BDS Marketing Aust Pty Ltd v Bacchus Distillery Pty Ltd
[2011] VSC 676
•16 December 2011
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
CORPORATIONS LIST
S CI 2011 01365
| BDS MARKETING AUST PTY LTD | Plaintiff |
| v | |
| BACCHUS DISTILLERY PTY LTD | Defendant |
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JUDGE: | GARDINER AsJ | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 25 November 2011 | |
DATE OF JUDGMENT: | 16 December 2011 | |
CASE MAY BE CITED AS: | BDS Marketing Aust Pty Ltd v Bacchus Distillery Pty Ltd | |
MEDIUM NEUTRAL CITATION: | [2011] VSC 676 | |
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PRACTICE AND PROCEDURE – Application for further discovery – Loss of bargain damages claim - Supreme Court (General Civil Procedure) Rules 2005 (Vic) r 29.01(1), r 29.08(2).
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr S.R. Horgan SC with Mr B.J. Murphy | Carter Lawyers |
| For the Defendant | Mr R.G. Craig | Clayton Utz |
HIS HONOUR:
By summons filed 17 November 2011, the defendant (“Bacchus”) makes application pursuant to r 29.08(2) and/or r 29.01(1) of the Supreme Court (General Civil Procedure) Rules 2005 (Vic) for orders that the plaintiff provide a further affidavit of documents.
Bacchus seeks further discovery of six categories of documents described in paragraph 1(a)(i) to (vi) of its summons. It also seeks certain orders in respect of confidentiality.
The third and fourth categories of documents in respect of which further discovery is sought have been the subject of an earlier ruling by me on 25 November 2011, and the subject of a further hearing on 9 December 2011. I have made orders consequent on that ruling on 9 December 2011. That part of the summons which seeks orders in respect of confidentiality has been resolved by agreement of the parties on 25 November 2011.
There remains categories (i), (ii), (v) and (vi) to be considered. Category (i) requires discrete consideration but categories (ii), (v) and (vi) can be dealt with collectively.
Rule 29.01(3) provides:
Without limiting Rules 29.05 and 29.07, for the purposes of this Order, the documents required to be discovered are any of the following documents of which the party giving discovery is, after a reasonable search, aware at the time discovery is given –
(a)documents on which the party relies;
(b)documents that adversely affect the party’s own case;
(c)documents that adversely affect another party’s case;
(d)documents that support another party’s case.
Order 29.08(2) makes provision for orders for particular discovery. It states:
Where, at any stage of a proceeding, it appears to the Court from evidence or from the nature or circumstances of the case or from any document filed in the proceeding that there are grounds for a belief that some document or class of document relating to any question in the proceeding may be or may have been in the possession of a party, the Court may order that party to make and serve on any other party an affidavit stating –
(a)whether that document or any, and if so, what document or documents of that class is or has been in that party’s possession; and
(b)if it has been but is no longer in that party’s possession, when the party parted with it and that party’s belief as to what has become of it.
The proceedings involve a distribution agreement entered into in July 2007 whereby Bacchus appointed BDS to promote, sell and distribute all of its products for a term of five years within Australia. BDS’s amended statement of claim filed 14 October 2011 contends that the terms of the distribution agreement provided that BDS had the sole and exclusive right to promote, sell and distribute the products during the term of the distribution agreement, i.e. five years from 1 July 2007. Payment for each order of products was required to be made within 60 days, and if BDS defaulted in that regard and that default continued for a period of 30 days following notice by Bacchus requiring rectification of the default, Bacchus could suspend its further obligations to BDS pursuant to the distribution agreement. The agreement provided that Bacchus would extend BDS credit to a maximum of $1.2 million. This accommodation was supported by directors’ guarantees. The amended statement of claim contends that from 1 July 2007, BDS and Bacchus operated under the distribution agreement as if it applied to all products manufactured by Bacchus. There was significant trade under the agreement from 1 July 2007 to July 2010. Purchases of $25,184,753.54 were made for which there were payments of $24,721,912.63. BDS alleges that there was a series of variations to the distribution agreement.
BDS alleges that, on 22 July 2010, Bacchus wrongly purported to terminate the distribution agreement, effective 5 August 2010. On 17 March 2011, Bacchus, relying on the notice of termination dated 22 July 2010, suspended supply of products under the distribution agreement. BDS denies that the distribution agreement had been validly terminated by the 22 July 2010 notice of termination and denies that it was in breach of the distribution agreement. It alleges in paragraph 27 that it has always remained willing and able to comply with the distribution agreement. BDS claims $5 million as loss of bargain damages and “additional expenses have (sic) incurred by BDS to perform the distribution agreement (as varied).”
