Unit 11 Pty Ltd v Sharpe Partners Pty Ltd

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

AND: SHARPE PARTNERS PTY LTD (ACN 061 707 042)

REASONS FOR JUDGMENT LEE J: 1 This is an appeal from interlocutory orders made by a Judge of this Court on a motion by the second respondent pursuant to Order 11 rule 16 of the Rules of the Federal Court ("the Rules"). Order 11 r 16 provides that the whole or any part of a pleading may be struck out where the pleading: (a) discloses no reasonable cause of action; (b) has a tendency to cause prejudice, embarrassment or delay in the proceeding; or (c) is otherwise an abuse of the process of the Court. Only the first of the forementioned grounds appears to have been relied upon on the hearing of the motion. 2 His Honour ordered that so much of the appellant's statement of claim as relied on causes of action against the second respondent in the proceeding brought by the appellant against the first and second respondents be struck out. The first respondent has not filed an appearance and has taken no part in the proceeding. His Honour further ordered that the appellant have leave to file a further amended statement of claim against the second respondent "to the extent that it relies on a cause of action based on an alleged misappropriation of the applicant's funds". 3 Pursuant to s 24(1A) of the Federal Court of Australia Act 1976 (Cth) an appeal from an interlocutory order is not competent unless leave to appeal has been granted. The appellant duly filed an application for leave which remains to be determined. The hearing was conducted as if leave to appeal were granted. His Honour's order was directed to a matter of practice and procedure for which leave to appeal is seldom extended. (See: Adam P Brown Male Fashions Pty Ltd v Philip Morris Inc (1981) 148 CLR 170 per Gibbs CJ, Aickin, Wilson and Brennan JJ at 177). It is apparent, however, that if his Honour's order has been made in error and remains uncorrected, it will disadvantage the appellant and be likely to occasion cost and inconvenience to all parties. If the matter has to proceed to a final judgment before correction of the error can be sought by way of appeal the only practical remedy then available would be an order that the matter be re-tried. Although not consented to by the second respondent the application for leave to appeal was not opposed. Given that it may be accepted that the order made by his Honour warrants reconsideration by a Full Court and that substantial prejudice to the appellant may follow if leave to appeal from the order were refused it is appropriate to grant leave. (See: Lenijamar Pty Ltd v AGC (Advances) Ltd (1990) 27 FCR 388). 4 Anterior to the hearing of the second respondent's motion the appellant had filed an amended statement of claim and a further amended statement of claim in response to strike-out motions filed by the second respondent in respect of the original and amended statement of claim. After the third form of the statement of claim had been filed the second respondent filed the amended strike-out motion on which the orders the subject of this appeal were made. 5 The material facts relied upon by the appellant in its pleading are set out below. For the purpose of the motion before his Honour and this appeal they are to be taken to be established. 6 The appellant is the trustee of the Arts Investment Trust ("the Trust") established by TWU Nominees Pty Ltd ("TWU Nominees") pursuant to a Deed of Trust dated 25 October 1996. TWU Nominees is the trustee of the TWU Superannuation Fund, a regulated superannuation fund for the purpose of the Superannuation Industry (Supervision) Act 1993 (Cth). The appellant is a wholly-owned subsidiary of TWU Nominees. 7 The appellant's case as pleaded, augmented by foreshadowed amendments, is that TWU Nominees accepted a proposal from a Mr Flood ("Flood"), a partner in a firm of solicitors retained by TWU Nominees, and subsequently by the appellant, that TWU Nominees adopt an "investment strategy" recommended by Flood for some of the superannuation fund monies administered by TWU Nominees ("the Flood investment proposal"). The Flood investment proposal involved the creation of the Trust and the advance of trust monies to the appellant by TWU Nominees for the purpose of the Trust, namely, for investment in productions of theatrical events or like investments in the leisure and entertainment industry. Flood was to direct and manage those investments on behalf of the appellant. Such investments involved a higher risk than the usual investments effected by TWU Nominees as trustee. The form of the "investments" made by the appellant is not disclosed in the statement of claim. It is not stated whether the monies were advanced as loans, secured or unsecured, or used to acquire capital interests in the ventures. 8 The directors of the appellant at material times were Flood, Mr Lovell ("Lovell") and Mr Noonan ("Noonan"). Lovell and Noonan were directors of TWU Nominees. Flood was the Chairman of the appellant and acted as its managing director. All of the day-to-day management and financial reporting responsibilities of the appellant were borne by Flood. 9 Flood's activities were not restricted to the practise of law. Either personally, or through corporate entities controlled by him, he was a producer of theatrical events. 10 In accepting the Flood investment proposal the appellant and TWU Nominees relied upon Flood, both as instructed solicitor and as managing director of the appellant, to act with probity and to safeguard their interests under that proposal, and, in particular, relied upon Flood not to allow the duties owed by Flood to the appellant and to TWU Nominees to be in conflict with the personal interests of Flood, or interests of persons or entities associated with Flood. 11 Soon after the Trust was established in October 1996 Flood caused the appellant to invest in a theatrical production known as "Sunset Boulevard". By May 1997 the directors of the appellant had resolved that legal proceedings be commenced against the producer of "Sunset Boulevard" for the loss of monies invested therein by reason of "false and misleading statements" said to have been made by the producer. 12 The firm of solicitors in which Flood was a partner was retained to act for the appellant in its claim against the producer of "Sunset Boulevard". In about March 1998 Flood left that firm to commence practise as Flood Partners. The original firm continued to act for the appellant. 13 The appellant asserts that in about February 1997 it instructed a firm of accountants, of which the first and second respondents were registered as the persons carrying on that business, to act as auditor of the appellant's accounts ("the audit contract"). In or about April 1998 an audit of the appellant's financial statements for the 1997 financial year was conducted pursuant to the audit contract. The second respondent was the person who carried out the audit. Flood was involved in preparing the financial statements and notes thereto and provided instructions to the second respondent and responded to any requests for further information submitted by the second respondent. On 14 April 1998 an audit report was presented which stated that by reason of the uncertainty in litigation no provision had been made in the accounts of the appellant for the recovery of any monies from proceedings commenced by the appellant against the producer of "Sunset Boulevard". The report stated that in respect of that proceeding the appellant was "the plaintiff in litigation alleging misleading or deceptive conduct and claiming damages of an unspecified amount. Discovery proceedings and actions are in progress." The second respondent relied upon information supplied by Flood for the foregoing statement. The statement was false. 14 Pursuant to the audit contract the second respondent conducted an audit of the appellant's financial accounts for the 1998 financial year in or about April 1999. The audit report dated 29 April 1999 repeated the statement recited above in respect of the "Sunset Boulevard" litigation. That is, the audit made no investigation of the state of the litigation and continued to rely on the earlier statement made by Flood in or about April 1998 that proceedings had been commenced to recover damages from the producer and had progressed to the stage of discovery of documents. That statement remained untrue at 29 April 1999, no proceeding having been commenced by the appellant. 15 It may be assumed from the role performed by Flood in the production of the appellant's accounts and in the conduct of the audit that Flood was the officer of the appellant who declared that the 1997 and 1998 audited accounts represented a true and fair view of the appellant's financial affairs. 16 Between April 1998 and May 2000 the appellant invested monies advanced to it by TWU Nominees in five theatrical productions or similar ventures, recommended by Flood. The sum invested was $3,863,000 of which only $200,000 has been returned to the appellant. It is said that the remainder of the monies invested is irrecoverable. The appellant claims that Flood misappropriated to his own use and purposes either $972,440.35 or $469,140.35 of the foregoing monies. 17 Of the five ventures recommended by Flood for the investment of funds by the appellant two were productions in which Flood either directly or indirectly held beneficial interests and three were concerns in which Flood held office as a director of a corporation that stood to benefit from the investment of funds by the appellant. 18 The appellant pleaded in its statement of claim that the audit contract included terms implied at law or by statute that required the second respondent to exercise due diligence; make due enquiry to verify matters material to the audit; and to warn the appellant of any irregular conduct by an officer of the appellant brought to the notice of the second respondent in the course of the audit. The appellant claimed that the second respondent breached those terms of the audit contract. In addition it was pleaded by the appellant that the second respondent failed to perform a duty of care owed to the appellant in the preparation of the April 1998 and April 1999 audit reports. The appellant asserted that if the second respondent had duly performed the audit contract and the duty of care the false, misleading or deceptive nature of statements made by Flood to the second respondent would have been discovered and under the terms of the audit contract, or pursuant to the duty of care, the second respondent would have been bound to disclose to the appellant, through Lovell and Noonan, that Flood had engaged in such conduct in the course of the audit. 19 It may be taken that the duty of an auditor under Australian Auditing Standards to disclose to a higher authority of an audited corporation any irregular conduct by an officer of the corporation discovered in the course of the audit, has an underlying public purpose that is relevant to determining whether a breach of that duty is connected to any loss subsequent to that breach suffered by a party to whom the duty is owed. (See: Travel Compensation Fund v Tambree (2005) 222 ALR 263 per Gleeson CJ at [27]-[28]). The purpose of the duty is to assist corporate governance and to reduce the risk of loss to creditors and investors by obliging auditors to inform senior officers of a corporation of any irregular conduct by an officer of the corporation discovered by the auditors. 20 The appellant's claims against the second respondent also included a pleading under the Fair Trading Act 1985 (Vic) (since replaced by the Fair Trading Act 1999 (Vic) ("the FTA") that the second respondent had engaged in conduct in trade or commerce that was misleading or deceptive and contravened s 11 of the FTA and that the appellant suffered loss by reason of that conduct. The appellant claimed that the second respondent engaged in such conduct by providing audit reports on the accounts of the appellant for the 1997 and 1998 financial years which held out that the second respondent had duly performed contractual or statutory duties to make due enquiry and to verify matters material to the audit and that no irregular conduct by a senior officer of the appellant had been disclosed by the audit of which the appellant should be informed or warned by the second respondent. 21 Where the misleading or deceptive conduct of the second respondent consists of a failure to inform or warn the appellant in circumstances where the second respondent was obliged so to act, the measure of the pecuniary remedy available to the appellant may be more analogous to that imposed on an errant fiduciary who causes loss by his conduct than to the measure applied in the tort of deceit. (See: Munchies Management Pty Ltd v Belperio (1988) 58 FCR 274 at 287). In such a circumstance the causal connection between the conduct and the loss sustained would be demonstrated on the face of the circumstances without need to show that the conduct concerned was relied upon or influenced the party that sustained the loss. (See: Janssen-Gilag Pty Limited v Pfizer Pty Limited (1992) 37 FCR 526 per Lockhart J at 530-531). 22 The appellant pleaded that if the audit contract and duty of care had not been breached, and the FTA contravened, by the second respondent in the manner alleged Lovell and Noonan would have been informed by the second respondent that Flood had made false, misleading or deceptive statements in the course of the audit and the appellant would have acted to terminate Flood's authority and would not thereafter have invested any monies in the five ventures recommended by Flood. Further it is said that the affairs of the Trust would have been concluded and any trust monies advanced to the appellant by TWU Nominees would have been returned to TWU Nominees. 