BestCare Foods Ltd v Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd)
[2013] NSWCA 285
•30 August 2013
Court of Appeal
New South Wales
Case Title: BestCare Foods Ltd v Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) Medium Neutral Citation: [2013] NSWCA 285 Hearing Date(s): On the papers Decision Date: 30 August 2013 Before: Macfarlan JA at [1];
Hoeben JA at [2];
Ward JA at [3]Decision: 1. The separate question removed to this Court for determination by order of Stevenson J, made by consent on 22 August 2013, be answered as follows:
"The question of the discount for contingencies to be applied to:
(a) the core business; and
(b) the Nestlé, Safcol and Doane dealings in the period to 20 June 2008
does not fall within the scope of the remitter ordered on 24 April 2013, as varied on 19 July 2013; the intent of that remitter being to leave the damages award for loss of profit in relation to those dealings (having regard to the discount recommended by the referee) undisturbed. The Court notes that this has the effect that the discount for contingencies to be applied to the loss of profit claims for (a) and (b) above is as the referee recommended (40%)."2. The proceeding be remitted to the Equity Division for the determination of the remaining questions in the proceeding, in accordance with the 24 April 2013 order, as varied on 19 July 2013, and answer 1 above.
3. The plaintiffs pay the defendants' costs of the separate determination of the question answered in 1 above.
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
Catchwords: APPEAL AND NEW TRIAL - separate question for determination as to scope of remitter - removed to Court of Appeal for determination pursuant to UCPR, r 1.21 Cases Cited: BestCare Foods Ltd & Anor v Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd & Anor [2012] NSWSC 574, [2012] NSWSC 670
Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) v BestCare Foods Ltd [2013] NSWCA 90
Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) v BestCare Foods Ltd [2013] NSWCA 229Category: Separate question Parties: BestCare Foods Ltd (First Plaintiff)
BestCare Foods (Sales) Pty Ltd (Second Plaintiff)
Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd (First Defendant)
Origin Energy Retail Ltd (Second Defendant)Representation - Counsel: Counsel:
ML Williams SC with SA Lawrance (Plaintiffs)
NC Hutley SC with EG Romaniuk, RD Glover (Defendants)- Solicitors: Solicitors:
McCabe Terrill (Plaintiffs)
Hunt & Hunt (Defendants)File Number(s): CA 2013/259986
JUDGMENT
MACFARLAN JA: I agree with Ward JA.
HOEBEN JA: I agree with Ward JA.
WARD JA: On 24 April 2013, this Court handed down judgment (Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) v BestCare Foods Ltd [2013] NSWCA 90) on an appeal by the Origin entities (together, Origin) from the judgment and orders of McDougall J (BestCare Foods Ltd & Anor v Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd & Anor [2012] NSWSC 574, [2012] NSWSC 670) as to the quantum of damages payable by Origin as a consequence of their liability to the BestCare entities (together, BestCare) for breaches of duties of care that had led to an explosion at BestCare's then pet food factory at Gunnedah and the subsequent entry into administration by BestCare. McDougall J had adopted, with a variation and some rejections, the report of a Court-appointed referee as to the quantum of damages.
Origin's appeal was successful and orders were made in relation to the adoption of the referee's report, in substitution for the orders that had been made by McDougall J. The matter was remitted to the Equity Division for determination as to the damages payable.
On 19 July 2013, this Court handed down a further judgment (Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) v BestCare Foods Ltd [2013] NSWCA 229) on an application by BestCare, pursuant to a notice of motion filed on 7 May 2013, for a variation in two respects of one of the orders made in April 2013. Origin had consented to one of the respects in which a variation of the orders was sought, but opposed the other.
As varied on 19 July 2013 (relevantly, in the manner to which Origin had consented), the orders made by this Court in relation to the referee's report and the remitter to the Equity Division were as follows:
3 Order that the referee's report of the Honourable JMN Rolfe QC published on 30 August 2011 be adopted save that:
(a) Paragraphs 916, 934, 935 and 936 are rejected.
(aa) The referee's reasoning and conclusions are rejected insofar as they reflect a failure to recommend an award on account of lost profits in respect of the period between 23 January 2003 and 24 November 2004.
