European Bank Limited v Robb Evans

European Bank Limited v Robb Evans of Robb Evans & Associates [2010] HCA 6

Summary

Majority: French CJ, Gummow, Hayne, Heydon and Kiefel JJ (unanimous).

Decision: Appeal allowed.

Money had been paid into court pursuant to an undertaking as to damages. On release of that money the plaintiff claimed damages pursuant to the undertaking in the amount of income that the plaintiff would have earned on the foreign exchange market, had it had the benefit of the money. The High Court found that the plaintiff was entitled to such damages. It said that the test for damages pursuant to an ordinary undertaking is as follows:

1. What is the loss that is alleged?
2. Did that loss flow directly from the order which was the subject of the undertaking?; and
3. Could the loss sustained have been foreseen at the time of that order? (Foreseeability in this sense means that a loss of the kind actually sustained could have been foreseen at the time.)

Facts

The appellant (“EBL”) was a company that speculated in foreign currency trading. EBL had obtained a judgment against the respondent in the Supreme Court ordering him to pay in the amount of almost $US9m. The respondent indicated that he intended to appeal the decision and so was ordered to pay the judgment debt into court subject to providing an undertaking as to damages. The respondent exhausted his appeals in relation to the judgment when he was denied leave to appeal to the High Court in 2005. Accordingly, the money was paid out of Court to EBL.

EBL claimed that, had it had access to the funds, it would have exchanged the US$ currency into EU€ and thereby received income from the judgment debt in excess of the interest earned by the prothonotory of the Court. EBL therefore sought compensation from the respondent, pursuant to the undertaking, for the income that it would have earned had the order to pay money into court not been made.

Rule 7(2) of the Supreme Court Rules 1970 (NSW) defines what is meant by a usual undertaking as to damages, it says:

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.

Decision

The Court found that the income that would have been realised by EBL by converting the US$ into EU€ came within the ambit of the undertaking as to damages.

Their Honours rejected the respondent’s argument that the proper test for determining the damages for the purposes of an undertaking was the same as that for determining damages for breach of contract. They said that the test for remoteness in Hadley v Baxendale (that the defendant is liable for damages that naturally arise from the breach or those that are in the contemplation of the parties when making the contract) was only relevant by analogy (at [14]) to determination of the appropriate damages under an undertaking as to damages.

The Court also rejected the reasoning of Basten JA in the Court of Appeal, where his Honour concluded that the damages sought were too remote because the consequential loss was “extrinsic” to the reason why EBL was kept from its money. Basten JA had found that changes in the exchange rate can not be seen as intrinsic to the purpose of the undertaking.

The Court said (at [17]) that Given that the order giving rise to the undertaking is essentially of equitable origins, a court is required to “do equity” and so must make an order for damages that it considers “just”. Therefore, the “assessment of compensation [for the purposes of an undertaking] cannot be constrained by a rigid formulation.”

The test espoused by the High Court was that, in determining the appropriate damages under an undertaking, a court should (at [16]), “look to the purpose which the undertaking as to damages is to serve and ... identify the causal connection or standard of causal connection which is most appropriate to that purpose”. In that context the court must determine (at [29]):

1. What is the loss that is alleged?
2. Did that loss flow directly from the order which was the subject of the undertaking?; and
3. Could the loss sustained have been foreseen at the time of that order? (Foreseeability in this sense means that "a loss of the kind actually sustained could have been foreseen" at the time.)

The Court found that the losses caused by EBL’s inability to exchange the US$ into EU€ satisfied that test and so were damages compensable pursuant to the undertaking.

Comment

There is little doubt in the correctness of the need to be cautious when applying contractual principles to other obligations in law. This is not a situation where the parties have bargained for an agreed relationship, an aspect of which is the acceptance of liability if the agreement is breached. This is the Court imposing on a successful litigant a period of surrender of funds which are rightfully theirs. The considerations are doubtlessly different.

However there is a policy problem with providing such a loosely defined test for damages. The Court referred to the “obvious proposition that … an undertaking is not lightly to be given”. But a failure to strictly define the scope of the undertaking undermines a party’s ability to determine whether it ought to give such an undertaking. And importantly for lawyers, it undermines a lawyer’s ability to advise their client of the risks associated with giving such an undertaking.

Query whether a lawyer will need to explore necessarily unpredictable future contingencies, such as exchange rates and share prices, before advising their client on the risks of giving an undertaking to a court.