote. I think

that they are recoverable under the ordinary principles upon

which this court proceeds in the case of damages."

60. His Lordship was using the expression "special damages" in the sense of damage recoverable under the second limb of Hadley v Baxendale. Thus Wadsworth was not a case of a plaintiff recovering interest on money wrongfully withheld by a defendant, but rather actual expenditure which was within the contemplation of the parties as a consequence of the defendant's breach of contract. The claim was for damages for money not paid. This is particularly so in respect of the 16.20 pounds legal costs which the Court of Appeal held were recoverable. In a sense Wadsworth was a leap-frogging advance because it challenged the "even more rigorous attitude" of the common law towards damages for non-payment of money (see McGregor, supra).

61. President of India v La Pintada (1985) AC 104 involved a claim for interest on amounts due for freight and demurrage. The House of Lords declined to depart from the decision in London, Chatham. But their Lordships expressly approved Wadsworth and held that London, Chatham only applied to prohibit claims for interest by way of general damages, that is to say claims based on the first limb of Hadley v Baxendale: see (1985) AC at 127.

62. In Hungerfords the plaintiffs carried on a business of selling, hiring and servicing television sets and other electronic goods. The defendants were an accounting firm who acted for the plaintiffs in preparing their income tax returns. In the returns for a number of years the defendants made a negligent error in calculating the amount of allowable depreciation. As a result the plaintiffs paid more tax than they were legally required to. In respect of the more recent years they were able to recover the overpaid tax from the Commissioner, but for earlier years such recovery was statute barred. The plaintiffs sued the defendants in breach of contract and negligence for the amounts of tax overpaid in these years and for consequential loss.

63. The trial judge (Bollen J) found that the plaintiffs would have put most, but not all, of the overpaid tax "into the business". He found that, as to this money, the plaintiffs would have used it "to produce a profit which may fairly be assessed at 10 per cent on that money": (1987) 44 SASR 532. The plaintiffs appealed.

64. The Full Court of the Supreme Court of South Australia held that the second limb of Hadley v Baxendale applied: (1987) 49 SASR 93. The Full Court approached the case in a way which did not distinguish between interest and loss of profits. The principal judgment was that of King CJ. After reviewing the authorities his Honour said (at 99):

"It follows from the principles of law referred to above

that if the appellants, in consequence of being deprived of

the use of the money paid out for tax in excess of their

true legal liability, incurred interest obligations which

would not have otherwise been incurred or lost profits which

could have been earned by the use of that money, and if the

respondents by reason of their knowledge of the special

circumstances of the appellants' business, ought reasonably

to have contemplated that that would occur, the appellants

are entitled to have compensation for incurring such

interest obligations or for the loss of profits as part of

their damages. I think that this is so whether the damages

are assessed in contract or in tort."

65. The plaintiffs' business was financed largely by loan money, partly from a family company and a bank but also from a finance company, Mutual Acceptance Limited, which charged high rates, some 20 per cent. The business was "money hungry", in the sense that it needed a lot of working capital.

66. The trial judge had not accepted the plaintiffs' evidence that they would have used the money to pay off the Mutual Acceptance loans as necessarily correct. His Honour thought that some of the money might have been used in the business in other ways. The Full Court accepted this finding but proceeded to draw a different conclusion. King CJ said (at 100):

"I am unable to accept, however, his Honour's reasoning from

that finding. He considered, correctly in my view, that

there was not, and could not in the nature of things be,

evidence establishing the rate of profit which the money

would have earned if employed in the business. He reasoned

from that that it would be wrong to base damages upon the

rate of interest payable in respect of the most expensive

loan. I think that that reasoning is incorrect. The

appellants conducted a successful business. Their business

judgment was obviously sound. The success of the business

proved that they were able to employ the funds which they

borrowed in a manner which enabled them to pay the high rate

of interest and make a profit. No doubt there must be

limits to the quantum of funds which they could employ

profitably. But their successful conduct of the business

provided every reason for confidence that they would make

correct judgments on that point. If they had had at their

disposal the money which was overpaid in tax and had been

prepared to use it in the business, it would have been

business common sense to repay the loans bearing the highest

interest, and to employ the additional funds directly in the

business in lieu of repaying those loans only if by so doing

they could earn profits in excess of the rate of interest

which they were paying on the most expensive loans. It

seems to me that their loss, to the extent that they were

prepared to devote the additional funds to the business,

could not be less than the rate of interest which they were

paying on the Mutual Acceptance loans."

