BestCare Foods Ltd v Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd)
[2013] NSWSC 1287
•10 September 2013
Supreme Court
New South Wales
Medium Neutral Citation: BestCare Foods Ltd v Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) [2013] NSWSC 1287 Hearing dates: 19 - 22 August 2013 Decision date: 10 September 2013 Jurisdiction: Equity Division - Commercial List Before: Stevenson J Decision: Damages to be awarded for lost profits
Catchwords: PRACTICE AND PROCEDURE - civil - judgments and orders - remitter from Court of Appeal to assess damages for lost profits - ambit of remitter
DAMAGES - torts - negligence - lost profits - whether there has been a loss of a chance or opportunity of real or not negligible value to derive profits from certain commercial relationships - appropriate discount to reflect vicissitudesLegislation Cited: Civil Procedure Act 2005
Uniform Civil Procedure Rules 2005Cases Cited: BestCare Foods Ltd v Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) [2011] NSWSC 908
BestCare Foods Ltd v Origin Energy LPG Ltd [2012] NSWSC 574
BestCare Foods Ltd v Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) [2013] NSWCA 285
Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558
Commonwealth v Amann Aviation Pty Ltd (1992) 174 CLR 64
Hungry Jack's Pty Ltd v Burger King Corp [1999] NSWSC 1029
Jones v Schiffmann (1971) 124 CLR 303
Malec v JC Hutton Pty Ltd [1990] HCA 20; (1990) 169 CLR 638
Manuel v Lane [2013] NSWCA 61
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 229
Origin Energy LPG Ltd v BestCare Foods Ltd [2012] NSWCA 407
Price Higgins & Fidge v Drysdale [1996] 1 VR 346
Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332
Sensis Pty Ltd v McMaster-Fay [2005] NSWCA 163
Tabet v Gett [2010] HCA 12; (2010) 240 CLR 537
Troulis v Vamvoukakis [1998] NSWCA 237Category: Principal judgment Parties: BestCare Foods Ltd (first plaintiff)
BestCare Food (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:
M L Williams SC with S A Lawrance (plaintiffs)
N C Hutley SC with E G Romaniuk and R D Glover (defendants)
Solicitors:
McCabes Lawyers (plaintiffs)
Dibbs Barker Lawyers (defendants)
File Number(s): SC 2005/270917 Publication restriction: Nil
Judgment
Introduction
This is the hearing of a remitter from the Court of Appeal arising from that Court's judgment of 24 April 2013: Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) v BestCare Foods Ltd [2013] NSWCA 90 ("the April CofA Judgment").
The Court of Appeal remitted the proceedings to the Equity Division for the determination of certain aspects of the claim made by the plaintiffs (together "BestCare") against the defendants (together "Origin").
The proceedings arise from an explosion that, on 25 January 2003, destroyed a pet food factory operated by BestCare at Gunnedah. BestCare claims damages from Origin for breaches of various duties of care that it contended led to the explosion.
Following a hearing that lasted 46 days, Nicholas J found Origin liable to BestCare for breach of contract and in negligence (BestCare Foods Ltd v Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) [2011] NSWSC 908) and, on 14 October 2011, entered judgment for BestCare against Origin in an amount to be assessed.
An appeal from that decision was dismissed by the Court of Appeal on 13 December 2012: Origin Energy LPG Ltd v BestCare Foods Ltd [2012] NSWCA 407.
In the meantime, in the course of the hearing, and over the objection of both parties, Nicholas J made orders, pursuant to r 20.14 of the Uniform Civil Procedure Rules 2005, referring all questions of quantum to a referee, the Hon J M N Rolfe QC ("the Referee").
On 30 August 2011, following a hearing that lasted 39 days, the Referee delivered his report ("the Referee's Report"). Leaving aside questions of interest and gross-up for tax, the Referee recommended an award for damages totalling $45,714,015 in accordance with the following heads of loss: -
(a)
Trading losses from 25 January 2003 to 24 November 2004 (when BestCare was placed into administration)
5,462,422
(b)
Stock destroyed in the explosion
755,564
(c)
Blocking plant destroyed in the explosion
140,000
(d)
Cost of re-establishing operations at Dubbo
10,523,572
(e)
Stamp duty on the purchase of the Dubbo factory
388,723
(f)
Expenses of the Coronial Inquiry
155,435
(g)
Receivers' fees
304,328
(h)
Administrators' fees
1,583,971
(i)
Lost profits from November 2004 onwards
26,400,000
BestCare moved for the adoption of the Referee's Report, subject to a variation. The variation, which was not controversial, sought an additional award of $4,002,850 on account of lost profits between the date of the explosion (25 January 2003) and the date BestCare was placed into administration (24 November 2004).