23 For the purpose of the second respondent's motion it was accepted by his Honour that the appellant's statement of claim properly pleaded a duty of care owed by the second respondent to the appellant and duly pleaded the breach thereof. It was said that the issue raised by the second respondent's motion was whether that breach of duty of care "caused" the loss claimed by the appellant. It was assumed by his Honour that the foregoing "causation issue" also arose under claims for the recovery of loss pursuant to the right of action provided under the FTA. The claim for damages for breach of contract was not separately addressed. 24 The foundation for his Honour's order was that the "causation claim" of the appellant defied "commonsense and experience in order to establish the requisite causative link" between the acts or omissions of the second respondent and the losses claimed by the appellant. In particular his Honour considered that the pleading by the appellant that it would have ceased to accept Flood's investment recommendations if Lovell and Noonan had been informed of Flood's misleading or deceptive statements to the second respondent was "among the least likely of … possible responses" and was not "based on anything other than speculation or conjecture". As his Honour put it the "problem confronting the applicant is that … no reason is proffered as to why the applicant would not have continued to carry on its business as it had in the past". 25 It may be thought that a conclusion that the appellant would not have ceased to accept Flood's investment recommendations if the appellant had been informed by the second respondent that Flood had made false, misleading or deceptive statements to the second respondent in the course of the audit, would also dispose of the argument that there was a "causative link" between the second respondent's breach of duty of care (in failing to so inform the appellant) and the loss of monies misappropriated by Flood. However, it was accepted for the purposes of the motion that such a connection could be shown. 26 For the following reasons I have concluded that his Honour's orders must be set aside. 27 First, as a matter of procedure it was not open under O 11 r 16 of the Rules to order that the statement of claim against the second respondent be struck out as a pleading that disclosed no reasonable cause of action once it had been accepted that the statement of claim contained a duly pleaded cause of action for breach of a duty of care and that it was arguable that there was a "causative link" between that breach and the claim for loss of misappropriated monies. 28 Second, and perhaps more importantly, the question of how the appellant would have acted had the second respondent not breached the duty of care in the manner alleged in the statement of claim was an issue that had to be determined at trial. The strength of the appellant's claim that it would have terminated Flood's authority if Flood's conduct in misleading or deceiving the auditor had been disclosed to the appellant would have to be assessed after due consideration of all of the evidence adduced. On its face it was not a fanciful or untenable claim able to be disposed of by a summary proceeding without evidence. Resolution of the question had to await assessment of the cogency of any evidence adduced from Lovell and Noonan and upon consideration of all other relevant evidence, not the least of which would be that relating to duties to be performed by the appellant as trustee. If particular facts alleged in the statement of claim are established at trial, namely, that the appellant was appointed trustee, and the Trust created, for the sole purpose of giving effect to the Flood investment proposal under which the appellant would make "investments" recommended by Flood, those facts would be germane to determining whether there was any prospect that the appellant would terminate Flood's authority if the second respondent had duly performed the duty of care. It appears to be the appellant's case that TWU Nominees and the appellant used trust monies of the TWU Nominees Superannuation Fund for investment in theatrical productions only to give effect to the Flood investment proposal. Implementation of the Flood investment proposal depended upon TWU Nominees and the appellant retaining confidence in Flood. The commitment of trust funds by TWU Nominees to investments in theatrical productions was limited to the Flood investment proposal and if TWU Nominees and the appellant brought the Flood investment proposal to an end by severing the connection with Flood there would be no business for the appellant to conduct in investing in such ventures and the Trust would be terminated. 29 It follows from the facts pleaded that Lovell and Noonan owed particular fiduciary duties to TWU Nominees, and to the appellant, as directors of entities responsible for the administration of trust funds and were bound to treat with the utmost seriousness any report from an auditor that Flood, a person acting under fiduciary duties as director of the appellant and who had further fiduciary duties as solicitor for the appellant, had misled the auditor by statements that were false, misleading or deceptive. 30 His Honour stated that it was "entirely a matter of speculation as to why Flood's incorrect statement was made". In the absence of any evidence on that point such a view could be formed but it did not follow therefrom that the statement of claim as pleaded disclosed no reasonable cause of action against the second respondent. In effect, his Honour concluded that as at April 1998 Lovell and Noonan understood that litigation against the producer of "Sunset Boulevard" was imminent and that, therefore, it was unlikely that either Lovell or Noonan would have attached any importance to advice from the second respondent at the time of the audit report on 14 April 1998 that Flood had made a false, misleading or deceptive statement to the second respondent that such a proceeding had been commenced and had progressed to the point of discovery of documents. But the matrix of relevant circumstances was not so sparse. As recently as March 1998 Flood had been receiving instructions as the appellant's solicitor in the matter. Therefore, on their face, false statements by Flood in early April 1998 that litigation had been commenced and had progressed to the point of discovery of documents was conduct likely to defy innocent explanation and to involve a breach of fiduciary duty sounding a warning as to Flood's trustworthiness. If informed by the second respondent that Flood had made such statements Lovell and Noonan would have had to ascertain on behalf of the appellant whether Flood's conduct was conformable with continuation of his position as fiduciary and, in effect, as a trustee. The statement of claim permitted the appellant to argue that it would not have been so satisfied. If the second respondent were to assert in a defence that due enquiry by the second respondent would have elicited that Flood had acted innocently and that, therefore, the appellant would not have terminated Flood's authority if the appellant had been informed by the second respondent that Flood had inadvertently made statements to the second respondent that were false, misleading or deceptive, there would be an evidentiary onus on the second respondent to support that pleading. The statement of claim, albeit inelegantly, pleaded dishonesty on the part of Flood by stating that Flood "lied" to the second respondent in making those statements. On the hearing of the motion counsel for the appellant conceded that it was not established by the pleaded facts that Flood knew that the statements he made were false. However, it remained the case on the motion that such an inference could be drawn from the assumed facts. 31 Relevant facts had to be found before any principles relating to the issue of causation could be applied. As Cooke J stated in Man Nutzfahrzeuge Atkiengesellschaft v Freightliner Ltd [2003] EWHC 2245 (Comm) (7 October 2003) at [14]: 'The law in the field of auditors' negligence and auditors' duties is in a state of development and transition and there are therefore real difficulties in deciding cases on a summary basis without a full investigation of the detailed facts, unless they fall fairly and squarely within the decided authorities.' 32 The case as pleaded is not able to be characterised as a mere claim against a negligent auditor for losses of a business incurred after the negligent acts or omissions of the auditor occurred, being losses that could be said to be attributable to "the ordinary risks associated with carrying on a business". (See: Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310; Galoo Ltd (in liq) v Bright Grahame Murray (a firm) [1994] 1 WLR 1360; Southern Cross Airlines Holdings Ltd (in liq) v Arthur Andersen & Co (a firm) [1998] 84 FCR 472). The statement of claim asserts sufficient material facts of a particular relationship between Flood and the appellant to allow a more direct connection to be made between the causes of action pleaded against the second respondent and the losses incurred by the appellant and permits the claim for relief as made to be argued. (See: Henville v Walker (2001) 206 CLR 459; Man (supra); Harris Scarfe Limited (Receivers and Managers Appointed) (in liq) v Ernst & Young (Reg) [2005] SASC 113; Sasea Finance Ltd (in liq) v KPMG (a firm) [2000] 1 All ER 676; Sew Hoy & Sons Ltd (In Receivership and in liquidation) v Coopers & Lybrand (1996) 1 NZLR 392). 33 Furthermore, the appellant's case was not restricted to a claim in tort, or under the FTA, for monies lost. The appellant also pleaded that by reason of breach of the audit contract, breach of a duty of care or contravention of the FTA by the second respondent the appellant lost an opportunity to act to prevent the loss of those monies. 34 A claim for compensation for the loss of an opportunity can be made in a cause of action for breach of contract. (See: Howe v Teefy (1927) 27 SR (NSW) 301). It may be accepted that in the instant case it could be found on the facts pleaded that the loss claimed would have been a loss within the contemplation of the parties on the circumstances known to each. It should also be taken to be arguable that the loss of an opportunity to prevent a pecuniary detriment as a result of a breach of contract is as quantifiable in worth as the loss of an opportunity to seek to obtain a pecuniary gain occasioned by such a breach. (See: Athey v Leonati [1996] 3 SCR 458 at [38]). 35 Similarly it is apparent that the worth of the loss of an opportunity is a measure of compensation available under causes of action in tort or for contravention of the FTA. (See: Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 per Mason CJ, Dawson, Toohey and Gaudron JJ at 349-356; Johnson v Perez (1988) 166 CLR 351 per Mason CJ at 360, Wilson, Toohey, Gaudron JJ at 364, 366; Takaro Properties Ltd v Rowling [1986] 1 NZLR 22; Craig v East Coast Bays City Council [1986] 1 NZLR 99; Bailey v NamolPty Ltd (1994) 125 ALR 228; Cownie "Damages for loss of a chance in tort?" (1989) 5 Professional Negligence 194; G. Masel "Damages in tort for loss of chance" (1995) 3(1) TLJ 43). 36 Whether loss of opportunity, or of a chance, extends to actions in tort for medical negligence where physical injury and damage has been sustained is not a relevant consideration in this case. (See: Chappel v Hart (1998) 195 CLR 232 per Gummow J at [74]-[76], Kirby J at [93], Hayne J at [135]-[144]; Naxakis v Western General Hospital (1999) 197 CLR 269 per Gaudron J at [29]-[36], Callinan J at [128]-[130]; Gavalas v Singh (2001) 3 VR 404 per Smith AJA at [37]-[43]). 37 Put at its lowest the appellant's case is that by reason of a breach of contract; breach of duty of care; or contravention of the FTA by the second respondent, the appellant was deprived of an opportunity, or of a chance, as trustee to assess the risk posed to the appellant's due administration of the Trust by allowing Flood to direct and manage Trust funds, and was deprived of the opportunity, or chance, to take steps to manage that risk and prevent loss. 38 The opportunity, or chance, described was capable of being assessed as to its worth in monetary terms, and the loss of that opportunity, or chance, was able to be shown to be connected to the conduct of the second respondent. 39 Whether it is the worth of the loss of an opportunity or of a chance that is to be assessed is not material at this point. It has been held that the amount of the loss sustained may represent the worth of the loss of an opportunity, but assessment of the worth of the loss of a chance may require a substantial discount to be applied to the loss incurred. (See: Sellars per Mason CJ, Dawson, Toohey and Gaudron JJ at 349; Cheshire & Fifoot, "Law of Contract" (7th Austn. Ed) [23.20]-[23.22]); Greig and Davis "The Law of Contract", 1987, pp 1417-1418). 40 It follows from the foregoing that the second respondent failed to establish that no reasonable cause of action against the second respondent was disclosed by the further amended statement of claim and, therefore, that the appellant's pleading against the second respondent should not have been struck out. 41 The appeal must be allowed and the orders of his Honour set aside and in lieu thereof an order made that the second respondent's motion be dismissed. A further order should be made that the appellant have leave to file a further amended statement of claim within 14 days. I certify that the preceding forty-one (41) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lee.

