FEDERAL COURT OF AUSTRALIA

CORPORATIONS LAW - Loss or damage an essential component of  damages claim under s 232(8) of the Corporations Law for breach of director's duties.

CONTRACTS - Loss of chance - Whether sale of disputed interest compensable for loss of chance - whether a loss of "some value" occasioned.

Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 (Followed)

Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 285 (Followed)

COSTS - discretion to award - award of nominal damages not a basis for costs as of course.

Hughes v Western Australian Cricket Association (Inc) (1986) ATPR 40-748 (Followed)

Alltrans Express Ltd v CVA Holdings Ltd [1984] 1 WLR 394 (Followed)

Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873

(Followed)

Beaumont v Greathead (1846) 2 CB 494

Australian Conservation Foundation v Forestry Commission (1988) 81 ALR 166 (Followed)

Henderson v Amadio Pty Ltd, unreported FCA 22 March 1996, Heerey J (Followed)

NEXUS MINERALS NL v BRUTUS CONSTRUCTIONS PTY LTD and BOLESLAW WILLIAM KOZYRSKI

WAG 137 of 1995

SPENDER, R D NICHOLSON, FINN JJ

PERTH

10 SEPTEMBER 1997

On appeal from a single Judge of the Federal Court of Australia

MINUTES OF ORDER

THE COURT ORDERS THAT:

The appeal be dismissed with costs.

Note:    Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

On appeal from a single Judge of the Federal Court of Australia

REASONS FOR JUDGMENT

This is an appeal from a decision of a single judge of this Court (Carr J), dismissing an application by Nexus Minerals NL (‘Nexus’) against the respondents, on the basis that Nexus had not proved any loss or damage.

At all material times the appellant, Nexus, was known as Dry Creek Mining NL.  Consistently with the trial judge’s reasons it will be referred to here as “Dry Creek”.  The company was the minority party in a gold-mining joint venture agreement with Samantha Gold NL (“Samantha”).  The first respondent Brutus Constructions Pty Ltd (“Brutus”), entered into a management agreement with Dry Creek in January 1991 under which it agreed to provide management and consulting services to Dry Creek as well as the personal services of Mr Kozyrski, the second respondent, who was to be and was appointed managing director of Dry Creek.

The claims made by Dry Creek against the two respondents that are of relevance to this appeal were for damages for a loss said to have been sustained when it sold its interest in the joint venture to its co-venturer Samantha.  That loss was alleged to have resulted from Brutus’ breach of the management agreement contract and from Mr Kozyrski’s breach of his duty of care and diligence to Dry Creek imposed by s232(4) of the Corporations Law.  The sale itself was in settlement of proceedings initiated by Dry Creek against Samantha in the Supreme Court of Western Australia in consequence of action taken by Samantha under the joint venture agreement to dilute Dry Creek’s proportional interest in the venture.

The trial judge found that Mr Kozyrski so conducted himself as both to contravene s232(4) and to cause Brutus to be in breach of the management agreement.  These breaches notwithstanding, his Honour then found that Dry Creek had not established that it suffered any loss when it sold its interest to Samantha or that it lost a chance that was compensable within the principles outlined in Sellars v Adelaide Petroleum NL (1994) 179 CLR 332.

Accordingly the trial judge ordered that the application be dismissed and that the matter of costs be adjourned to a date to be fixed.  Before any order as to costs was made or any order was entered, the applicant sought, under O35r1 and O35r7 of the Federal Court Rules, orders inter alia, that it be declared that Mr Kozyrski breached his duties as a director of Dry Creek and Brutus, its contract;  that Mr Kozyrski be ordered to pay nominal damages to Dry Creek;  and that the respondents pay 75 per cent of Dry Creek’s costs of the application (save for certain interlocutory costs).  The trial judge declined to make the declarations or orders sought.  Having dismissed Dry Creek’s application his Honour concluded that costs should follow the event.

The essence of Dry Creek’s appeal to this Court (as prosecuted) is that the trial judge was incorrect (i) in holding that damage was an essential element of the breach of contract and s232(4) claims;  (ii) in not making a declaration of breach of contract and/or of awarding nominal damages therefor;  (iii) in finding that no compensable chance (or opportunity) had been lost as a result of Mr Kozyrski’s conduct;  (iv) in finding that no loss had been suffered on the sale of the joint venture interest to Samantha;  and (v) in refusing the applicant a proportionate part of the costs of the application.

