27 May 2004

Interpreting "loss or damage" under the Trade Practices Act

By Ainslee Cox, David Harland, Nicole McKinnon

The High Court expressly stated that it is wrong to approach the operation of the "loss and damage" provisions of Pt VI of the Act by beginning with an attempt to draw an analogy with any particular claim under the general law.

In Murphy v Overton Investments Pty Limited [2004] HCA 3 (5 February 2004) the High Court of Australia overturned the Federal Court's decision in respect of how "loss or damage" should be interpreted under Pt VI of the Trade Practices Act 1974 (Cth).

Background

Mr and Mrs Murphy were considering moving into a retirement home. The respondent, the developer and then owner of the Heritage Retirement Village in Padstow Heights, Sydney, furnished the Murphys with an information brochure about the village which explained that the respondent was selling leasehold interests in units at the village and that there would be an associated "on-going management and maintenance program". The information brochure stated that "[p]resent budget figures would indicate" that, for a unit of the kind that the appellants were considering leasing, a pensioner would incur a weekly cost of $55.71. This estimated levy was calculated on a certain set of outgoings, which failed to account for all possible outgoings, which could be included in the weekly maintenance fee. This resulted in an estimated weekly cost that was significantly lower than the respondent was entitled to charge under the lease.

Approximately four years later, the respondent unequivocally communicated to the Murphys that it would now be taking into account all expenditure in the calculation of the maintenance fee and the Murphys would, therefore, be required to pay a much higher weekly rate. By the time of the High Court appeal, it was not disputed that it was misleading for the respondent to provide an estimate to the appellants without disclosing that it did not adequately provide for all items of expenditure actually being incurred in the operation of the village. It was accepted, therefore, that the respondent had engaged in conduct in contravention of Pt V of the Act.

Summary of the proceedings in respect of the Pt VI loss or damage claim

The trial judge concluded that the appellants had not proved that they had suffered any loss or damage. The Full Court dismissed an appeal in respect of the trial judge's refusal to award damages. The appellants appealed to the High Court contending that the assessment of damages should be remitted to the trial judge. That contention was accepted by the High Court and the relevant applications were remitted to the trial judge for consideration.

Loss or damage under the Act

Section 52 of the Act is a general prohibition against misleading and deceptive conduct. However, it is section 82 of the Act which enables damages to be recovered for loss or damage caused by the conduct of another person that is in contravention of various parts of the Act, including section 52. In addition, section 87 of the Act gives the Court a wide discretion to make a variety of orders and remedies, including orders to prevent damage as a result of a contravening act.

In the past the High Court has often looked at the issue of how damages should be assessed under the Act in light of two established, but competing, principles. These are the tort compensation principle ("TCP") and the contract compensation principle ("CCP"): see Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 and Marks v GIO Australia Holdings Ltd (1998) 158 ALR 333. Many decisions have struggled with the difficultly and artificiality of applying these common law principles to the concept of loss and damage under the consumer protection regime of the Act. However, it would seem that - at least in the two decisions cited above - the High Court has applied an approach more in keeping with the TCP in deciding not to award damages for "loss of expectation" - a typical head of damage under the CCP. Despite making an award for damages which seems to align with the TCP, the High Court in Marks v GIO was very careful to point out that, whilst the remedies of the common law are continually referred to and remain a useful tool when assessing damages under section 82, "there is nothing in section 82 or section 87 which suggests either that the amount that may be recovered under section 82(1), or that the orders that may be made under s 87, should be limited by drawing some analogy with the law of contract, tort or equitable remedies", and to limit the Act in this way would be "wrong".

Based on the TCP analogy, a party who is induced to enter a contract by a misrepresentation that they will receive more than the contract ultimately provides will not suffer any loss or damage if they cannot show that they could have been better off acting in some other way. Therefore, in assessing loss or damage the Court would need to consider whether the person obtained less in value than they paid or whether they could have - and would have - obtained a better deal had the misrepresentation not been made. Under a CCP analysis, an individual would be able to claim the loss of their expectation of receiving the benefit promised.

For example, in Gates v CML, the appellant took out disability cover on the basis of misrepresentations that the policy would entitle him to benefits if he were totally disabled, thus preventing him continuing his occupation as a builder. Subsequently, the appellant did suffer injury preventing him from following his occupation, although he could still carry out other forms of employment. The policy, however, only entitled him to benefits if he was permanently disabled from carrying out any employment. Damages were therefore sought under section 82, for misleading conduct in contravention of section 52, seeking to recoup the benefit for total disablement under the policy, after the insurer had refused to indemnify.

It was held by the High Court that, although the conduct engaged in by the respondent was misleading, the appellant was not entitled to recover damages (other than a refund of premiums paid) on the basis that the cover provided was worth the consideration provided. In addition, evidence was not adduced that an alternative policy could have been retained by the appellant providing him with the benefits sought and misrepresented. Therefore, the court awarded damages with a view to placing the appellant in the position he would have been in had the misleading conduct not occurred, that is, in accordance with the TCP principle. Had the court awarded damages in accordance with the CCP principle, it would have ordered the respondent to pay to the appellant the benefit for total disablement under the policy, in accordance with the appellant's expectation.