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

AND: SHARPE PARTNERS PTY LTD (ACN 061 707 042)

Tamberlin j: 42 Unit 11 Pty Ltd ("Unit 11") is the trustee of the Arts Investment Trust ("the Trust") established pursuant to the Arts Investment Trust Deed made on 25 October 1996. The sole activity of Unit 11 is to invest money entrusted to it by the TWU Superannuation Fund in high risk commercial enterprises in the nature of musical theatrical productions such as Sunset Boulevard, Fiddler on the Roof, Popcorn and Concept Sports. 43 The Chairman of Unit 11 was Mr Flood ("Flood"), a solicitor and partner at Smith Emmerton, Solicitors. The other directors of Unit 11 are Mr Noonan ("Noonan") and Lovell ("Lovell"), who relied on Flood's advice as to the investments that the Trust should make. Mr Flood also assisted in the preparation of the financial accounts of Unit 11 and the notes thereto. 44 Sharpe Partners Pty Ltd ("Sharpe") is a firm of accountants which, at the relevant time, carried on a practice in New South Wales. David Lamb ("Lamb") was an employee of Sharpe. Unit 11 retained Sharpe and Lamb as its auditors. Although served with the Application and Statement of Claim, Sharpe did not appear on the proceedings. 45 Unit 11 suffered large losses arising from investments made by it and instituted proceedings in the Federal Court alleging that Sharpe and Lamb were responsible for the losses because they breached the duty of care they owed to Unit 11 in carrying out their audit of the financial affairs of the Trust. There is also an allegation that Sharpe contravened ss 52 and 74 of the Trade Practices Act (Cth) and similar claims are made in relation to the Fair Trading Act 1985 (Vic) (which has now been replaced by the Fair Trading Act 1999 (Vic) ("the FTA")). The appellant's claim in respect of alleged misleading or deceptive conduct arises under provisions of the Acts which enable a person to recover losses arising from a contravention of the Acts. 46 Lamb sought to have the Third Further Amended Statement of Claim ("the Third FASC") struck out in part pursuant to O 11 r 16 of the Federal Court Rules on the ground that it disclosed no reasonable cause of action against him, it causes prejudice, embarrassment and delay in the proceedings and is an abuse of process. The primary Judge ordered that, in so far as the Third FASC relied on causes of action against the second respondent, it should be struck out.

The Allegations 47 Unit 11 claims that, pursuant to its retainer of the respondents to audit its financial accounts, the respondents owed it a duty of care. It contends that this duty of care was breached because there was a failure by the respondents to ascertain the falsity of a representation made to them by Flood, which was to the effect that litigation alleging misleading or deceptive conduct had been commenced against the producers of Sunset Boulevard and that those proceedings had reached the discovery stage. This representation was false. No such litigation had been commenced. 48 On the strike-out application, it was not in issue that Unit 11 had properly pleaded the duty of care owed to it by the respondents and the breach of that duty. There were also allegations of misappropriation, however, these are not directly relevant to the present issues and there is no application to strike them out. 49 The relevant issue before the primary Judge and this Court is whether the breach of duty by the respondents was causative, in the legal sense, of the loss suffered and claimed by Unit 11 in relation to the investments. It is common ground that the causation issue raised by the common law claim in negligence does not differ in any relevant respect from the causation issue arising in relation to the claim under the legislation. 50 In respect of the claim for losses arising from the high risk investments, Unit 11 claims that, if the respondents had not breached their duty of care, the respondents would have ascertained that Flood had misled them about the commencement of litigation and would have informed Noonan and Lovell, the other Unit 11 directors, of that fact. It is also alleged that, if the other directors had been so informed, then Unit 11 would not have invested further monies in the failed investments on Flood's recommendations, and therefore would not have suffered the losses which Unit 11 now seeks to recover from the respondents. Put another way, Unit 11 alleges that the respondents' breach of duty caused it to lose the opportunity to cease investing further funds in the investments recommended and, in effect, selected by Flood. The losses pleaded in relation to the lost opportunity claims are the same as those losses suffered as a result of the failed investments. 51 The application by the auditor, Lamb, to strike out the claim for losses arising from the failed investments is based on his contention that, on the facts alleged in the Third FASC, Unit 11's claim that the respondents caused its losses should be struck out because the causal nexus between the breach and the loss is not reasonably arguable or is clearly untenable and is bound to fail as a matter of law without any need to consider the evidence and facts. 52 The terms of the false representation made by Flood are pleaded in par 6.7 of the Third FASC as follows: "Flood represented to the auditor that litigation against the producers of 'Sunset Boulevard' alleging misleading and deceptive conduct and claiming damages of an unspecified amount had been commenced and that discovery proceeding [sic] and actions were in progress. Particulars The Applicant refers to the letter dated 14 April 1998 entitled 'INDEPENDENT AUDIT REPORT' from Sharpe Hume & Co. to the Trustees, the Arts Investment Trust and, in particular, to the content of the paragraph on page 2 thereof under the heading 'Inherent Uncertainty Regarding Litigation' which stated: Inherent Uncertainty Regarding Litigation Without qualification to the opinion expressed above, attention is drawn to the following matter. As indicated in Note 4 'Sunset Boulevard' to the financial report, The Trustees of The Arts Investment Trust (sic) is the plaintiff in litigation alleging misleading or deceptive conduct and claiming damages of an unspecified amount. Discovery proceedings and actions are in progress. As discussed in Note 4 'Sunset Boulevard', the circumstances of the action is such that the ultimate outcome of the litigation cannot presently be determined with an acceptable degree of reliability, and accordingly no provision has been made in the financial statements. (emphasis added)" The claim against Sharpe and Lamb is based upon the falsity of Flood's representation because, although litigation was imminent, it had not in fact been commenced and no discovery, either preliminary or otherwise, was in progress when the statement was made. 53 There was a reference to the proposed litigation in the Chairman's Report to the Board meeting held on 26 March 1998, which referred to an intention to issue proceedings against the Really Useful Group immediately for false and misleading conduct in respect of Sunset Boulevard. The minutes of the Board meeting of Unit 11 on 14 May 1997 also record that: "(t)he legal position in relation to breach of contract … was reviewed and it was unanimously agreed that legal action would be pursued …." 54 These statements indicate that further legal action had been intended by Unit 11. In fact, no action was ever initiated. It was common ground that, as at April 1998, the Board of Unit 11 had been informed by Flood that proceedings claiming misleading and deceptive conduct in relation to Sunset Boulevard were to be issued immediately, but when Flood subsequently stated to the auditors that the proceedings had been issued and discovery was in progress, that statement was not accurate. 55 The duty alleged to have been owed to Unit 11 by the auditors is pleaded as follows: "Performance of the Audit 7. By reason of the matters referred to in paragraphs 4 to 6, the auditor owed specific duties to the Applicant: 7.1 to review the 1997 relevant minutes; 7.2 to seek independent third party confirmation of the existence and value of the Applicant's principal financial investment; 7.3 to seek independent confirmation of the existence of the litigation said to have been commenced against the producers of Sunset Boulevard by: 7.3.1 making inquiries of persons other than Flood to determine whether or not there was any litigation on foot between the Applicant and the producers of 'Sunset Boulevard'; or 7.3.2 calling for court documents to determine whether or not there was any litigation on foot between the Applicant and the producers of 'Sunset Boulevard; or 7.3.3 calling for court documents to determine the nature and progress of any litigation on foot between the Applicant and the producers of Sunset Boulevard: (collectively, 'proper inquiries') 7.4 to make such inquiries as were appropriate in the circumstances to determine whether, notwithstanding the existence of discrepancies between the 1997 draft accounts and the 1997 relevant minutes, the financial statements and notes thereto were drawn so as to give a true and fair view of the financial position and performance of the Applicant; 7.5 if the review, investigations and inquiries specified in sub-paragraphs 7.1, 7.2, 7.3 and 7.4 revealed that the Applicant had not commenced litigation against the producers of 'Sunset Boulevard': 7.5.1 to investigate the statement made to the auditor that litigation against the producers of 'Sunset Boulevard' alleging misleading and deceptive conduct and claiming damages of an unspecified amount had been commenced and that discovery proceedings and actions were in progress; 7.5.2 to report to Noonan and Lovell that, notwithstanding the fact that no litigation against the producers of Sunset Boulevard had been commenced, the auditor had been informed by Flood that such litigation had commenced and that discovery proceedings and actions were in progress; 7.5.3 to report to Noon and Lovell that the auditor had been misled by Flood as to whether litigation against the producers of Sunset Boulevard had commenced; and 7.5.4 in particular, to report to Noonan and Lovell that Flood had misled the auditor in so far as it had been told by Flood that litigation against the producers of Sunset Boulevard alleging misleading and deceptive conduct and claiming damages of an unspecified amount had been commenced and that discovery proceeding and actions were in progress." 56 The important issue of causation is pleaded in pars 15, 16 and 17 as follows: "15. If, having discovered that the Applicant had not commenced litigation against the producers of 'Sunset Boulevard', the auditor had investigated the statement made to it that litigation against the producers of 'Sunset Boulevard' had been commenced and that discovery proceedings and actions were in progress, the auditor would have: 15.1 reported to Noonan and Lovell that, notwithstanding the fact that no litigation against the producers of Sunset Boulevard had been commenced, the auditor had been informed by Flood that such litigation had commenced and that discovery proceedings and actions were in progress; 15.2 reported to Noonan and Lovell that the auditor had been lied to and misled by Flood as to whether litigation against the producers of Sunset Boulevard had commenced; and 15.3 in particular, reported to Noonan and Lovell that Flood had lied to and misled the auditor in so far as it had been told by Flood that litigation against the producers of Sunset Boulevard alleging misleading and deceptive conduct and claiming damages of an unspecified amount had been commenced and that discovery proceeding [sic] and actions were in progress. 16. Had the auditor reported to Noonan and Lovell that it had been lied to and misled by Flood in the manner described in paragraph 15 hereof, Noonan and Lovell would have: 16.1 invested no monies or no further monies in investments recommended by Flood in which: 16.1.1 Flood had in [sic] interest which was in conflict with his duties as a director of the Applicant; and 16.1.2 Flood, either directly or indirectly, stood to receive a benefit independently of his position as a director of the Applicant. namely: (a) 'Popcorn' (b) 'Nigel Productions'; … 16.2 invested no monies or no further monies in investments recommended by Flood in which Flood was a director of the respective production companies namely: (a) 'Fiddler on the Roof'; (b) 'Concept Sports'; and (c) 'Sam Hill Chronicles'. 16.3 alternatively, invested no monies or no further monies in any investments recommended by Flood, namely. (a) 'Popcorn' (b) 'Nigel Productions'; (c) 'Fiddler on the Roof'; (d) 'Concept Sports'; and (e) 'Sam Hill Chronicles'. 16.4 alternatively, removed Flood from any position which would have allowed him to appropriate the moneys [sic] of the Applicant to any investment." 17. By reason of the failure of the auditor to discover and report to the directors of the Applicant that it had been misled by Flood, the directors of the Applicant lost the opportunity to: 17.1 invest no monies or further monies in investments recommended by Flood: 17.1.1 in which Flood had in [sic] interest which was in conflict with his duties as a director of the Applicant and either directly or indirectly, stood to receive a benefit independently of his position as a director of the Applicant; namely: (a) 'Popcorn' (b) 'Nigel Productions'; 17.1.2 in which Flood was a director of the respective production companies; namely: (a) 'Fiddler on the Roof'; (b) 'Concept Sports'; and (c) 'Sam Hill Chronicles'. 17.2 alternatively, invest no monies or no further monies in any investments recommended by Flood as being suitable for the Applicant to undertake, namely: (a) 'Popcorn' (b) 'Nigel Productions'; (c) 'Fiddler on the Roof'; (d) 'Concept Sports'; and (e) 'Sam Hill Chronicles'. 17.3 alternatively, remove Flood from any position which would have allowed him to appropriate the moneys [sic] of the Applicant to any investment." 57 As the primary Judge pointed out at [18], the causation question in this case is unusual in that it is not pleaded that Flood's representation related to, or resulted in, any misunderstanding of Unit 11's financial affairs or related to any other matter that was relevant to any particular decision regarding any investment recommended by Flood. Rather, the causation question is said to relate to the particular conduct of Flood in misleading the auditors by making an inaccurate representation to them. Unit 11 says that, if it had known the true position, it would have ceased to trust Flood and would therefore have ceased to accept or act upon his investment advice, with the consequence that the losses thereafter would not have been suffered. 58 It is important to note that it is common ground, for the purposes of this appeal, specifically that Unit 11 does not allege that Flood has been guilty of any fraud or dishonesty. Instead, the case advanced for Unit 11 on this application is based on an allegation of misleading and deceptive conduct arising from the auditor's omission to investigate and verify Flood's statement without more. Unit 11 alleges that the auditor is bound by an obligation to report any irregularities or inaccurate statements by Flood to Noonan and Lovell. The pleading is that Flood made inaccurate statements to the auditors which ought to have been investigated and reported by them.

