Bartonvale Management Services Pty Ltd v International Linen Services Pty Ltd

[2002] SASC 254

BARTONVALE MANAGEMENT SERVICES PTY LTD  v  INTERNATIONAL LINEN SERVICES PTY LTD
[2002] SASC 254

Full Court: Doyle CJ, Williams and Gray JJ

1. DOYLE CJ:            The defendant in an action in the District Court appeals against the award of damages in favour of the plaintiff.  Although the Notice of Appeal challenged the finding that the defendant was in breach of the contract, that challenge was not pursued on appeal.  For convenience I will continue to refer to the parties as plaintiff and defendant respectively.

   Facts

2. The plaintiff supplies laundry services to a range of businesses.  The services include the supply of linen, laundering the linen, collecting used and soiled linen and delivering clean linen.

3. In November 1996 the plaintiff entered into a written contract with the defendant to provide laundry services to the defendant at a nursing home conducted by the defendant.

4. The contract was to run from 23 December 1996 to 23 December 1999.  The appeal was argued on the basis that the defendant was obliged to pay at the specified rate according to the amount of linen supplied and cleaned.  The defendant was not contractually obliged to use the laundry services to a specified or minimum extent.  On the other hand, by cl 2.5 of the contract, the defendant could not engage any other “independent commercial linen service” to “launder clean or supply linen” for the defendant.  On my reading of the contract it was open to the defendant to supply and launder some of its own linen if it saw fit.  It is not necessary to decide whether or not it was open to the defendant, consistently with the contract, to provide entirely its own laundry requirements.

5. The defendant gave notice terminating the agreement, and the supply of laundry services under the agreement ended on 25 February 1998.  The Judge found that the defendant was in breach of the agreement in terminating it.

   The assessment of damages

6. The Judge assessed the plaintiff’s claim by taking the average weekly payment by the defendant to the plaintiff during the life of the agreement (which average payment was $1,675).  He multiplied that amount by the weeks that remained to the expiry of the contract, namely 95 weeks.  In that way he arrived at a figure of $159,129.

7. Mr Hall, an accountant, gave evidence for the plaintiff that the correct measure of the plaintiff’s loss was to determine how much of that amount would have been gross profit, meaning the difference between revenue or sales and the cost of earning that revenue or making those sales.  Mr Hall examined the plaintiff’s financial statements.  He calculated that over a five year period to 30 June 1999, the gross profit averaged 71.9 per cent of revenue.  He applied that percentage to the figure referred to above, and arrived at a gross profit of $114,239.  He calculated an allowance of $8,361 as interest reflecting the loss to the plaintiff of not having the use of that money.  That amount was calculated on an after tax amount.  In that way he arrived at a final amount of $122,600, and that is the amount that the Judge awarded.  As is implicit in what I have said, the Judge accepted Mr Hall’s approach.

   The appeal

8. Mr Clayton QC, counsel for the defendant, argued two issues on appeal.

9. First, he submitted that the Judge failed to allow for the fact that it was open to the defendant to reduce its usage of the plaintiff’s laundry services.  There were some indications that shortly before the defendant terminated the contract, it had reduced its usage of the laundry services.  There was evidence that the defendant had facilities to launder its own linen, were it to resume providing its own linen.  Accordingly, he submitted, the Judge should have reduced the starting figure of $159,129.  Mr Clayton argued that it was not appropriate for the Judge to use the average weekly figure that he used.

10. Secondly, Mr Clayton submitted that Mr Dewing, an accountant called by the defendant, had demonstrated that Mr Hall’s approach was wrong.  Mr Dewing argued, broadly, that it was necessary to deduct from the income figure not only the cost of goods sold, as Mr Hall had done, but also all costs incurred in fulfilling the contract and an allowance for the appropriate proportion of the general overheads of the business that could reasonably be attributed to the performance of the contract.  For example, Mr Hall had not made a deduction for wages paid to staff, which Mr Dewing said was a variable cost, or for the rent of premises, which Mr Dewing identified as a fixed cost.  Mr Dewing argued that deductions should be made for items like these.  Mr Dewing estimated the loss at about $2,700.

    The Judge’s reasoning

11. The Judge said nothing about the first ground argued on appeal.  It was not argued by Mr Britton, counsel for the plaintiff, that this point had not been argued before the Judge.

