Australian Goldfields NL (In Liquidation) v North Australian Diamonds NL [2009] HCATrans 273 (14 October 2009)

Last Updated: 22 October 2009

[2009] HCATrans 273

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Perth No P21 of 2009

B e t w e e n -

AUSTRALIAN GOLDFIELDS NL (IN LIQUIDATION) (ACN 009 132 361)

Applicant

and

NORTH AUSTRALIAN DIAMONDS NL (ACN 009 153 119)

Respondent

Application for special leave to appeal

FRENCH CJ
HAYNE J

TRANSCRIPT OF PROCEEDINGS

AT PERTH ON WEDNESDAY, 14 OCTOBER 2009, AT 11.17 AM

Copyright in the High Court of Australia

MR M.L. BENNETT: May it please your Honour, I appear on behalf of the applicant. (instructed by Lavan Legal)

MR D.R. WILLIAMS, QC: May it please the Court, I appear with my learned friend, MR J.A. THOMSON, for the respondent. (instructed by Lawfield Legal Practice)

FRENCH CJ: Thank you. Yes, Mr Bennett.

MR BENNETT: Your Honours, the starting point in respect of these oral submissions is to address what we say are the false, with respect, propositions put by my friend’s summary of argument in paragraph 3, appearing at page 333 of the application book, namely, that this appeal depends on the High Court making two contested factual findings relating firstly to causation and the second as to value. We say at the outset, since 1854 when Baron Alderson in his famous speech in Hadley v Baxendale was given, that the issue of damages goes far beyond the question of causation.

The heart of this application for special leave is to contend that the majority in the Court of Appeal – we rely, I should say to your Honours, as is apparent from our written submissions, on the powerful dissenting judgment of Appeal Justice Buss – that the majority unacceptably extended the extent of damages that can be recoverable in an action for breach of contract to include consequential damages not arising in reliance upon the promise made by the party in breach of the contract. In other words, with knowledge of the breach and not in reliance of the promise, their Honours held that damages could then properly fall within the concept of reliance loss. To do so, we say, is to mistake the principles in McRae’s Case enunciated by this Court and extend the scope of damages, we say, beyond the appropriate dichotomy.

We would accept only one limited circumstance where damages could properly be claimed by an innocent party to a breach of contract after knowledge that the promise had been broken and they would be costs incurred by the party in attempting to mitigate loss and damage, where the party knows of the breach and then acts reasonably in a manner attempting to mitigate loss and damage but otherwise causes an aggravation or an extension of damage and a separate head would be recoverable in that circumstance.

What your Honour knows in the facts of this case is that the respondent, who was known then as Striker, confronted with what his Honour the learned trial judge Justice Heenan found to be a breach of the secondary underwriting agreement that had been committed by the applicant in 1997, then set about incurring a series of expenditure. Originally it formed part of a much larger claim that at trial was reduced from some 11 million to 6 million, his Honour ending up finding for the respondent in the sum of $3 million. $2 million worth of that was exploration expenditure. The issue, we say, is not the question of causation.

We accepted at the Court of Appeal that the argument advanced of implied causation before the learned trial judge was not the subject of challenge. The respondent incurred the expenditure after the breach because it did not have the substantial funds, the $7.5 million, so it could carry out its primary concept, its primary proposed work which was a trial mine for diamonds at the Ashmore tenements in the.....River in the North West of Western Australia.

HAYNE J: Can I understand this, Mr Bennett? Was any argument advanced at trial or on appeal to the Court of Appeal that the expenditures in question would not have been made but for the breach of the underwriting agreement?

MR BENNETT: Not in those terms.

HAYNE J: Was any argument advanced at trial or in the Court of Appeal that the money spent was not, as the respondent in this Court submits, wasted?

MR BENNETT: Yes.

HAYNE J: What was the argument about wasted expenditure?

MR BENNETT: The evidence at trial was that in each of the years 1998 and 1999 the annual report for Striker referred to the exploration that had been carried out by the utilisation of those funds as being promising, as identifying on tenements beyond the Ashore tenements significant intersections that were valuable and potentially worthy of further investigation and exploration by the company. You see that these, your Honour, are set out clearly in Appeal Justice Buss’ reasons for decision on this aspect and you see that at page 275 of the application book, your Honour, at paragraph 295. So that reading from that:

(a) Striker’s 1998 annual report (in respect of the year ended 30 June 1998) does not suggest that any of its exploration activities were wasted, valueless or pointless . . .