Origin opposed the adoption of the Referee's recommended award for lost profits (the figure of $26,400,000 referred to at item (i) in [7] above), but did not oppose any of the other recommended awards (items (a) - (h)), nor the additional amount sought of $4,002,850 for lost profits between January 2003 and November 2004.
The basis on which Origin opposed adoption of the Referee's recommended award for lost profits was its contention that the Referee had misunderstood the evidence before him, and had recommended an award for which there was no evidence.
So far as is relevant to the matters that I must decide, the controversy concerning BestCare's claim for lost profits focused on the profits that BestCare contended that, but for the explosion, it would have derived from its commercial relationship with entities in the IAMS group (The IAMS Company, IAMS Japan KK and Proctor & Gamble Far East Inc - together "IAMS"), Nestlé Australia Limited, Safcol Australia Pty Ltd and Doane International. Each of these entities was a customer of, or at least had some dealings with, BestCare at the time it went into administration in November 2004.
Before the Referee, the expert accountants briefed by the parties quantified BestCare's lost profits so far as concerns IAMS by reference to two scenarios which came to be labelled "IAMS 1" and "IAMS 2". The two scenarios assumed the same levels of sales in BestCare's base or core business but different levels of sales that BestCare could have made to IAMS, but for the explosion. The two scenarios were alternatives. The different levels of sales assumed under those two scenarios were as follows: -
FY05
FY06
FY07
FY08
IAMS 1
6250 tonnes
17,000 tonnes
22,500 tonnes
25,000 tonnes
IAMS 2
25,000 tonnes
40,000 tonnes
60,000 tonnes
80,000 tonnes
The Referee's recommended award on account of lost profits was 60 per cent (a discount of 40 per cent to reflect vicissitudes) of the present value, at the date of the explosion, of future profits under the IAMS 2 scenario.
Origin contended that the Referee had failed to appreciate that IAMS 1 and IAMS 2 were alternatives and had incorrectly understood IAMS 2 to represent a continuation of the IAMS contract beyond its initial term. Origin contended that, in any event, there was no evidence for an award of lost profits based on the IAMS 2 tonnages.
McDougall J heard the motion to adopt the Referee's Report between 21 and 24 May 2012. In effect, his Honour rejected Origin's submissions and concluded that the Referee's Report should be adopted (with some qualifications not relevant to the dispute before me): BestCare Foods Ltd v Origin Energy LPG Ltd [2012] NSWSC 574. There was no contest before McDougall J that the variation to the Referee's recommendation (adding $4,002,850 for lost profits from January 2003 to November 2004) should be made.
On 15 June 2012, McDougall J entered judgment for BestCare against Origin in the sum of $91,219,465 made up as follows: -
Award
Interest
Total
(a)
Trading losses from January 2003 to November 2004
5,462,422
4,256,427
9,718,849
(b)
Stock destroyed in the explosion
755,564
649,206
1,404,770
(c)
Blocking plant destroyed in the explosion
140,000
120,293
260,293
(d)
Cost of re-establishing operations at Dubbo
10,523,572
8,819,424
19,342,996
(e)
Stamp duty on the purchase of the Dubbo factory
388,723
318,083
706,806
(f)
Expenses of the Coronial inquiry
155,435
95,400
250,835
(g)
Receivers' fees
304,328
220,460
524,788
(h)
Administrators' fees
1,583,971
900,163
2,484,134
(i)
Lost profits from January 2003 to November 2004
4,002,850
3,439,382
7,442,232
(j)
Lost profits from November 2004 onwards
26,400,000
22,683,762
49,083,762
Items (a) to (h) were awards that had been recommended by the Referee and were not disputed before McDougall J. Item (i) was the award, undisputed before McDougall J, for lost profits between the explosion and administration.
The final item, $26,400,000, was the Referee's recommended award for lost profits for the period after administration. That is the amount now in dispute before me.
By the April CofA Judgment, the Court of Appeal allowed Origin's appeal from the decision of McDougall J.
