In our August publication we discussed the case of Wealthsure Pty Ltd v Selig27in the context of the Federal Court's application of the proportionate liability regime.28 We now take a look at how the approach adopted by the Federal Court in that case and the approach adopted by the Supreme Court of Queensland in the case of Jamieson & Ors v Westpac Banking Corporation29 provide some useful guidance on claims for damages made on a 'no-transaction' basis.
Judgment in Wealthsure
In 2004 and 2005 Mr and Mrs Selig (the Seligs) invested $450,000 in Neovest Ltd. This was on the financial advice of Mr Bertram, who was the authorised representative of Wealthsure Pty Ltd (Wealthsure). The investment was part of a negative gearing strategy concerned with the purchase of three properties in the suburb of Wynnum (the Wynnum units).
The investment failed and the Seligs commenced Federal Court proceedings against Mr Bertram and Wealthsure (among others) seeking damages arising from, and as a consequence of, the lost investment.
At first instance judgment was entered in the Seligs' favour and damages were assessed in the sum of $1.7 million. The basis of this assessment was to return the Seligs to the financial position they would have been in had they not proceeded with the investment, ie a 'no-transaction basis'.
The award of $1.7 million comprised the initial investment, transaction costs, borrowing costs, refinancing costs and loss of equity and capital arising from the purchase of the Wynnum units and the forced sale of properties owned by the Seligs prior to receiving the investment advice. The award also included an interest component in the approximate sum of $750,000.
Wealthsure and Mr Bertram appealed against the decision at first instance. Of most relevance was the appellants' assertion that the judge at first instance should have found that the Seligs had not established any loss as a result of the investment advice because they did not prove what they would have done in the absence of the proven breaches. They submitted that the Seligs were not entitled to damages on a no-transaction basis because the evidence indicated that once the Seligs entered into contracts to purchase the Wynnum units they had no option other than to proceed with the investment because no alternative investment strategy would have earned sufficient income to meet the mortgage payments on the Wynnum units.
The appellants referred to the cases of BHP Billiton (Olympic Dam) Corporation Pty Ltd v Steuler Industriewerke GmbH (No 2)30 and Copping v ANZ McCaughan31 in support of their appeal. In the former case the Victorian Supreme Court declined to award damages to the applicant because the applicant had not proved what it would have done had it not contracted with the respondent as a result of the respondent's misrepresentation. In the latter case the Full Court of the Supreme Court of South Australia upheld the trial judge's finding that the plaintiffs were only entitled to nominal damages in consequence of their reliance on the defendant's misrepresentation. This was on the basis that, even in the absence of the misrepresentation, the plaintiff would still have borrowed money offshore in the same way and suffered the same losses.
The Federal Court of Appeal consisting of Mansfield, Besanko and White JJ did not agree with the appellants' submissions on this issue and instead found that the judge at first instance did turn his mind to what the Seligs would have done had it not been for the appellants' breaches of duty. That is, "if the plaintiffs had been properly advised, they would not have engaged in negative gearing". Besanko J stated at :
"...it is in my opinion incongruous for Wealthsure and Mr Bertram to content that, had they not breached their duties by the advice which they gave with respect to the investment in Neovest, the Seligs would still have embarked on some other high risk and inappropriate investment".
Aside from finding that the judge at first instance had erred in his calculation of compound interest, the appeal was dismissed.
Judgment in Jamieson
In May 2007 Mr and Mrs Jamieson (the Jamiesons) made investments based on a written statement of financial advice prepared by Mr Tindall, a financial planner with Westpac Bank (Westpac). The first recommended strategy involved the Jamiesons borrowing $5 million from Macquarie Bank for a 3 year term to be invested in a managed investment fund. The second recommended strategy involved the Jamiesons borrowing a further $600,000 from Westpac to make contributions to a self-managed superfund which would invest the funds in self-funding instalment warrants.
Both strategies failed and the Jamiesons commenced proceedings against Westpac alleging breach of contract, negligence and contraventions of the Australian Securities and Investments Act 2011 (Cth) (the ASIC Act). The Jamiesons claimed damages on a no-transaction basis, alleging that, but for Westpac's misleading conduct, they would not have made the investments.
Although Jackson J did not consider that the ASIC Act had been contravened, he did find that Mr Tindall acted in breach of contract and was negligent in several respects.
On the issue of causation Jackson J acknowledged that the claim was brought on a 'no-transaction' basis and identified that the relevant question was whether the Jamiesons would not have made the recommended investments if they had not been given the negligent advice. Interestingly, Jackson J rejected Mr Jamieson's evidence as to his intentions at the time of receiving Mr Tindall's advice as being "completely unbelievable".32 Nonetheless, Jackson J found that the Jamiesons would not have made the investments had they been fully informed and he concluded that "the found breaches of contract and negligence in relation to the [investments] constituted a necessary condition of the harm alleged".33
On the issue of the measure of damages Westpac contended that the Jamiesons did not prove any recoverable loss because:
- the applicable measure of loss is calculated in accordance with the rule in 'Potts v Miller'34 as the difference between the price paid and the value of what was acquired at the time of making the investments, and that loss was nil;
- Mr Jamieson would have entered into some other similar transaction in any event and he was required to prove what that the alternative transaction was.
Jackson J rejected both of these propositions.