(b) Similarly, Striker’s 1999 annual report (in respect of the year ended 30 June 1999) does not suggest that any of the expenses were wasted, valueless or pointless. Again, to the contrary, the report indicates that Striker’s exploration activities were of utility –

If you go back to the precise terms of those annual reports, which appear, your Honour, earlier in his judgment at paragraph 268 at page 263, you will see:

our exploration team led by Dr Ramsay has achieved several successes. Notable achievements since the release of the last annual report include:

• Confirmation from drilling that the Ashmore 3 and 4 anomalies are diamond bearing kimberlites.
  
• Two additional anomalies have been defined as Ashmore 5 and 6 from ground-based geophysics . . .
  
• Diamond recoveries from drilling continue to be encouraging . . .
  
• Identification of a new outcropping silicified kimberlite zone in close proximity to Seppelt 1.
  
• Confirmation that the diamondiferous Seppelt 2 pipe is sited within a 300 metre diameter (9 hectare) geophysical anomaly.
  

Then again in the 1998 report there was a much more extensive exploration report reproduced at paragraph 269. At 270 the 1999 annual report is set out again with the exploration activities in 271. Then in the context of that, your Honour, what the company did was it capitalised as an asset in its balance sheet the exploration expenditure. It did not write it off as wasted or valueless.

FRENCH CJ: This was something called a deferred exploration asset, was it not?

MR BENNETT: That was a note to the account, wrote it as an asset in the accounts and - - -

FRENCH CJ: Something that is going to have the capacity to vanish.

MR BENNETT: Perhaps. The vagaries of the exploration are that further drilling may cause one to revise the - - -

HAYNE J: The accounts, Mr Bennett.

MR BENNETT: I am sorry?

HAYNE J: The vagaries of accounts rather than the vagaries of the exploration is what we are talking about.

MR BENNETT: Perhaps, but the important point is that Striker led at trial only the evidence of its 1998 and 1999 annual reports. It did not lead evidence. This moves to the second point that is criticised against us that Justice Buss deals with authoritatively, we would say, with respect. Striker did not say in 2000, after we had done this ex post facto assessment of the value of Ashmore, having carried out the trial drilling sampling and determined although there are diamonds, they are not economically recoverable that we will go back and we will write off all our exploration expenditure. So there was no evidence that they ever amended their accounts to write off the exploration expenditure. So they went to trial standing at trial on the basis that they claimed in their accounts to the investing public and to the community at large, on a true and fair view of the assets of the company, that these were assets; they had value.

HAYNE J: Be it so, was there an argument at trial to the contrary of the assertion that the expenditure was wasted? What troubles me is what appears at paragraph 299 of Justice Buss’ judgment where he says, as I read it, that the issue of causation was not raised and seems not to have been raised in the courts below and yet you seek leave to come to this Court to focus on the issue of causation. Now, is there a difficulty there? If there is, how do you surmount it?

MR BENNETT: We do not focus on causation. We do not ask the Court to focus on causation. We ask the Court to focus on the question of principle, that the question of recoverable ability of damages in contract law depends on factors other than causation. So you have got the reasonable foreseeability test in Hadley v Baxendale adopted by the Court in Amann. So, when one looks at the two heads of damage of reliance, loss and expectation loss, reliance loss has a as a fundamental gravamen reliance upon the promise of the promisor that is breached giving rise to the claim. Here the consequential loss cannot fall within reliance loss.

HAYNE J: But would we have to consider that point of principle from the premise that (a) there was a loss and (b) that loss was caused by?

MR BENNETT: But for the breach the expenditure would not have been incurred. But it was incurred with knowledge of the breach is the point we raise and once you incur expenditure with knowledge of the breach, you move outside the accepted areas of contractual damage. You enter into an area where voluntary incurring of expenditure, even if it is said to have been caused by the breach, I had a breach and so I had to go and take steps to deal with it. Someone was to loan me money to buy a new house. They did not. I renovated my house and the renovation did not add to the value of my house. Can I claim the renovation cost that I incurred? Those are issues where the “but for” test of causation, if assumed, gives rise to a head of damage not recognised at law and the error in the Court of Appeal majority decision lies in that point.

