PROVAN v HCL REAL ESTATE LIMITED & ORSJudges:
Supreme Court of New South Wales
[His Honour stated the nature of the plaintiff's claim and the facts of the case and concluded that the plaintiff had established a breach by the fourth and fifth defendants of their fiduciary duty as real estate agents. His Honour then found that the plaintiff was entitled to recover an amount of $955,450 against the fourth and fifth defendants, as well as interest pursuant to sec 94 of the Supreme Court Act. He then continued...]
The Capital Gains Tax Problem
A complication of some magnitude for me has arisen in relation to damages. The plaintiff submits that he may be liable to pay capital gains tax on any judgment he recovers in these proceedings. The defendants submit that he will not be liable to do so. The parties have asked me to determine whether capital gains tax will be payable and, if I am of the opinion that it will, to make a declaration that the defendants should indemnify the plaintiff for any such amount. It is agreed I cannot make any assessment of that amount. It is necessary to bear in mind that the Court will not make a declaration unless it is essential to the determination of the proceedings. Whilst a declaration that capital gains tax is or is not payable may well be essential for a determination of the extent of liability of the defendants to the plaintiff in these proceedings, any such decision by me would not be binding upon the taxation authorities and, in due course, it will be necessary, if the plaintiff wishes or is required to contest liability to capital gains tax, which he may well be obliged to do for reasons to which I shall refer, for that issue to be litigated between the appropriate parties. By appropriate parties I mean the plaintiff and the taxation authorities. It is unfortunate that no steps have been taken, such as were suggested by Rogers J in
Gill v Australian Wheat Board  2 NSWLR 795, to allow the taxation authorities to be joined in proceedings so that all matters in issue can be determined at one time. His Honour said, at p. 797:-
``It is convenient to consider firstly whether the verdict will be liable to be included in the plaintiff's assessable income in the year of receipt. The necessity for this inquiry adds yet another imponderable to the task of assessment of damages. The Commissioner of Taxation is not, and cannot be made, a party to the determination and will not be bound by it: cf
Spencer v. Macmillan's Trustees  SLT 41. In the result, a decision may be arrived at inconsistent with the actual tax liability when determined and there may be an unfair result one way or the other. This unsatisfactory state of affairs has drawn comment from the highest authorities (cf
Riches v Westminster Bank Ltd  AC 390) without response from the legislature. Perhaps another reminder may be permissible.''
A further reminder, as twelve years has elapsed, is not unwarranted.
In my opinion the real issue is whether, in the event of those proceedings being determined unfavourably to the plaintiff, the plaintiff is entitled to recover any capital gains tax, held to be payable by him in properly constituted proceedings, from the defendants. The plaintiff submitted that consistently with the principles expounded in
British Transport Commission v Gourlay  AC 185,
Taylor v O'Connor  AC 115,
Petroleum and Chemical Corporation (Australia) Ltd v Morris (1973) 47 ALJR 484 and
Beneke v Franklin  1 NSWLR 571, I should hold that any capital gains tax payable be reimbursed by the defendants to the plaintiff. These authorities, all of which were concerned with damages for personal injuries, established that regard should be had to the effect of income tax on a verdict. They all pre-date the introduction of capital gains tax legislation in Australia and the United Kingdom legislation of 1979.
Atlas Tiles Limited v Briers (1976-1978) 144 CLR 202 the majority held that Gourlay should not be followed in a wrongful dismissal case, i.e. one founded in breach of contract, although not, as I understand the majority decision, for that reason. However, for present purposes, the fact the cause of action was for breach of contract, is of significance. In
Cullen v Trappell (1979-1980) 146 CLR 1 it was held that Gourlay should be followed in personal injury cases. As Gleeson CJ and Handley JA observed in
The New South Wales Cancer
ATC 4646Council v Sarfaty (5 August 1992 - as yet unreported), which was also a wrongful dismissal case, the consequence of the decision in Cullen v Trappell was "necessarily that Atlas Tiles Ltd v Briers should not be followed in wrongful dismissal cases": p. 19. Their Honours considered statements in Atlas Tiles by Gibbs J at p. 227 and Stephen J at p. 236 and then, after noting a submission "that the increase in the award due to the effect of taxation was contrary to principle and outside the limits of recovery established by Hadley v Baxendale", their Honours continued at p. 21:-
``However in our opinion this Court should apply the principles stated by Gibbs and Stephen JJ in Atlas Tiles v Briers.''
In the result the appeal, insofar as it made an allowance for the tax payable on the award, failed in principle, only a minor adjustment being made to correct an agreed mathematical error. The passages their Honours cited from the judgments of Gibbs and Stephen JJ made no reference to the ``rules'' in Hadley v Baxendale. Nor, so far as I can see, was that matter referred to at first instance in
Briers v Atlas Tiles Ltd  VR 151 or in the High Court. However, as the claim was for breach of contract, Gibbs and Stephen JJ must have considered that the damages were reasonably foreseeable. Be that as it may, the point having been raised before the Court of Appeal it became, as I understand it, essential for the decision because, unless the payment of tax fell within one of the ``rules'', it would not be recoverable as damages for breach of contract. Even if I thought, which I do not, that it was obiter dictum, I would not be disposed to come to a different conclusion. Mahoney AP did not express a view on this particular matter. Therefore the law binding upon me, at the least, is that in a wrongful dismissal case the taxation payable on the judgment falls within one of the rules in Hadley v Baxendale. The particular one is not identified but that is not a matter to cause me to seek to draw any distinction:
Proctor v Jetway Aviation Pty Ltd  1 NSWLR 166.