(b) The referee's reasoning and conclusions are rejected insofar as they constitute, incorporate or reflect findings as to whether, and to what extent, the respondents would, or may, have supplied pet food to the entity known as IAMS (and indefinitely to one or more of Nestlé, Safcol or Doane) if the explosion had not occurred at the respondent's premises on 25 January 2003.4 Remit the proceedings to the Equity Division for the determination of the damages to which the respondent is entitled and the making of orders (including as to costs) that the judge considers appropriate for disposal of the proceedings, on the basis that (subject to the tender of additional evidence as to matters of calculation and the tender of any further evidence that the judge considers is warranted on special grounds), the issues should be determined on the evidence taken before the referee, in accordance with r 20.24(1)(d) of the Uniform Civil Procedure Rules. (Note that, as part of this remitter, the question whether there should be a modification of the interest award in order to take into account the reliance placed by BestCare on the IAMS 2 scenario should be a matter for the judge hearing the matter.)
On the hearing of the question remitted to the Equity Division before Stevenson J in August this year, a dispute has arisen between the parties as to the scope of the remitter. In effect, the dispute turns on the import on the scope of the remitter of the fact that this Court rejected the referee's reasoning and conclusions "insofar as they constitute, incorporate or reflect findings as to whether, and to what extent, the respondents would, or may, have supplied pet food to the entity known as IAMS (and indefinitely to one or more of Nestlé, Safcol or Doane) if the explosion had not occurred at the respondent's premises on 25 January 2003" (in order 3(b)).
With the consent of the parties, on 22 August 2013, Stevenson J ordered that:
1. Pursuant to r. 28.2, the following question be decided separately from, and before, any remaining question in the proceeding:
Whether, by reason of the order made by the Court of Appeal in ORIGIN ENERGY LPG LTD v BESTCARE FOODS LTD [2013] NSWCA 90 ("the 24 April 2013 Order"), there is remitted for consideration by the Equity Division the discount for contingencies to be applied to:
(a) the core business; and
(b) the Nestle, Safcol and Doane dealings in the period to 30 June 2008,
or whether that discount is fixed at 40 per cent.2. Pursuant to r. 1.21, the proceeding be removed into the Court of Appeal for consideration of the question in Order 1.
Background
The background to the latest dispute between the parties is set out in this Court's April reasons and need not be repeated. It is, however, relevant to note that BestCare's motion to vary, which was heard and determined in July this year, also raised a question as to the scope of the remitter, namely, whether it should be restricted to the extent of determining the lost opportunity for BestCare to profit from dealing with the entity referred to as IAMS.
BestCare had sought the deletion of the words appearing in parentheses in order 3(b). As explained in the July reasons at [13], those words were intended to focus on the indefinite continuation of the loss of profit component of the calculation referable to the three named non-IAMS customers (as opposed to the loss of profit component as a whole in respect of IAMS). The distinction had arisen because there was some evidence as to the contractual arrangements in respect of the three named non-IAMS customers up to June 2008 and there had not been raised the same issue as to the assumptions of continuing per annum production in relation to those arrangements.
Issue now in dispute as to scope of retainer
As appears from the separate question that, by consent, has been posed for consideration by this Court, the dispute as to the scope of the remitter that is now raised (and that could have been raised by way of clarification of the Court's orders when the matter was last brought before this Court) focuses on the referee's discount for contingencies (40%) insofar as it applies to those aspects of the loss of profits claim that were not remitted to the Equity Division for re-hearing (namely, the claim in respect of what was referred to as BestCare's "core" business and the claim in respect of the loss of profits from the business up to 30 June 2008 of three identified customers of BestCare - Nestlé, Safcol and Doane).
Senior Counsel for BestCare, Mr Williams, contends that the referee's adoption of a 40% discount for vicissitudes or contingencies was a conclusion that was infected by the IAMS error and hence that conclusion was one that was rejected by this Court. He submits that the operation of the orders in this regard is plain: first, that everything "infected" by the referee's error in relation to IAMS (identified at [56] of the April reasons) has been excised from the adoption of his report and, second, that there has then been remitted to the Equity Division all things necessary for the determination of the damages to which BestCare is entitled.