We accept Appeal Justice Buss’ caveat in paragraph 299 in relation to causation, but it is not, we think, germane to the point that his Honour accepted in his clear passage where his Honour deals with the question of damage at paragraphs 289 to 296, his Honour summarising that at paragraph 297 on page 277. The question in respect of whether or not the wasted expenditure was of value, in relation to that we adopt our written submissions which effectively, your Honour, adopt the reasoning by Appeal Justice Buss. If I can take your Honours to the passage at page 273 of the application book at paragraph 288 it goes through and reviews the evidence through into 295 and the passage that I showed you. Fundamentally at 296 what his Honour says – and this stands as against the respondent – that:

there was no evidence at the trial of the extent to which the expenses related wholly or partly to the Ashmore tenements . . . or to other tenements held by Striker or in which it had an interest. Striker carried the onus of proving the nature and amount of any ‘wasted’ or ‘valueless’ expenditure caused or contributed to by AGF’s breach. The onus did not shift.

Now, that is a fundamental answer, we say, to the second question that is posed by my friend in his responsive argument. It was not for us to show it was of value. The fact of the trial, the onus at trial was on the respondent to show that the expenditure was wasted or valueless, that did not shift. There was no attempt made by the respondent to show that the expenses related particularly to Ashmore tenement alone or wasted or valueless or the nature of holding costs. In those circumstances, for his Honour to have dealt with it in that fashion, is wrong.

Can I say that all of the judges in the Court of Appeal held that the learned trial judge erred in his assessment of damage. You find that error at page 178 in paragraph 37 where his Honour, on a frolic of his own, can I say, with respect, said at page 178 – you see it referred to in Justice McLure’s judgment at paragraph 37. Then the error is at page 125 in paragraph 255. If I can take you 125 of the application book. The learned trial judge said:

There was no accounting evidence, expert or otherwise, about the conventions followed in the treatment of exploration expenditure . . . That may well be appropriate when a productive mine or other profitable operation is established because of the potential deductibility of such expenditure against income when derived. For a publicly listed exploration company the perception of its value is largely determined by the market price of its listed securities, rather than by the carrying value of its assets –

Her Honour, at paragraph 37 on page 178 accepts that the perception of value comment:

has no foundation in the evidence (nor does logic or experience compel that conclusion).

Similarly, it was criticised by Appeal Justice Buss.

HAYNE J: At the same paragraph of the trial judge’s reasons in the passage immediately following – that is page 125, paragraph 255 at about line 15 or thereabouts:

I therefore do not see any inconsistency or lack of candour in Messrs Dodd and Hart maintaining that, despite the capitalisation of that expenditure in the accounts, it resulted in no real benefit to the company and should be treated as a loss . . . I accept the explanations of the plaintiff’s witnesses that this expenditure was necessarily incurred and paid, at a time when . . . it could not be turned to value by the plaintiff.

Now, where lies the error in that conclusion?

MR BENNETT: By the use of the word “therefore” importing as a false premise that the value of a publicly listed company is determined by its market price, not by its assets. So his Honour then explicates his reasoning process by writing “I therefore do not see any inconsistency”. The inconsistency of them saying, “We have signed accounts as director and secretary” – Hart the secretary – “those accounts have been adopted and published as a true and fair view of the value and we have adopted as a value something we now claim as a loss”, had been put to his Honour as an inconsistency. His Honour resolves that by saying, “by a false premise”, accepted as such by the Court of Appeal.

So the Court of Appeal then deals with it afresh and deals with it, in particular Appeal Justice McLure deals with it in a short passage from 39 and 40 of pages 178 to 179. At 42 she accepts there is merit in the particulars of error, whether it affects the outcome she then turns to consider, at the foot of 42. Then at 44, with respect to her Honour, what she

does is confuse the fact that the expenditure has not been confined to the Ashmore tenement and says:

In light of the trial judge’s finding that but for the breach, Striker would have conducted the Ashmore trial mine instead of incurring the claimed exploration expenditure, the value of the claimed exploration expenditure should be assessed in hindsight having regard to the knowledge obtained from the Ashmore trial.