The first relevant principle is that the affectation of a judgment by the imposition of tax should, so far as possible, be removed, so that the damages recovered are truly compensatory. Mr Menzies did not dispute, as a matter of principle, that these authorities entitled the plaintiff to recover any capital gains tax payable provided ``that it is causally related to the breach'' or "if the breach is in contract it falls within the principles in Hadley v Baxendale".
In my view there can be no doubt that if capital gains tax is payable as a consequence of the necessity to bring these proceedings and of recovering a judgment in them, that payment is causally related to the breach of fiduciary duty and, whilst Mr Menzies intruded the proviso into his submission, he did not submit to the contrary. On the basis, therefore, of the way in which the case was argued and of my findings, the question is whether the plaintiff is entitled to a declaration that in the event of his being found liable to pay the taxation authorities capital gains tax on the judgment, he is entitled to be indemnified for that amount by the defendants. It may well be that the plaintiff will have to contest any such proceedings by the taxation authorities if the view taken by the defendants is persisted in, although that would be, in my opinion, at the cost of the defendants whether the plaintiff be right or wrong. In either circumstance it could be said the defendants benefit. Moreover I must bear in mind, in formulating any declaration that the defendants should only be liable to indemnify the plaintiff for capital gains tax if it is established, by judicial decision if need be, that such is payable. It will be a matter for the defendants to state at what point they are satisfied of this. But, as I have said, I see no reason why the determination of this issue should not be at the cost of the defendants.
I am very conscious of the circumstances in which the High Court of Australia and the Court of Appeal have said declarations should be made. It should, generally, only be done in the resolution of a justiciable issue between the parties. In my opinion, and no submission was put to the contrary, that is the purpose for my considering whether such a declaration should be made in these proceedings. The declaration will formalize the question as to the damages or compensation to which the plaintiff is entitled, depending upon any liability to capital gains tax.
On the other hand for me to make a decision as to whether capital gains tax was or was not payable would not be conclusive of the plaintiff's liability to capital gains tax, although as between the plaintiff and the defendants it may result in a res judicata or issue estoppel,
ATC 4647subject to any variation on appeal. If I were to find in these proceedings that the plaintiff had such a liability it would resolve nothing in practical terms, because the taxation authorities could not be bound and I cannot quantify the amount. Therefore until the rights as between the plaintiff and the taxation authorities are resolved there would be no obligation on the defendants to pay anything, and if those proceedings are resolved in a manner favourable to the plaintiff there would never be anything upon which the declaration granting the indemnity could operate.
In all these circumstances I consider the question for my decision is not whether as between the plaintiff and the taxation authorities, the plaintiff is liable to pay capital gains tax on the verdict, but whether, if the plaintiff is so liable he is entitled to recover the amount he is obliged to pay from the defendants. This approach, particularly in view of the way the case was argued, does not affront the principle that damages must be determined once and for all. That principle is subject to the qualification that liability may be considered in proceedings separate from those which quantify damages. Also, and particularly when there is a consideration of damages in equity proceedings or in proceedings involving equitable relief, orders are frequently made referring the matter to the appropriate judicial officer to determine the amount e.g. by the taking of accounts.
If I adopt the approach that I make a declaration granting an indemnity in the event of the plaintiff's being held liable to pay capital gains tax I also avoid an area of potential prejudice to the defendants. I am satisfied the defendants are liable to pay the plaintiff damages or compensation in the sum of $955,450. Interest on that amount is running at the rate prescribed by s. 94 of the Supreme Court Act, which is now in excess of commercial rates of interest. This obligation of the defendants should be terminated as soon as possible, or more accurately the defendants should be given the opportunity of stopping interest running.
Possible Bases on which Damages may be Recovered
Hospital Products Ltd v United States Surgical Corporation & Ors (1984) 156 CLR 41 at pp. 96-97 Mason J said:-
``The accepted fiduciary relationships are sometimes referred to as relationships of trust and confidence or confidential relations (cf.
Phipps v. Boardman  2 A.C. 46, at p. 127), viz., trustee and beneficiary, agent and principal, solicitor and client, employee and employer, director and company, and partners. The critical feature of these relationships is that the fiduciary undertakes or agrees to act for or on behalf of or in the interests of another person in the exercise of a power or discretion which will affect the interests of that other person in a legal or practical sense.''
In Halsbury (4th Edition) Vol 1 at para 784 it is stated:-
"`Upon an agent's breach of duty the principal's remedy is, as a rule, to bring an action for damages, and the period of limitation runs in the agent's favour from the date of the breach.'