JUDGMENT BELOW 59 The primary Judge concluded, contrary to the specific allegations in the Third FASC, that, even if Noonan and Lovell had been fully informed of Flood's misrepresentation as to the status of the litigation, there was no reason to find that Unit 11 would not have continued to carry on its business as it had done in the past. His Honour noted that the claim was only that Flood's statement was inaccurate and it was not alleged that the statement was fraudulent or dishonest. He considered that this was not a case where there had been a failure by the respondents to inform the directors of a lack of honesty or trustworthiness of Flood but rather that there had been a statement made which was incorrect. 60 In his Honour's view, the Third FASC went no further on the question of causation in relation to this claim for loss than to assert that the auditor's breach might have provided the occasion for the loss suffered, in the sense of a "but for" test, but that it was not legally causative of the loss. Applying "common sense and experience" to the claim as pleaded, his Honour determined that there was no causative link between the failure of the respondents to inform Unit 11 of the inaccuracy and the loss suffered, and that the loss was "too remote" from the acts and omissions of the respondents. The making good of the alleged causal link, in his Honour's view, required too many speculative steps. His Honour stated that the allegations defied common sense and experience because the factors that influenced Unit 11's decision to make the investments, which resulted in the loss, were not related to any relevant incompetence or untrustworthiness by Flood. The loss arose from the continued trading in high risk investments and as a consequence of the dynamics of the market.

principles 61 As a general principle, an allegation of causation should not be struck out unless it is clearly untenable on the pleading and the question of law is one that can stand independently of the facts giving rise to it. The purpose of a strike out application is to spare litigants the cost and inconvenience of a trial where there is manifestly no prospect of success. 62 There are two matters that require consideration from the point of view of legal principle. These are the principles which should be applied to a strike out application at the pleading stage and the principles that apply to a determination of causation in circumstances, such as the present, of alleged negligent omission by auditors. 63 When considering whether a pleading should be struck out, the Court must proceed on the basis that the facts alleged are proven. The question for consideration then is whether, on the facts as alleged, there is a sufficient causative relationship alleged between the failure or breach by the auditors and the loss suffered. 64 Of importance in considering this question is the allegation of reliance in par 16 of the Third FASC to the effect that, if the auditor had properly reported to Noonan and Lovell that it had been misled by Flood, as alleged, then Unit 11 would have invested no further monies in investments in which Flood had an interest that conflicted with his duties as a director of Unit 11. This is especially so in circumstances where Flood stood to receive a benefit independently of his position as a director of the appellant in relation to nominated productions. This reliance and alleged future course of action by Noonan and Lovell in causing a cessation of further investments are matters that must be established on the evidence and, if made out, would lend support to the allegation of causation. The Court must exercise caution at the pleading stage when considering an application to strike out a basis of claim, that it does not strike out simply because it considers that there is be a high degree of improbability that an applicant will be able to prove that the directors would act in the way alleged. Scepticism as to whether alleged material facts can be established is not a sufficient basis for striking out a basis of claim. 65 The authorities indicate that the Court should not strike out a claim without a hearing in circumstances where a detailed examination of the evidentiary material in the light of discovery, cross-examination and addresses has not yet taken place. When considering questions of auditors' liability for breach of duty, it is a relevant consideration that the law regarding of the nature and extent of auditors' liability is in the course of development and by no means can be said to be settled or clearly defined. Therefore, in a strike out application, in this developing area, some allowance ought be made to the circumstance that the law is not well settled. See generally Australian Broadcasting Corporation v Lenah Game Meats Pty Ltd (2001) 208 CLR 199 at 268 per Kirby J; Sew Hoy & Sons Ltd (In Receivership and In Liquidation) v Coopers & Lybrand [1996] 1 NZLR 392 at 407 per Thomas J; Man Nutzfahrzeuge Aktiengesellschaft v Freightliner Ltd [2003] EWHC 2245 (Comm) (7 October 2003) at [14] per Cooke J. 66 The case law instructs that, to a large extent, the question of causation is a question of fact and degree. This consideration reinforces the need for the Court to take a cautious approach when determining, prior to any evidence or further investigation of the circumstances, whether a claim is untenable. Of course, the material facts pleaded must be capable of being regarded as sufficient to establish that the required cause or connection between a breach and the loss exists. It is not enough to refer to a breach and recite that a loss was subsequently suffered. The link with the breach must be established on the balance of probability: see Bond Corporation Pty Ltd v Theiss Contractors Pty Ltd (1987) 14 FCR 215 at 222 per French J; McKellar v Container Terminal Management Services Ltd (1999) 165 ALR 409 at [26] per Weinberg J. 67 Subsequent to the primary Judge having delivered his reasons for judgment, on 20 May 2005, the High Court revisited the principles relating to causation in the context of auditors' liability in Travel Compensation Fund v Robert Tambree T/as R Tambree and Associates & Ors [2005] HCA 69. In that case, the question arose in relation to a claim for damages against an auditor, arising from a failure to properly audit and issue reports relating to the financial affairs of a travel agent. The plaintiff's contention was that, if there had been a proper audit showing a true and fair view of the financial position of the business, the Travel Compensation Fund would have taken protective measures in the form of requiring bank guarantees or substantial increases of capital as a condition of permitting continued participation by the travel agent in the Fund. The case did not involve a strike out at the pleading stage. 68 The trial Judge found that, on the evidence, if such protective steps had been taken, the losses arising from the continued participation of the travel agent in the Fund would have been avoided. His Honour also found that the losses claimed as a consequence of the travel agent continuing to trade illegally after a certain date flowed from the failure to conduct a proper audit and that the chain of causation between the breach and the loss was not broken by this illegality. 69 On appeal, the New South Wales Court of Appeal reached a different view. The Court of Appeal considered that the chain of causation between the auditors' breach of duty and the losses accruing after the travel agent continued to trade was broken because the continued trading by the travel agent was illegal. 70 The High Court reversed the decision of the Court of Appeal. In his reasons for decision, Gleeson CJ explored the need to consider the purpose for which agents were required to provide financial statements. At [27]-[28], his Honour said: "[27] … 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. The whole purpose of the scheme is to protect the public against loss resulting from dealing with defaulting agents. Default commonly results from financial failure, and failure to account by an agent may well involve some form of illegality. When the appellant called for audited financial statements, the kind of loss to the public, and the kind of loss to itself, against which it sought protection was loss that would always involve an agent's failure to account. [28] It is not in doubt that issues of causation commonly involve normative considerations, sometimes referred to by reference to "values" or "policy". … the object is to formulate principles from policy, and to apply those principles to the case in hand. In the context of considering an issue of causation under the Fair Trading Act, the statutory purpose is the primary source of the relevant legal norms. The case did not call for a value judgment about the conduct of Ms Fry. Why her failure to account, after she lost her licence, in respect of moneys paid to her company while it was illegally trading under her licence should be treated differently from her failure to account, after she lost her licence, in respect of moneys paid after she lost her licence but before the authorities took steps to close down her business, is not apparent." (Emphasis added) 71 His Honour concluded at [34]-[35]: "[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. … 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." (Emphasis added) 72 Gummow and Hayne JJ, in their joint judgment, also emphasised the need to consider whether what happened was the occurrence of the very risk against which the appellant sought to protect itself by seeking and obtaining the accounting information in question. Their Honours said at [45]: "[45] … it is doubtful whether there is any 'common sense' notion of causation which can provide a useful, still less universal, legal norm. There are, therefore, cases in which the answer to a question of causation will require examination of the purpose of a particular cause of action, or the nature and scope of the defendant's obligation in the particular circumstances." (Emphasis added) 73 Their Honours referred to Allianz Australia Insurance Ltd v GSF Australia Pty Ltd (2005) 215 ALR 385 at 406-407 per Gummow, Hayne and Heydon JJ. 74 An analogous approach was applied by Gleeson CJ in I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 at 119, where his Honour observed: "When a court assesses an amount of loss or damage for the purpose of making an order under s 82, it is not merely engaging in the factual, or historical, exercise of explaining, and calculating the financial consequences of, a sequence of events, of which the contravention forms part. It is attributing legal responsibility; blame. This is not done in a conceptual vacuum. It is done in order to give effect to a statute with a discernible purpose; and that purpose provides a guide as to the requirements of justice and equity in the case. Those requirements are not determined by a visceral response on the part of the judge assessing damages, but by the judge's concept of principle and of the statutory purpose." (Emphasis added) 75 There is a helpful discussion of recent authorities on causation by Lord Hoffman in "Causation" (2005) 121 LQR 592. At 594, his Lordship refers to the "standard criteria" of causation. These criteria include the "but for" test, as an appropriate guideline in the absence of any intentional human act or subsequent unusual natural occurrence without which the harm would not have occurred. His Lordship expressed the view that there may be a need to vary that approach according to the nature and circumstances of the case. For example, where liability is strict, the nature of the liability may affect not only the conduct giving rise to the liability but also the width of the range of operative causes that apply in the particular circumstances: see Environment Agency v Empress Car Co (Abertillery) Ltd [1999] 2 AC 22.