In its defence and amended counterclaim filed 14 November 2011, Bacchus alleges that, inter alia, in breach of the distribution agreement, BDS failed to use its best endeavours to sell the products and achieve the expected sales volumes. It also alleges that BDS failed to and did not have the capacity to pay moneys due to Bacchus pursuant to the distribution agreement, that BDS operated substantially in excess of its credit limit of $1.2 million, that BDS engaged directly or indirectly in the supply, promotion, advertising and distribution of products of a similar nature to Bacchus’ products without Bacchus’ consent. Those similar products are alleged to be Riley’s Vodka Creams and Shakem Cocktails (the “similar products”).
As a result of the breaches, Bacchus alleges that it was entitled to terminate the distribution agreement on 22 July 2010, and/or that BDS repudiated the distribution agreement and that Bacchus accepted the repudiation on 22 July 2010, and that it has suffered loss and damage.
In its application, Bacchus seeks discovery of the documents in paragraph 1(a)(i) of the summons which are described as:
“All supplier invoices issued to the plaintiff in respect of Riley’s Vodka Creams and/or Shakem cocktails during the periods from 1 July 2007 up to 25 March 2011.”
Bacchus says that the information contained in the supplier invoices which is sought as to the quantity of the similar products will be relevant to and affect the net profit which Bacchus would otherwise have earned had BDS not, as alleged, breached the distribution agreement by the sale of such similar products. It submits that the category of documents sought therefore supports its case (see Rule 29.01(3)(d)). If, as Mr Craig of Counsel for the defendant put it, BDS had not, as alleged, breached the term of the distribution agreement in respect of the similar products, BDS would have purchased that quantity of the Bacchus products from Bacchus and the documents sought will be relevant to how much of the offending product BDS purchased over the life of the contract, 1 July 2007 to 25 March 2011 on the broadest case. When that information is to hand, Bacchus will then apply their own price and margin to that quantity.
BDS resists discovery of these documents. It states that relief by way of account of profits is not sought and is not open to Bacchus and the documents are not relevant. Mr Craig responds that an account of profits is not sought and says that the documents sought go to the quantities of the products purchased so that Bacchus’ own profit margin can then be applied to calculate its claim for breach of the distribution agreement.
Mr Horgan, Senior Counsel for BDS, states that the distribution of the similar products is not a breach of the distribution agreement and that such distribution is therefore not going to result in recoverable damage or to a method of calculating damages. That may well be the position which BDS takes in regard to the distribution of the similar products, but such a claim has been pleaded by Bacchus in paragraphs 45 and 46 of the defence and amended counterclaim and no attack has been made on that pleading.
I am satisfied that Bacchus has established that the documents sought in category (i) will support its case in the context of enabling calculation of its damages and BDS will be ordered to make further discovery of the documents sought in that category.
Paragraphs (ii), (v) and (vi) of Bacchus’ summons seek particular discovery of the following categories of documents:
(ii)All actual and forecast cash flow statements (including but not limited to cash flow reports generated by MYOB, or equivalent accounting software (in relation to any of the period from 30 June 2008 up to and including 30 June 2012).
(v)All documents recording, referring to or in respect of any debt or finance facility between Westpac Banking Corporation (“Westpac”) and the plaintiff during the period 1 July 2007 to 17 March 2011 including but not limited to
A.any demands for payments made by Westpac under any debt or finance facility;
B.any notices to, or correspondence with the plaintiff in respect of any withdrawal of credit or finance made by Westpac;
C.correspondence between Westpac and the plaintiff in respect of increasing or lowering the level of any debt or finance facility;
D.any investigations and/or reports undertaken and/or prepared by, or on behalf of or at the direction of Westpac with respect to the ability of the plaintiff to satisfy any debt facility, including any reports or communications with respect to the withdrawal by Westpac of any debt facility provided to the plaintiff; and
E.all internal Westpac file notes or working papers concerning the level of debt of the plaintiff or its ability to service its levels of debt with Westpac.
(vi)all documents relating to outstanding taxation liabilities of the plaintiff, for the period from 1 January 2007 onwards, including (but not limited to):
A.any statement of account issued after 1 January 2007;
B.any notice requiring payment of an estimated taxation liability;
C.any director penalty notice;
D.any notice of assessment of a penalty for failing to comply with an obligation under a taxation law;
E.any notification that the Commissioner of Taxation has required a third party to make a payment to satisfy a liability of the plaintiff;
F.any demand for payment or notice of intended legal action issued by the Australian Taxation Office;
G.all other correspondence between the Australian Taxation Office and the plaintiff (or any of its representatives) in relation to the payment, recovery or remission of any outstanding liability;
H.any record of other communications between the Australian Taxation Office and the plaintiff (or any of its representatives) in relation to the payment, recovery or remission of any outstanding liability; and …
In Clayton Utz’s request of 9 November 2011 in regard to these categories of documents it says that they are each relevant to
(i)Bacchus’ assessment of BDS’s alleged loss of bargain damages;
(ii)BDS’s breach of the distribution agreement by failing to use its best endeavours to sell the products and achieve the expected sales volumes; and
(iii)the capacity of BDS to pay moneys due to Bacchus pursuant to the distribution agreement as pleaded at paragraph 7A(b) and 7D(b) of the defence and amended counterclaim.