The Court of Appeal held that the Referee had proceeded upon the misapprehension referred to at [14] above and that there was no evidence to support a finding that, but for the explosion, there was a 60 per cent chance that profits under the IAMS contract would have been achieved at the IAMS 2 levels.
The Court of Appeal also upheld a complaint made by Origin in relation to BestCare's arrangements with Nestlé, Safcol and Doane. Before the Referee, the experts' quantifications of profits to be derived by BestCare from its relationship with these three customers assumed that BestCare's relationship with those customers would be indefinite. Origin contended that there was no evidence to support a quantification based on an indefinite relationship (in particular, beyond 30 June 2008) between BestCare and these customers.
The Court of Appeal ordered that the Referee's Report be adopted save that, relevantly (at [234]): -
"The Referee's reasoning and conclusions are rejected insofar as they constitute, incorporate or reflect findings as to whether, and to what extent, [BestCare] would, or may, have supplied pet food to an entity known as IAMS (and indefinitely to one or more of Nestlé, Safcol or Doane) if the explosion had not occurred at [BestCare's] premises on 25 January 2003."
The Court made the following remitter order (at [234]): -
"Remit the proceedings to the Equity Division for the determination of the damages to which [BestCare] is entitled and the making of orders (including as to costs) that the judge considers appropriate for the 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 of 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 19 July 2013, the Court of Appeal rejected an application by BestCare to vary those orders: Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) v BestCare Foods Ltd [2013] NSWCA 229.
Ambit of the remitter
Before me, there was argument as to the ambit of the remitter. Mr Williams SC, who appeared with Mr Lawrence for BestCare, submitted that the remitter included consideration of the discount for contingencies to be applied to BestCare's core business, and its dealings with Nestlé, Safcol and Doane, prior to 30 June 2008. Mr Hutley SC, who appeared with Mr Romaniuk and Mr Glover for Origin, submitted that such matters formed no part of the remitter.
With a view of having that controversy resolved expeditiously, on the fourth day of the hearing, 22 August 2013, and with the consent of the parties, I removed to the Court of Appeal agreed questions as to the ambit of the remitter (on the basis that the parties agreed that the matter should be remitted back to me, once the questions were answered).
On 30 August 2013, the Court of Appeal answered those questions 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%)." (BestCare Foods Ltd v Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) [2013] NSWCA 285 at [38]) (emphasis added).
The Court of Appeal's reference to "20" June 2008 appears to be a slip. The reference should be to 30 June 2008.
In light of the Court of Appeal's answer to those questions, and the terms of the orders made on 24 April 2013, clarified on 19 July 2013, the task remitted to me is: -
(a) to determine the extent to which BestCare would have been likely to supply pet food to IAMS, but for the explosion;
(b) to determine the extent to which BestCare would have been likely to supply pet food to Nestlé, Safcol and Doane beyond 30 June 2008, but for the explosion;
(c) in light of (a) and (b), and the Referee's conclusions in relation to the core business and BestCare's likely dealings with Nestlé, Safcol and Doane to 30 June 2008, arrive at an award in respect of the loss of opportunity to earn profits selling pet food after November 2004;
(d) add the award in (c) to the non-contentious heads of damages (items (a) to (i) in [16] above);
(e) determine interest up to judgment under s 100 of the Civil Procedure Act 2005; and
(f) determine the appropriate order that should be made for costs, including those of the reference, but excluding costs in the Court of Appeal.
BestCare's business
The following is uncontroversial background taken from Mr Williams' submissions, and from the April CofA Judgment.
At some time prior to July 2001, Mr Michael Goldring and Mr Franz Strobl identified an opportunity to consolidate the baked pet food business of J&J Dry Pet Food Manufacturers Pty Ltd, with an extruded pet food business operated by Bayer Australia Ltd at the Gunnedah factory. At the time, J&J had an established business selling baked dog biscuits manufactured at a factory in Rouse Hill.
The BestCare business was established in July 2001. Mr Strobl became the Managing Director of BestCare and Mr Goldring became its Operations Director. The business then comprised the businesses formerly carried on by Bayer at Gunnedah and J&J at Rouse Hill. During the first year of operations, BestCare consolidated those operations by relocating the former J&J baking line to Gunnedah and shutting down the Rouse Hill factory.
In the first 18 months of its operations, BestCare launched a number of other business lines.