In Murphy v Overton the lower courts refused to award loss or damage as there was no evidence that the value of the appellants' leasehold was of less value than they had paid and no evidence that they would have obtained a better deal had the misrepresentation not been made. The High Court, having found that the appellants did suffer loss or damage, remitted the matter to the trial judge for that loss or damage to be quantified.

The decision

The High Court acknowledged that "the difference between price and value will often be an important element in assessing the damage suffered by a person who, by a misrepresentation, has been induced to buy an item of property...there may also be questions of consequential damage. It went on to say that "it would be wrong, however, to assume that in every case of misrepresentation...the only kind of damage which may be suffered, and compensated or redressed by orders under Pt VI of the Act, is any difference between price and value or any consequential losses."

The High Court agreed with the trial judge's findings that there was no evidence that the appellants did not receive value for the fees paid. However, the High Court said that this was not conclusive of the fact that the appellants had not suffered any loss.

The High Court noted the Full Court's focus on whether the appellants had proved an entitlement to damages. Due to the lack of evidence as to whether the appellants would have obtained a more attractive deal with another retirement home the majority in the Full Court confined its attention to whether the appellants had paid too much for the lease. The High Court referred to this as the "capital consequences" of the misleading and deceptive conduct. The High Court understood Gyles J in his dissenting judgment to be directing attention to a more general inquiry about whether, and how, the appellants were worse off as a result of the respondent's contravention.

Guiding principles from the High Court

In its decision, the High Court set out a number principles to be applied when assessments of loss or damage are to be made under the Act. Although these principles may be useful they do not establish a logical test or formula for the assessment of loss or damage under the Act. These principles include:

  1. The Act's references to "loss or damage" is not to be given a narrow meaning. The loss or damage spoken of in sections 82 and 87 is not confined to economic loss.
  2. It is necessary to identify the detriment which is said to be the loss or damage which has occurred (or, when considering the application of section 87, has occurred or is likely to occur).
  3. Risk of loss is not itself a category of loss, however, once the risk of loss has crystallised, this will amount to a category of loss for the purpose of the Act.
  4. Loss is not necessarily a "one off" event and may require more than one remedy.
  5. Remedies other than an award of damages may be made under the Act to compensate for, prevent or reduce those future losses. For example, the terms of contracts could be varied.
  6. Whether damages are to be awarded in compensation may depend upon what other forms of relief are to be granted. In particular it will be much affected by what orders to prevent or reduce the loss or damage are made under section 87. During the course of the various proceedings the retirement home was sold to new owners. If the home had not been sold it may have been open to the Court to vary the lease so that it reflected the representation originally made.

The orders sought by the appellants were confined to orders remitting the matter to the trial judge to determine damages. No orders under section 87 were sought.

What had to be shown was that the appellants had suffered or were likely to suffer loss or damage by conduct engaged in by the respondent in contravention of a relevant provision of the Act. That was established in this case as the appellants did establish that they had undertaken an obligation which, in the events that happened, proved to be more significant than the respondent's misleading conduct led them believe. The High Court held in principle that the appellants had suffered loss or damage. However, it also said that ultimately the appellants may fail to quantify any loss or damage.

The High Court said the Full Court's reasoning used to conclude that the appellants proved no loss or damage was wrong The High Court rejected the appellants' claim to damages assessed by reference to an asserted difference in the value of their lease, caused by the increased payments. It is difficult to understand the basis on which the High Court found the appellants to have suffered loss. On one view, the only possible head of loss that could be identified is "expectation loss". That is, the appellants were told that the levies would be calculated on certain factors and instead the levies were to be calculated on additional factors leading to significantly higher levies than were expected.

The High Court identified 3 main areas of potential difficulty in the eventual quantification of the appellants' loss:

  1. When they took the lease, the appellants knew, or at least must be taken to have known, that the outgoings might increase. They knew unexpected outgoings could occur in the future. It would be wrong to compensate them for their incurring outgoings of that kind, but how was proper account to be taken of that fact?
  2. Issues of mitigation may arise - should the appellants have moved out?
  3. Quantification would have to take into account the number of years the appellants would be paying these higher levies. Therefore life expectancy evidence would probably be required.

Conclusion

The High Court has expressly rejected the analysis of damages under the Act in terms of the TCP versus the CCP. In Murphy v Overton the High Court stated that it is wrong to approach the operation of the "loss and damage" provisions of Pt VI of the Act by beginning with an attempt to draw an analogy with any particular claim under the general law.

Although the High Court listed a number of factors that would have the effect of reducing any amount ultimately awarded by the trial judge, the High Court's decision seems to lend some indirect support to a concept which has been previously rejected by most judges who have considered the point, that is the concept that damages for "loss of expectation" are recoverable under the Act.

While the High Court's decision does not provide for any clear-cut formula as to the most appropriate method of assessing damages under the Act, it does highlight the importance that each case must be considered in light of its own individual facts and circumstances, using a unique measure of loss or damage obtained through a careful consideration of the particular facts at hand. That is, in each case the relevant loss must be particularised as being caused by conduct in contravention of the Act, and then the nature of such loss must be examined. It seems that the High Court is very reluctant to prescribe any set formula for fear that it might exclude a class of plaintiffs from the operation of the Act, and interfere with the underlying purpose of the Act, namely, consumer protection. It will be interesting to see how the lower courts handle this authority. It may be that Gates v CML would be decided differently today.

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