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Murphy’s Law: you get what you expect

Feature Articles

Cite as: (2005) 79(4) LIJ, p. 32

Until the High Court decision in Murphy, disappointed expectations alone were not compensable under the Trade Practices Act. It now seems that they are.

By Richard Greenfield

In Murphy v Overton Pty Ltd,[1] seven justices of the High Court jointly held that Mr and Mrs Murphy had sustained compensable loss or damage because they had to pay higher fees than had been represented to them. This was despite the absence of any evidence that they had suffered any capital loss or that they had been overcharged.

The facts of the case[2] were that in October 1992, Mr and Mrs Murphy purchased a leasehold interest in a unit in a retirement village, the Heritage Village, from Overton Investments Pty Ltd. The lease was nominally for 99 years but in fact terminated on the death of the survivor of Mr and Mrs Murphy. On sale of the interest, Overton was entitled to 25 per cent of any capital gain, but any capital loss was to be borne fully by Mr and Mrs Murphy.

The decision to sell their house and move to the retirement village was a “momentous” one for Mr and Mrs Murphy and was reached only over several months and after legal advice.

The lease provided that Overton could require Mr and Mrs Murphy to pay management fees to meet certain outgoings which were described fully in the lease. While Mr and Mrs Murphy understood that the initial management fee of $55.71 per week would vary over time as costs changed, Overton represented that all outgoings which it was entitled to recover had been included in the initial fee.

Mr and Mrs Murphy had considered an alternative, the John Paul Village, but would have had to wait 12 to 18 months before a unit in that village became available. The factors critical to the decision to enter the Heritage Village were its affordability and the declining health of Mrs Murphy.

In March 1994 Mr Murphy received correspondence from Overton which showed that the management fees for 1992/93 had in fact covered less than half of the expenditure which Overton was entitled to recover. Overton sought, and ultimately Mr and Mrs Murphy paid, an increase of 18.37 per cent for 1994/95. In May 1994, Mr Murphy became the president of the Residents’ Committee and from then on retained and sought legal advice from The Accommodation Rights Service (TARS). Extensive and at times acrimonious communication ensued between the residents and TARS on one side and Overton on the other. Two of the residents put their interests on the market during 1994 but Mr and Mrs Murphy did not, wanting the Heritage Village to be their last home.

On 27 November 1996 Overton wrote to all residents advising that all outgoings including past shortfalls were to be recouped.

On 29 June 2000 Overton sold the Heritage Village.[3] [35]

The claim

After Overton’s letter of 27 November 1996 an “avalanche of litigation” [15] ensued, involving the Residential Tenancies Tribunal, the local court, the NSW Supreme Court and the Federal Court. Ultimately, the outcome was determined by Federal Court proceedings which started on 23 February 1999 and which were heard at first instance by Emmett J and then on appeal by the Full Federal Court (Branson, Nicholson and Gyles JJ).[4]

Mr and Mrs Murphy claimed that Overton’s conduct had been misleading and deceptive in contravention of s52 of the Trade Practices Act 1974 (Cth) (TPA) and unconscionable in contravention of s51AA of the TPA. They sought remedies under ss82 and 87 of the TPA, primarily an order under the latter, restricting Overton’s right to recover the previously undisclosed outgoings. However, by the time the case reached the Full Federal Court, Overton had sold the Heritage Village and the only appropriate remedy had become damages.

Both at first instance and on appeal, the Federal Court ruled against Mr and Mrs Murphy who then appealed to the High Court.

The expert evidence

Both sides led evidence from valuers. Critically, the valuer called by Overton gave uncontradicted evidence that units such as the Murphys’ unit “did not appear to have suffered a substantial decrease in value after November 1996 as a result of the increase in outgoings”.[5]

Somewhat perplexingly, there was, though, a consensus between the valuers that at November 1996 (and also at February 2000) the value of the leasehold interest was less because of the higher management fee. The valuer called by Overton assessed the reduction in value to be less than the valuer called by Mr and Mrs Murphy.