By 31 December 2002, the business was trading profitably. However, on 25 January 2003, the Gunnedah factory was destroyed by an explosion that Nicholas J found to have been caused by breaches by Origin of various duties of care it owed BestCare. As I have mentioned, an appeal from the decision of Nicholas J to the Court of Appeal was dismissed.
Following the explosion, BestCare decided not to repair the Gunnedah factory. Instead, using the proceeds of insurance policies, BestCare acquired a factory at Dubbo from Nestlé in July 2003.
Production at Dubbo commenced in late 2003, by which time many of BestCare's products had been out of the market for almost a year. The business was not able to return to profitable trading before insurance monies ran out.
In the April CofA Judgment, Ward JA said (at [19]): -
"The Referee accepted... that BestCare's business could barely continue following the explosion (something the Referee considered was to be expected having regard to the extent of the devastation brought about by the explosion) and said... that, whatever the business was at the date of the explosion, it was "destroyed at that point". Mr Goldring's evidence was that as at mid 2004 BestCare had lost about 75 % of its original business and that this was business that was never recovered."
As I have mentioned, BestCare was placed into voluntary administration on 24 November 2004. On 10 March 2005, the administrator sold the business.
The Referee found that the explosion at the Gunnedah factory, and the consequences of that explosion, was a (if not the) cause of the financial collapse of BestCare. That finding was not in issue before the Court of Appeal (see Ward JA at [35] of the April CofA Judgment) or before me.
Principles of assessment of damages for loss of a chance
In the April CofA Judgment, Ward JA (who wrote the principal judgment) summarised the relevant principles as follows (at [84] - [86]): -
"Where a claim is made for loss of a chance or opportunity caused by negligence (or breach of contract), the loss of that chance or opportunity must be proved on the balance of probabilities. Once the loss of a chance or opportunity has been so proved, then it is for the Court to value the possibility or prospect of that chance or opportunity (and this is not an exercise to be carried out on the balance of probabilities) (see Malec v JC Hutton Ltd (1990) 169 CLR 638; Commonwealth v Amann Aviation Pty Ltd (1992) 174 CLR 64; Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 and, more recently, Tabet v Gett (2010) 240 CLR 537).
The majority in Sellars said (at 355) that 'acceptance of the principle enunciated in Malec requires that damages for deprivation of a commercial opportunity, whether the deprivation occurred by reason of breach of contract, tort or contravention of s 52(1), should be ascertained by reference to the court's assessment of the prospects of success of that opportunity had it been pursued'. At 358, Brennan J, as his Honour then was, said:
'Where a loss is alleged to be a lost opportunity to acquire a benefit, a plaintiff who bears the onus of proving that a loss was caused by the conduct of the defendant discharges that onus by establishing a chain of causation that continues up to the point when there is a substantial prospect of acquiring the benefit sought by the plaintiff. Up to that point, the plaintiff must establish both the historical facts and any necessary hypothesis on the balance of probabilities. A constant standard of proof applies to the finding that a loss has been suffered and to the finding that that loss was caused by the defendant's conduct, whether those findings depend on evidence of historical facts or on evidence giving rise to competing hypotheses. In any event, the standard is proof on the balance of probabilities.'
While it is accepted that, as Toohey J in Amann noted (at 138) the assessment of damages does sometimes, of necessity, involve what is 'guess work rather than estimation' (his Honour there quoting Menzies J in Jones v Schiffmann (1971) 124 CLR 303 at 308), the onus remains on the plaintiff to prove its loss. In a loss of opportunity case that requires evidence from which the value of that lost opportunity can be assessed. In Sellars, Brennan J (at 365) noted that 'in order for a plaintiff to establish that a negligent defendant's conduct has caused a valuable loss of opportunity, he or she must establish by evidence that, but for the contravening conduct of the defendant, he or she could have and would have taken the opportunity and the benefit that it would have yielded' (my emphasis)."
Macfarlan JA said (at [3]): -
"Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332 established that whilst the value of a lost commercial opportunity is to be 'ascertained by reference to the degree of probabilities or possibilities' that it would be realised, a plaintiff must first prove 'on the balance of probabilities that he or she has sustained some loss or damage' (at 355)".
In Tabet v Gett, Keifel J, also referring to Sellars v Adelaide Petroleum NL, observed (at [124]) that: -
"So long as an opportunity provides a substantial and not merely a speculative prospect of acquiring a benefit, it can be regarded as of value and therefore loss or damage."