It is submitted that the making of a single finding as to the discount for vicissitudes is a finding that incorporates and reflects the referee's adoption of the IAMS 2 scenario and that it may be inferred (from the reference to the greater risk associated with the more optimistic IAMS 2 figures) that if the referee had been applying a discount for vicissitudes only to the core business/Nestlé/Safcol and Doane cash flows, then the referee would have selected a lower discount. Hence, the argument that the applicable discount now falls to be determined by Stevenson J.
Origin submits, to the contrary, that the effect of this Court's previous decisions on the damages appeal is that the award of damages to be made on the remitter for the loss of profit claims not remitted for determination (i.e., the core business and pre-30 June 2008 Nestlé, Safcol and Doane losses) is to take into account the 40% discount recommended by the referee (which it is submitted was adopted and not remitted by this Court).
Adoption of the 40% discount for vicissitudes
BestCare maintains that the referee's adoption of a 40% discount for vicissitudes is a conclusion that was infected by the IAMS error in that it incorporates or reflects findings as to the extent to which BestCare would have supplied pet food to IAMS. Reference is made in this regard to paragraph [933] of the report, in which the referee, having considered the calculation of the loss of profits claimed by BestCare, said:
933. The next issue that has to be addressed is the amount to be deducted from the $44m to allow for vicissitudes. As I have indicated I am working on the IAMS 2 figures, which are the most optimistic so far as BestCare is concerned and, accordingly, carry the greatest degree of risk, Mr Williams' submission was that 20% should be deducted for "unforeseen contingencies". In my opinion that is too low a discount bearing in mind the vicissitudes confronting any trading company, which, and I deliberately refrain from using the words either "mature" or "immature", or "emerging", is a company which is establishing itself and has the benefit and, consequently, the detriment, of a lengthy period. In my view the proper discount range should be 40% to 50% and I have chosen 40%, giving an amount for damages for loss of future profits of $26,400,000. In doing so, I have taken into account the conservative approach adopted by Mr Dolman. (my emphasis)
Mr Williams submits that the main reason for the choice by the referee of the 40% discount was that he was "working on" the IAMS 2 figures, which the referee accepted were "the most optimistic so far as BestCare is concerned and, accordingly, carry the greatest degree of risk". Insofar as the adoption of a 40% discount for vicissitudes was based on the acceptance of the IAMS 2 scenario, it is submitted that it is a conclusion that has been rejected (by reference to the wording of order 3(b)) and therefore on the remitter of the question of damages it is a matter for Stevenson J to determine the discount (or discounts) for vicissitudes to be applied as part of the determination of the damages to which BestCare is entitled (both for the loss of profit claims not disturbed on appeal and those that were).
Mr Williams further submits that the application of the 40% discount to the core business and pre-30 June 2008 Nestlé, Safcol, Doane loss of profits claim cannot be preserved because the referee did not make two separate findings; rather the referee worked from a single set of projections (the IAMS 2 scenario), which included both the core business and the estimated production for IAMS, Nestlé, Safcol and Doane (there referring to paragraphs [928]-[932] of the report; and to the observations made at [16] and [44] of the July reasons as to the ambit of the IAMS 2 scenario). Origin submits that the division of the totality of the award to its component parts is a mathematical matter and one that can be arrived at by reference to the calculations done by the accounting expert, whose approach was accepted by the referee (Mr Dolman at Blue 1/357).
Submissions
On the analysis put forward by Mr Williams the question is whether the 40% discount is one that "incorporates" or "reflects" a finding as to the extent of the IAMS 2 production.
I accept that the referee approached his discussion of the discount for vicissitudes by referring to the fact that he was working from the IAMS 2 figures and spoke of those being "the most optimistic" and carrying the "greatest degree of risk". However, he went on to base his decision in [933], as I read it, on the fact that BestCare was a company that was establishing itself "and has the benefit and, consequently, the detriment, of a lengthy period". By that reference to a lengthy period, it seems that the referee was referring to the period of time over which the estimated production figures, including those of the core and non-IAMS businesses, had been extrapolated (i.e., to "terminal value") for the purpose of the discounted cash flow methodology adopted by the experts and accepted by the referee.