On the application of the rule in Potts v Miller, Jackson J rejected Westpac's submission that the price paid by the Jamiesons for the investments was equal to the value of the investments. Since the Jamiesons would not have made the investments but for the breaches of contract and negligence, it was open to the Court to assess the measure of the Jamiesons' losses by reference to a comparison between the actual losses suffered by the Jamiesons and the past hypothetical case had they not made the investments. Jackson J opined that this was not necessarily inconsistent with the rule in Potts v Miller, which was "intended to operate as a methodology to assess compensation on the principle of restoring the plaintiff to the equivalent economic position they would have been in if they had not acted on the fraudulent inducement".35
With regard to Wespac's contention that the Jamiesons would have entered into an alternative transaction and had failed to prove the alternative investment, Jackson J resolved this issue by reference to the case of Kenny & Good Pty Ltd v MGICA (1992).36 In that case Kirby and Callinan JJ rejected the submission that the application of the rule in Potts v Miller had the effect that the plaintiff could not recover the losses it sustained when security received by it in respect of a mortgage proved to be inadequate some years after it had advanced the loan. Jackson J considered that the analogy between the Jamieson's position and the case of Kenny & Good was "sufficient to conclude that the claimed loss could be recoverable, as a matter of principle".37
Turning to the issue of quantum, Jackson J drew a distinction between a claim for damages based on a loss of opportunity to make a profit and a no-transaction claim. In the case of a lost opportunity claim the assessment of the past hypothetical scenario to be compared with the actual facts takes account of various contingencies and risks that may affect the quantification of damages. That is, the amount of damages is discounted depending on the degree of the likelihood of the past hypothetical scenario.
In the case of a no-transaction claim Jackson J stated that a plaintiff who can prove that the defendant's wrong caused loss of money invested will usually receive an award of damages measured by the full amount of the difference between the hypothetical scenario and the actual facts.
In terms of the actual facts pertaining to the Jamiesons, Jackson J formed the view that had Mr Jamieson not invested in the strategies recommended by Wespac it is more likely than not that he would have made an agribusiness investment similar to those he had made in previous years. The evidence was that this alternative investment would have been unprofitable and there would have been a loss. Accordingly, Jackson J considered that the Jamieson's claim for damages should be reduced to reflect the outcome of that hypothetical alternative investment.
The judgments in Wealthsure and Jamieson demonstrate that when a claim is made on a no-transaction basis the success or failure of that claim is influenced by the plaintiff's ability to demonstrate that they would not have entered into the unsuccessful transaction, but for the defendant's actionable conduct.
Further, where the plaintiff is able to overcome that hurdle the claim will not be defeated solely by reference to the rule in Potts v Miller. To the contrary, the judgment in Jamison demonstrates that the courts may be willing to interpret the rule in Potts v Miller in such a way as to encompass claims made on a no-transaction basis.
However, when contrasting the economic position that the plaintiff is faced with against the hypothetical position the plaintiff would have been in the absence of the defendant's wrongful conduct, the courts may factor in hypothetical alternative investments as a means of off-setting the losses claimed.
Finally, the Wealthsure decision demonstrates that once a plaintiff establishes that it is entitled to damages on a no-transaction basis, the award can not only encompass the lost investment itself, but also the consequential losses flowing from the lost investment.
1 NSWCA 476, per Macfarlan JA at
2See  NSWCA 476, per Beazley P at  for her Honour's characterisation of the duty of care
3 NSWCA 476, per Macfarlan JA at 
4 NSWCA 476, per Macfarlan JA at 
5 NSWCA 476, per Garling J at 
6 NSWCA 476, per Garling J at 
7 NSWCA 476, per Macfarlan JA at  and Beazley P at 
8 NSWCA 476, per Macfarlan JA at  and  citing Rosenberg v Percival  HCA 18; 205 CLR 434 per Gummow J at  with approval
9 NSWCA 476, per Macfarlan JA at 
10 NSWCA 476, per Macfarlan JA at - and Beazley P at [1
11 NSWCA 476, per Macfarlan JA at  and Beazley P at 
12 NSWCA 476, per Macfarlan JA at  and Beazley P at 
13(2001) 207 CLR 562 at 579-580
14Hunter and New England Local Health District v McKenna; Hunter and New England Local Health District v Simon  HCA 44 at -
15See Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581-582 per Mason CJ and Dawson, Toohey and Gaudron JJ.
16In Anjin No. 13 Pty Ltd v Allianz Australian Insurance Limited  VSC 371 Vickery J summarised the relevant cases and said (by way of obiter dictum) that he preferred the reasoning in Ashmere and other cases
17 NSWCA 276
18Cross claim heard as part of BlueScope Steel Ltd v Allianz Australia Ltd  NSWDDT 3
19s9(1) Insurance Contracts Act 1984 (Cth)
20 NSWDDT 3 at 15-16, 26
21 NSWCA 276 at 56, 59, 73, 216, 326
22Supreme Court (NSW), Wood J 26 June 1986 Unrep
23 NSWCA 276 at 67
24 NSWCA 276 at 229
25(1974) 130 CLR 1
26 HCA 25
27 FCAFC 64
28State of play: Proportionate Liability under Federal legislation (Nicole Wearne and Joshua Carton)
29 QSC 32
30 VSC 659
31(1997) SASR 525
34(1940) 64 CLR 282.
36(1999) 199 CLR 413.