Where an agent is sued by his principal for breach of contract, the measure of damages is the measure recoverable under the general law of contract, which is the full amount of the loss actually sustained, and no more, provided that such loss is the natural and probable consequence of the breach of duty, or such as was within the contemplation of the parties."
If one is confined to damages for breach of contract, basically the damages are restricted to such as ``may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it'': Hadley v Baxendale.
It seems clear to me that liability to capital gains tax was not in the contemplation of either party, let alone both parties, when the contract was made. The question arises as to whether such liability arose naturally in the sense referred to, i.e. whether it can be said that the liability to the payment of capital gains tax arises ``according to the usual course of things''. The incidence of capital gains tax was, of course, appreciated in October 1988, the tax having been introduced by legislation as from 20 September 1985. It may be said that such was the potential impact of capital gains tax that it was well known about, if not fully understood, by October 1988 and, certainly, it may also be said that the sale of property
ATC 4648acquired after 20 September 1985 was understood, in general terms, to attract capital gains tax. However, I find it very difficult to contemplate that when the plaintiff and the defendants entered into the present agency contract it could be said ``according to the usual course of things'' capital gains tax would be imposed upon an award of damages in the event of the defendants breaching their agency agreement in the manner I have found. To impose such a liability on the defendants would, in my opinion, be going far outside ``the rule'' in Hadley v Baxendale and creating, in the circumstances of this case, a liability for all consequences of the breach or, perhaps in more conventional language, a liability for consequences other than those ``arising naturally''. In
Koufos v C. Czarnikow Ltd  1 AC 350 the House of Lords propounded a test based on the requirement that the relevant question to ask is whether the defendant ought to have realised that the damage was of a kind not unlikely to result from a breach, i.e. denoting a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable. In my opinion this makes the task of the plaintiff in contract difficult. In Greig & Davis ``The Law of Contract'', the authors say at p. 1376:-
``The limitation of remoteness of damage is a matter of striking a balance between the desire of the plaintiff to be compensated for all the damage flowing from a breach of contract and the need to protect the defendant from liability for a wholly unpredictable loss. The law must assess the extent to which the defendant ought, as a matter of justice, to be liable for the damage he has caused. This goal is achieved by determining how likely was the particular loss of which the plaintiff complains.''
Wenham & Anor v Ella (1972) 127 CLR 454 at p. 466, Walsh J said:-
``In my opinion the error that is contained in the argument for the appellants consists in treating rules which constitute useful guidance in the ascertainment of damages as rigid rules of universal application, instead of treating them as prima facie rules which may be displaced or modified whenever it is necessary to do so in order to achieve a result which provides reasonable compensation for a breach of contract without imposing a liability upon the other party exceeding that which he could fairly be regarded as having contemplated and been willing to accept. The achievement of such a result is the purpose of the principles laid down in
Hadley v Baxendale (1854) 9 Exch. 341 [156 E.R. 145] as explained in subsequent cases, including those to which Gibbs J. has referred in his judgment in the present case.... The entitlement of the injured party is limited of course by the requirement that the damages must not be too remote. Lord Wright went on to say that remoteness `is in truth a question of fact'  A.C., at p. 223 and he cited a passage from the speech of Lord Haldane in an earlier case, to the effect that the apparent discrepancies found in the statements of general principles governing damages are due mainly to the varying nature of the particular questions which have arisen in different cases and to the need to mould the expression of the general principles, in applying them to the circumstances of particular cases.''
Burns v M.A.N. Automotive (Aust) Pty Ltd (1986) 161 CLR 653 Gibbs CJ referred, without any qualification, to the rule in Hadley v Baxendale as explained in
Victoria Laundry (Windsor) Ltd v Newman Industries Ltd  2 KB 528, C. Czarnikow v Koufos and Wenham v Ella. In the joint judgment of Wilson, Deane and Dawson JJ their Honours, at p. 667, cited with approval the following passage from Lord Reid in C. Czarnikow v Koufos:-
``The crucial question is whether, on the information available to the defendant when the contract was made, he should, or the reasonable man in his position would, have realised that such loss was sufficiently likely to result from the breach of contract to make it proper to hold that the loss flowed naturally from the breach or that loss of that kind should have been within his contemplation.''
The decision of the High Court in
Hungerfords & Ors v Walker & Ors (1988-1989) 171 CLR 125 provides support for a fulsome award of damages. At p. 143 Mason CJ and Wilson J considered the justification for drawing too rigorous a distinction between the two limbs of the ``rule'' in Hadley v Baxendale. Their Honours said:-
``Indeed, such a policy would be at odds with the fundamental principle that a plaintiff is entitled to restitutio in integrum. According to that principle, the plaintiff is entitled to full compensation for the loss which he sustains in consequence of the defendant's wrong, subject to the rules as to remoteness of damage and to the plaintiff's duty to mitigate his loss. In principle he should be awarded the compensation which would restore him to the position he would have been in but for the defendant's breach of contract or negligence.''