Thus, while a factor in the referee's consideration of the discount to be adopted for vicissitudes appears to have been his recognition that the IAMS 2 scenario was the most optimistic, in terms of production levels, for BestCare, he also focussed on the length of time over which the estimated loss of profits was being calculated and that BestCare was a company that was "establishing itself" at the time. The part that each of those factors played in the referee's reasoning is not clear.
For Origin it is submitted that the effect of this Court's previous decisions, and in particular what was said in the July reasons at [58], leads to the practical outcome that the 40% discount remains undisturbed for the core business/pre-30 June Nestlé/Safcol/Doane damages award.
At [58] of the July reasons, I dealt with a submission that referred back to what had been said at [229] of my earlier reasons. At [228]-[229] of the April reasons, I had said:
[228] BestCare submitted that the award of damages insofar as it related to the calculation of lost profits in respect of sales to other (non-IAMS) customers should, in effect, not be disturbed (i.e. that these should be calculated in accordance with the method of calculation underlying the IAMS 2 scenario by: accepting the forecast profits appearing at Blue 1/357 (save for the last two rows relating to IAMS production), calculating the net present value of those projected profits (extrapolated in the manner performed by Mr Fayad before the referee), taking the midpoint of net present values calculated using the discount rates appearing in the two right-hand columns of that page, and applying a discount for vicissitudes of 40% to those net present values).
[229] As to the non-IAMS component, this was calculated on an indefinite basis (insofar as the IAMS 2 scenario was carried through to terminal value). I am concerned that the question whether there was evidence to support the aspect of the IAMS 2 scenario that assumed the non-IAMS component would continue indefinitely into the future was not fully argued. Indeed, there is some doubt as to whether this point was even in issue (see transcript for 6 March 2013 p 2 line 18 - p 3 line 35). As the appellant's arguments concerning the prospects of supply to IAMS itself justify the orders that I propose, those orders should be made on the basis that this Court has not expressed any concluded view on the question concerning the non-IAMS component that I have identified.
It was submitted by BestCare, on its motion to vary, that the unintended consequence of the orders that had been made in April was to deprive BestCare of the amount of $4,002,850 awarded by McDougall J for loss of profits between January 2003 and November 2004. Origin accepted that this amount was not in issue on the appeal. Paragraph (aa) was added to order 3 so as to make that clear.
At [58] of the July reasons, I explained the intention that underlay the parenthetical words in order 3(b) as follows:
If there is confusion as to the operation of order 3(b) by reference to [229] of my reasons then I accept that the latter should be clarified. As I understood the challenge by Origin, it was to the indefinite continuation, on the IAMS 2 scenario, to the projected profits for the Nestlé, Safcol and Doane arrangements and it was to this that I intended to refer (as reflected in the orders I subsequently proposed). However, it seems to me there is no need to recall the paragraph, as such. Rather, I simply note that it was my intention there to refer to the aspect of the IAMS 2 scenario that assumed indefinite continuation after June 2008 of the three non-IAMS contract manufacturing arrangements that had been in place with BestCare (with Nestlé, Safcol and Doane). (Although Green's was another non-IAMS contract manufacturing customer, it seemed to be accepted that this arrangement would have come to an end by 2008 in any event.) What was intended by the parenthetical words was to remit to the Equity Division the question as to the damages referable to loss of profits after 30 June 2008 from the three named non-IAMS customers (having regard to the evidence that was before the referee as to the arrangements with those customers). The loss of profits by reference to "core" business or direct sales was not intended by me to be part of the remitter. (my emphasis)
In that paragraph it was made clear that the amount recommended by the referee and accepted by McDougall J as compensation for the loss of profits referable to the core business or the so-called direct sales was not intended to be part of the remitter. The fact that that amount was arrived at by reference to a percentage discount recommended by the referee does not change that position. The amount awarded by reference to the core business and pre-30 June 2008 Nestlé, Safcol and Doane sales was not the subject of the remitter.