68. The Full Court accepted the trial Judge's finding that not all the excess tax monies would have been put into the business. King CJ held that a fair calculation of the plaintiff's loss must take into account the possibility that part of the money would if available have been used for non-business purposes. On the "sparse material available" his Honour made a broad brush assessment by reducing the amount of the recovery from $334,521.64 to $270,000 (at 101). The defendants appealed.

69. In the High Court the principal judgment was that of Mason CJ and Wilson J. Their Honours did not find it necessary to discuss in terms the distinction between interest and damages for money not paid. Nor did they deal with loss of trading profits as a measure of the latter kind of damages. The judgment is concerned with the recoverability of compensation for consequential loss assessed in terms of interest. Thus at the outset (171 CLR at 132) their Honours say:

"This appeal raises the important question whether, at

common law, a court, when awarding damages for breach of

contract or negligence, can include in its award damages,

assessed by reference to appropriate interest rates, for the

loss of the use of money which the plaintiff paid away and

lost as a direct consequence of the defendant's breach of

contract or negligence." (Emphasis added.)

70. The essence of their Honours' judgment is to put the plaintiff's right to damages on the more general basis of the first limb of Hadley v Baxendale rather than, as the Full Court had done, on the second. Their Honours looked at the distinction drawn in La Pintada which, as has been noted, confined London, Chatham to claims under the first limb of Hadley v Baxendale, and pointed out (at 141):

"... the circumstances which are now held to attract the

second limb in Hadley v Baxendale - take, for example, those

in Wadsworth v Lydall - are very often circumstances which

in any event would attract the first limb. If a plaintiff

sustains loss or damage in relation to money which he has

paid out or foregone, why is he not entitled to recover

damages for loss of the use of money when the loss or damage

sustained was reasonably foreseeable as liable to result

from the relevant breach of contract or tort? After all,

that is the fundamental rule governing the recovery of

damages according to the first limb in Hadley v Baxendale

Ltd (see Victoria Laundry (Windsor) Ltd v Newman Industries

Ltd) and, subject to proximity, in negligence."

71. Their Honours (at 143) considered that from a commercial viewpoint no valid distinction could be drawn between the cost incurred by a plaintiff who incurs interest costs in borrowing as opposed to a plaintiff who does not have to borrow but loses the interest on his money which could have been invested instead of being used in lieu of the money wrongfully withheld by the defendant.

"The loss may arise in the form of the investment cost of

being deprived of money which could have been invested at

interest or used to reduce an existing indebtedness. Or the

loss may arise in the form of the borrowing cost, ie,

interest payable on borrowed money or interest foregone

because an existing investment is realized or reduced."

72. Their Honours thereafter use the expression "incurred expense and opportunity cost" as referring to the two forms of loss. That their Honours were concerned with the plaintiffs' right to compensation assessed in terms of interest for the loss of use of money is made clear again in the following passage (at 145):

"The requirement of foreseeability is no obstacle to the

award of damages, calculated by reference to the appropriate

interest rates for loss of the use of money. Opportunity

cost, more so than incurred expense, is a plainly

foreseeable loss because, according to common understanding,

it represents the market price of obtaining money. But,

even in the case of incurred expense, it is at least

strongly arguable that a plaintiff's loss or damage

represented by this expense is not too remote on the score

of foreseeability. In truth, it is an expense which

represents loss or damage flowing naturally and directly

from the defendant's wrongful act or omission, particularly

when that act or omission results in the withholding of

money from a plaintiff or causes the plaintiff to pay away

money." (Emphasis added.)

73. Likewise, their Honours (at 150) characterised the decision of the Full Court as one which involved "ascertain(ing) the value of the injury arising from the loss of use of the money."