At pp. 145-146 their Honours said:-
``The cost of borrowing money to replace money paid away or withheld, in consequence of the defendant's breach of contract or negligence, is directly related to the wrong and is not too remote in the sense in which the common law regarded the loss attributable to late payment of damages as being too remote. We reach this conclusion more readily, knowing that legal and economic thinking about the remoteness of financial and economic loss have developed markedly in recent times.''
Brennan and Deane JJ expressed their ``general agreement'' with the reasons of the Chief Justice and Wilson J: p. 152.
This really takes one back to the issue of fact to which I have referred earlier and, in my opinion, when the question is propounded that way, which in my view it is necessary for me to do, the answer, subject to an important matter to which I shall now refer, must be adverse to the plaintiff. That matter is the majority decision in Sarfaty to which I have referred. If the liability to pay tax on an award of damages fell within the ``rule'' in Hadley v Baxendale, why am I not obliged, by authority, to hold that the liability to pay capital gains tax, on the assumption that such a liability exists, does also? I can find no satisfactory reason to answer that question in the negative. Authority binding on me, as I understand it, requires I should hold that at least the first limb of the ``rule'' has been satisfied. Hungerfords, in its more general application, supports this.
For these reasons I am of the opinion that the plaintiff has shown a causal relationship, in the sense I have been seeking to describe, between the breach of contract by the defendants and the loss, if any, resulting from any requirement to pay capital gains tax.
I am satisfied that the proper legal characterisation of the relationship between the plaintiff and the defendants is, prima facie, in contract. This was considered in
Keppel v Wheeler  1 KB 577 at p. 591, Atkin LJ said:-
``And, if the proposed sale went off because of that refusal, the principal, the vendor, might have a substantial cause of complaint against the agents; he would have a claim for breach of the contract to use reasonable skill and diligence in the obtaining of a purchaser, a person who would purchase the property. For those reasons it appears to me to be a mistake to suppose that the contractual relationship ends as soon as a person has been introduced who is in fact ready and willing to purchase. It continues as long as the negotiations between him and the vendor continue. To my mind that is made plain by the words of Lord Watson in Toulmin v Millar, which, though obiter dicta, are of great weight. I think, therefore, that there was a breach of contract.''
The plaintiff has cast his case as one encompassing any conceivable duty owed by the defendants to him. He has alleged a breach of ``contractual, common law and fiduciary duties''. In my view this is wide enough to encompass a claim, if it is otherwise available, in negligence and, on reflection, I appreciate that the submission of Mr Menzies, in the course of conceding the entitlement to a component for capital gains tax subject to there being shown to be a causal connection or a fulfilment of the requirement of the rules in Hadley v Baxendale, recognised the case in negligence as well as in contract.
In my opinion it is now established that negligence is an alternative cause of action to contract, notwithstanding that the parties are in a contractual relationship, provided the obligation does not extend beyond that contemplated by the contract or is not otherwise negated by its terms. In a case such as the present the contract, at least impliedly, imposes an obligation upon the defendants to use reasonable care and diligence, relevantly for present purposes, in doing all things necessary to obtain a purchaser at the highest possible price and to keep the plaintiff informed of interest and other appropriate developments. The failure of the defendants to do so can,
ATC 4650therefore, either amount to a breach of contract or to negligence, each breach covering the same areas, so that the defendants were under co- extensive obligations in contract and tort.
It becomes necessary to consider whether damages would be awarded in negligence for two reasons. Firstly, it is recognised that the recovery of damages in negligence may be wider than in contract and it may be held that my decision as to the damages payable for breach of contract is erroneous. Secondly, the measure of damages in negligence is the measure of damages appropriate under the Trade Practices Act and, I shall assume for the moment, the Fair Trading Act, in most, if not all cases, under Part V of the former Act and, especially, in actions involving misleading or deceptive conduct:
Gates v The City Mutual Life Assurance Society Ltd (1985-1986) 160 CLR 1.
At pp. 6-7 Gibbs CJ said:-
``Actions based on ss. 52 and 53 are analogous to actions in tort and the remedy in damages provided by s. 82(1) appears to adopt the measure of damages applicable in an action in tort... The acts referred to in ss. 52 and 53 do not include the breach of a contract, and in awarding damages under s. 82 for a breach of either of those sections, no question can arise of damages for loss of a bargain. The contractual measure of damages is therefore inappropriate in such a case. It has been held in the Federal Court in a number of cases that the measure of damages in tort, and not that for breach of contract, will apply in the assessment of damages under s. 82 where there has been a contravention of s. 52 or s. 53... This view is plainly correct.''
Mason, Wilson and Dawson JJ, in referring to the necessity of the Court to determine the measure of damages under the Act said, at pp. 11-12:-
``Two established measures of damages, those applicable in contract and tort respectively, compete for acceptance. In contract, damages are awarded with the object of placing the plaintiff in the position in which he would have been had the contract been performed - he is entitled to damages for loss of bargain (expectation loss) and damage suffered, including expenditure incurred, in reliance on the contract (reliance loss). In tort, on the other hand, damages are awarded with the object of placing the plaintiff in the position in which he would have been had the tort not been committed (similar to reliance loss).''