Senior Counsel for Origin, Mr Hutley, points in his written submissions to the inconsistency between the current argument being put by BestCare and what was submitted at the hearing in March 2013 (as recorded at [228] of the April reasons). On 6 March 2013, addressing the draft orders that might be made on the appeal, Mr Williams said, (at T 44.21-23):
... Paragraph 3, that the referee's findings as to IAMS be put to one side and then sent back to the referee, para 4, on the existing evidence before the referee subject to additional calculations on loss of profits and any further evidence on special grounds. And for clarity we've set out in 5 - the intention of that being that it doesn't seem to us, with respect, that anything above the IAMS line on p 356 and 357, to which we've been many times, is in contest. So that, we'll call it the core business plus the contracts, that is everything apart from IAMS stays with the 40% discount and then the referee makes, under 5B, a fresh assessment on the damages in respect of the IAMS business (my emphasis)
It is acknowledged by Mr Williams that, in the course of argument on the question of damages, it was put for BestCare that the 40% discount should be retained for the "core business plus the contracts". However, he points out that this was in the context of a submission that "anything above the IAMS line" was not in contest and that, ultimately, BestCare's contentions in that regard were not accepted. He emphasises that no party is now seeking to vary the amended orders of 24 April 2013. In effect, therefore, the proposition for which BestCare contends is that the outcome of the separate question is one that depends on the construction of the orders made in April, as varied in July 2013.
As [228] of the reasons indicated, the approach to damages adopted by this Court was that not only the adoption of the IAMS 2 scenario but also the indefinite continuation of the Nestlé, Safcol and Doane business was in issue. It was not, however, suggested that the 40% discount as applied to damages that were not in issue was a matter for consideration. The exchange recorded in the transcript of 6 March 2013 indicates that this was the basis on which the matter was being approached by BestCare. While Mr Williams noted that BestCare had put forward a submission to the referee that a 20% discount would be appropriate, and had relied on the adoption of the 40% discount as indicating the reasonableness of the IAMS 2 scenario (on the basis that it worked out as almost exactly the same as the IAMS 1 scenario discounted by 20%), the suggestion that the damages award for the core business loss of profit or that referable to the Nestlé, Safcol and Doane business should be revisited by reference to the discount factor to be applied was not one that was made during the course of the appeal.
There was reference to the discount percentage during the hearing on BestCare's motion to vary but that was raised by Senior Counsel then appearing for Origin, Mr Walker SC. On 16 July 2013, Mr Walker said (at T 8.17-49):
...as we understand it, the purpose of the respondent's motion is to tailor or modify the orders in this Court so as to preserve undisturbed more of the report in relation to the damages award than they consider presently to be the case. They want more of it to be undisturbed. That translates to leaving in place that part of the calculation which is based upon the trade connection with those four companies. We make this point, that that part of the report, based upon the trade connection with those three companies involves integrally upon an assessment of what I will call the indefinite duration point, the referee's choice of 40%. You've not heard anything about that from our friends in writing or in address today but I can from the bar table tell you that for the remitter, the respondent has already made it clear that they wish to argue that the discount should be less than 40%.
So there is a real difficulty in the respondent's presentation before you today. They want the damages award in relation to these companies to be undisturbed is how it appears to you in argument but we can tell you as a matter of forensic fact at first instance on remitter, they want to reopen and reduce, surprise, surprise, the 40%. That in our submission is a very difficult position because that 40% is, as one knows from the referee's 933, really driven by the uncertainty of a future. That's what informs an argumentative attack by us on the indefinite duration assumption. That was an attack cognate at a general level with our attack on the IAMS matter which is not in question today and upon which we have succeeded in getting a remitter.
We submit it needs to be made clear, it needs to be clear beyond argument that either the matter stays as we put that that of course is order 3B [3(b)] as it is where the specific question relates to the indefinite duration or else the respondent is granted its relief today, gets order 3B [3(b)] amended accordingly so as to leave undisturbed the award of damages in relation to those trade connections, the non IAMS trade connections which award of damages incorporates the 40%. ...