In effect, the evidence was that the value of the unit was less than it would have been if the management fee had not been increased, but that other factors, presumably general increases in market prices, had meant that in November 1996 Mr and Mrs Murphy did not suffer a fall in the value of their interest.

The issues

Emmett J held that Overton’s conduct in not disclosing all expenditure which it was entitled to recoup was misleading and deceptive in contravention of s52 of the TPA. This finding was confirmed unanimously by the Full Federal Court and was not appealed to the High Court.

Thus, the Full Federal Court and then the High Court had to decide whether Mr and Mrs Murphy had suffered loss or damage. If they had, the Courts also had to identify when the loss or damage had been sustained in order to decide whether the claim was out of time.

Loss or damage

While it was clear that Mr and Mrs Murphy had not received what they expected, it was not claimed that the purchase price they paid was excessive, nor was it argued that the maintenance fees did not represent fair payment for the services provided.

At first instance Emmett J decided that if there was loss or damage, it had occurred in 1992, but noted that there was no claim for loss or damage incurred at that time.[6] Accordingly, his Honour did not have to rule on the actual claim – that the increase in maintenance fees in 1996 caused a reduction in the value of the leasehold interest – because he held that the claim was statute barred.

The majority in the Full Federal Court (Branson and Nicholson JJ) relied on the principle enunciated in Marks[7] that “a comparison must be made between the position in which the party that allegedly has suffered loss or damage is in and the position in which that party would have been but for the contravening conduct”.[8] As the alternative in this case was the John Paul Village, a comparison with a unit in that village was required to be made. No evidence had been led to permit such a comparison.[9]

In dissent, Gyles J argued that if a comparison was to be made it should be with there having been no transaction.[10] He also remarked that any evidence which cast doubt on the “self-evident truth” that differences in management fees “must be reflected in the capital value of the leasehold” “should be carefully scrutinised”.[11] His Honour would have remitted the matter for assessment of the loss or damage, remarking that possible approaches included calculating the present (i.e. discounted) value of the extra management fees. This latter approach was included as a new claim in the High Court appeal.

The High Court specifically rejected the majority decision in the Full Federal Court that the loss had to be assessed by a comparison with alternative accommodation [66] but also noted that the increase in management fees did not cause any substantial capital loss in November 1996. [60]

In interpreting ss82 and 87 of the TPA, the High Court emphasised that “it is necessary to identify the detriment which is said to be the loss or damage”, [46] that loss or damage is not necessarily singular, and that it may take several forms and may be a loss of capital or a loss on revenue account, or both. [49]–[52]

These principles were applied to support the conclusion that Mr and Mrs Murphy did suffer loss or damage “when the respondent started to charge all the outgoings it was entitled to charge”. [66]

The quantification of the extra management fees was remitted to the trial judge to assess the loss or damage. Only the extra fees payable by Mr and Mrs Murphy were to be taken into account, requiring allowance for departure from the Heritage Village due to ill health or death. It was also left open for Overton to argue that Mr and Mrs Murphy could reasonably have mitigated their loss by selling their interest in the village and moving elsewhere.

Limitation of action

As the limitation period under ss82(2) and 87(1)(CA) of the TPA was three years, the Courts had to decide whether there was loss or damage before or after February 1996.

At first instance, Emmett J emphasised that the circumstances in Murphy should be distinguished from Wardley[12] in which the High Court held that loss or damage from a contingent liability is not sustained until the contingency actually occurs. In his Honour’s view the obligation of Mr and Mrs Murphy was not contingent in the Wardley sense,[13] presumably because the contingency depended solely on a decision by the defendant and not on an independent event. He concluded that if Mr and Mrs Murphy suffered any loss or damage, “they did so when they entered into the lease”[14] and therefore their claim was out of time.