After analysing the matter their Honours said, at p. 14:-
``The question then is whether it is appropriate to apply the contract measure of damages to the contraventions found to have taken place. The courts are not bound to make a definitive choice between the two measures of damages so that one applies to all contraventions to the exclusion of the other. However, there is much to be said for the view that the measure of damages in tort is appropriate in most, if not all, Pt V cases, especially those involving misleading or deceptive conduct and the making of false statements. Such conduct is similar both in character and effect to tortious conduct, particularly fraudulent misrepresentation and negligent misstatement.''
In order to recover damages in negligence it is necessary to establish that the breach was causative of the damage suffered and that requires that the damage be ``reasonably foreseeable'', those words marking ``the limits beyond which a wrongdoer will not be held responsible for damage resulting from his wrongful act'':
Chapman v Hearse (1961) 106 CLR 112 at p. 122. In
Mahony v J. Kruschich (Demolitions) Pty Ltd (1985) 156 CLR 522 at 528 the High Court said:-
``A line marking the boundary of the damage for which a tortfeasor is liable in negligence may be drawn either because the relevant injury is not reasonably foreseeable or because the chain of causation is broken by a novus actus interveniens... Whether such a line can and should be drawn is very much a matter of fact and degree...''
March v E. & M.H. Stramare Pty Ltd & Anor (1990-1991) 171 CLR 506 the High Court considered the question of causation. At p. 515 Mason CJ said:-
``The common law tradition is that what was the cause of a particular occurrence is a question of fact which `must be determined by applying common sense to the facts of each particular case', in the words of Lord Reid...''
His Honour, whilst being somewhat critical of the ``but for'' test, stated at pp. 515-516:-
``That said, the `but for' test, applied as a negative criterion of causation, has an important role to play in the resolution of the question.''
At p. 522 Deane J said:-
``For the purposes of the law of negligence, the question of causation arises in the context of the attribution of fault or responsibility whether an identified negligent act or omission of the defendant was so connected with the plaintiff's loss or injury that, as a matter of ordinary common sense and experience, it should be regarded as a cause of it... The `but for' (or `causa sine qua non') test may well be a useful aid in determining whether something is properly to be seen as an effective cause of something else in that sense. In particular, the test will commonly exclude causation for the purposes of the law of negligence if the answer to the question it poses is that the accident which caused the injuries would have occurred in the same way and with the same consequences in any event...''
In the same case McHugh J considered remoteness of damage and causation, p. 534, and noted that foreseeability did not remain the exclusive common law test of remoteness of damage, particularly as the rule that a tortfeasor must take his victim as he finds him remains. At p. 535 his Honour said:-
``Once it is recognised that foreseeability is not the exclusive test of remoteness and that policy-based rules, disguised as causation principles, are also being used to limit responsibility for occasioning damage, the rationalization of the rules concerning remoteness of damage requires an approach which incorporates the issue of foreseeability but also enables other policy factors to be articulated and examined.''
His Honour indicated that he favoured the ``scope of the risk'' test and cited with approval the following passage from the judgment of Denning LJ in
Roe v Minister of Health  2 QB 66 at p. 85:-
``Starting with the proposition that a negligent person should be liable, within reason, for the consequences of his conduct, the extent of his liability is to be found by asking the one question: Is the consequence fairly to be regarded as within the risk created by the negligence? If so, the negligent person is liable for it: but otherwise not.''
(The emphasis is that of McHugh J.)
His Honour then noted that the ``scope of the risk'' test enabled more than foreseeability of damage to be considered and, after citing a passage from Fleming ``The Law of Torts'', 7th Edition, he continued:-
``Thus, the `scope of the risk' test enables relevant policy factors to be articulated and justified in a way which is not possible when responsibility is limited by reference to commonsense notions of causation or to more specific criteria such as `novus actus interveniens', `sole cause' or `real cause', all of which conceal unexpressed value judgments.''
When one returns to the passage of Denning LJ the limitations imposed are ``within reason'' and ``fairly''.
Bennett v Minister of Community Welfare (1992) 66 ALJR 550 at p. 551 Mason CJ, Deane and Toohey JJ said:-
``In the realm of negligence, causation is essentially a question of fact, to be resolved as a matter of common sense (
Fitzgerald v Penn (1954) 91 CLR 268, per Dixon CJ, Fullagar and Kitto JJ, at 277-278;
March v Stramare (E & MH) Pty Ltd (1991) 171 CLR 506, per Mason CJ, at 515; Deane J, at 522-523). In resolving that question, the `but for' test, applied as a negative criterion of causation, has an important role to play but it is not a comprehensive and exclusive test of causation; value judgments and policy considerations necessarily intrude (March v Stramare (E & MH) Pty Ltd). The inadequacy of the `but for' test has emerged in cases in which a superseding cause, amounting to a novus actus interveniens, has been held to break the chain of causation which would have otherwise resulted from an earlier wrongful act or omission. In those cases, though the earlier wrongful act or omission may have amounted to an essential condition of the occurrence of the ultimate harm, it was not the true cause or a true cause of that harm.''