Mr Williams' response to this, at T 10.11-22, was as follows:
... As to what we might or might have put in our submissions before the remitter, your Honours, the hearing is listed in the commercial division commencing on I think 19 August. We have been ordered to put on submissions and any additional evidence by 24 June and that's been done and obviously we had to do that against the contingencies that this application might or might not fail and we have put a number of alternative propositions in our submission for the consideration of the commercial list but what we have put there is, with respect, of no relevance to the points we raise here today.
Two things may be noted from those exchanges.
First, it was seemingly accepted by Mr Walker that the 40% discount was informed by the indefinite duration (to terminal value) of the estimated loss of profits, though I note that would apply whether or not the IAMS 2 or the IAMS 1 scenario was used, since the relevant difference between the two was as to level of production.
Second, what BestCare seems to have been submitting was that anything put in its remitter submissions in relation to the discount applicable to the non-IAMS trade connections was not a matter raised by the motion to vary and not a matter to be taken into account by this Court when considering the motion to vary. The practical difficulty with that approach, to which Origin have referred in their written submissions, is that if the issue as to the scope of the remitter turns on the intent of the orders made by this Court in April, then the application in July provided a sensible opportunity of canvassing that issue. Instead, the parties have now prepared for and appeared on the remitter hearing, in the course of which the issue has been the subject of the dispute and it has led to the further application to this Court that would have been avoided had it been raised in July this year. Nevertheless, while there is force in Origin's submission that it would have been opportune and efficient to raise the present issue when the scope of the remitter was being considered in July, that is something that might go to the costs of the remitter not its determination.
Conclusion
Ultimately, the question posed for this Court by way of separate determination is as to whether, having regard to what was rejected in the referee's reasoning and conclusions, what was remitted to the Equity Division included the question as to what discount should be applied to the loss of profit claims in relation to the core business and the pre-30 June 2008 Nestlé, Safcol and Doane business.
This Court rejected the referee's reasoning and conclusions only insofar as they constituted, incorporated or reflected findings as to whether, and to what extent, BestCare would or may have supplied pet food to IAMS (and, post 30 June 2008, to Nestlé, Safcol and Doane). The findings as to the core business and pre-30 June 2008 loss of profits for the three named customers were not disturbed. BestCare's own position was that the 40% discount should not be disturbed for the non-IAMS trade connections, albeit in the context of its submission that all entries "above the IAMS line" in the relevant schedule should be left undisturbed.
The 40% discount adopted by the referee was not solely referable to the adoption of the IAMS 2 calculations, although the referee acknowledged that there was a "greater risk" in working from those figures. It was also referable to the fact that BestCare was seen as a company that was still being established and which had the benefit, and greater risk, of the lengthy period over which the damages claim, including the core business claim, was being assessed. In those circumstances, the adoption of the 40% discount factor did not incorporate the IAMS 2 findings and did not, in my opinion, reflect them in the sense contemplated by order 3(b).
To the extent that the 40% discount figure might be said to "reflect" part of the reasoning by reference to which it appears to have been chosen (i.e., the "greater risk" inherent in the IAMS 2 scenario production levels), it was not intended to form part of the remitter. Rather, the intention (as expressed at [228] of the April reasons) was that the award of damages referable to the core business and pre-30 June 2008 Nestlé, Safcol and Doane business be left undisturbed.
Accordingly, I would answer the separate question as follows:
1. The question of the discount for contingencies to be applied to:
(a) the core business; and
(b) the Nestlé, Safcol and Doane dealings in the period to 20 June 2008
does not fall within the scope of the remitter ordered on 24 April 2013, as varied on 19 July 2013; the intent of that remitter being to leave the damages award for loss of profit in relation to those dealings (having regard to the discount recommended by the referee) undisturbed. The Court notes that this has the effect that the discount for contingencies to be applied to the loss of profit claims for (a) and (b) above is as the referee recommended (40%).
2. The proceeding be remitted to the Equity Division for the determination of the remaining questions in the proceeding, in accordance with the 24 April 2013 order, as varied on 19 July 2013, and answer 1 above.
As to the costs of the separate determination of the question, they should be borne by BestCare.
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