It is not disputed in this appeal that Mr Kozyrski so conducted himself as to contravene s232(4) of the Corporations Law and to cause Brutus to be in breach of its management agreement with Dry Creek.  Accordingly it is sufficient to set out a truncated version of the relevant events.

Dry Creek owned certain mining tenements near Eundynie in Western Australia.  In 1989 it entered into a joint venture agreement with Samantha under which Samantha on incurring a particular level of exploration expenditure would acquire an 80 per cent participating interest in the tenements.  Both companies appointed persons to an Operating Committee, Mr Kozyrski being one of Dry Creek’s two appointees.  Samantha was to manage the joint venture, Dry Creek was to reimburse Samantha for 20 per cent of Samantha’s expenditure on the tenements, and under the joint venture agreement Samantha could dilute Dry Creek’s interest in the tenements in the event that Dry Creek did not pay its share of such expenditure.

In consequence of such a failure to pay, Samantha’s solicitors wrote to Dry Creek on 7 October 1991 enclosing a notice purporting to dilute Dry Creek’s interest from 20 per cent to 11.8 per cent.  On 21 October 1991 Dry Creek sued Samantha in the Supreme Court of Western Australia seeking relief against forfeiture in respect of the dilution of its interest in the tenements.  Those proceedings were settled in April 1992.  The terms of the settlement were that Samantha acquired Dry Creek’s interest in the tenements (defined as a 20 per cent interest for the purposes of the Agreement for Sale of Joint Venture Interest executed on 9 June 1992) for the sum of $1.6 million.

The applicant’s Statement of Claim alleged that in consequence of the breach of contract and the contravention of s 232(4):

“the First and Second Respondents have caused the Applicant loss and damage.

PARTICULARS OF DAMAGE

            (a)        as at 7 October 1991 the Applicant was the beneficial owner of a 20 % interest in Eundynie, worth $3.1 million;

            (b)        by reason of the dilution of its interest, the Applicant was left with an 11.8 % interest in Eundynie;

            (c)        in 1992 the applicant sold its 11.8 % interest in Eundynie to Samantha for the sum of $1.6 million;

            (d)        in the premises the dilution occasioned by the actions of the first and Second Respondents resulted in a loss to the Applicant in the sum of $1.5 million.

            AND THE APPLICANT CLAIMS

            against the First and Second Respondents

            (a)        damages

            (b)        interest

            (c)        costs”

We would note that, as particularised, the “loss and damage” said to have been suffered was not the loss of some commercial opportunity, nor in the loss of continued participation in the joint venture.

We turn to each of the five matters of appeal as earlier set out.

1.         The Causes of Action and Damage

The trial judge found Mr Kozyrski guilty of some number of defaults which he particularised, and as already noted, the trial judge concluded:

            “not only did [Mr Kozyrski] contravene s232(4) of the Corporations Law but he caused Brutus to be in breach of the Management Agreement.”

The question to which the trial judge then turned was whether either breach caused Dry Creek “actual damage”.  In dealing with this matter his Honour accepted that there was “a direct causal link between Mr Kozyrski’s defaults ... and the service by Samantha of the dilution notice”.  That notice in turn led to the Supreme Court proceedings and then to their settlement.  The loss the applicant alleged it suffered, as noted in the particulars set out earlier in these reasons, was that sustained on the sale of its joint venture interest to Samantha.  Substantial damages were claimed.

The trial judge found that Dry Creek had not suffered any loss.  In consequence he concluded that:

            “as damage is an essential element of each of the causes of action upon which it relies, Dry Creek’s application must be dismissed.”

In our view the “damage” to which the trial judge referred was “actual damage” that would sound in an award of compensatory damages.  In our respectful opinion, his Honour was not making, or intending to make, a technically precise statement of law about the two causes of action in question.

A damages claim brought under the then s232(8) of the Corporations Law in respect of the s232(4) contravention (no other basis was suggested as founding the claim for breach of director’s duties), requires proof of loss or damage before the statutory cause of action is made out:  s232(8).

It is, of course, otherwise where a breach of contract has been established.  In such a case, a right to claim damages arises on proof of the breach itself, albeit only nominal damages if the claimant is unable to prove actual loss or damage suffered by reason of the breach:  see eg Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286.  We do not understand that his Honour was intending to suggest to the contrary.  In our view, his Honour was making an accurate but colloquial statement about the true character of the claims Dry Creek had prosecuted.

