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.