It will be seen that these three categories are all concerned with the financial position of BDS from 1 July 2007 to 25 March 2011 (17 March 2011 in respect of the Westpac records). Bacchus says that these categories are relevant to the claim by BDS at paragraph 33 of its amended statement of claim for loss of bargain damages which are estimated to be $5 million. Mr Craig submitted that damages calculated in accordance with the principle protect the expectation created by a contract that it will be performed and hence such damages for breach of contract are often described as “expectation” damages that they would have been attained.
Mr Craig submits, however, referring to the decision of the High Court of Australia in Commonwealth v Amann Aviation Pty Ltd,[1] that in order to bring home a claim for these damages, BDS must establish on the balance of probabilities that the expected outcome on which the basis of such damages are claimed would have been attained; it cannot be a “mere” expectation.
[1](1991) 174 CLR 64 at 80.
Mr Craig submits that the financial material sought in these three categories goes to whether BDS could, as a matter of reality, have performed the contract.
Paragraph 6(e) of the defence and amended counterclaim pleads the term of the distribution agreement that the maximum credit extended by Bacchus was $1.2 million with directors’ personal guarantees (such a term appears in clause 6.4 of the distribution agreement in handwritten form). Paragraph 7A of the defence and amended counterclaim states that between 2 February 2010 and 22 July 2010 (when Bacchus says the agreement was terminated) BDS was operating with credit of between $1,868,714 and $3,098,381 and was thereby in breach of the distribution agreement.
It is submitted that there is a real question as to whether BDS can establish the burden of proof, which it bears, that it could have brought itself back within trading terms so as to oblige Bacchus to continue to supply products under the distribution agreement. In addition, Bacchus submits that the documents will also assist its own case as they are relevant on the question of whether or not BDS had the capacity to meet the obligations to Bacchus as at 22 July 2010. The documents are also contended to relate to whether BDS was “able” to perform the distribution agreement, as it contends it was in paragraph 27 of the amended statement of claim.
Bacchus says that in order to challenge BDS’s entitlement to expectation damages, it will contend that BDS could not have brought itself back within the trading terms stipulated by the distribution agreement that limited credit to $1.2 million.
The three categories sought, Bacchus says, are relevant or are sought on the basis that they adversely affect BDS’s case for loss of expectation damage. In the application Bacchus relies on the affidavit of Christopher Gregory Keith sworn 17 November 2011. Mr Keith exhibits documentation which, it is said, demonstrates that BDS’s capacity to comply with its trading terms with Bacchus would be a very real issue at trial and that the three categories of documents sought are likely to be adverse to BDS’s case (and conversely would support Bacchus’ case in that it would facilitate an attack on BDS’s claim for damages).
Those documents include letters from the Australian Taxation Office to the director of the company in November 2010 enclosing a director’s penalty notice. Such notices are served when a company is not in compliance with its taxation obligations to remit withholding taxation. The schedule to the director’s penalty notice set out the amounts outstanding, totalling approximately $190,000. BDS is apparently a monthly remitter and had been in breach of its compliance obligations from 1 January 2010 to 1 June 2010. In addition, the correspondence exhibits material which indicates that a garnishee notice under s 260(5) of the Tax Administration Act had been issued to the Commonwealth Bank of Australia in respect of BDS’s outstanding taxation liabilities. The effect of that notice was to garnishee any moneys due to the director by the bank to meet the liability of BDS.
A separate exhibit consists of a bundle of email correspondence exhibiting emails from Mr Iacovangelo. The emails, extracts of which are set out in paragraph 7b (a) to (e) of Mr Craig’s written submissions, stating difficulties that BDS was having with its bankers, Westpac. On 10 August 2009, Mr Iacovangelo wrote to Mr Heng of Bacchus, indicating that Westpac were “tightening down” on debtor finance facilities. Westpac had reduced the acceleration rate (which appears to relate in some way to factoring of debts, although Mr Craig was not able to explain the significance of this). Later that month, on 31 August, Mr Iacovangelo emailed Mr Heng stating that “we have hit the limit and the bank refuses to stretch it for one day even – “.