In Sellars v Adelaide PetroleumNL Brennan J said (at 364) that: -
"Provided an opportunity offers a substantial, and not merely speculative, prospect of acquiring a benefit that the plaintiff sought to acquire or of avoiding a detriment that the plaintiff sought to avoid, the opportunity can be held to be valuable."
In the same case, the plurality (Mason CJ, Dawson, Toohey and Gaudron JJ) said that the commercial opportunity must have "some value (not being a negligible value)" (at 355). There are judicial references to the necessity that the opportunity be of "real value" (for example, Sensis Pty Ltd v McMaster-Fay [2005] NSWCA 163 at [24] and Price Higgins & Fidge v Drysdale [1996] 1 VR 346 at 355).
Thus, I must engage in a two stage process.
The first stage is to consider whether BestCare has established, on the balance of probabilities, that it has lost a "chance" or "opportunity" from its relationship with IAMS (generally) and each of Nestlé, Safcol and Doane (beyond 30 June 2008); and that such chance or opportunity was of "not speculative", or "not negligible" or "real" value.
The second stage of the process, only reached if the first stage is passed, is to place a figure on the value of the chance or opportunity. That task is not to be carried out on the probabilities. If I find that, probably, BestCare has lost a commercial opportunity or chance (of "some", "not negligible" or "real" value), I must then make an assessment of that value. I must do that by "having regard to the possibility that such an opportunity would have matured" (the April CofA Judgment at [97] per Ward JA). But there must be a basis in the evidence for me to arrive at a figure for the lost opportunity. What I cannot do is take a stab in the dark; "justice does not dictate that in such a case, a figure should be plucked out of the air" (Troulis v Vamvoukakis [1998] NSWCA 237 at [29] per Gleeson CJ).
In order to assess the nature of the opportunity or chance that BestCare had in relation to IAMS, Nestlé, Safcol and Doane, it is necessary to examine, in some detail, the history of BestCare's dealings with those entities. So far as concerns IAMS, it is also necessary to have regard to the observations made in the April CofA Judgment and the extent to which those observations constrain the conclusions which are open to me.
I shall deal first with IAMS, and then with Nestlé, Safcol and Doane.
IAMS
Negotiations leading to the Supply Agreement
When the BestCare business was established in July 2001, IAMS was selling in Australia pet food manufactured abroad (as it had been doing since about 1995). To this day, IAMS sells imported pet food in Australia. So far as the evidence reveals, IAMS has at no time manufactured pet food in Australia.
Some nine months before the BestCare business was established, and whilst Bayer was operating the plant at Gunnedah, representatives of IAMS visited the Gunnedah plant.
In August 2001, shortly after the BestCare operations commenced, a BestCare employee told Mr Strobl of the IAMS visit in October 2000. On 20 August 2001, Mr Strobl wrote to IAMS' New Zealand office introducing BestCare: -
"Further to our telephone conversation the other day I would like to present BestCare Foods Limited and outline some of the thoughts we discussed...
BestCare Foods Limited is a public company (unlisted) that operates two manufacturing plants in NSW. That is the former Bayer - Gunnedah plant for the manufacture of extruded dog, cat food and the J&J Dry Pet Food plant at Rouse Hill, Sydney manufacturing baked pet snacks...
We are intending to relocate the biscuit production to Gunnedah...
Because of your company having shown interest in the past in possibly utilising the plant [at Gunnedah] for the co-manufacture of IAMS products we would be most pleased to be able to discuss with you the possibility of BestCare Foods making a proposal to you...".
On 7 September 2001, Mr Strobl and Mr Goldring travelled to New Zealand to meet with a representative of IAMS, Mr Murray Swanson.
On 10 September 2001, Mr Strobl and Mr Goldring sent Mr Swanson an information pack about BestCare.
There the matter rested for almost two years. In the meantime, the explosion occurred at the Gunnedah factory on 25 January 2003 and, thereafter, BestCare relocated its operations to Dubbo.
On 29 August 2003, eight months after the explosion, Mr Brian Rutemiller, a purchasing group manager at IAMS, circulated to a number of parties, including BestCare, a request for tender which included: -
"Proctor & Gamble/IAMS is conducting an inquiry for contract manufacturing of IAMS and Eukanuba dry pet food in Australia and have included your company as a candidate for this business. The Australia Local Manufacturing project is an attempt to find a local contract manufacturer in Australia to manufacturer our current dry products for Australia.
