In November 2009, the Federal Court of Australia (in Hine v
New South Wales Land and Housing Corporation  FCA 1242)
considered whether or not a legal remedy was available for
perceived injustices arising from a direction given by the
Department of Housing (DOH) to its contractors, in
circumstances where losses claimed were pure economic losses
arising from dealings in a wholly commercial context.
Mr Hine, the first applicant, was sole director and shareholder
of the second applicant, CPR Property Pty Ltd
(CPR), a company that carried out cleaning and
maintenance work as a sub-contractor on behalf of the first
respondent, the New South Wales Land and Housing Corporation
(the Corporation), a statutory body associated
with the DOH (the State of New South Wales was the second
respondent). O n 24 March 2004, the Corporation issued directions
to its contractors prohibiting them from using CPR as a
sub-contractor (relying on a contractual provision with its
contractors). Clause 16 provided that DOH was entitled to prohibit
a contractor from using any subcontractor if DOH 's
representative "reasonably regarded" that subcontractor
as incompetent, negligent or otherwise unsuitable.
The applicants alleged that the respondents had contravened s 42
of the Fair Trading Act 1987 (NSW) by using language that
misled CPR's contractors as to the permanency of the
prohibition against using CPR and that DOH 's
representative could not have reasonably regarded CPR to be
permanently incompetent at the time of making the statement. In the
alternative, the applicants argued that DOH 's
representative could not have had a reasonable basis for the
opinion that CPR was incompetent (in the first instance) and that
the representative's statement was therefore misleading.
Both arguments claimed that the subject directions, containing
misleading representations, caused loss to the applicants.
In finding that the respondents' representations were
reasonable (due to the state of mind of each of the respondents),
and dismissing the temporal distinction between permanent
unsuitability and temporary unsuitability, Jagot J commented that
the term "reasonable" was not, as the respondents
submitted, an opinion that is honestly held but rather a view that
is rational having regard to the circumstances known to the person
at the time. An assessment of rationality must therefore be
undertaken recognising the statutory structure within which a
company operates and the commercial realities in which it exercises
its functions. The mere fact that an opinion may turn out to be
incorrect does not prove that it was misleading when conveyed.
Jagot J held that the same applies to negligent misstatement.
Second, the applicants alleged that the respondents breached a
duty of care owed by them, namely, to exercise reasonable care and
skill in determining whether the contractual conditions of clause
16 had been fulfilled.
Her Honour rejected this claim, stating that "the fact that
the harm suffered by the applicants (loss of profits from the
business of CPR Property) was a reasonably foreseeable consequence
of the issue of the directions under cl 16... does not mean that
the respondents are liable in the tort of negligence to the
applicants". Each party was entitled to act in what it
perceived was in its best interests.
Finally, Jagot J addressed the tort of inducing a breach of
contract, which involves knowingly and intentionally interfering
with contractual relations (or the contractual rights of the
applicants), thereby causing damage to that person/s where there is
no sufficient justification for that interference. Her Honour
stated plainly that since the directions were authorised by clause
16, the direction could not be an unlawful interference between
contractors and subcontractors.
Her Honour dismissed the case entirely. The decision is a timely
reminder that, especially in a commercial context, legal remedies
are not always available to disgruntled parties.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
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