On 7 September 2009, Mr Iacovangelo again spoke of Westpac reducing the acceleration rate and that they would not increase BDS’s limit further than $7 million. Mr Iacovangelo wrote again on 13 January 2010 stating “I do not want to over commit on stock at this stage because we are negotiating with the banks who are watching our whole accounts with ridiculous detail.”
In addition, Bacchus submits that the documents will also assist its own case as they are relevant on the question of whether or not BDS had the capacity to meet the obligations to Bacchus as at 22 July 2010 and that BDS was ready, willing and able to comply with the distribution agreement.
BDS states that the three categories sought are not relevant to the calculation of loss of bargain damages. As to the actual and forecast cash flow statements, Mr Horgan SC says that no breach of contract arises by reason of an incapacity or an inability to pay, relying on the decision of the Court of Appeal in New South Wales in McCrohon v Harith[2].
[2][2010] NSWCA 67 at [54]-[60].
In Clayton Utz’s request of 9 November 2011 in regard to these categories of documents, it says that they are each relevant to:
(i)Bacchus’ assessment of BDS’s alleged loss of bargain damages;
(ii)BDS’s breach of the distribution agreement by failing to use its best endeavour to sell the products and achieve the expected sales volumes; and
(iii)the capacity of BDS to pay moneys due to Bacchus pursuant to the distribution agreement as pleaded at paragraph 7A(b) and 7D(b) of the defence and amended counterclaim.
In response, BDS’s solicitors in their letter to Clayton Utz of 11 November 2011[3] as to the cash flow reports sought under (ii), said that unless it could be explained how cash flow was relevant to loss of bargain damages they were unable to agree on the relevance of this category. BDS says further that there is no term of the distribution agreement pleaded which would be breached if BDS did not have the capacity to pay would demonstrate a clear inability to make payments due under the distribution agreement. BDS’s solicitors say that the allegations of breach should otherwise be struck out and that they are being raised for no other reason than to embarrass and scandalise BDS. The same response is given to the request in regard to the Westpac and taxation documents.
[3]Exhibit CJK-13.
Mr Horgan referred to the passages of McCrohon which state that the general rule is that damages for tort or breach of contract are assessed as at the date of the breach. At paragraph 56 of McCrohon, the New South Wales Court of Appeal state the general rule will yield if at the time the damages are assessed the Court is aware of new and material facts relevant to the assessment. An example of that is developed in paragraph 57 of the Golden Strait[4] case. In December 2001, charterers of a ship repudiated a charter party due to run until mid‑2005. The owners of the ship accepted the repudiation of the charter party and sought to recover damages. On 20 March 2003, the Second Gulf War broke out, an event which would have entitled the parties to cancel the charter party. The owners of the ship argued that because the charterers’ repudiation and their acceptance of it preceded the outbreak of war, the rule requiring damages for breach of contract be assessed as at the date of breach required that event to be ignored. That argument was rejected and the House of Lords explained its reasons for doing so at the quotation contained in paragraph 58 of McCrohon. It stated:
If a contract for performance over a period is come to an end by reason of a repudiatory breach but might if it remained on foot have terminated early on the occurrence of a particular event, the chance of that even happening must, it is agreed, be taken into account in an assessment of the damages payable for the breach. And if it is certain that the event will happen the damages must be assessed on that footing.
[4]
Put succinctly, Mr Horgan says that none of the breaches of the distribution agreement alleged are breaches of terms that relate to having the capacity to pay.
In his oral submissions at the hearing of this matter on 25 November, Mr Craig responded that Mr Horgan was really attempting to litigate the state of the law on loss of bargain damages on the issue of whether a future event, possible or probable, is capable of reducing loss of bargain damages such that the Court must assess the probability of the opportunity of coming to pass and make an appropriate discount. The plaintiffs, if they wish to establish loss of bargain damages, must identify and prove on the balance of probabilities that this is more than a mere expectation. Mr Craig says that the issue of the state of the company, in particular its indebtedness to taxation and other authorities is such that they will be unable to discharge that burden at trial. Mr Craig says that if BDS could not pay its debts as of the dates that it terminated the agreement, it is not in a position to contend that it was ready, willing and able to perform the contract.
The issue is finely balanced and somewhat complex but I have decided that the three categories of documents should be discovered as they may advance Bacchus’ attack on BDS’s loss of bargain damages claim. Further, I accept that the documents are relevant to the issues raised at paragraph 7A(b) and 7D(b) of the defence and amended statement of claim in the context of BDS’s capacity to pay moneys due to Bacchus as at 22 July 2010 and whether BDS was able to comply with the distribution agreement as BDS contends it was in paragraph 27 of the amended statement of claim.
I would ask the parties to prepare minutes of orders which reflect these reasons.
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