The central dispute concerned the ‘remoteness’ of compensation of $1,251,088.33 ordered by His Honour Gzell in respect of an undertaking given as to damages in litigation. The Court of Appeal upheld the appeal on the basis that Gzell J had erred in holding, in the terms of Hadley v Baxendale, that the loss claimed by European Bank was a natural consequence of the undertaking and should have found it was too remote (paragraph 21). The basis for the argument of remoteness was the loss was calculated by reference to differential amounts on the exchange rate in converting currency into euro’s over an extended period of time.
The High Court overturned the Court of Appeal decision.
Mr Evans was minded to institute an application for special leave to appeal to this Court. On 18 May 2004, upon him giving the usual undertaking as to damages, the Court of Appeal ordered that an amount of US$8,731,023.73 that, pursuant to its decision on the successful appeal by European Bank, otherwise was to be paid by Citibank to European Bank in discharge of its indebtedness, be paid into court to abide the outcome of the High Court application. Upon payment into court the amount was to be invested by the Prothonotary in an interest-bearing deposit with Westpac Banking Corporation.
The application for special leave to this Court was dismissed by Gleeson CJ and Gummow J on 11 March 2005. Thereafter by consent the Court of Appeal ordered that the Prothonotary pay the judgment debt to European Bank with the interest that had accrued. On 29 March 2005 the total sum of US$8,855,975.16 less US$3,077.71 was paid out to European Bank. The sum of US$3,077.71 was deducted pursuant to provision made by cl 13 of the Supreme Court Regulation 2000 (NSW).
On 11 May 2005 European Bank moved in the Equity Division for an order for the assessment of the amount of compensation payable by Mr Evans to it pursuant to the undertaking as to damages he had given to the Court of Appeal on 18 May 2004. The content of the expression “usual undertaking as to damages” was given by Pt 28 r 7(2) of the Supreme Court Rules 1970 (NSW) in the following terms:
“The ‘usual undertaking as to damages’, if given to the Court in connection with any interlocutory order or undertaking, is an undertaking to the Court to submit to such order (if any) as the Court may consider to be just for the payment of compensation, to be assessed by the Court or as it may direct, to any person, whether or not a party, affected by the operation of the interlocutory order or undertaking or of any interlocutory continuation, with or without variation, of the order or undertaking.”
The sum awarded by Gzell J as compensation principally was the product of increases in the value of the euro against the United States dollar, although it also included a component reflecting the higher rates of interest earned on euro accounts in the relevant periods. His Honour expressed the finding in terms of United States dollars at US$800,000, but subsequently, by a consent order made on 27 September 2007, required Mr Evans to pay A$1,251,088.33 as the Australian dollar equivalent of US$800,000.
The findings made by Gzell J are of great importance. They were made in circumstances where a bank was being kept out of its money, Mr Evans did not give evidence, and Ms Ihrig, a manager employed in Vanuatu by European Bank, was cross-examined at some length and her evidence was accepted by his Honour.
The findings made by Gzell J included the following:
(a) At the time the undertaking was given to the Court of Appeal, Mr Evans knew that European Bank, a Vanuatu bank carrying on business there, and dealing exclusively in foreign currencies, earned income from interest rates and from currency differentials and he understood the payment into court would have the effect of denying to European Bank the opportunity to convert the funds from United States dollars to other currencies so as to take advantage of market fluctuations in the values of such currencies;
(b) But for the interlocutory order made on 18 May 2004 European Bank would have converted in early July 2004 the funds invested by the Prothonotary from United States dollars to euros; and
(c) The amount European Bank would have made in addition to the interest earned on the Prothonotary’s account was US$800,000.
FRENCH CJ, GUMMOW, HAYNE, HEYDON AND KIEFEL JJ:
Their Honours held an undertaking is not to be approached on contractual principles, but rather equitable:
Reliance upon the rule in Hadley v Baxendale in an application such as that before Gzell J must be only by way of analogy. The point made by Farwell LJ in Re Hailstone; Hopkinson v Carter and repeated by Cussen J in Victorian Onion and Potato Growers’ Association v Finnigan (No 2) and by Neill LJ in Cheltenham & Gloucester Building Society v Ricketts is important here. It is that the undertaking as to damages is given to the court, for enforcement by the court; it is not a contract between parties or some other cause of action upon which one party can sue the other. It is worth repeating the obvious proposition that such an undertaking is not lightly to be given.