At p. 558 McHugh J said:-
``Whether or not a causal connection exists between a breach of duty and any harm suffered by the person to whom the duty is owed is a question of fact to be decided on
ATC 4652the balance of probabilities... The existence of the causal connection is to be determined in accordance with common sense notions of causation and not in accordance with any philosophical or scientific theory of causation or any modification or adaption of such a theory for legal purposes (March v Stramare (E & MH) Pty Ltd...''
If the plaintiff is liable to pay capital gains tax it seems to me, determining the matter as one of fact and on the basis of commonsense, that the obligation to pay the capital gains tax was caused by the negligence of the defendants.
It seems to me that it was reasonably foreseeable by the defendants, as that term has been understood in the authorities: (
The Council of the Shire of Wyong v Shirt & Ors (1979-1980) 146 CLR 40), that their conduct involved a risk of financial detriment to the plaintiff. It is well established that it does not have to be shown precisely what loss or injury would be sustained by the plaintiff and also it is the law that the defendants must take the plaintiff as they find him. If there is a liability to income tax regard must, on the authorities, be had to that. As a matter of principle, capital gains tax cannot, in my view, be in a different position. In the passage I have already quoted from the judgment of McHugh J in March v Stramare, his Honour repeats what I understand to be established, viz that the precise damage need not be foreseen provided damage of the kind which occurred could have been foreseen in a general way.
Therefore, in my opinion, once financial loss was reasonably foreseeable the fact that the precise nature of that financial loss, i.e. the requirement to pay capital gains tax, and the fact that the defendants were not aware of the obligation to pay capital gains tax are not matters which preclude the defendants being liable. The capital gains tax is payable because the negligence of the defendants has changed the essential character of the asset. Had the property been sold for its proper value in October 1988, the moneys received would have represented the realization of an asset, which for all presently relevant purposes, was obtained before 20 September 1985 and on which capital gains tax was not payable. But the judgment represents the fruits of the legal action, in respect of a cause of action which did not arise until October 1988.
The plaintiff submits that as assets are defined to include ``a chose-in-action'' or ``any other right'' and as there is deemed to be a ``disposal'' of such assets on ``the release, discharge or satisfaction at law or in equity of the asset'', from which only actions for personal injury and defamation are excluded, the obtaining of the judgment amounts to the disposal of an asset, which, in the circumstances of this case is liable to capital gains tax.
Compensation for Breach of Fiduciary Duty
The next matter to be considered is whether, as the breach was a breach of a fiduciary duty, damages may be awarded ``to enforce compensation for breach of a fiduciary obligation'':
Nocton v Lord Ashburton  AC 932 at 946. This was a matter to which McHugh J referred in
Bennett v Minister of Community Welfare (1992) 66 ALJR 550 at p. 557. His Honour said:-
``If that jurisdiction had been invoked, there would be much to be said for the view that the Minister could not escape liability to compensate the appellant even if the receipt of legal advice by the appellant in 1976 constituted a novus actus interveniens... In
Caffrey v Darby (1801) 6 Ves Jun, at 496 [31 ER, at 1162], where trustees had been guilty of neglect in not recovering a trust asset, the Master of the Rolls said:
`if they have been already guilty of negligence, they must be responsible for any loss in any way to that property: for whatever may be the immediate cause, the property would not have been in a situation to sustain that loss, if it had not been for their negligence... If the loss had happened by fire, lightning, or any other accident, that would not be an excuse for them, if guilty of previous negligence.'
Re Dawson (deceased)  2 NSWR at 215,, Street J said that `causation, foreseeability and remoteness do not readily enter into the matter'.''
Whilst this was obiter dictum it is not only entitled to great weight, but, if I may say so with respect, it appeals as being correct.
The decision of Street J in
Re Dawson (deceased)  2 NSWR 211 was concerned with a breach by a trustee of his duties. His Honour had to consider a submission ``that where a defaulting trustee is required to make
ATC 4653good to a trust estate, assets which he has wrongfully extracted from it, this obligation is in a different and higher category than a claim which merely sounds in damages at common law. He (counsel for the estate) disputes the validity of applying to a claim against the defaulting trustee principles which have been developed from the common law rules governing remoteness of damage''.
This was a submission to which his Honour gave effect at pp. 214-215. I do not propose to set out the whole of what his Honour said, for it was cited with approval in the 13th Edition of Underhill's ``Law of Trusts and Trustees'' (1979) at pp. 702-703, and is set out fully in ``Equity Doctrines and Remedies'', (2nd Edition) Meagher, Gummow and Lehane at para 2303. In the immediately preceding paragraph the authors, after referring to Nocton v Lord Ashburton (supra), state:-
McKenzie v McDonald  VLR 134 at 146, in dealing with an estate agent who purchased his principal's property at an undervalue, Dixon AJ (as he then was) spoke of Nocton v Lord Ashburton as showing that the jurisdiction to remedy breaches of fiduciary duty extended to decrees of compensation in favour of the person whose confidence had been abused.