Well, that might work for Ashmore, but it does not work for Seppelt and it does not work for the other tenements, we say:

When viewed in that light, I am not persuaded the trial judge erred in accepting the evidence of Mr Hart and Mr Dodd to conclude that the claimed exploration expenditure was of no benefit or value to Striker. For the purpose of valuing the tenements, exploration expenditure is relevant to an assessment of their prospectivity. It is a speculative assessment of potentiality . . . The Ashmore trial mine provided a negative answer on prospectivity in the then prevailing economic conditions.

So it had value up until 2000, in 2000 when the results of the trial mines were assessed, then it could have been written off, but there was no evidence it had been written off. There was no material for the learned trial judge nor for the Court of Appeal to determine that the company had written it off at the expression only of opinion. The fundamental question though is whether consequential damages arising after the breach are claimable in these circumstances. That is a question, we say, of substantial importance because to so hold and to confirm the Court of Appeal decision will extend the scope of contractual damages. May it please the Court.

FRENCH CJ: Thank you, Mr Bennett. Yes, Mr Williams.

MR WILLIAMS: Your Honours, we submit special leave should not be granted. There is no special leave question. My learned friend’s formulation of the special leave issues appears at page 323 of the application book. There are two issues stated. The two questions really give rise to the same issue and, in our submission, they are based on a misapprehension. The misapprehension is that what has been allowed is reliance damages when, in fact, it is not. Our response on that issue appears in the summary of argument, paragraphs 27 to 31.

Each of the trial judge and the members of the Court of Appeal had something to say about damages. None of them expressly stated that the damages that were being allowed were reliance damages. As stated in paragraph 28, the critical aspect of the relevant findings is the wasted exploration expenditure was not made in reliance upon performance of a contract which is breached, but was made as a consequence of a breach having occurred.

Now, we also submit that special leave should not be granted on the basis that what is really at issue here are findings of fact, one of which was not even contested below or in the Court of Appeal and the other which has been fairly thoroughly dealt with by the trial judge and by the majority of the Court of Appeal. From what my learned friend has said, it would appear that the causation issue is no longer relied upon. Our response to that is in paragraph 18 of our summary of argument and I take it that my learned friend is conceding that is correct.

Could I then refer the Court to some of the reasons that we rely upon for the submissions we make. In the trial judge judgment at paragraph 252 it shows that Striker, when the applicant went into administration, reduced its monthly expenditure considerably and went into holding mode. His Honour concludes that:

The result of the trial mine at Ashmore, which was undertaken after March 1999, showed that there were diamond resources in the area but that it was not economic to exploit them and, consequently, further investment in those areas ceased. This meant that the decision not to mine or exploit these areas was deferred by approximately 18 months and that the extra holding and operation costs incurred before this conclusion could be reached proved to be of no tangible benefit to the plaintiff.

Reference has been made to paragraph 255 and I respectfully adopt the point behind the question put by Justice Hayne to my learned friend in respect - - -

HAYNE J: I am glad you can observe the point, Mr Williams.

MR WILLIAMS: I beg your pardon?

HAYNE J: I am glad you can observe the point I was making. I am not quite sure what it was?

MR WILLIAMS: Really? Well, the point is not that his Honour was found to have made an error in reaching a conclusion about how you would perceive the value of a publicly listed exploration company. The point was that there was nothing inconsistent with the view that the deferred expenditure in the balance sheet was of no value, no real benefit and should be treated as a loss in that it had been capitalised in the accounts. An explanation was given and it is referred to at length in the judgment of the reasons of Justice Buss as to the way this particular company treated expenditure. In Justice McLure’s reasons at paragraph 25 she deals with the causation issue in the first sentence and in the last sentence and she deals with the point my learned friend has been making to your Honours that:

Although the trial judge does not identify the ‘diamond resources’ or the ‘area’ to which he is referred in [252], it must in context mean all Striker’s diamond resources on its various tenements, not just the diamond resources on the Ashmore tenements - - -

FRENCH CJ: I think there was a finding by his Honour looking, in fact, at paragraph 242 at page 121 that the continuing exploration activity and expenditure was “within the contemplation of the parties”.

MR WILLIAMS: Yes and:

Striker would need to maintain and finance its administrative organisation –

That is dealt with reasonable extensively also in the reasons of Justice McLure. Justice Pullin at paragraph 55 refers to paragraph 252 in the trial judge’s reasons. He says:

I understand his Honour to be saying that if AGF had performed its contract and provided the funds, then the work at Ashmore would have been carried out 18 months earlier, found that the area was not economic, and then ceased incurring any further exploration costs. The award was for the wasted exploration costs.

