27 May 2004

Damages for misleading conduct - The centrality of causation and reliance

By David Harland

A recent Federal Court decision illustrates how showing a causal link between misleading conduct and the loss alleged is crucial in an action for damages.

Perhaps the best known provision in the Commonwealth Trade Practices Act 1974 (TPA) is section 52, which provides that "a corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive". Section 52 established what has been described as a new norm of conduct for Australian commercial activity and has given rise to literally thousands of reported cases. It has had what in retrospect is a quite dramatic impact on Australian commercial law generally and in particular on the law of contract. This is because the scope of the conduct prohibited by section 52 has generally been interpreted broadly by the courts, but also because very effective private rights of action are granted to persons or companies who can show that they have suffered or are likely to suffer loss or damage caused by a defendant's contravention of the section.

It may be noted that very similar provisions appear (in relation to financial services) in the Commonwealth Australian Securities and Investments Commission Act 2001 and in the Fair Trading Acts of the States and Territories (applying to unincorporated traders who in many cases cannot, for constitutional reasons, be caught by the TPA).

Where a party (which may be a large corporation as the provisions are not limited to consumers) complains that another has engaged in misleading conduct in contravention of section 52 TPA, very frequently that party will seek to recover damages under section 82 TPA which provides that one "who suffers loss or damage by conduct of another person that was done in contravention of" (among other provisions) section 52 may recover the amount of that loss or damage by an action against that other person.

Very commonly, for example, a purchaser of a business will allege that it was induced to enter into the contract for purchase by misleading representations made by the vendor or, perhaps an agent, and as a result suffered loss. Likewise many other cases have involved situations where the lessee of a shop in a commercial shopping centre alleged having entered into the lease and suffered loss as a result of misleading representations concerning the shopping centre made by the lessor or a letting agent. But it is important to appreciate that section 82 damages are available only where loss or damage is suffered "by" conduct that was misleading in contravention of section 52. The phrase "by conduct" is somewhat curious, but it is well established that its effect is that a causal link must be established between the misleading conduct and the loss that was suffered.

Usually this will be established by the plaintiff proving that it was induced by the misrepresentations to enter into the contract (though the misleading conduct does not have to be the sole or even the principal cause of the plaintiff contracting). In a number of cases plaintiffs have failed because they could not prove any loss which was suffered as a result of the conduct. For example, the plaintiff may not have been aware of the misrepresentation when entering into the contract, or it may have known that the representation was false or it may have relied solely on its own judgment as to the subject matter or on reports from experts employed by itself (in the latter case however, very often the plaintiff will be able to establish that though it was influenced by its own judgment or that of its own experts it did nonetheless rely in part on the misrepresentations made). The importance of all this is that plaintiffs may well suffer a rather Pyrrhic victory in the sense that even though they may prove that there was indeed misleading conduct that contravened section 52, nonetheless the action fails because they cannot prove loss or damage caused by that conduct.

Why causation is important

Ford Motor Company of Australia Limited v Arrowcrest Group Pty Ltd [2003] FCAFC 313 is a recent decision of a Full Court of the Federal Court of Australia which neatly illustrates the importance of causation. Ford sued Arrowcrest and its subsidiary, Tristar. Both companies manufactured motor vehicle component parts and they had longstanding commercial relationships with Ford (though it was apparent that these relationships had become strained in recent years). Tristar contracted to provide steering gears to Ford for its Grizzly model. There was a dispute as to the term of this contract but it was ultimately found that it provided for the supply by Tristar of gears only until August 2001. Ford expected to produce the Grizzly model until about the middle of 2002, at which time production would cease and the Grizzly would be replaced by the Barra model.