The majority in the Full Federal Court did not rule on whether the claim was out of time because they held that no loss or damage had been established by the evidence. Branson J did note, however, that it was feasible for loss or damage to be shown “at a time later than the time of entry into the lease”.[15] In dissent, Gyles J relied[16] on the indication by Gummow J in Marks that loss or damage would have been suffered when, and would not have been suffered until, the defendant lender exercised its contractual right to increase the interest rate charged to the plaintiff borrowers.[17]

The unanimous High Court held that the claim was not statute barred because there was no loss “unless and until the contingency ...was first realised”. [55] Overton might have argued that there had been loss on entry to the lease [56] but had not led any evidence to this effect. [54] The High Court also posited that, even if Overton had shown that there had been loss or damage initially, other items of loss or damage may still have been sustained at a later date, and a claim in respect of those other items would not necessarily have been statute barred. [56]

What does Murphy stand for?

Murphy confirmed the Wardley principle that a cause of action accrues from the time that loss or damage is ascertained or ascertainable,[18] and that if the loss or damage depends on a contingency, it is not ascertained or ascertainable until the contingency is realised, even if the realisation is at the discretion of the offending party. The judgment posed, but did not answer, the question of whether some items of loss or damage may be recoverable even if others are statute barred.

It is in the broadening of the concept of loss or damage that Murphy represents new law, in two ways. First, the High Court held that loss or damage in one form was compensable, despite the absence of loss or damage in another form. Specifically, the High Court decided that the increase in management fees was compensable notwithstanding that the capital value of the Murphys’ interest had not reduced. In effect, the High Court decided to disregard the capital gain from external causes. It was this gain which had offset the reduction in capital value caused by the increase in management fees.

Second, and more fundamentally, the Murphy decision discarded the principle that there is no loss or damage unless the plaintiff would have been better off if he or she had not relied on the defendant’s misleading or deceptive conduct.

Compare:

Marks: “What is important is what that party could have done, not what it might have hoped for or expected”;[19] (emphasis added)

with:

Murphy: “The appellants suffered loss because the continuing financial obligations they undertook when they took the lease proved to be larger than they had been led to believe”. [66] (emphasis added)

There was no evidence that Mr and Mrs Murphy were worse off, either against the alternative of the John Paul Village or against the status quo. In Murphy, the Marks obligation to compare with the alternative was simply discarded.

Murphy means that a defendant can be required to compensate for misleading and deceptive conduct even if the plaintiff, by relying on the conduct, has not suffered a loss and may even have made a profit.

Conclusion

In Murphy, the High Court extended the concept of loss or damage under the TPA in a novel way, perhaps simply to overcome evidentiary deficiencies and still achieve what was perceived to be a just outcome.

Whatever the explanation, Murphy is the latest instalment, after Gates, Wardley, Sellars, Kizbeau, Marks, Kenney & Good v MGICA, Henville v Walker and I & L Securities v HTW Valuers,[20] in the ongoing interpretation by the High Court of “loss or damage” under the TPA. We can only await the next one with interest.


RICHARD GREENFIELD is a member of the Victorian Bar who practises in commercial law. He is a qualified actuary and was formerly chief investment manager of a major financial institution.


[1] [2004] HCA 3; (2004) 204 ALR 26.

[2] This summary is derived from [2000] FCA 801 [31]–[170].

[3] The numbers in square brackets refer to the paragraph numbers in the HCA judgment in note 1 above.

[4] [2000] FCA 801 [283].

[5] [2001] FCA 500.

[6] Presumably because such a claim would have been out of time.

[7] Marks v GIO Holdings Limited (1998) 196 CLR 494.

[8] Note 7 above, 512 per McHugh, Hayne, Callinan JJ.

[9] Note 5 above, at [42].

[10] Note 5 above, at [137].

[11] Note 5 above, at [167].

[12] Wardley Australia Ltd v Western Australia (1992) 175 CLR 514.

[13] Note 4 above, at [220].

[14] Note 4 above, at [221].

[15] Note 5 above, at [46].

[16] Note 5 above, at [130].

[17] Note 7 above, at 536.

[18] Note 12 above, at 527.

[19] Note 7 above, at 514 per McHugh, Hayne, Callinan JJ.

[20] Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1; note 12 above; Sellars v Adelaide Petroleum NL (1994) 179 CLR 332; Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281; note 7 above; Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413; (2001) 206 CLR 459; and I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109.

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