reasoning in the present case 76 Having regard to these principles, it is appropriate in the present case to seek to identify the nature of the risk against which the duty was imposed in order to afford protection to a plaintiff and to consider the purpose served by the duty. It is worth noting that Lord Hoffman, in the aforementioned article, consistently with the principles expressed above, emphasised that criteria of causation are often creatures of the law and are fashioned to suit the purpose of the rules that impose the liability. His Lordship considered that it is the extent of liability that a Judge thinks Parliament was intending to impose which is important. This determination involves a question of law and is not simply a matter of "common sense". 77 Paragraph 7 of the Third FASC sets out the duties alleged to have been owed by the auditor to Unit 11. These include a duty to determine whether the 1997 draft accounts and minutes were drawn so as to give a true and fair view of the financial position and performance of Unit 11. It cannot be said that, as a consequence of the failure to report, the financial accounts or notes did not give a true and fair view of the financial position or performance of Unit 11. There is no suggestion that proper accounting records were not kept or that there were any shortcomings in the accounts themselves. The focus of the allegation in this case is on the failure of the auditors to report the inaccurate statement by Flood to Unit 11. 78 In par 4 of the Third FASC, it is alleged that it was a term of the 1997 audit retainer that the auditor owed a duty to Unit 11 to use reasonable care and skill in the conduct of the audit. On the material facts alleged, there is claimed to have been a breach of this duty because the auditors did not inform the other directors of Unit 11, Noonan and Lovell, of the inaccurate and misleading statement by Flood. 79 It is important to take into account the context in which the breaches of duty are alleged to have been committed. In this case, the invested funds were trust funds and the directors were appointed by the Trust. It is evident that special responsibility and confidence had been placed in Flood to make decisions as to the investments. The funds were set aside to be invested in high risk commercial investments and the investments were made by Flood, in whom the Trust and the other directors placed trust and confidence both as to his competence and honesty. The investments were made in ventures in which Flood had a conflict of interest and in which he stood to receive a benefit independently of his position as director of Unit 11. These considerations point to a higher level of trust between Unit 11 and Flood than would normally be the case in relation to an investment adviser. However, these circumstances are neutralised by the fact that both Lovell and Noonan were aware that Flood had such a conflict. 80 The primary Judge approached the case on the basis that the steps relied upon by Unit 11 to establish causation in the Third FASC were so speculative and conjectural that they could not constitute a tenable claim that the breaches were causative, in the requisite legal sense, of the loss. One difficulty with this reasoning, however, is that the primary Judge appears to have made his own factual determination as to the high degree of improbability that Noonan and Lovell would have ceased to accept Flood's investment recommendations if they had been fully informed of the inaccurate statement. His Honour observed at [45]: "How Noonan and Lovell might have reacted to being told a short time later (ie early in April 1998) that Flood had misrepresented the situation concerning the litigation is also entirely speculative and conjectural. One can conceive of a number of responses. However, the one relied upon by the applicant of ceasing to accept Flood's investment recommendations is among the least likely of those possible responses. It is correct that the applicant has pleaded that had Noonan and Lovell been informed of Flood's incorrect statement of the auditors they would have ceased to invest in or act upon Flood's recommendation but it is not suggested that that pleading is based on anything other than speculation of conjecture." 81 As his Honour points out, par 16 of the Third FASC alleges that Noonan and Lovell would have invested no further monies if they had been informed of the inaccurate statement. It is not for the Court on a strike out application at the pleading stage, before there is any discovery, examination of evidence or detailed address, to decide on the face of the pleading that such conduct cannot be proven. In the present case, the Court must proceed on the basis alleged in the pleading, which requires evidence acceptable to the Court to establish that Noonan and Lovell would have taken this course of action. Unit 11 is not required at the pleading stage to persuade the Court that the evidence to support that allegation will be accepted. 82 In so far as his Honour's decision was based on the above reasoning as to the speculative and conjectural nature of the behaviour of Noonan and Lovell, I am satisfied that his Honour erred. 83 In my view, the reasoning and approach in Travel Compensation is applicable in the present case. In deciding causation, the Court is not charged with the making of a value judgment but rather with an identification of the specific risk against which the duty was directed and an examination of the loss suffered in the light and context of the wrongful conduct. 84 The duty alleged to have been owed by the auditor to Unit 11 is to report any misleading statement by Flood to Noonan and Lovell. This duty is directed, in the context of trust fund investment in high risk activities where there is a conflict of interest, to protecting Unit 11 against loss arising from a lack of probity, untrustworthiness or perhaps incompetence of Flood in continuing to make investments for Unit 11 in such ventures. This is not a strict liability case. Nor is the duty directed to imposing a responsibility on the part of the auditors to insure Unit 11 against all types of loss. 85 If one stands back and asks, "what caused the loss?" - The answer is that the nature of the investments and market forces, of which Unit 11 was fully aware, caused the loss. The losses alleged in this case are not alleged to arise from any incompetence, lack of probity or trustworthiness on the part of Flood. Any breach by the auditor of the duty to report and any consequent failure of Noonan and Lovell to take action is not alleged to have increased the financial risk to Unit 11. Nor did it change the nature of that risk. If it is established, as alleged, that Noonan and Lovell would have ceased to allow Flood to make any further investments of trust monies, it does not follow that subsequent losses were caused by that breach. On the facts as alleged, while the failure of the auditor to investigate and report Flood's inaccurate statement to Noonan and Lovell was a circumstance antecedent to the loss it was not causative of the loss in any legal sense. 86 While it might be suggested that the present case has some special features, having regard to the nature of the funds and the role of Flood, these are not to properly allege the required specific causal connection alleged between the breach and the loss suffered. 87 Accordingly, the appeal should be dismissed with costs. I certify that the preceding forty-six (46) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin.