In December 1998 Ford had informed Tristar that it would not be the supplier of gears for the Barra model. This placed Ford in a vulnerable position because it would, for the last year of production of the Grizzly model, either have to enter into a new agreement with Tristar or to find an alternative provider, which ultimately proved impossible to find. After considerable negotiation and disputation (including Tristar at one stage ceasing supply because Ford was refusing to enter into a long-term supply agreement with it), in December 2001 Ford and Tristar eventually signed an agreement for Tristar to supply steering gears for both the Grizzly and the Barra models for a period of five years. Ford entered this agreement notwithstanding that it had earlier adopted a policy that it did not intend to honour any contract with any member of the Arrowcrest Group after September 2002.

In September 2002 Ford purported to terminate this new contract. A number of issues were involved in the case, but what concerns us here is that Ford sought damages from Tristar claiming that it had been induced to enter into the new supply contract by various false representations allegedly made by Tristar. This claim by Ford failed (though it did succeed in certain cross-claims against Tristar).

It was held that it was not necessary to decide whether the representations made to Ford had been false because in any event Ford had not relied on them. Ford "simply did not believe what Tristar was telling it" and the terms were dictated by Tristar because Ford was without an alternative source of supply and it entered into the agreement "so that it could continue production of the Grizzly model and for no other reason". Moreover, when Ford entered into that agreement it intended not to honour it.

Ford also argued that something less than reliance might establish the causation required by section 82 TPA, but this argument was rejected by the court. Relying on earlier authorities the court accepted that when considering whether causation has been proven a "commonsense or practical" view of causation should apply, and that, as indicated above, it is not necessary that the conduct complained of be the sole or principal inducement for a party to enter into a contract. All this could be accepted, but nonetheless the essential requirement of causation remained. Ford relied on a number of authorities which it argued showed that causation could be established in a misleading conduct case without proof that that conduct was relied upon.

The Full Court disagreed, holding that these cases supported a different proposition (which was not applicable on the facts of this case) that in some situations the plaintiff can succeed by proving that it suffered loss caused by a third party relying on misleading conduct. In one case, for example, a manufacturer of an over-the-counter pharmaceutical complained of misleading conduct by the manufacturer of a competing drug. It was held that if the plaintiff could establish that the defendant's misleading claims resulted in consumers and pharmacists purchasing the defendant's drug, as a result causing the plaintiff to lose sales which it otherwise would have made, then it could recover damages to compensate it for that loss of sales. In such a case it was not the plaintiff who relied on the misleading conduct but rather third parties, but this was enough so long as that reliance by third parties was the cause of loss to the plaintiff.

In another case a cleaner who contracted dermatitis as a result of using cleaning material which did not have an appropriate warning as to how to use it was able to recover compensation even though the cleaner herself had not read or relied upon the product label. This was because her supervisor had in fact read the label and relying on it had distributed it to employees such as the plaintiff in accordance with the instructions for use contained on the label. On the facts of this case Ford would be able to recover damages only if it proved that it (Ford) had relied upon Tristar's representations. As it did not do so it did not suffer loss or damage "by conduct of" Tristar. It entered the agreement not because of any representations by Tristar but as a matter of commercial necessity.

It is not always the case that in a section 52 action actual loss or damage must be established. For example, where a plaintiff (sometimes the Australian Competition and Consumer Commission, often a competitor) seeks an injunction under section 80 TPA to prevent misleading conduct being repeated into the future, it is not essential to prove that anyone was actually misled, so long as the conduct has a tendency or capacity to produce that effect. But the Ford v Arrowcrest case is a salutary reminder that merely proving that misleading or deceptive conduct occurred will not assist a plaintiff seeking section 82 damages if it is unable to prove that it suffered any loss or damage caused by the misleading conduct. Similar considerations apply where a party seeks other orders (the most common of which in practice are orders having the effect of setting aside a contract) in reliance on section 87 TPA, which only applies where a person has suffered or is likely to suffer loss or damage "by conduct of" another in contravention of section 52.

In some cases a plaintiff may establish that it was indeed induced to enter a contract as a result of misleading conduct, but is unable to establish loss (eg. perhaps because a misrepresented property was nonetheless worth as much as was paid for it). In other cases problems will arise as to how the money value of the loss or damage is to be assessed. These issues are beyond the scope of this article.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.