12. The approach of the judge was to accept and act upon the evidence of the accounting expert Mr Hall. This was opinion evidence. Mr Hall’s conclusions were mainly inferences drawn from the relevant facts. In effect the judge adopted Mr Hall’s opinion. However in substance the judge made his own assessment. That assessment coincided with the evidence of Mr Hall. The judge was entitled to accept and act on the evidence of Mr Hall. So understood the approach of the judge cannot be criticised.

13. As to the items that appeared in the plaintiff’s financial statements as business costs, but in respect of which Mr Hall had not made a deduction, the Judge referred to Mr Hall’s comment that the earnings from the contract with the defendant were only 1 per cent of the plaintiff’s total earnings, and apparently accepted Mr Hall’s opinion that that being so, “the loss of that contract would have had no effect on the fixed or operating expenses of the plaintiff’s business”.  He noted Mr Hall’s opinion that the “fixed or operating expenses of the business” had been approximately 70 per cent of sales before the contract was entered into, and after it was terminated.  The Judge said:

    “I mention that there was no evidence of any actual changes to the operation of the plaintiff’s business because of the contract between the plaintiff and the defendant during those five years.”

    The Judge also said:

    “I mention that there was no evidence, apart from the opinion expressed by Mr Dewing, that any of the indirect expenses were significantly impacted upon by the contract between the plaintiff and the defendant; for example, there was no evidence that delivery costs increased in any significant way because of the contract; rather, the indications being that, if there was any increase in the delivery costs because of the contract, it was miniscule because deliveries were made to the defendant as part of a delivery route already in place before the contract was entered into.”

14. The Judge accepted Mr Hall’s opinion that the operating costs of the business, in respect of which Mr Hall made no deduction, would not have altered materially with the entry into the contract, or upon its termination.  The Judge said that Mr Hall’s approach “seems to accord with the commercial reality of the situation”.

    Assessment of damages

15. The applicable principles are clear.  The plaintiff is entitled to be placed in the same position as if the contract had been performed.  It suffices to refer to the following remarks of Mason CJ and Dawson J in The Commonwealth of Australia v Amann Aviation Pty Limited (1991) 174 CLR 64 at 80 ‑ 81:

    “The general rule at common law, as stated by Parke B. in Robinson v. Harman, is ‘that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed’.  This statement of principle has been accepted and applied in Australia.

    The award of damages for breach of contract protects a plaintiff’s expectation of receiving the defendant’s performance.  That expectation arises out of or is created by the contract.  Hence, damages for breach of contract are often described as ‘expectation damages’.  The onus of proving damages sustained lies on a plaintiff and the amount of damages awarded will be commensurate with the plaintiff’s expectation, objectively determined, rather than subjectively ascertained.  That is to say, a plaintiff must prove, on the balance of probabilities, that his or her expectation of a certain outcome, as a result of performance of the contract, had a likelihood of attainment rather than being mere expectation.

    In the ordinary course of commercial dealings, a party supplying goods or rendering services will enter into a contract with a view to securing a profit, that is to say, that party will expect a certain margin of gain to be achieved in addition to the recouping of any expenses reasonably incurred by it in the discharge of its contractual obligations.  It is for this reason that expectation damages are often described as damages for loss of profits.  Damages recoverable as lost profits are constituted by the combination of expenses justifiably incurred by a plaintiff in the discharge of contractual obligations and any amount by which gross receipts would have exceeded those expenses.  This second amount is the net profit.” (Citations omitted)

    Revenue lost

16. The plaintiff was entitled to an award of expectation damages. That expectation was the defendant’s performance of the contract. However, the services to be provided by the plaintiff were dependent on the extent of the services requested by the defendant. Had the contract continued there was a real possibility that the services requested would have reduced as a result of the defendant’s apparent dissatisfaction with the plaintiff.

17. In considering the value of the expectation loss, regard must be had to both the reduction in income and any saving of or reduction in expenses.  On the cessation of the contract the plaintiff was relieved of certain expenses.  One expense was the cost of a new set of linen. It must also be borne in mind that at the end of the contract that set of linen would still have had some value to the plaintiff. 

18. A proper assessment of the plaintiff’s loss required an allowance to be made for the real possibility of reduced income as well as for the consequential reduction in expenditure.

19. The evidence did not allow precise calculation be made of either matter.

20. I consider that the estimate of, or allowance for, revenue lost should have been reduced by about 15 per cent.  As I will explain later, that figure includes one other allowance which should be made.

    Deduction for expenses

21. The approach to this issue is dictated by the purpose of the award of damages, namely, by determining how best to place the plaintiff in the same position as it would have been in if the contract had been performed.

