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21 April 2020
The civil standard of proof is well known to lawyers; claims must be proved on the balance of probabilities or, in other words, the thing in question must be more likely than not. In numbers, this threshold is crossed upon satisfying the court that the degree of certainty is more than 50%.
At first this may seem unduly harsh or too black and white, but not when consideration is given to the fact that courts exist to resolve disputes and ascertain responsibility. It would be unduly complex, and largely unworkable, if the courts did not deal in binary certainties. Therefore, legally speaking, something either happened or it did not; there is no grey area.
An all-or-nothing approach makes logical sense for past events, but what of future events? What of hypothetical alternatives where, for example, the plaintiff says that it would have obtained some benefit had it not been for the defendant's wrongdoing? This is the realm of the loss of a chance doctrine, where something less than the civil standard of proof may suffice to establish a case.
Loss of a chance is a difficult area of law and the authorities are not easy to reconcile. The doctrine originated in the English case of Chaplin v Hicks.(1) In this 1911 decision, the Court of Appeal awarded damages to the plaintiff for having lost the chance to partake in a beauty contest. Chaplin successfully sued Hicks, claiming that he had breached their contract to provide her with adequate notice of the final round of the contest, depriving her of the chance to partake alongside the 49 other finalists and therefore of the chance to win. Chaplin has been called something of a "legal Pandora's Box",(2) with the doctrine evolving over the next century in the context of English solicitors' negligence cases. This culminated in the takeover case Allied Maples Group Ltd v Simmons & Simmons (a firm),(3) which involved the plaintiff's solicitors failing to notify it of a deleted warranty regarding contingent liabilities under leases that it was acquiring.
The significant feature of a loss of a chance claim is that if a plaintiff proves that it has lost a chance of some value, the damages to which it is entitled will be assessed on a probabilities basis, rather than the usual civil all-or-nothing standard. If the chance lost is the potential to win $1 million and the lost chance amounts to a 25% probability, the plaintiff will be entitled to $250,000 in damages.
New Zealand's High Court recently considered the loss of a chance doctrine in Forest Holdings Ltd v Mangatu Blocks Incorporation.(4) Two days after the decision was released, the Court of Appeal delivered its judgment in Strack v Grey, which provided much needed clarity on when a loss of a chance analysis is appropriate.(5)
This was an appeal to the High Court from a private arbitration between Forest Holdings Limited (FHL) and Mangatu Blocks Incorporation relating to a forestry right. In 2013 Mangatu breached its contract with FHL by terminating the forestry right without first giving FHL 120 days' notice of its intention to do so and, thereby, the corresponding opportunity to remedy any defaults. FHL brought a claim before an arbitrator who found that, although Mangatu had breached the contract, the breach did not cause FHL any loss because Mangatu would have validly terminated even if the required notice had been given.
FHL obtained leave to appeal to the High Court, arguing that the arbitrator had applied the wrong standard of proof when determining its loss of a chance claim. In particular, FHL contended that it needed to prove only that there was a real prospect or chance that Mangatu would have withdrawn its notice to terminate (in the hypothetical scenario where Mangatu had issued the contractually required 120-day notice to remedy), rather than proving that it would have done so on the balance of probabilities.
The High Court rejected the argument that the arbitrator had applied the wrong standard when assessing Mangatu's hypothetical actions and, in doing so, set out what it considered to be the correct application of the various standards of proof in a loss of a chance claim:
The court provided the following explanation as to why third parties are treated differently to parties to a proceeding:
No unfairness arises, or could arise, from this requirement. Both parties are just that; both are before the Court. Each may offer evidence. Each may challenge the evidence offered by the other. Each may adduce contrary evidence. Each may insist on discovery from the other, to determine what evidence to adduce, challenge, or both. Each may argue what the other would have done if Y had happened. And, each may comment on the other's argument about what the other would have done, if Y had happened. None of this is true of third parties, who are typically not before the Court in a loss of chance claim.