You are invited to submit your best full service bid for the manufacturing services as described in the attachments...".
One of the attachments was a document called "Bid Assumptions" which stated, under the heading "Quantities": -
"Production capacity estimated to be 12,000 - 14,000 metric tonnes during the first 12 months of operation."
A "Quote Sheet" attached to the request for tender sought pricing in the volume ranges 0 - 15,000 tonnes, 15,001 - 25,000 tonnes, 25,001 - 35,000 tonnes and over 35,000 tonnes.
BestCare submitted a proposal to IAMS later in August 2003 and, consistently with the request for tender, included pricing for these volumes.
In September 2003, Mr Rutemiller told Mr Goldring that BestCare was on IAMS' shortlist of tenders.
In September or October 2003, someone from IAMS asked Mr Goldring whether BestCare "could improve" on the tender submitted in August. Mr Goldring said that he: -
"... conducted a detailed analysis of the profitability to BestCare of winning the IAMS contract, in order to assess whether, and by how much, BestCare could improve on the prices it had quoted in August."
Mr Goldring said that around this time he asked Mr Rutemiller: -
"... what levels of production I should assume for the purpose of preparing the improved quote".
Mr Goldring said that someone from IAMS ("probably" Mr Rutemiller) provided the tonnages which became the "IAMS 1" scenario to which I have referred, namely: -
2004
2005
2006
2007
15,000
17,000
22,500
25,000
Mr Goldring prepared a document called "Budget 2004 - 2006 Plan with IAMS" which reflected these figures.
In October 2003, representatives of IAMS (including Mr Rutemiller and Mr Swanson) visited BestCare's premises at Dubbo to assess its suitability for manufacturing IAMS products.
On 26 October 2003, IAMS sent Mr Strobl and Mr Goldring a note setting out the "changes we feel would be required prior to your facility being able to manufacturing [sic] our products". The report stated: -
"Overall the plant layout in Dubbo very closely mirrors that of IAMS existing facilities with the possible exception of the separate meat processing and milling areas. Our primary concerns are focused on the milling and batching capability of your facility".
Representatives of IAMS made a further visit to Australia in January 2004 and, in Mr Goldring's company, "visited a large number of potential suppliers of raw materials".
On 10 February 2004, Mr Goldring had a telephone call with Mr Rutemiller following which he circulated an email: -
"Brian Rutemiller confirms prior volumes forecasts (year 1 - 14,000 tons, year 2 increasing - potentially 20,000 tons)."
Mr Goldring prepared revised pricing for IAMS, assuming these higher tonnages.
On 21 March 2004, IAMS prepared a document that the parties described as a "task sheet". This is one of the few documents emanating from IAMS to which my attention was drawn.
A striking feature of BestCare's claim for lost profits said to arise from the loss of opportunity to deal with IAMS (and, indeed Nestlé, Safcol and Duane) was that no evidence was called from any representative of those companies; nor, it seems, was any subpoena served on those entities requiring production of documents. That is a curious omission, as it seems highly probable that each entity would have in its possession documents indicating the extent to which, in the period leading up to the appointment of administrators to BestCare, it proposed to source their pet food requirements from BestCare. Production of such material would have provided a far sounder basis upon which BestCare could mount a claim for lost profits than the one adopted; which was, for the most part, the drawing of inferences from internal BestCare budgets, statements made to BestCare by IAMS of estimated requirements and other like circumstances.
Returning to the "task sheet", the document sets forth various "tasks" that IAMS required to be attended to, including tasks associated with identification and shipping of ingredients, research and development formulation, technical services, engineering, packaging and the like. The documents specified the estimated duration of those tasks, the extent to which they were (from time to time) complete, and the start and finish date of the tasks. The form of the task sheet suggests that it was to be updated from time to time. The only update in evidence is dated 22 October 2004. I return to that document below (at [114]).
In April 2004, Mr Goldring and Mr Stobl travelled to the United States of America to meet with IAMS' representatives.
The 28 May 2004 Supply Agreement
On 28 May 2004, IAMS and BestCare entered a "Supply Agreement".