VICTORIA DISTRICT REGISTRY DISTRICT REGISTRY VID 523 OF 2005

ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA

Dowsett J: 88 I have read the reasons prepared by Lee and Tamberlin JJ. The facts of the case appear sufficiently from such reasons. I agree with Lee J that the appeal should be allowed and have derived particular assistance from his Honour's reasons. My own reasons are not substantially dissimilar from them. I will state them briefly. 89 There are three unusual aspects to this case. Firstly, according to the statement of claim, the applicant's business strategy was 'to invest moneys in high-risk commercial ventures …'. Such ventures were, or at least included, investment in stage productions. I infer that investments are 'high risk' if, even with appropriate care, it is impossible to be sure of success. In the case of stage productions, that may reflect difficulty in anticipating the theatre-going public's reaction to a particular production. It follows that such an investment may fail in the absence of negligence or other breach of duty on the part of those involved. Even the most careful business judgment may be wrong. The law has long recognized that high risk investment has a legitimate place in the business world. The no liability company was developed specifically to take account of the speculative nature of investment in mining exploration. 90 No doubt high risk ventures are managed so as to minimize the risk. This might involve special care in choosing each investment and in managing it. An investor in high risk ventures would look for returns on successful investments sufficient to reimburse it for losses incurred in unsuccessful investments. All of these matters involve the exercise of commercial judgment. 91 The second unusual aspect of the case is the applicant's plea that it depended substantially upon the advice of one man, Flood, in identifying the projects in which it would invest. Flood was chairman of the board and responsible for investment policy, operational matters and financial reporting. Through his legal firm, he also acted as the applicant's solicitor. In the course of argument, counsel for the applicant seemed almost to assert that the other directors had abdicated to Flood their responsibility for making commercial judgments. Such an abdication might expose them to unfortunate consequences. However that is not relevant for present purposes. The point is simply that in pursuing its high risk commercial ventures, the other directors relied primarily, if not entirely, upon Flood. 92 Thirdly, it seems that the applicant accepted that Flood might advise investment in productions in which he had a personal interest. Of the five productions identified in the claim for damages as being those in which the applicant lost money, it is alleged that he had financial interests in two of them and was a director of each of the production companies concerned in the other three. The applicant's case is that had it been told that Flood had provided misleading information to the auditors, the other directors would have intervened to prevent further investment in productions recommended by him or in which he had such interests. This suggests that the applicant, through its board, was, at the times at which it decided to invest in those five productions, aware of Flood's interests in them. 93 The applicant alleges that the second respondent breached his duty to it in auditing its 1996/97 and 1997/98 annual accounts. At some earlier time the applicant had invested in a production of "Sunset Boulevard", presumably through the production company referred to in the statement of claim as "Really Useful Group". Minutes of a board meeting held on 14 May 1997 disclose that it had decided that the applicant should commence legal proceedings against Really Useful Group in connection with that production. In minutes of board meetings held on 22 December 1997, 13 February 1998 and 26 March 1998, reference is made to 'possible litigation', 'potential litigation' and to the '[intention] to issue proceedings immediately …'. 94 In the second respondent's audit report concerning the accounts for the 1996/97 financial year, which report was dated 14 April 1998, he reported that the applicant was the plaintiff in proceedings in which it alleged misleading or deceptive conduct against Really Useful Group and claimed damages, and that 'discovery proceedings and actions' were in progress. This information had been derived from Flood. 95 The applicant claims that the second respondent ought to have discovered that the information given by Flood was incorrect and that, as at the end of the 1996/97 financial year, no such proceedings had been commenced. It seems to be alleged that the second respondent ought to have checked the information received from Flood either because his duty as auditor dictated such a check, or because he was on notice of a possible irregularity by virtue of the fact that the minutes of board meetings disclosed that as late as March 1998, proceedings had not been commenced. 96 Whether or not, in conducting the audit for 1996/97, the second respondent should have inspected minutes of meetings held after the end of that year may be a matter for expert evidence at the trial. However, in view of the alternative allegation that it was part of the auditor's duty, in any event, to check such information, it probably does not matter for present purposes. One also wonders whether the directors ought not, themselves, have identified the apparent discrepancy between the statement in the audit report and the minutes. That matter appears not to have received consideration to date. In any event, it is probably also irrelevant for present purposes. The applicant alleges that had the second respondent discovered the discrepancy, he should have advised the board accordingly, and that had the board been so informed, it would not have invested in further projects on Flood's advice, or at least not in projects in which Flood had conflicting interests. Alternatively, it claims that it lost an opportunity not to invest. Broadly speaking, the same claim is made in connection with the audit of the 1997/98 accounts. 97 The applicant claims against the second respondent: · damages for breach of duty in the conduct of the audit; and · damages pursuant to s 159(1) of the Fair Trading Act 1999 (Vic) (the "Fair Trading Act (Vic)"). 98 As to the latter claim, it seems that earlier legislation may have applied for some of the relevant period. However, for present purposes, the only effective change was of the relevant section numbers. Section 9 of the Fair Trading Act (Vic) (previously s 11) provides: '(1) A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive; (2) Nothing in the succeeding provisions of this Part is to be taken as limiting by implication the generality of subsection (1).' 99 Section 159(1) provides: 'A person who suffers loss, injury or damage because of a contravention of a provision of this Act may recover the amount of the loss or damage or damages in respect of the injury by proceeding against any person who contravened the provision or was involved in the contravention.' 100 Sections 9 and 159 are substantially similar in effect to ss 52 and 82 of the Trade Practices Act 1974 (Cth) (the "Trade Practices Act"). There is similar legislation in New South Wales to which I will refer at a later stage. 101 The applicant asserts that after receipt of the audit report dated 14 April 1998, it invested further moneys in five productions, namely "Fiddler on the Roof", "Popcorn", "Nigel Productions", "Concept Sports" and "Sam Hill Chronicles". "Popcorn" and "Nigel Productions" were productions in which Flood allegedly had interests. "Fiddler on the Roof", "Sam Hill Chronicles" and "Concept Sports" were produced by companies of which he was a director. As I have said, the applicant claims the losses suffered in those investments. It also claims other amounts which were allegedly misappropriated by Flood, asserting that had the second respondent discovered Flood's misrepresentation and reported it to the board, he would have been prevented from misappropriating such amounts. The second respondent concedes that the claim to "recover" misappropriated moneys is maintainable. However he submits that the claim for investment losses is not maintainable because there is no sufficient causal link between his conduct and such losses. 102 The primary judge examined numerous Australian and English cases concerning causation. However it seems that his Honour was not referred to two recent decisions of the High Court which bear upon the question. A third decision was handed down shortly before the argument of this appeal. The cases relate specifically to breaches of provisions similar to ss 9 and 159 of the Fair Trading Act (Vic). 103 In Henville v Walker (2001) 206 CLR 459, an architect sued a real estate agent for loss incurred by the former in building and selling a block of residential units. In so doing he relied upon a representation made by the real estate agent concerning demand for units in the area and likely sale prices. Such representations were misleading. The architect also relied upon his own estimates of the cost of building and selling the units. They involved substantial underestimates. Had either the selling prices or the costs been estimated accurately, the project would have been demonstrably unprofitable and would not have proceeded. The architect alleged breach of the Trade Practices Act and claimed the nett loss on the project. The trial judge awarded damages accordingly. On appeal, the Full Court of the Supreme Court of Western Australia set aside the judgment, holding that the necessary causal connection between the agent's conduct and the architect's loss had not been established. The High Court reversed that decision. At [13] and [14], Gleeson CJ observed: '13. It will commonly be the case that a person who is induced by a misleading or deceptive representation to undertake a course of action will have acted carelessly, or will have been otherwise at fault, in responding to the inducement. The purpose of the legislation is not restricted to the protection of the careful or the astute. Negligence on the part of the victim of a contravention is not a bar to an action under s 82 [of the Trade Practices Act] unless the conduct of the victim is such as to destroy the causal connection between contravention and loss or damage. The respondents knew the purpose for which their representations were being relied upon by the appellants. The Full Court accepted that the making of the representations amounted to engaging in misleading or deceptive conduct in trade or commerce. There was no warrant for a conclusion that the negligence of the appellants in relation to the feasibility study was the sole cause of the decision to undertake the project. 14. For there to be the necessary causal relationship between a contravention of s 52, and loss or damage, so as to satisfy the requirements of s 82(1), it is not essential that the contravention be the sole cause of the loss or damage. As Brennan J pointed out in Sellars v Adelaide Petroleum NL, where the making of a false representation induces a person to act in a certain manner, loss or damage may flow directly from the act and only indirectly from the making of the representation; but in such a case the act "is a link - not a break - in the chain of causation". In the present case there were two concurrent causes of the imprudent decision to buy the land and undertake the development project. The conduct of the respondents was one of those causes. That is enough.' 104 McHugh J said at [97] et seq (Gummow J concurring): '97. The common law concept of causation recognises that conduct that infringes a legal norm may be causally connected with the sustaining of loss or damage even though other factors may have contributed to the loss or damage … . Every event is the product of a number of conditions that have combined to produce the event. Some philosophers draw a distinction between a condition that is necessary only and a cause that is both necessary and sufficient … to produce the event. The common law has avoided the technical controversies inherent in the logic of causation. Unlike science and philosophy, the common law is not concerned to discover universal connections between phenomena so as to enable predictions to be made. The common law concept of causation looks backward because its function is to determine whether a person should be held responsible for some past act or omission. Out of the many conditions that combine to produce loss or damage to a person, the common law is concerned with determining only whether some breach of a legal norm was so significant that, as a matter of commonsense, it should be regarded as a cause of damage … . 98. More than once in recent years, judges have pointed out that the issue of causation cannot be divorced from the legal framework that gives rise to the cause of action … . In Barnes v Hay …, Mahoney JA said: "[T]he determination of a causal question involves, in my opinion, a normative decision as to whether, for the purposes of the case, the precedent act for which the defendant is responsible should be seen as causal of the plaintiff's loss. And, in my opinion, that evaluation is made, not by a 'test' or 'guide' such as the 'but for' test, but by functional evaluation of the relationship and the purposes and policy of the relevant part of the law." 99. In Environment Agency v Empress Car Co (Abertillery) Ltd …, Lord Hoffmann pointed out that common sense answers to questions of causation will differ according to the purpose for which the question is asked. Furthermore, not only may there be different answers to questions regarding causation when attributing responsibility to different people under different rules, but there may be different answers when attributing responsibility to different people under the same rule … . 100. In some situations, the legal framework may require a finding that, despite a causal connection in a physical sense between the breach and damage, no causal connection exists for legal purposes. In other situations, the legal framework may require a finding that a causal connection exists even though no more appears than that the damage followed after breach of a legal norm. 101. In the first class of case, some act of the defendant may have set in train, or some omission of the defendant may have failed to set in train, a series of physical events that resulted in or could have avoided damage to another person or property. In this situation, the damage occurred because, given the act or omission, the laws of nature dictated the result. The physical connection between the defendant's act or omission and the damage suffered, and the materiality of the connection is usually apparent, although often enough it will require expert evidence to demonstrate the connection. In this situation, questions of causation usually present no difficulty, although questions of remoteness of damage may do so. Exceptionally, however, the policy or rationale of the legal norm that has been breached will require the court to disregard the physical connection and to make a finding of no causal connection. 