There is also good reason for a lesser standard in relation to the actions of third parties. Frequently, a plaintiff cannot know—hence cannot prove—how the third party would have acted. So, it is right a plaintiff need only prove there is a real prospect the third party would have acted a certain way. This lesser standard also inhibits well-resourced defendants from putting a plaintiff to proof on every conceivable aspect of a hypothetical scenario.(7)
The High Court's decision in Forest Holdings Ltd was likely affected by both the context in which the issue arose and the application of the ratio decidendi of previous decisions.(8) The court heard the appeal as it was presented by FHL, following an earlier grant of leave to appeal. In the particular context, the question of whether the substantive dispute in the arbitration engaged a loss of a chance was implicitly assumed in granting leave to appeal and assumed in argument. In previous loss of a chance decisions, the courts in New Zealand and England have drawn clear distinctions between parties to the proceeding and independent third parties when making their decisions.
Two days after Forest Holdings Ltd was issued, the Court of Appeal released its decision in Strack(9) which addressed when a loss of a chance analysis should be adopted.
Mr Grey agreed to purchase the Stracks' family home but the agreement was conditional on Grey obtaining both finance and a written building report to his satisfaction within 10 working days of signing the agreement. Grey purported to avoid the agreement only two days after it was signed on the basis that he was not satisfied with his building report. In truth, Grey had not obtained a written building report and 'went off' the property after learning that it had retrofitted wall insulation which he had erroneous concerns about. After confirming that Grey was resolute about cancelling, the Stracks sold their property to another purchaser for NZ$150,000 less than what Grey had agreed to pay for it. They then sued Grey for the shortfall, plus interest and costs.
High Court decision
The High Court held that Grey had breached his contract with the Stracks by failing to comply with his obligations under the building report condition. However, the Stracks were awarded only nominal damages of NZ$100 on the ground that Grey's prospects of obtaining finance were so remote as to be negligible. In other words, Grey's breach was held to not have caused the Stracks any substantive loss. In coming to its conclusion, the court adopted a loss of a chance assessment which it considered was appropriate in this case. The Stracks appealed.
Court of Appeal decision
The Court of Appeal allowed the appeal and awarded the Stracks NZ$150,000. The court said that the High Court was wrong to have characterised the dispute as one involving a loss of a chance and that, consequently, damages were payable on the usual all-or-nothing basis to the Stracks. Grey had to account for the Stracks' expectation loss because he had failed to discharge the burden of showing that on the balance of probabilities, he would not have succeeded in raising finance if he had attempted to do so.(10)
In considering when damages are to be assessed on a loss of a chance basis, rather than an all-or-nothing basis, the Court of Appeal derived several general propositions from the authorities, notwithstanding that the cases are difficult to reconcile:
Importantly, the court set out when a case falling within one or more of the scenarios above would trigger a loss of a chance analysis. The position ultimately depends on whether the relevant event is objectively susceptible to proof on the balance of probabilities. If so, the normal civil standard must be applied to establish causation. If not, a loss of a chance analysis is warranted.
The court held that, even though it was concerned with a hypothetical past event contingent on third-party decisions (ie, would Grey have been able to obtain finance had he in fact sought it), this was susceptible to proof to the usual civil standard and Grey had failed to meet that standard.(12) The court considered that Grey's ability to secure finance was determinable as an all-or-nothing question because:
The reasoning makes clear that when dealing with the actions of third parties, the courts should only adopt a loss of a chance analysis where those actions can be properly characterised as unknowable.(14)
These decisions provide insightful authority in New Zealand on a challenging area of law. Forest Holdings Ltd was not specifically concerned with whether it was appropriate to apply a loss of a chance analysis to the facts of that case as that was assumed. In contrast, Strack considered the issue of application and, in the process, set out a test for when the loss of a chance doctrine can be invoked.
Strack indicates that whether a future or hypothetical event is susceptible to proof on the balance of probabilities is an objective question to be answered by reference to the nature of the event itself – what a particular party is capable itself of proving is irrelevant. The fact that a particular party cannot prove its case is not usually regarded as a good reason for lowering the evidential standard. In application, the balance of probabilities standard will apply if it is an objectively surmountable hurdle for the notional claimant. The touchstone, which extends to the actions and decisions of third parties to the proceeding, is whether the relevant event is susceptible to proof on the balance of probabilities.
For further information on this topic please contact David Kraitzick at Wilson Harle by telephone (+64 9 915 5700) or email (firstname.lastname@example.org). The Wilson Harle website can be accessed at www.wilsonharle.com.
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