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Hookey & Anor v Manthey & Ors

 
Unreported Citation: [2020] QSC 125
EDITOR'S NOTE

In this significant case, Ryan J was asked to strike out pleadings alleging a loss of opportunity, and a knowing receipt of trust funds. Notably, her Honour clarified that, in pleading a loss of opportunity from a contract, a party is not always required to plead a specific counterfactual scenario provided the party has pleaded the facts necessary to establish a link between the breach of contract and the loss suffered.

Ryan J

21 May 2020

The parties entered into a business relationship to develop a “highly efficient internal combustion engine” designed by the first defendant and his son. [4]–[5], [8]. The plaintiffs allege that this took the form of a joint venture through a company called Advanced Engine Dynamics Corporation (“AEDC”), something disputed by the defendants. [8]–[10]. Ultimately, AEDC was dissolved by the defendants. [11]. The plaintiffs subsequently filed a claim against the defendants, “claiming inter alia damages for the loss of the commercial opportunity caused by the breach of the duty to co-operate implied in the joint venture agreement”. [13].

The defendants applied for three paragraphs of the plaintiffs’ third further amended statement of claim to be struck out. [14]. Those paragraphs were: [16]:

  • [50], in which the plaintiffs alleged that the first plaintiff suffered loss and damage in the form of a lost opportunity arising from the termination of the joint venture agreement;
  • [51], in which the probability of the opportunity was stated as “80%”, with no particulars given; and
  • [52], in which the value of the lost opportunity was stated as being “at least $1m”, with no particulars given.

At its heart, the reason for this application was a contention by the defendants that these “paragraphs fail to disclose a reasonable cause of action because they fail to adequately plead a claim for damages for loss of a commercial opportunity which might have arisen upon the commercialisation of a certain engine”. [1]. Conversely, the plaintiffs submitted that, because their claim is in contract, rather than tort, their allegations are “established upon proof of the breach of the contract”. [2].

The defendants also sought that “an allegation that the fourth defendant was a knowing recipient of wrongfully distributed trust property” in para 61 be struck out. [3]. The plaintiffs contended that this was sufficiently pleaded. [3].

After stepping through the parties’ arguments and the relevant case law regarding the striking out of paras 50 to 52 of the statement of claim, Ryan J observed that “a contract to provide a commercial advantage or opportunity, if breached, enables an ‘innocent party’ to bring an action for damages for the loss of that advantage or opportunity”. [111]. While there must still be “an actual loss of some value”, there is a value in a commercial opportunity, even if it is not likely to garner a profit. [111]. Accordingly, the plaintiffs were not required to plead a counterfactual scenario to establish their loss arising from the termination of the joint venture agreement. [112].

Significantly, Ryan J noted that “a counterfactual scenario may be required in a breach of contract case to establish a link between the breaches of contract alleged and the loss suffered”, however, none was required in this case. [112]. The ultimate point, in her Honour’s view, was that “it is necessary to plead facts which lead to a reasonable inference of a causal link between the breach and the loss”, which may or may not, depending on the circumstances of a case, require the pleading of a counterfactual. [114].

Against this background, her Honour identified that the loss claimed by the plaintiffs was the loss of a commercial opportunity which might have manifested in a profitable way. [115]. Thus, “the relevant loss is identified by the contractual promise to afford the plaintiff an opportunity (in this case, by being part of the joint venture) to acquire a benefit. That loss may be established upon proof of the breach alleged”. [116]. It followed that the pleading in para 50 was adequate and was not struck out. [116], [124].

Conversely, Ryan J was of the view that paras 51 and 52 were deficient. [119]. This was because they did not disclose the basis of the claimed amounts of 80% and $1 million, respectively. [120]–[121]. That basis is required to enable the defendants to understand the case they have to meet and “to ensure they are not taken by surprise”. [123]. To do so, the plaintiffs were required to plead the “assumptions or methodology or similar” upon which those figures are based. [123]. Because they failed to do so, the pleadings in paras 51 and 52 were found to be inadequate. [124]. Accordingly, Ryan J ordered that they be struck out, with leave to re-plead. [124].

Turning to the second question, that of the fourth defendant’s knowledge, Ryan J identified the pleading in para 61 as alleging that the first, second, fourth and fifth defendants knowingly received payments made in breach of trust. [128]. Significantly, the defendants submitted that, pursuant to r 150(1)(k) of the Uniform Civil Procedure Rules 1999, the plaintiffs were required to plead that the fourth defendant had notice of the trust. [129]. There was no question that it had been pleaded that the first, second and third defendants had knowledge of the trust. [130].

Ryan J considered that r 150(1)(k) “requires knowledge to be specifically pleaded”, and r 150(2) “requires any fact from which knowledge is claimed to be an inference to be specifically pleaded”. [136]. Particularly where the allegation levelled against the fourth defendant “is a serious one”, she “is entitled to know the facts upon which it is contended one might draw an inference of her actual knowledge that she received funds in breach of trust”. [136]. Accordingly, her Honour struck out para 61 as it related to the fourth defendant, with leave to re-plead. [136].

M Paterson