102. … 103. In the second class of case, the damage will not have occurred because of the laws of nature but because a person has acted to his or her detriment by reason of or following some conduct of the defendant. The conduct may be an act, an omission, a statement or a suggestion. But it will not be regarded as causally connected with the detriment if it provides no more than the reason why the person acted to his or her detriment. If the defendant intended the person suffering a detriment to act in the general way that he or she did, the common law will invariably hold that a causal connection existed between the conduct and the detriment. But if the conduct merely provides the reason why the person acted, it will not be sufficient to establish a causal connection unless the purpose of the legal norm that the defendant has breached is to prevent persons suffering detriment in circumstances of the kind that occurred. If a broker negligently advises a client to retain shares because they are a good investment, the broker will be liable for the loss sustained in retaining those shares. But if, having received that advice, the client decides to buy more shares, the broker will not be liable for the further losses unless the terms of the original retainer impose a duty on the broker to advise in respect of further purchases.' 105 At [155] and following, Hayne J said (Gummow J concurring): '155. … The question is to what extent, if any, did the appellant suffer loss "by" (that is, caused by) the respondents' misleading conduct? 156. If the traditional "but for" test, the test of necessity, is applied to the history I have described, neither the overestimation of the selling price, nor the underestimation of the costs, will be seen as the single cause of the whole of the loss that the appellant sustained. It cannot be said of either of these steps that, but for its occurrence, the appellants would not have sustained the amount of loss that they did suffer. Yet it can be said of each step that it was a necessary element of the set of circumstances that, together, were sufficient to bring about the loss that was sustained. Each played its part in the history of the event; each was a cause of what happened. Moreover, the two steps were concurrent causes of what happened. It cannot be said of either estimate that it was, in any sense, an intervening event. 157. The question which is presented in this case then becomes whether s 82(1) of the Act requires some limiting of the consequences for which the respondents are to be held liable. Is it enough for the appellants to demonstrate that the respondents' contravention of the Act was a cause of the appellants' suffering the loss they did? Does s 82 require only that the contravention played a role in the history of the events connecting the contravening conduct and the loss sustained? That is, is s 82 concerned only with establishing that the contravening conduct played a role in the history of the events that culminated in the loss sustained? Are there some limits to the recovery that is permitted, or are the respondents to be liable for all of the loss that the appellant sustained? 158. It is clear that s 82 requires that the contravening conduct have played a role in the history of the events and that the role required is one of causation. Section 82(1) of the Act speaks of "[a] person who suffers loss or damage by conduct of another person that was done in contravention" (among other things) of Pt V of the Act being entitled to recover "the amount of the loss or damage". That is, s 82 provides that a person may recover the amount of the loss or damage caused by the conduct in question, here a contravention of Pt V. 159. In the present case, the respondents' contravention of the Act can be seen to have caused the appellants' damage because the appellants relied on the respondents' misleading or deceptive conduct in deciding to proceed with the project. The amount of the loss ultimately suffered by the appellant was, however, brought about by the combination of circumstances of which the respondents' misleading and deceptive conduct was only one factor. The appellants' mistaken estimate of costs was another. How is s 82(1) of the Act to operate in such a case? 160. First, it is necessary to identify the loss sustained by the appellants. The loss which the appellants suffered is a single sum. It is the amount by which their expenditures exceeded their receipts. … 161. Both the estimate of likely receipts and the estimate of likely expenditures were wrong. That does not mean, however, that in this case, attention can be confined to one side of the profit and loss account in determining what loss and damage was caused by the respondents' misleading and deceptive conduct. The question presented by the statute is what loss was suffered by the appellants that was caused by the relevant contravention? 162. The conclusion that the appellants suffered loss requires comparison between the position in which the appellants found themselves after the project was finished, and the position in which they would have been if, instead of relying on what they were told by the respondents, they had not undertaken the project. It does not invite attention to what would have been their position if an accurate estimate of selling price had been given by the respondents … . Moreover, the conclusion that the appellants suffered loss neither requires nor permits consideration of some third or intermediate position in which the appellants undertook some project or transaction other than the one they did. It is, therefore, not relevant to consider what the loss might have been if costs had been estimated properly. 163. Secondly, seldom, if ever, will contravening conduct be the sole cause of a person suffering loss. Other factors will always be capable of identification as a cause of the person suffering loss. In a case like the present, the appellants' relying on the respondents' estimate of likely receipts can be seen to be a cause of their loss. What the Act directs attention to is whether the contravening conduct was a cause. It does not require, or permit, the attribution of some qualification such as "solely" or "principally" to the word "by". 164. Thirdly, it is necessary to recognise that, on its face, the section permits recovery of the whole of the loss sustained by a person who demonstrates that a contravention of Pt V of the Act was a cause of that loss. Neither the words of s 82(1) nor anything in the intended scope and context of the Act suggests some narrower conclusion. 165. In particular, nothing in the text of s 82(1) (or any of the other provisions of the Act) suggests that the carelessness of the person who suffers loss or damage as the result of contravention of the Act should be taken into account in deciding what was the amount of loss or damage actually suffered. Nor is some such limitation to be derived from considering the intended purposes of the Act. The very simplicity of the language used in s 82(1) appears to confine attention to the limited question of the historical relevance of the contravening conduct to the loss or damage sustained. It does not provide a basis for concluding that notions of contributory fault are to be given a place in its operation. 166. There may be cases where some of the loss suffered by a person following - and I use the word "following" in a neutral sense - the conduct of another in contravention of the Act may not be loss suffered by that person by the contravening conduct. … For the moment, it is enough to say that it seems to me that such questions must find their answers within the Act rather than in analogies with common law. Thus, if notions of remoteness of damage or reasonableness are to find reflection in s 82(1) it seems probable that they may do so only through consideration of the causation question which the subsection poses. …' 106 I have cited these extended passages from the decision in Henville v Walker because, with the benefit of hindsight, it seems that the decision was an important step in the development of the law in this area as expounded by the High Court in two subsequent decisions, the first being I & L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited (2001-2002) 210 CLR 109. That case concerned a claim by a financier against a valuer for negligent valuation of property taken as security. The financier alleged that the valuer's conduct was misleading. At trial the court found that the financier had failed to take reasonable care to protect its own interests in that it had not taken proper steps to investigate the creditworthiness of the borrower. The question was whether or not the award of damages pursuant to s 82 of the Trade Practices Act ought be reduced to take account of such 'contributory negligence'. At [26] Gleeson CJ said: 'The relationship between conduct of a person that is in contravention of the statute, and loss or damage suffered, expressed in the word "by", is one of legal responsibility. Such responsibility is vindicated by an award of damages. When a court assesses an amount of loss or damage for the purpose of making an order under s 82, it is not merely engaged in the factual, or historical, exercise of explaining, and calculating the financial consequences of, a sequence of events, of which the contravention forms part. It is attributing legal responsibility; blame. This is not done in a conceptual vacuum. It is done in order to give effect to a statute with a discernible purpose; and that purpose provides a guide as to the requirements of justice and equity in the case. Those requirements are not determined by a visceral response on the part of the judge assessing damages, but by the judge's concept of principal and of the statute purpose.' 107 At [33] His Honour continued: '… The relevant purpose of the statute was to proscribe misleading and deceptive conduct in circumstances which included those of the present case. In aid of that purpose, the statute provided for compensation, by an award of damages, to a victim of such conduct. The measure of damages stipulated was the loss or damage of which the conduct was a cause. It was not limited to loss or damage of which such conduct was the sole cause. In most business transactions resulting in financial loss there are multiple causes of the loss. The statutory purpose would be defeated if the remedy under s 82 were restricted to loss of which the contravening conduct was the sole cause.' 108 At [55] et seq, Gaudron, Gummow and Hayne JJ said: '55. If there is a contravention of the Act and, following the contravention, a person suffers loss or damage, it may be possible to identify several features of the history of events as having contributed to the person suffering loss. To take the simple example of a person who suffers loss or damage following a person making a misleading or deceptive statement, the loss may be said to have been caused by the combined effect of the making of the statement and reliance on it by the person who suffers loss. Sometimes it will be open to say that the person who relied on the statement was foolish to do so or, at least, did not take reasonable care to protect his or her own interests. … In those cases it may well be that the loss or damage which has been suffered would not have been suffered but for each of the persons who suffered loss acting, or omitting to act, as they did. 56. There may be many acts or omissions that could be said to have contributed to the happening of an event. As has often been mentioned … in learned articles on the subject of causation, the decision of a tortfeasor's great-great grandmother have children can be identified as one factual cause for an event which is the subject of litigation. To search for the single cause of an event is, therefore, to pursue an illusion. And, much more often than not, to speak of the "effective cause" or the "proximate cause" (or to use some similar expression) is to hide important assumptions that are made, or conclusions that are reached, about the attribution of responsibility for particular kinds of act or omission. That is why it is necessary to understand the purpose of making some inquiry about causation … . Only when the purpose of the inquiry is known is it possible to identify and articulate how and why some circumstances are extracted "out of the whole complex of antecedent conditions of an event" and identified by the law as a cause of it … . 57. In light of these considerations, it is hardly surprising that it is now well established that the question presented by s 82 of the Act is not what was the (sole) cause of the loss or damage which has allegedly been sustained … . It is enough to demonstrate that contravention of a relevant provision of the Act was a cause of the loss or damage sustained … .' 109 Before departing from these cases to consider the most recent decision of the High Court, I should draw attention to one aspect of the judgments of Gleeson CJ in I & L Securities and in Henville v Walker. In the former case at [24] His Honour said: '… This was not a case in which, in reliance upon a misrepresentation, a party entered into a complex business venture, with adverse consequences unrelated to the falsity of the misrepresentation in any sense other than that, but for the misrepresentation, the venture would not have been undertaken … .' 110 In that context his Honour also referred to his own decision in Henville v Walker at [36]. I take Gleeson CJ to have implied that such a link was insufficient for the purpose then under consideration. 111 In Travel Compensation Fund v Robert Tambree [2005] HCA 69, the High Court was concerned with the consequences of the failure of a travel agency. Pursuant to uniform State legislation there is a compensation fund designed to safeguard people who suffer loss by reason of an act or omission on the part of a travel agent, including loss incurred as the result of payment in advance for travel services which are not supplied because of default on the part of the agent. A participating travel agent is obliged to meet certain eligibility criteria on an annual basis. The criteria are based upon the financial position of the agent, determined by reference to audited financial statements. The trustees of the fund became liable to compensate customers for losses suffered as a result of the failure of a travel agency. It had extended cover to the agent in reliance upon accounts prepared by one respondent and audited by the other, and sought damages from them for misleading conduct in breach of the Fair Trading Act 1987 (NSW) (the "Fair Trading Act (NSW)") and for breach of duty. The relevant provisions of the Fair Trading Act (NSW) were similar to ss 52 and 82 of the Trade Practices Act and ss 9 and 159 of the Fair Trading Act (Vic). The trial Judge accepted that had the accounts shown the true financial position, the trustees would have required the travel agent to provide bank guarantees or a substantial increase in capital as a condition of permitting her to continue to participate in the fund. The matter was complicated by the fact that the travel agent had continued to trade in circumstances which rendered such trading illegal. The trial Judge found that such illegality did not break the chain of causation. On appeal, the Court of Appeal held that it did so. In the High Court Gleeson J said at [28] et seq: '28. It is not in doubt that issues of causation commonly involve normative considerations, sometimes referred to by reference to "values" or "policy". However, as Stephen J pointed out in Caltex oil Australia Pty v the Dredge Willemstad, the object is to formulate principles from policy, and to apply those principles to the case in hand. In the context of considering an issue of causation under the Fair Trading Act, the statutory purpose is the primary source of the relevant legal norms. The case did not call for a value judgment about the conduct of (the travel agent). Why her failure to account, after she lost her licence, in respect of moneys paid to her company while it was illegally trading under her licence should be treated differently from her failure to account after she lost her licence, in respect of moneys paid after she lost her licence but before the authorities took steps to close down her business, is not apparent. 