It is, after all, plain that in respect of delinquent trustees the remedies available in Chancery include a personal remedy obliging them to restore the trust funds and to make good any loss caused by breach of trust... What Nocton v Lord Ashburton, supra, illustrates is the application of these principles to fiduciaries generally; see Davidson `The Equitable Remedy of Compensation' (1982) 13 Melb Univ L Rev 349, cited with approval in
United States Surgical Corp v Hospital Products International Pty Ltd  2 NSWLR 766 at 816. It is these concepts which indicate the proper basis for a pecuniary remedy for breach of an equitable duty of confidence: see (4126). Accordingly, there is no need to provide in legislation such as Lord Cairns' Act for `damages' for purely equitable obligations; there is an inherent power to order restitution in respect of violation of equitable rights.''
Critically, for present purposes, Street J said, at p. 215:-
``The principles embodied in this approach do not appear to involve any inquiry as to whether the loss was caused by or flowed from the breach. Rather the inquiry in each instance would appear to be whether the loss would have happened if there had been no breach.''
Thus his Honour was able to conclude that ``causation, foreseeability and remoteness do not readily enter into the matter''.
Bartlett v Barclays Trust Co Ltd  Ch 515 at p. 543 Brightman LJ said:-
``In my judgment the defendant is seeking to introduce a distinction which is not justified. As was pointed out by the plaintiffs' counsel, the obligation of a defaulting trustee is essentially that of effecting restitution to the trust estate: see Underhilll's Law of Trusts and Trustees, 13th Edition (1979) p. 702, where there is a useful quotation from the judgment in the Australian case of
In re Dawson Deceased  2 NSWR 211, with which I respectfully agree. Until restitution has been made, the default continues because it has not been made good.''
These cases were concerned with strictly trust obligations.
United States Surgical Corporation v Hospital Products International Pty Ltd  2 NSWLR 766 at 816 McLelland J was concerned with a breach of a fiduciary duty of a different type. At p. 816 his Honour said:-
``Apart from the limited power to award damages in addition to or in substitution for equitable relief, conferred by the Supreme Court Act, 1970, s 68 (following Lord Cairns' Act), which is of no present relevance, the court has an inherent power to grant relief by way of monetary compensation for breach of a fiduciary or other equitable obligation: see
Nocton v Lord Ashburton  AC 932, at pp 946, 956, 957;
McKenzie v McDonald  VLR 134, at p 146;
Homes v Walton  1 WAR 96...''
His Honour continued:-
``The nature and extent of this remedy have been discussed by IE Davidson in an illuminating article entitled `The Equitable Remedy of Compensation' in 13 Melbourne University Law Review 349. This remedy differs from an account of profits in that the
ATC 4654loss to the plaintiff rather than the gain to the defendant is the measure of relief. The principles of assessment of equitable compensation do not necessarily coincide with those applicable to common law damages.''
This case was not concerned with a trust situation, but it was heard in the Equity Division of this Court. In
Catt & Ors v Marac Australia Ltd & Ors (1987) 9 NSWLR 639 Rogers J, sitting in the Common Law Division Commercial List, in considering the relief to which the plaintiff was entitled stated that he could not ``believe that the law is incapable of furnishing an appropriate remedy'': p. 659. Nor, if I may say so with respect, am I. In that case his Honour had held that the originators, instigators and sponsors of projects for the acquisition of aircraft through the medium of syndicates owed a fiduciary obligation to the partners of the syndicates, akin to those of promoters and that there had been breaches of that fiduciary obligation. His Honour continued:-
``In order to recognise that the plaintiffs have been the victims of equitable fraud or breach of fiduciary duty, rightly or wrongly I have in my judgment given in July held that, to the extent there defined, Marac bears legal responsibility for what has transpired with respect to the wrong done to the plaintiffs.
If I am right in the findings of fact which I have made and the conclusions of law which I have drawn, are the plaintiffs entitled to equitable compensation? The origins of equitable compensation are shrouded in a degree of mystery but there can be no doubt today of the existence of such a principle and of such relief.''
His Honour referred to what McLelland J had said in the passage which I have quoted and to the support the last sentence thereof gained from the decision in Re Dawson (supra). His Honour then considered and dismissed a submission that equitable compensation could not arise ``because it has to be associated with a gain'', and a further submission that ``equitable compensation is payable in circumstances such as the present only where there has been rescission of the transaction which founded the initial payment''.
His Honour said:-
``In my opinion the reach of this beneficial equitable remedy is not so restricted. What, in circumstances such as the present, the remedy is designed to achieve has been described by Dixon AJ, then sitting as a judge of the Supreme Court of Victoria in McKenzie v McDonald... as a `jurisdiction to remedy breaches of fiduciary duty (which) extends to decreeing compensation to the person whose confidence has been abused'. Here the call for compensation arises in favour of those against whom and in respect of whom breaches of fiduciary duty have been committed.''
Subsequently his Honour said:-
``The plaintiffs seek recovery not merely of what they had thus paid to Marac but all the expenditures which they had made. I do not find this approach inappropriate. The plaintiffs' case, after all, is and always has been that they entered into the entirety of this transaction in circumstances which, at every step of the way, were attended by breaches of fiduciary duty by Mr Winter and Mr Joffick and there were involved in these fiduciary breaches Wings and Marac in the ways I have sought to outline in my earlier judgment.''