Clause 4 was the operative provision of the Supply Agreement which incorporated the "buyer estimated quantity" of "14,000 US tons" and was in the following terms (substituting the names of the parties for the words "buyer" and "seller"; I shall make the same substitution in subsequently quoted clauses): -
"4.0 QUANTITY
4.1 PURCHASE & SALE OBLIGATIONS.
IAMS estimated quantity is 14,000 US tons annually.
4.2 PURCHASE ORDERS. From time to time during the PERIOD of this AGREEMENT, IAMS shall request GOODS from BestCare pursuant to and in accordance with the separate IAMS forms of purchase orders, releases or other related documentation (collectively "PURCHASE ORDERS"). Such PURCHASE ORDERS shall specify quantities of GOODS, shipping instructions, delivery date(s) and detailed instructions for the delivery of GOODS (with release schedules, delivery orders or equivalent notices). Each PURCHASE ORDER shall be binding upon IAMS and BestCare, and shall be deemed to constitute a part of this AGREEMENT as if fully set forth herein, and all terms and conditions of this AGREEMENT shall be deemed to apply to the subject matter of such PURCHASE ORDER as if fully set forth therein. In the event of any conflict or inconsistency between the terms of this AGREEMENT and the terms of any PURCHASE ORDER, the terms of this AGREEMENT shall prevail."
Clause 4.1 makes clear that, as was common ground, the Supply Agreement did not require IAMS to purchase any nominated minimum quantity of pet food.
It also reveals that the parties contemplated that any pet food to be purchased by IAMS under the Supply Agreement was to be the subject of a separate purchase order specifying the particular goods required. Such purchase orders were to incorporate the terms of the Supply Agreement.
The Supply Agreement did not contain any provision which, in terms, prevented IAMS from selling in Australia pet food manufactured outside Australia (whether by IAMS or some other party) or which prevented IAMS from purchasing pet food manufactured in Australia by a competitor of BestCare.
Nonetheless, Mr Williams submitted that, on its proper construction, the Supply Agreement obliged IAMS to purchase its pet food requirements "in Australia" from BestCare. The arguments Mr Williams put to me on this subject were not put to the Court of Appeal in the argument that led to the April CofA Judgment.
Mr Williams drew attention to cl 2.1 of the Supply Agreement which was in the following terms: -
"2.1 GOODS: SPECIFICATIONS. BestCare shall sell and IAMS shall purchase manufacturing goods and services for dry extruded dog and cat pet food in Australia in accordance with the terms and conditions set forth in this AGREEMENT..." (emphasis added)
Mr Williams drew attention to the use of the word "shall" and submitted that those words bespoke an intention of the parties that, if IAMS was to purchase pet food "in Australia", it would do so from BestCare.
I do not read these words in cl 2.1, taken alone, as compelling this conclusion. I accept the submission made by Mr Hutley that the effect of cl 2.1 is no more than to make plain that, if there were dealings between the parties, the terms of the contract would govern those dealings.
However, Mr Williams also pointed to a number of clauses in the Supply Agreement that stated that, in specified circumstances, IAMS "may" purchase goods "from any other supplier". Mr Williams submitted that these clauses would be otiose if, as Mr Hutley submitted, the Supply Agreement was no more than a "call option" pursuant to which IAMS could order any quantity of pet food it liked from BestCare, but was free to purchase from other domestic producers.
For example, cl 2.2.1 stated that IAMS could revise its specifications from a particular date and that BestCare could object to such changes. In that event, cl 2.2.2 stated that the parties were obliged to "promptly discuss the reason for the objection and attempt to resolve the same". Clause 2.2.2 then provided that: -
"If the PARTIES cannot resolve or agree to a plan to resolve the OBJECTION within thirty (30) calendar days, IAMS may (i) purchase the GOODS from any other supplier in which case the obligations, including, but not limited to, any purchase and sale requirements and/or commitments, if any of IAMS and BestCare hereunder be reduced accordingly; or (ii) terminate this AGREEMENT without any penalty, liability or further obligation."
Similar provisions were made in cl 3.4.4 (concerning quality assurance key elements), cl 4.3.1 (concerning reformulation), cl 4.3.2(c) (concerning BestCare's "financial ratings") and cl 10.2 (concerning force majeure).
Two further such clauses warrant particular consideration.