The undertaking as to damages and its origins in equity practice of the 19th century, if not earlier, were explained by Aickin J in Air Express and by Gleeson CJ, Gummow, Kirby, Hayne and Crennan JJ in Mansfield v Director of Public Prosecutions (WA). The authorities discussed in Mansfield included Russell v Farley, where Bradley J had explained the requirement of the undertaking as a response to the anxiety entertained by the court that otherwise its interlocutory order might lead to damage for which there could be no redress except by an order for costs.
In Air Express, Mason J said that there was little to be gained from an examination of the authorities dealing with causation of damage in contract, tort and other situations; the Court was better advised to look to the purpose which the undertaking as to damages is to serve and to identify the causal connection or standard of causal connection which is most appropriate to that purpose.
A party seeking an equitable remedy is required to “do equity” and this is the origin of the requirement that the party giving an undertaking as to damages submit to such order for payment of compensation as the court may consider to be just. Given its origin and application to varied circumstances in particular cases, the process of assessment of compensation cannot be constrained by a rigid formulation.
These considerations, bearing upon the interests of justice in the particular circumstances of the litigation, support the following statement by Aickin J in Air Express, made with respect to interlocutory injunctions, but applicable to the interlocutory order made by the Court of Appeal against European Bank. His Honour said:
“In a proceeding of an equitable nature it is generally proper to adopt a view which is just and equitable, or fair and reasonable, in all the circumstances rather than to apply a rigid rule. However the view that the damages should be those which flow directly from the injunction and which could have been foreseen when the injunction was granted, is one which will be just and equitable in the circumstances of most cases and certainly in the present case.”
The phrase “could have been foreseen” should be noted.
As to contract analogy
The primary judge approached the assessment of compensation on the basis that the criteria for the treatment of remoteness in cases of breach of contract would be appropriate and that it would be just for the payment of compensation to be assessed having regard to the rule in Hadley v Baxendale. This was in reliance upon what was said by Aickin J in Air Express Ltd v Ansett Transport Industries (Operations) Pty Ltd, repeating, amongst other things, references to Hadley v Baxendale by Brett LJ in Smith v Day.
Something immediately should be said respecting the significance for the issues in this appeal of the rule in Hadley v Baxendale. The rule is, of course, associated with the assessment of damages in actions for breach of contract. The principle with respect to damages at common law for breach of contract recently was confirmed by this Court in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd as that stated by Parke B in Robinson v Harman. The plaintiff is to be placed in the same situation with respect to damages, so far as money can do it, as if the contract had been performed.
As Toohey J remarked in The Commonwealth v Amann Aviation Pty Ltd, the rule in Hadley v Baxendale does not detract from what was said in Robinson v Harman. The rule is concerned with the question of remoteness and marks out the limits of the heads of damage for which the plaintiff is entitled to receive compensation. In the same case, McHugh J said of Hadley v Baxendale that the rule is a limit on, rather than a ground of, liability, marking out the boundary of the liability for loss or damage caused by a breach of contract.
The formulation of the rule in Hadley v Baxendale states the entitlement of the plaintiff to recover such damages as arise naturally, that is, according to the usual course of things, from the breach of contract, or such damages as may reasonably be supposed to have been in the contemplation of both parties concerned at the time they made the contract as the probable result of the breach. In The Commonwealth v Amann Aviation Pty Ltd Mason CJ and Dawson J, with reference to the speeches of Lord Reid and Lord Upjohn in C Czarnikow Ltd v Koufos, said that the two limbs of the rule in Hadley v Baxendale represent the statement of a single principle and that the application of that principle may depend on the degree of relevant knowledge possessed by the defendant in the particular case. Lord Reid had used the expression “on the cards”.
On the inquiry before Gzell J the first question was “What is the loss that is now alleged?”, the second “Did that loss flow directly from the order of 18 May 2004?” and the third “Could the loss sustained have been foreseen at the time of that order?” The inquiry presented by the third question is an inquiry as to whether a loss of the kind actually sustained could have been foreseen. Contrary to the submission by the respondent, Mr Evans, the inquiry is not as to whether the actual loss suffered was foreseen at the time the undertaking was given. In the present case there was a finding by the primary judge, as indicated above, that the loss directly flowed from the order and his Honour further found that the loss could have been foreseen. That result should not have been disturbed.
Brisbane Barrister – David Cormack