Although the precise terms of the orders made by his Honour are not stated, it seems clear that his Honour awarded equitable compensation of the type he discussed. This case was not concerned either with a pure trust situation nor was it one heard in the Equity Division.
As the plaintiff's entitlement to compensation for breach of fiduciary duty had not been the subject of any submissions I drew the attention of counsel to the authorities and sought further submissions. Mr Toomey embraced the concept that damages or compensation could be awarded on this basis conformably with the authorities. Miss Needham offered no submissions on this point, which I do not say critically for it was consistent with the position of the first defendant to which I have referred.
Mr Menzies submitted that whether the defendants owed fiduciary duties to the plaintiff, they were ``the duties of agents not trustees''. He submitted:-
``The duty is one of loyalty, that is a duty not to permit their own interests to conflict with the interests of the principal.''
As I understand it Mr Menzies was submitting that any breach by the defendants of their fiduciary duty did not attract an award of equitable damages or compensation, but rather damages for breach of contract or negligence. I do not agree. In my opinion the authorities to which I have referred are to the contrary.
Mr Menzies nextly submitted that whilst ``it is open on the facts to find that the defendants, or some of them, were guilty of negligence or were in breach of their contractual duties to the plaintiff or were guilty of misleading and deceptive conduct, there is no evidence sufficient for a finding that they were in breach of their fiduciary duties''. He offered, by way of illustration that in Keppel v Wheeler (supra) the breach was found to be in contract. In my opinion the fact that the breach may be so characterized does not preclude it also being a breach of a fiduciary relationship also. That, so it seems to me, is also consistent with the authorities. For the reasons I have given I am satisfied that there was a breach of fiduciary duty.
Finally it was submitted that even if a breach of fiduciary duty is identified, ``equitable compensation does not follow unless it is found that there would have been no loss had there been no breach''. Dawson (supra) at p. 215 was cited as authority, for this prima facie self- evident proposition.
The submission stems from the paragraph in the reasons of Street J, which I have already quoted for a proposition contrary to the submission of Mr Menzies. In my opinion his Honour was expounding the width of the remedy, when compared with damages for breach of contract or damages, rather than restricting it.
AWA Limited v Daniels & Ors (3 July 1992 - as yet unreported) Rogers CJ Comm D said at p. 265:-
``Second, equitable damages are generally a more complete compensation and breach of fiduciary duty more easily established than negligence at common law.''
I appreciate the context was different, but this is an appropriate characterization of the legal principle.
In these circumstances, and notwithstanding the apparent reservations expressed by the authors of Meagher, Gummow & Lehane at para 231, I consider there is power in the Court, even when not dealing with a matter in the Equity Division, to award damages in the form of equitable compensation, as specified by Street J in Dawson and adverted to by McHugh J in Bennett v Minister of Community Welfare. Once this conclusion is reached the approach demanded in deciding whether damages are payable for breach of contract or tortious breach are substantially, if not wholly, removed. So also is the way in which the relief can be moulded, for I have little doubt that in such a case it would be entirely appropriate to make a declaration accommodating liability in respect of a future finding of financial detriment flowing from the breach of fiduciary duty.
On this basis I consider that I am justified in awarding compensation for breach of fiduciary duty and in making a declaration that in the event of the plaintiff being found liable to pay capital gains tax the defendants are bound to indemnify him for the amount so paid.
It will be appreciated that the necessity to consider equitable damages or compensation only arose because of the difficulties, or potential difficulties, in determining whether the plaintiff was entitled to a declaration indemnifying him against any capital gains tax for which he may be liable. The other damages clearly flowed in contract or tort.
I direct the parties to bring in Short Minutes of Order giving effect to the following:-
- 1. I uphold the plaintiff's appeal against the rejection of the proof of debt.
- 2. I order judgment for the plaintiff against the second to fifth defendants in the sum of $955,450.
- 3. I order that the second to fifth defendants pay interest on the sum of $955,450 pursuant to s. 94 from l January 1989 to today's date, subject to any adjustment for income received by the plaintiff from the property during that period.
- 4. On the cross-claim of the first defendant I order that the first defendant is entitled to a complete indemnity against the second to fifth defendants jointly and severally for any amount by way of dividend or otherwise it
ATC 4656may pay to the plaintiff as a consequence of the orders I have made.
- 5. I declare that if the plaintiff is held liable to pay to the Commissioner of Taxation capital gains tax on the judgment, in circumstances the defendants acknowledge as constituting a proper defence by the plaintiff of any such claim made against him by the Commissioner of Taxation, the plaintiff is entitled to be indemnified for such amount together with such costs, on a solicitor and client basis, the plaintiff is required to pay in pursuing or defending any such proceedings in consequence of the defendants not making the acknowledgment to which I have referred.
- 6. I order the second to fifth defendants to pay the plaintiff's costs.
- 7. I order that the exhibits be returned at the expiration of 28 days unless, within that time, an appeal has been brought against this decision.
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