Termination of Contract Procured by Fraud: Appropriate Measure of Damages
In Berry & Anor v CCL Secure Pty Ltd  HCA 27, the High Court of Australia considered the appropriate measure of damages payable in circumstances where a party deliberately engaged in conduct which was fraudulent and misleading or deceptive, or likely to mislead or deceive.
The Reserve Bank of Australia and Innovia Films Ltd were parties to a 50/50 joint venture (Securency) that produced polymer for use in printing banknotes. Securency sought to expand sales of its products into foreign markets, and engaged Dr Berry and his company, GSC, to act as its sole agent in negotiations with the Nigerian government.
Dr Berry and GSC entered into an agency agreement with Securency which entitled Dr Berry to receive a 15% commission on Securency’s net invoiced sales of polymer to the Nigerian government (Agency Agreement). The Agency Agreement automatically renewed every two years, unless either party gave 30 days’ written notice of termination.
Securency sought to cut ties with Dr Berry because:
it became aware that a company controlled by Dr Berry was involved in legal proceedings against the Nigerian government; and
it wanted to avoid liability for the valuable commission due to Dr Berry arising from Securency’s sale of polymer to the Nigerian government.
Securency fraudently advised Dr Berry that it was necessary for the parties to terminate the Agency Agreement to allow Securency, Dr Berry and GSC to enter into a separate joint venture agreement in Nigeria. Securency advised Dr Berry that, notwithstanding the termination of the Agency Agreement, he would continue to act as Securency’s sole agent and would still be entitled to receive his commission.
Despite such assurances, Securency separately engaged a new agent. Dr Berry became aware of the termination of his agency role via media reports regarding Securency’s alleged bribery of public officials in other countries.
Dr Berry and GSC commenced proceedings against Securency (which had been renamed ‘CCL Secure’) in the Federal Court of Australia, alleging that it had engaged in misleading or deceptive conduct in contravention of section 52 of the Trade Practices Act 1974 (TPA).
At first instance, the trial judge:
found that Securency had engaged in misleading or deceptive conduct by ‘duping’ Dr Berry to terminate the Agency Agreement;
concluded that the fraudulent nature of Securency’s conduct prevented it from relying on a counterfactual argument that, absent its own fraud, it would have lawfully terminated the Agency Agreement in accordance with its terms;
held that, ‘but for’ Securency’s fraudulent conduct, Dr Berry would not have agreed to terminate the Agency Agreement such that it would have continued, through automatic renewal, up until the date of trial. In light of this, it awarded Dr Berry almost $65 million in damages based on Securency’s actual sales to the Nigerian Mint.
Securency appealed the decision at first instance. On appeal, the Full Federal Court:
held that Securency had engaged in misleading or deceptive conduct;
concluded that the fraud invalidated the termination of the Agency Agreement); and
accepted Securency’s counterfactual argument that, in the absence of its own fraudulent conduct, Securency would have validly terminated the Agency Agreement on 30 June 2008 (years earlier than the trial date) by giving the 30 days’ notice and calculated damages accordingly at $1.8 million.
Dr Berry sought, and was granted, leave to appeal part of the Full Federal Court’s decision with respect to the proper assessment of damages. In upholding the appeal, the High Court held that:
where termination of a contract is procured by misleading or deceptive conduct the claimant bears the onus of proving, on the balance of probabilities, what the ‘objective value’ of the contract would have been, had it not been terminated;
in circumstances where Securency had deliberately engaged in the misleading or deceptive conduct, the natural inference was that it was not prepared to lawfully terminate the Agency Agreement such that the evidentiary burden shifted to Securency;
Securency failed to adduce evidence establishing that, in the absence of its own wrongdoing, there was a ‘substantial prospect’ it would have lawfully terminated the Agency Agreement; and
but for Securency’s misleading or deceptive conduct, the Agency Agreement would have continued until 30 June 2010. Therefore, the proper assessment of damages was the commission which would have been payable to Dr Berry up to this point. The High Court awarded Dr Berry $27 million in damages on this basis.
This decision confirms the correct approach to the assessment of damages in the context of a claim for misleading or deceptive conduct, where the wrongdoer contends that, but for its own misleading or deceptive conduct, it would otherwise have deployed lawful means to bring about the same result. There is now little uncertainty that, in these circumstances, the evidentiary burden lies with the wrongdoer to establish that there was a real possibility it would have brought about the same result by lawful means. If the wrongdoer is unable to do so then the natural inference is that such a result would not have been brought about through lawful means, and damages must be assessed on this basis.
The full decision can be found here.