We accept that Dry Creek was technically entitled to an award of nominal damages.  For reasons which appear later, such an award would not have been of practical significance in these proceedings.  It is not apparent that the applicant sought such damages in the contract claim, although such damages were sought (inappropriately) in the Corporations Law claim at the later hearing on the orders.

2.         The Failure to Make Declarations

At the later hearing on the orders, Dry Creek sought, but was refused, declarations that Mr Kozyrski was in breach of s232 and, seemingly, that Brutus breached the Management Agreement.  Though his Honour appears only to have dealt with the matter in relation to Mr Kozyrski, the circumstances were not such that in either case it would have been appropriate after the handing down of his Honour’s principal judgment to have amended the pleadings to insert a prayer for declaratory relief:  cf Metcalfe v NZI Securities Australia Ltd, unreported, FCA, 29 June 1995, Sackville J.

The declarations were sought in the context of submissions relating to costs.  Of this his Honour said:

            “As I say, the applicant came to the court seeking damages and nothing else.  That was the basis upon which the proceedings were conducted and that was the issue in respect of which I gave judgment.  As I have just mentioned, I found and held that no damage had been sustained.  I infer that the applicant is seeking a declaration as a basis upon which to sustain its application for costs and to further that application for costs orders.  I decline to make a declaration, first, because the applicant did not seek a declaration;  secondly, because all of the proceedings were conducted on the basis that the only matter in issue was damages;  thirdly, because of the inference which I had made that the purpose of obtaining the declaration is to found and further the costs orders;  and fourthly, because no good reason has in my opinion been put forward to justify the making of a declaratory order.”

There is no error in his Honour’s exercise of discretion in this matter.

3.         The Loss of an Opportunity

Though the pleadings do not allege that the loss and damage suffered by Dry Creek were the loss of a commercial opportunity, the trial judge nonetheless adverted to this matter in this way:

            “I do not consider that Dry Creek has established that by reason of Mr Kozyrski’s defaults which gave rise to Brutus’ breach of the Management Agreement (being the same conduct which constituted his breach of duty to Dry Creek), it lost a chance which was compensable within the principles outlined in Sellars v Adelaide Petroleum NL (1994) 120 ALR 16.  If anything, the evidence disclosed that Mr Kozyrski’s defaults presented an opportunity for Dry Creek to sell its interest in the joint venture for a substantial cash payment.”

In this Court the appellant has submitted that his Honour should have found that it had proved on the balance of probabilities that it had sustained some loss or damage being the dilution of its interest in the joint venture and the subsequent deprivation of the commercial opportunity to stay in the joint venture - even if his Honour was then to find he was unable to ascertain the value of that opportunity.

The trial judge did note in his reasons that Mr Bay, an executive director of Dry Creek, gave evidence that, but for the dilution of its interest, Dry Creek “was keen to stay in the joint venture”.  This said, it is not surprising that his Honour made no finding of loss of a commercial opportunity.  This was not the loss pleaded or particularised.  No evidence was advanced for the purpose of assigning (albeit even in a quite imperfect way) “some value” to that opportunity:  Sellars v Adelaide Petroleum NL, above, at 355.  Such evidence of loss as was adduced related to the loss said to have been suffered on the sale of Dry Creek’s interest.  Put shortly this “loss of opportunity” was not a matter of actual contention in the proceedings.  His Honour cannot be faulted for dealing with the matter in the way he did.

We would add that, given the amount obtained from the sale of the joint venture interest and the positive advantages to Dry Creek accruing from the settlement, some of which are referred to in his Honour’s reasons, such opportunity as was lost in being “forced” to leave the venture was compensated for by, and in consequence of, the settlement.  Dry Creek, as a result of the events of which it complained, may have found itself in a position other than where it wished itself to be.  But that “loss” was rendered “negligible” as a compensable one because of the advantageous position in fact it achieved, on his Honour’s findings, through the buy-out.  It was not, relevantly, a loss of “some value” for the purposes of attracting contractual damages.

4.         The No Loss Finding

Given the loss claimed to have been suffered because of Dry Creek’s sale of its interest, the trial judge had to decide:

            “whether it has been established on the balance of probabilities that, if there had been no dispute over whether Dry Creek had a 20 % interest in the Joint Venture, that company could have obtained more than in fact it did obtain for that interest.  In other words, would a willing but not over-anxious purchaser (including Samantha) be prepared to have paid more than the amount received by Dry Creek for its interest?”