Some idea of what was being done during the holding period can be derived from the part of the transcript referred to in the reasons of Justice Buss. It is a long paragraph 267, which starts on page 258, the relevant part is right at the end. In paragraph 291 Justice Buss says – and we challenge this – in the second sentence:

The evidence at the trial did not establish that Striker would never have incurred the expenses but for the breach.

I think that is contradicted by the findings of the trial judge and the other two members of the Court of Appeal. It says in the last sentence in that paragraph:

No claim was made by Striker for any loss attributable to the deferring of the Ashmore trial mine or the acceleration of exploration which was less significant or had a lower order of priority. The

expenses were not ‘wasted’ or ‘valueless’ by reason of AGF’s breach.

On the question of characterisation of the damages I would simply mention that it is dealt with in the trial judge’s account in paragraphs 230 to 239. He discusses consequential losses. In paragraphs 28 and 29 in Justice McLure’s reasons she plainly sees the losses as consequential and in Justice Pullin at paragraph 55 he similarly. Justice Buss discusses the nature of damages in paragraphs 276 to 282. He does not indicate any error of principle, but at 298 he acknowledges that:

the opinions expressed in evidence by Mr Dodd and Mr Hart as to the utility of the exploration expenditure carries some limited weight in favour of Striker.

The other members of the Court of Appeal and the trial judge had given considerable weight. So the issue on which my learned friend seeks to appeal really relate to matters of evidence and not principle. We rely on our written submissions in their entirety whether addressed or not.

FRENCH CJ: Thank you, Mr Williams. Yes, Mr Bennett.

MR BENNETT: If your Honours turn up page 271 of the application book and look to paragraph 280 of Appeal Justice Buss’s reasons for decision, the error and the point of principle is clearly identified and we draw issue with my friend’s suggestion that there is no identification by Appeal Justice Buss of the error in principle. The passage adopted from the joint judgment of then Chief Justice Mason and Justice Dawson in Amann Aviation was to deal with the question of wasted expenditure.

My friend says both the learned trial judge and Appeal Justices McLure and Pullin put it as wasted expenditure and the principle before this case was that McRae illustrates the proposition that a plaintiff has a prima facie case for recovery of wasted expenditure once it is established that the expenditure was incurred in reliance on the promise of the party in breach. This is not expenditure incurred in reliance on the party – promise of the party in breach. As his Honour Appeal Justice Buss accepts on a strict analysis of a “but for” test, it is incurred with knowledge of the breach not in reliance upon the promise.

So the question is whether or not the concept of wasted expenditure as consequential loss discussed in McRae’s Case and Amann Aviation extends beyond expenses incurred in reliance upon the promise of a party in breach and encompasses expenses incurred other than in reliance. That is the point of principle that we say arises in relation to the matter. That is the only point I wish to raise by way of reply.

FRENCH CJ: Thank you, Mr Bennett.

The applicant for special leave sued the respondent in the Supreme Court of Western Australia for breach of an agreement whereby the respondent alleged that it suffered loss as a result of the breach in a number of different ways. One head of claimed loss was what it alleged to be expenditure it had made to preserve mining tenements which but for the failure of the underwriting and capital raising it would not have made.

There appears to have been no dispute at trial or on appeal to the Court of Appeal in Western Australia that the respondent made the expenditures in question. No argument appears to have been advanced at trial or on appeal to the Court of Appeal that the expenditures would not have been made but for the breach of the underwriting agreement.

The applicant seeks special leave to appeal to this Court to allege that its breach of the underwriting agreement did not cause loss of a kind recoverable as damages. Having regard to the way in which the trial and appeal to the Court of Appeal were conducted, no disputed question of general principle would conveniently fall for consideration if special leave to appeal were to be granted.

It is not in the interests of justice generally or in this particular case that there be a grant of special leave to appeal. Special leave will be refused.

MR WILLIAMS: May we have costs, your Honour?

FRENCH CJ: Can you resist that, Mr Bennett?

MR BENNETT: No, your Honour.

FRENCH CJ: Special leave will be refused with costs.

The Court will adjourn briefly to reconstitute for the next matter.

AT 11.51 AM THE MATTER WAS CONCLUDED