74. The ratio of their Honours' judgment is summed up in the following passage (at 145):

"The cost of borrowing money to replace money paid away or

withheld, in consequence of the defendant's breach of

contract or negligence, is directly related to the wrong and

is not too remote in the sense in which the common law

regarded the loss attributable to late payment of damages as

being too remote. We reach this conclusion more readily,

knowing that legal and economic thinking about the

remoteness of financial and economic loss have developed

markedly in recent times. Likewise, opportunity cost should

not be considered as being too remote when money is paid

away or withheld."

75. In their concurring judgment Brennan and Deane JJ (at 152) also spoke primarily in terms of compensation for loss of use of money measured by interest. Their Honours said:

"... there is no acceptable reason why the ordinary

principles governing the recovery of common law damages

should not, in an appropriate case, apply to entitle a

plaintiff to an actual award of damages as compensation for

a wrongfully and foreseeably caused loss of the use of

money. To the extent that the reported cases support the

proposition that damages cannot be awarded as compensation

for the loss of the use of a specific sum of money which the

wrongful act of a defendant had caused to be paid away or

withheld, they are contrary to the principle and commercial

reality and should not be followed.

In the present case, the breach of the duty of care which

the appellants owed to the respondents caused overpayments

of tax by the respondents. The direct and foreseeable

effect of those overpayments was that specific sums of money

(ie the amounts of the overpayments), which would otherwise

have been available to avoid, repay or offset the costs of

some of the significant borrowings of the respondents'

business, were unavailable to the respondents from the time

of the respective overpayments. The injury sustained by the

respondents by reason of the loss of the use of the amounts

of the overpayments was as foreseeably caused by the breach

of the appellants' duty of care as would have been the case

if the appellants had wrongfully deprived the respondents of

the use of their money by locking it in a foolproof safe and

withholding the key. The quantum of damages which

represents appropriate compensation for that loss plainly

fell to be assessed by reference to (among other things) the

rates of interest paid by the respondents upon borrowings

which would probably have been avoided, retired or offset

but for the overpayments."

76. As I have noted, King CJ in the Full Court referred to interest and loss of profits as though the two were interchangeable. However, his Honour spoke in the context of a case where the business was profitable even after paying high interest rates to Mutual Acceptance. It followed logically enough that if the Mutual Acceptance loans were paid off, money invested in the business would produce a return at least equal to those rates. Were it not for this special characteristic, there "could not in the nature of things be evidence establishing the rate of profit which the money would have earned if employed in the business" (49 SASR at 100). There was no attempt in Hungerfords to formulate a loss of profits claim on any other basis.

77. I think therefore that Hungerfords is no authority for any proposition that a plaintiff's loss of trading profits which would have been earned by money wrongfully withheld by a defendant is a direct and foreseeable consequence of the defendant's wrong, or something that arises naturally according to the usual course of things.

78. There is of course no novelty in an award of damages for loss of profits. Typical examples occur where the plaintiff has been wrongfully deprived of a profit earning chattel or the plaintiff would have earned profits by performing the very contract which the defendant has repudiated: cf Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64.

79. But what is said by Garraway Metals in the present case is that it should be awarded damages assessed by reference to trading profits it would have earned from money wrongfully withheld by Comalco and money paid away as a result of Comalco's contravention of the Act. The old prohibition of damages for money not paid has been removed by Wadsworth, but where the damages are sought to be quantified by reference to lost trading profits, the court encounters special factors. These arise from the inherent nature of money.

80. Money is a uniquely versatile and useful commodity. On the assumption that money wrongfully withheld by a defendant would have been "put into the business" by a plaintiff, to what use would that money be put? It might have been expended in acquiring more trading stock, in purchasing plant, in engaging more staff, in increasing advertising, in any combination of those uses or in a myriad of other ways. The potential of the money producing a profit would be affected by the wisdom of those decisions as well as factors external to the business such as the actions of suppliers, customers and competitors and the general state of the economy.