His Honour properly recognised that it might reasonably be thought that an undisputed entitlement to a 20 per cent interest would clearly be worth more than an interest the subject of litigation.  Nonetheless he concluded that:

            “Dry Creek has not established on a balance of probabilities that it suffered any loss when it sold its interest in the Joint Venture to Samantha.”

A number of considerations informed this conclusion.

            (1)        Samantha was not called to give evidence of the basis on which it purchased at the price it did.

            (2)        While Mr Kozyrski expressed the opinion that Dry Creek’s interest was worth considerably more than $1.5 million, which the appellant presses as a statement against interest, his Honour did not accept that opinion, both because Mr Kozyrski was not shown to be an expert in valuing gold-mining tenements and because of his Honour’s general reservation as to Mr Kozyrski’s reliability.

            (3)        Reliance on the opinions of an expert, Mr Hemmings, called to establish the loss on the sale was found by the trial judge to be unsafe.

            (4)        A Dry Creek circular of June 1992 announcing the terms of settlement with Samantha pointed to the positive benefits of the settlement and did not suggest that Dry Creek had been forced to settle on unfavourable terms.

            (5)        A report of Messrs Judge Constable of 10 June 1992 in recommending the settlement to the shareholders of Dry Creek, again noted its positive effects.

            (6)        Although regarded as minor factors suggesting no loss was suffered, (a) the sale agreement itself recited that for its purposes Dry Creek’s interest was a 20 per cent one;  and (b) it was not until Brutus instituted District Court proceedings on 26 February 1993 against Dry Creek, that this application was made.

The challenge made to his Honour’s conclusion was based on the wrongful rejection of expert evidence and particularly Mr Hemmings.  It is submitted that that evidence should lead to a finding that a loss had been proved.

Between March and June 1992 Mr Hemmings prepared four draft valuations of Dry Creek’s 20 per cent interest in the joint venture.  These placed a reasonable selling price on that interest varying from $1.44 m (first draft), to $4.4 m (second draft), to $3.8 m (third draft) and, in justification of the settlement (fourth draft), to an endorsement as “fair and reasonable” of the settlement terms.

Mr Hemmings conceded that these various opinions were prepared for different purposes and thus reached different conclusions.  When it was put to him that he altered his calculations at the request of either Mr Kozyrski or the Dry Creek directors generally, he did not deny this.  He merely indicated he did not remember such a request being made.  His Honour found Mr Hemmings not to be entirely independent of Dry Creek.  And he found the fourth draft to have been prepared after a request that he prepare a report to shareholders “which would justify [the settlement] price”.

The appellant has challenged the trial judge’s rejection of Mr Hemmings’ evidence by pointing to what are said to be factual errors or unjustifiable conclusions in his reasoning: first, his Honour’s rejection of evidence concerning the alleged smaller quantum of the ore body on which the first draft - but not the later drafts - was said to be based (1,542,000 tonnes of gold bearing ore as opposed to 2,000,000 tonnes);  secondly, the finding that Mr Hemmings conceded he was asked to prepare a report justifying the settlement of the claim against Samantha;  and thirdly, the finding that Mr Bay told Dry Creek’s solicitors who in turn gave instructions to counsel that the value of the 8.32 per cent dilution was in the $600,000 to $700,000 range, a figure which when related to a 20 per cent interest, “corresponds remarkably”, in his Honour’s words, with the figure contained in the first Hemmings’ draft.

As to the first of these, we can find no error in his Honour’s finding.  While the summary to the first draft referred to 1,542,000 tonnes, his Honour related his finding to para 8.2 of the draft (which projects a 2 million tonne ore body) and to calculations based on it. 

The concession attributed to Mr Hemmings is soundly based on the evidence Mr Hemmings gave, which is set out:

            “And I put it to you that Mr Bay had a discussion with you prior to your preparation of the final report which is at 415 in which he advised you that he had - or rather Dry Creek had, settled dispute between it and Samantha Gold under which a sale of Dry Creek’s interest to Samantha Gold was going to be carried out.  Do you agree with that? --- Yes.

            And he also told you how much the settlement figure was, did he not? --- Yes.

            Now, I put it to you that he asked you to prepare a report that would justify that price to shareholders? --- I’m not sure whether it came through David Bay or Bob Kozyrksi.  It was one of the two.

            Sorry, are you agreeing with the proposition that you are asked to prepare a report that would justify the settlement price to shareholders? --- Yes.”