22. The approach that the Judge adopted was correct in principle.

23. Mr Hall deducted from the estimated earnings the expenses that he identified as attributable to the provision of the contract services.  That is, he deducted expenses that in his opinion would have increased when the contract was being performed, and would have diminished when it ended.  Mr Hall correctly observed that other outgoings, such as accounting fees, rent, rates and taxes, would not reduce as a result of the termination of the contract.  Mr Hall acknowledged that there were other expenses, for example telephone and postage, which would reduce slightly upon the termination of the contract.  But as Mr Hall said, as the earnings from the contract were only 1 per cent of the plaintiff’s total revenue, looking at things broadly, these other items of expense were insignificant and could be disregarded.  In my opinion that is an appropriate way of approaching the matter.  That approach is supported by the Judge’s observation that there was no evidence that these other expenses were significantly affected by the performance of the contract.

24. Mr Dewing’s approach was to attribute a proportion of all overheads to each dollar of revenue earned.  For some purposes it would be appropriate to do that.  But that approach does not help identify the loss suffered by the plaintiff as a result of the termination of the contract.  In principle, Mr Hall’s approach is correct.  The expenses that Mr Dewing would deduct, but that Mr Hall did not deduct, would not have reduced with the termination of the contract.

25. I have considered the particular costs or expenses that Mr Dewing would have deducted, but that Mr Hall did not deduct.  A number of them are labour or wage costs.  There is no evidence to suggest that the plaintiff’s labour or wage costs were reduced after the contract ended.  Another item is delivery costs.  I have already set out a passage from the Judge’s reasons indicating that in this case delivery costs were likely to be insignificant.

26. As I have said, the Judge’s approach was correct in principle, and is supported by the evidence.  Nevertheless, it would have been appropriate to make a small reduction in the estimate of revenue lost, on account of costs that could not be separately identified.  Something of the order of a few per cent would be appropriate.

27. One item requires further consideration.  Mr Clayton argued that had the contract run its full term, the plaintiff would have incurred a further cost in purchasing linen to replace linen that had worn out.  There was evidence that linen was replaced, on average, after every 100 washes.  A complete new set of linen to meet the defendant’s requirements would cost about $34,000.

28. The evidence on this topic is confusing.  Mr Hall said that in allowing for the cost of goods sold, he had relied upon the plaintiff’s financial statements, and had treated them as recording the cost of linen purchased.  In cross‑examination it was put to him that in the plaintiff’s tax returns there was an item in the reconciliation statement referring to stock on hand, which, by a process of deduction, should be identified as recording a further amount attributable to the cost of linen supplies.  Mr Hall’s response was that he had relied upon the plaintiff’s financial statements as accurately recording the cost of linen.  Mr Dewing gave evidence explaining how he came to the conclusion that the relevant adjustment did reflect the cost of linen.  His argument is a reasonable one, but in the end it is no more than that.  At no stage did either counsel question any of the officers of the plaintiff about this item in the tax return.  However, in cross‑examination Mr James, a director of the plaintiff, was questioned about the need to purchase replacement laundry.  His evidence on the topic does not throw much light on the point argued on appeal.

29. While the onus is on the plaintiff to make out its loss, my view is that the approach that Mr Hall took was a reasonable one.  I am not satisfied that Mr Dewing’s deduction is correct, but nor am I satisfied that full allowance for the cost of purchasing linen has been made.  On the other hand, I am satisfied that the figures relied upon by Mr Hall would have included part of the cost of purchases.

30. In all the circumstances, the best one can do is make a further small reduction in the estimate of revenue lost.

31. I consider that a reduction of 5 per cent is a reasonable allowance to cover both items considered under this head.

    Conclusions

32. The Judge’s approach was broadly correct.  However, for reasons I have indicated, the estimate of revenue lost should be reduced by 20 per cent overall.

33. If the revenue lost is reduced by 20 per cent, but in other respects the approach of Mr Hall is followed, one arrives at an amount of approximately $90,000 as the appropriate amount, before allowing for interest.

34. For those reasons I would allow the appeal, set aside the judgment for the plaintiff, and order that there be substituted a judgment for the plaintiff in the sum of $96,000 inclusive of interest.

35. WILLIAMS J:        I agree.

36. GRAY J:                 I agree that this appeal should be allowed for the reasons given by Doyle CJ. I agree with the orders that he proposes.