29. To acknowledge that, in appropriate circumstances, normative considerations have a role to play in judgments about issues of causation is not to invite judges to engage in value judgments at large. The relevant norms must be derived from legal principle. In this case, the primary task of the Court is to apply the legislative norms to be found in the Fair Trading Act, although the outcome is not materially different to applying the common law of negligence.' 112 At [31]-[35] his Honour continued: '31. This is a case of known reliance and negligent misrepresentations. 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 difficulty. 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 representations. 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 losses resulting from the misleading conduct.' … 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.' 113 His Honour considered that similar considerations applied to the claim for breach of duty. Gummow and Hayne JJ were of the same opinion. At [48] their Honours indicated dissatisfaction with the way in which the law concerning causation was developing in the United Kingdom. This suggests a need for care in considering the English cases cited by the primary Judge in the present case. However it is not necessary that I consider them. 114 Clearly, the ambit of recoverable damages for breach of duty or of a statute should be sought in the relevant legal regime. One must seek to identify the underlying policy considerations and the contemplated mechanisms for giving effect to them. In the present case, one looks to the duty imposed upon the second respondent as auditor of the applicant and the purposes to be served by the imposition of such duty. One must then consider the operation of the Fair Trading Act (Vic) in that context, seeking to identify the intended extent of recovery pursuant to s 159. A similar process must be applied in connection with the claim for breach of duty. In the latter case, the source of the cause of action, namely the common law, will offer substantial judicial exegesis upon which to act. 115 It is not difficult to infer that a primary aspect of a company auditor's role is to identify any misconduct on the part of an officer or employee and to report it to the board. Relevantly, the obvious purpose of that procedure is to offer to the board the opportunity to: · ensure that such misconduct does not continue; · take steps to remedy the consequences of past misconduct; · consider information relevant to the reliability and competence of the person in question; and · make informed decisions concerning his or her ongoing relationship with the company. 116 The ambit of the second respondent's alleged duty in this case is pleaded in pars 4 and 7 of the statement of claim. To some extent, the pleaded duties are general in nature, applying to all audits. Others are specific to this case. It may be that the applicant should also have addressed the second respondent's state of knowledge concerning its affairs and Flood's role in them, but those matters are not immediately relevant. They may go to foreseeability rather than causation. Of course the two issues cannot always be considered in isolation. 117 I turn to the Fair Trading Act (Vic) for the purpose of determining the 'legislative norms' to be found there. As was the case in Travel Compensation Fund v Robert Tambree, this is a case of known reliance and negligent misrepresentation (at least as pleaded). The aspects of trade and commerce which attract the operation of s 9 of the Fair Trading Act (Vic) are the conduct of the affairs of a corporation involved in an investment business. Such conduct is regulated by the companies legislation, which requires a system of auditing and places certain responsibilities upon auditors. Relevantly, the applicant pleads that those responsibilities included: · seeking independent third party confirmation of the existence of material investments; · obtaining appropriate evidence concerning legal matters; · identifying inconsistencies between company minutes and the contents of financial reports; and · identifying whether any senior manager had made misleading statements to the auditor and to report those to the directors. 118 To my mind, a "norm" of the Fair Trading Act (Vic) is that there be no misleading statements made by auditors concerning the reliability and trustworthiness of senior officers of the entity under audit. One ultimate purpose of such norm is to prevent the entity from acting on the advice of an officer who is not reliable or whose judgment might be suspect, or at least to ensure that it acts with knowledge of any such deficiency. 119 In the course of the hearing of the appeal there was a tendency to under-estimate the significance of Flood's statement concerning the litigation. It is difficult to understand how a person in Flood's position could have been so seriously mistaken as to the state of affairs. He was a solicitor, and his firm acted for the applicant. He was also principally responsible for the administration of the affairs of the applicant. One infers that if anybody in the organization should have known about the conduct of such litigation, it was he. Further, one might expect that he would have been, to some extent, involved in any discovery. That he was so badly mistaken inevitably invited questions as to how the mistake had occurred. It is, after all, reasonable to assume that the claimed cause of action was potentially of substantial value to the applicant. 120 There is another aspect to the matter. The applicant's case is that quite apart from Flood's association with it, he was otherwise involved in the entertainment industry. In those circumstances a director, told of the error in connection with the commencement of legal proceedings, might well wonder whether or not Flood had some ulterior purpose in concealing the fact that legal proceedings had not been commenced, such purpose being associated with potential conflict of interest or his association with other persons in the industry. Had the second respondent become aware of the inaccuracy of the information provided to him by Flood and drawn it to the board's attention, it would have been a matter which required further enquiry. None of this excludes the possibility that there was a simple and innocent explanation for the mistake. 121 I have previously referred to the claim to recover allegedly misappropriated funds in reliance upon the same alleged conduct of the second respondent. It is relevant to enquire why that head of damage should be recoverable if the investment losses are not. The distinction must be that there is a closer causal relationship between Flood's conduct and the misappropriation than between that conduct and the investment losses. Such a view may reflect the approach taken by Gleeson CJ to losses incurred in participating in a venture, which losses cannot be immediately related to conduct which induced such participation. 122 It might be said that the allegation of misappropriation implies dishonesty on Flood's part, and that disclosure to the board of his statement to the second respondent would have given the applicant notice of such weakness of character, and so an opportunity to guard against misappropriation, by removing him from office or otherwise. To this point, neither party has offered a view as to why the five stage productions yielded losses rather than profits. They may have failed because of actionable misconduct or breach of duty, or they may have failed without any such cause. The business judgments which led to their being undertaken may have been appropriately careful but, in the event, wrong. In other words, it is not presently alleged that the investment losses were caused by anything other than the decision to invest in high risk investments which failed. The chain of events leading to such losses was: · the second respondent failed to identify and report the irregularity in Flood's conduct; · Flood advised investment in the five projects; · without knowledge of his conduct, the board accepted that advice; · had the board known of such conduct, it would not have accepted the advice; · acting on that advice, the applicant invested in high risk investments in which it would not otherwise have invested; and · the investments failed. 123 In the case of the misappropriations, it is apparently accepted that had the board been aware of Flood's conduct, it would have been able to prevent the misappropriation. I see no reason for rejecting the allegation that had the board possessed the same knowledge, it would have been able to avoid investment losses by not allowing Flood to put the applicant's money into high risk investments in which he had personal involvement. 124 Ultimately the question is whether or not the investment losses were, in the words of s 159 of the Fair Trading Act, suffered 'because of' the alleged contravention of that Act. If it is accepted that a purpose of a company audit is to detect irregular conduct and report it to the board, then the proscription of misleading conduct by a company auditor must be intended to protect the relevant company from the risk of making a decision without knowledge of such irregularity where such knowledge may be relevant to the decision. Where the company's business is high risk investment in accordance with advice from a particular officer, such protection could only be provided by allowing recovery of losses incurred in high risk investments made as a result of misleading conduct such as that alleged against the second respondent. 125 The primary Judge apparently rejected the applicant's allegation that the non-executive directors, and therefore the applicant, would have ceased to accept Flood's investment recommendations had they been aware of his conduct. His Honour observed at [45] that it was not suggested that the allegation was based on anything other than speculation or conjecture. However I assume that the allegation is based upon proper instructions. It follows that it must be accepted for present purposes. His Honour also concluded at [47] that: '[T]he steps relied upon … to establish causation are so speculative and conjectural that I am satisfied that they do not go further than establishing that the respondent's breaches might have provided the occasion for the loss suffered, in the sense that "but for" the breach the loss might not have been suffered. I am not satisfied, however, that they justify the next step and constitute a tenable claim that the breaches were causative, in the requisite legal sense, of the losses. Rather, applying common sense and experience to the facts pleaded I have come to the conclusion that the breach is not so significant that it should be regarded as a cause of the losses claimed. In my view the causation claim is so clearly untenable that it should be struck out. Put simply, the causation claim requires too many speculative steps that defy common sense and experience in order to establish the requisite causative link. Put another way, … I am not satisfied that the applicant has a tenable claim that the acts and omissions of the auditors that are relied upon are so connected to the losses claimed that legal responsibility for those losses should attach to those acts and omissions. Those acts and omissions are "too remote" and should be discarded as a cause in law of the losses claimed ….' 126 In my view, the causal link is anything but speculative or conjectural. It is true that there are difficulties in the case. In particular, it may be difficult to prove such a high degree of reliance upon Flood. Further, the nature of his relevant conduct, although capable of causing concern, was also capable of innocent explanation. There may be questions about alternative high risk investments and how the applicant would have invested the relevant funds had it not relied on Flood. These matters are all factually relevant to causation of loss, but it cannot be assumed at this stage that they will be resolved in ways which are unfavourable to the applicant. 127 To some extent the applicant has pleaded its case in a way which conceals its true nature. The mechanics of each investment transaction have not been pleaded. It seems likely that in each case, the applicant advanced funds to the relevant production company, but the terms of each advance are unknown. There is no suggestion that they were by way of loan or gift. Probably, they were capital contributions. I infer that the applicant received some interest in return, presumably the right to share in any profits derived from the venture in question. As I have said, each decision to invest exposed the applicant to a high risk of loss. On the applicant's case, such exposure was the direct result of its not having been informed of Flood's conduct. Seen in this way, the applicant's claim is for damages for incurrence of that risk. It is to be placed in the position in which it would have been had the second respondent's misleading conduct not occurred. 128 Risk can be valued. Presumably, the production companies do so, at least indirectly, when they commit themselves to acquiring the rights to produce overseas stage productions in Australia. Such a right could conceivably be assigned, necessitating agreement on a price. Alternatively, such a right might be an asset of a company, the value of the shares in which would reflect the value of such right. That value would also reflect the risks involved in the production. Similar comments apply to the valuation of mining exploration rights and shares in exploration companies. 129 In the present case, the measure of damages might well be the measure traditionally used in tortious misrepresentation cases, namely the difference between the amount paid and the value of the interest acquired. The applicant "paid" the amount of each investment and, perhaps, the amount of any foregone return on alternative investments or foregone interest. The claim assumes that it received nothing in exchange for each investment, but that is probably incorrect. It presumably received the right to participate in any profits. That right was, and is, capable of valuation. No doubt the applicant asserts that events have demonstrated that such rights were worth nothing. However that may not have been the case when the investments were made. The appropriate date of calculation has not been addressed. I do not assert that this approach is the correct, or only correct, approach to assessing damages, but it is arguably available. The same approach to causation might be taken in connection with the claim for breach of duty. 130 In these reasons I have, in a number of places, drawn inferences from allegations in the statement of claim. I do not mean to imply that those inferences should necessarily be drawn, merely that they are arguably available. 131 I agree with the orders proposed by Lee J. I certify that the preceding forty-four (44) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett.

Associate: Dated: 30 March 2006 Counsel for the Appellant: J G Santamaria QC; A M Thomas

Counsel for the Second Respondent: D Collins SC; A Herskope

Solicitors for the Second Respondent: Moray & Agnew

Dates of Hearing: 16 and 17 November 2005

Date of Judgment: 30 March 2006