81. As the present case shows, even when a particular application of money is retrospectively selected (a hypothetical application of which, it must be remembered, Comalco had no reason to be aware at the time), the answer to the question whether any profit (and if so how much) would have been earned will depend on a number of further assumptions. If even only one of those assumptions is incorrect, the answer can be very different.

82. To illustrate the point by an example that was used in argument, let it be assumed that a builder does work under a building contract on the home of a client who is a foreign exchange dealer. The builder is aware of his client's occupation, but nothing more. The builder performs defective work and abandons the contract and as a result the client has to expend money on rectification and completion of the work. It would seem odd that the client could claim profits that he would have made with speculative foreign exchange dealings with the money he has had to pay out as a result of the builder's breach of contract. One might ask what would be the position if, in contrast to the present case, it were clearly established by the evidence that the client had planned to embark on particular transactions which, by the time of the trial, it is clear would have produced a large loss. Can the builder set off against the client's claim the money that the client has been saved?

83. In the present case Comalco did not have, and could not be expected to have had, any knowledge of the internal financial structures or business plans of Garraway Metals. Comalco were aware of the fact that Garraway Metals conducted the business of dealing in non-ferrous scrap, but nothing more than that. No question of knowledge of special circumstances arises. Comalco in my opinion is not liable for any loss of trading profit (even if it could be shown that profit would have been earned) on either limb of Hadley v Baxendale. Nor was such loss reasonably foreseeable. In any case, it was too remote.

84. I think the compensation Garraway Metals is entitled to recover is to be quantified as "the value of the injury arising from the loss of the use of the money" (Hungerfords 171 CLR at 150). The appropriate quantification is interest, the ordinary economic measure of the loss of use of money. This is the "kind or type of loss or damage" which the parties must be taken as having contemplated: Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 365-6 per McHugh JA.

85. Comalco's case conceded that interest was payable and that, in the words of its senior counsel, in

"... the calculation of that interest we do not object to it

being made upon what might be called the Hungerford

principle, in the sense that it is calculated by reference

to the cost of the money which the respondent (sic, clearly

applicant was intended) - I was going to say enjoyed; I

think suffered is the word - by way of overdraft and the

amounts of money which he would have made from investments

had the amounts which your Honour has found, the $750 odd,

being paid in what has been described as a timely way."

86. Although Comalco, successfully as I have held, challenged the case that some of the judgment funds would have been spent on doubling the amount of trading stock and that additional profit would have been generated therefrom, Comalco did not raise a case that any significant portion of the judgment funds would have been spent for purposes unconnected with the business. In other words, there is no equivalent in the present case to the reduction which the trial judge and the Full Court made in Hungerfords.

87. Garraway Metals put forward an alternative case based on allocation of the judgment funds to progressively eliminate the overdraft and then invest the surplus in bank bills. In principle that alternative claim matched the amount which Comalco conceded should be ordered to be paid in addition to the judgment funds (while retaining of course its primary stance that no award should have been made for the judgment funds themselves).

88. However there were some differences in calculations which mainly arose from the fact that Garraway Metals took the actual overdraft figures that existed from time to time whereas Comalco only took the figures that existed as at May 1988. Further, it appears that Comalco's calculation did not compound the figures.

89. In my opinion Garraway Metals' calculations are correct because they more closely approximate what in fact would be the situation had the judgment funds been received over the relevant period which extended from May 1988 to September 1990.

90. In the event I hold that Garraway Metals is entitled to damages for money wrongfully withheld from them or paid away by them as a consequence of Comalco's breach of contract and contravention of the Act in the amount of $405,383. There will be judgment, in addition to the amounts already ordered, for $405,383. I will hear argument on the question of costs.

Law Reform (Miscellaneous Provisions) Act 1934

Re Garraway Metals Pty Ltd v Comalco Aluminium Limited [1993] FCA 219;

At a glance

Court

Decision date

Before

Source

Judgment (135 paragraphs)

Re Garraway Metals Pty Ltd v Comalco Aluminium Limited [1993] FCA 219; (1993) 114 ALR 118 (10 May 1993)

Parties

Legislation Cited (2)

Cases Cited (6)