As to the valuation placed on the 8.32 per cent interest, this evidence attributed to Mr Bay was in fact contained in a letter forming part of the agreed tender bundle, though the truth of its contents was not agreed.  We do not consider this to be a matter of substance.  His Honour’s objection was by way of passing comment; it was not regarded as reliable evidence of the value of the interest itself.

There was evidence to warrant the conclusion to which his Honour arrived concerning Mr Hemmings’ evidence.  Moreover, that conclusion was in some degree based on his Honour’s appreciation of Mr Hemmings’ credibility.  We need not here repeat the well known principles governing interference by an appellate court with a trial judge’s finding of fact in such circumstances:  see Devries v Australian National Railways Commission (1993) 177 CLR 472 at 479.  There is no basis at all for suggesting that his Honour ‘misused this advantage’.

Further, the Judge Constable report (prepared to determine the fairness and reasonableness of the Samantha settlement) which explained what it understood to be the basis of the valuations arrived at by Mr Hemmings in his final draft, provides no basis for challenging his Honour’s conclusion as to Mr Hemmings’ opinions generally.

5.         Costs

The trial judge, as we have noted, ordered the applicant to pay the costs of the application.  In this it is claimed his Honour erred in that, in the contract claim at least, the applicant has succeeded to the extent of proving a breach of contract, albeit one that in the circumstances could result only in an award of nominal and not compensatory damages.  In consequence, it is said, there should have been an apportionment of costs between the issues of liability and of damages.

In refusing to apportion costs at the later hearing on the orders to be made, his Honour referred to (i) the general rule that costs follow the event;  (ii) the undoubted discretion the court has as to costs and in this he referred to the observations of Toohey J in Hughes v Western Australian Cricket Association (Inc) (1986) ATPR 40-748 at p48,136;  and (iii) the inappropriateness in some cases of dissecting costs when what is needed is a “broad judgment as to what is reasonable in the whole of the circumstances”.

His Honour accepted the respondents submissions on the interrelationship or overlap of the issues going both to loss and to the substantive claims and concluded that:

            “the matter of loss was of the very essence of whether the applicant was going to succeed or fail.”

The effect of his Honour’s order was that the applicant was not to be regarded as successful in the claims it brought notwithstanding that it succeeded in proving a breach of contract that could have resulted in an award of nominal damages.  To adapt the words of Stephenson LJ in Alltrans Express Ltd v CVA Holdings Ltd [1984] 1 WLR 394 at 401 in a like context, ‘the event of an award of nominal damages was not the event at which the applicant was aiming’.

In Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873, Devlin J made these observations on the award of costs to a plaintiff who could have recovered only nominal damages (at 874):

            “No doubt, the ordinary rule is that, where a plaintiff has been successful, he ought not to be deprived of his costs, or, at any rate, made to pay the costs of the other side, unless he has been guilty of some sort of misconduct.  In applying that rule, however, it is necessary to decide whether the plaintiff really has been successful, and I do not think that a plaintiff who recovers nominal damages ought necessarily to be regarded in the ordinary sense of the word as a “successful” plaintiff.  In certain cases he may be, eg, where part of the object of the action is to establish a legal right, wholly irrespective of whether any substantial remedy is obtained.  To that extent a plaintiff who recovers nominal damages may properly be regarded as a successful plaintiff, but it is necessary to examine the facts of each particular case.”

We respectfully agree with this:  it has “the force of common sense”:  Alltrans Express Ltd v CVA Holdings Ltd, above, at 401.  An award of nominal damages ought not today be regarded as a “peg on which to hang costs”: cf  Beaumont v Greathead (1846) 2 CB 494 at 499;  see McGregor on Damages, paras 404-405, Sweet & Maxwell, London, (1988, 15th Ed); see also Burrows, Remedies for Tort and Breach of Contract, 269-270, Butterworths, London (2nd ed 1994).

Given the discretion conferred in the award of costs by s43 of the Federal Court Act 1976 (Cth) (as to which, in the present circumstances, see Australian Conservation Foundation v Forestry Commission (1988) 81 ALR 166 per Burchett J at 169 and Henderson v Amadio Pty Ltd, unreported, FCA 22 March 1996, per Heerey J); the character his Honour attributed to the real nature of the applicant’s claims, a character with which we respectfully agree, and the conclusion that the applicant was not successful in those claims, there is no basis upon which an appellate court properly should interfere with the costs order made.

The appeal should be dismissed with costs.

I certify that this and the preceding eleven

(11) pages are a true copy of the Reasons for Judgment herein of the Court.

Associate:

Dated:  10 September 1997