Clause 5.3 contained a "meet or release" provision in the following terms: -
"If during the PERIOD of this AGREEMENT IAMS can purchase goods or materials of like quality to GOODS and MATERIALS purchased hereunder from another supplier at a total delivered cost to... IAMS... that is lower than the total delivered cost of the GOODS or MATERIALS purchased hereunder from BestCare, IAMS may notify BestCare of such total delivered cost and BestCare shall have an opportunity to price the GOODS or MATERIALS purchased hereunder on such a basis as to result in the same total delivered cost to IAMS within thirty (30) calendar days of such notice."
Clause 5.3 went on to provide that if BestCare "timely fails to do so or cannot legally do so" then IAMS could purchase elsewhere or terminate the Supply Agreement.
Clause 5.4 contained a "most favoured customer" clause which made similar provision in the event that BestCare was selling pet food of the kind the subject of the Supply Agreement to a third party at a price lower than to IAMS.
As I have mentioned, Mr Williams submitted that all of these provisions would be otiose if, in truth, the Supply Agreement did not impose on IAMS an obligation to purchase pet food in Australia from BestCare.
In response to this submission, Mr Hutley submitted that the fact that cl 4.2 contemplated that the clauses in the Supply Agreement were intended to be incorporated into each purchase order showed that the provisions said to be otiose "have work to do in that context".
I do not accept that the provision for purchase orders in cl 4.2 does constitute an answer to Mr Williams' submission that the clauses would be "otherwise otiose".
In my opinion, those clauses bespeak a contemplation by the parties that, if IAMS was to purchase pet food in Australia it would, subject to those provisions enabling it to purchase pet food in Australia elsewhere, purchase such pet food from BestCare.
That conclusion is fortified, in my opinion, when those clauses are read in light of the mandatory provision ("shall purchase") in cl 2.1 (see [80] above). As I have said, cl 2.2 taken in isolation does not, in my opinion, lead to the conclusion for which Mr Williams contends; but when read in light of the "otherwise otiose" clauses to which Mr Williams referred, makes clear to me that Mr Williams' submission should be accepted.
As I have said, Mr Hutley submitted that the Supply Agreement was no more than, in effect, a "call option" exercisable by IAMS as and when it wanted supply from BestCare. For the reasons I have outlined, I do not see the matter as being that simple.
However, so far as BestCare is concerned, a number of significant uncertainties, arising from the terms of the Supply Agreement, remain.
First, as I have mentioned, there was nothing in the Supply Agreement that obliged IAMS to purchase any minimum quantity of pet food from BestCare. And there was nothing in the Supply Agreement preventing IAMS from itself manufacturing and selling pet food in Australia, or importing for sale in Australia pet food made overseas by it, or another supplier. Prior to entering into the Supply Agreement, IAMS sold pet food in Australia made elsewhere. There was nothing in the Supply Agreement to prevent IAMS from continuing to act in this way. Indeed the evidence shows that this is exactly what IAMS has done. It is still a player in the Australian pet food market and sells, in Australia, pet food manufactured outside Australia.
Second, by reason of the "meet or release" provision in cl 5.3 (see [87] above), if IAMS identified a supplier of like pet food at a price less than BestCare, it was entitled to ask BestCare to match or better that price, failing which IAMS was free to purchase elsewhere or, indeed, terminate the Supply Agreement.
Third, by reason of the "most favoured customer" provision in cl 5.4 (see [89] above), if BestCare sold goods, equivalent to those to be sold to IAMS, to others for a price less than in the Supply Agreement, IAMS could purchase elsewhere.
Events between the Supply Agreement and the appointment of administrators
Mr Goldring gave evidence that: -
"When BestCare was awarded the contract with IAMS in 2004 a joint project was established. The project became known as Project Stealth (later, known as Project Sydney) and involved 31 personnel (25 were senior specialist staff from IAMS)... BestCare was provided with the time, experience and expertise of IAMS staff at no charge. The teams met regularly for over 6 months to establish and implement tasks in their respective fields to enable BestCare to commence production for IAMS."
In May and June 2004, IAMS also provided BestCare with confidential IAMS specifications, formulations and procedures.
Thereafter, product trials took place. Mr Goldring gave evidence: -
"BestCare did not pay for the cost of product trials for IAMS. IAMS paid for raw materials and equipment required for trials together with all its own staff costs. BestCare was only required to meet its own staffing costs."
In late July 2004, IAMS agreed to provide BestCare with certain items of equipment at "30 per cent of IAMS' written down value".
Mr Williams placed great emphasis on these matters as pointing to the probability that the Supply Agreement would prove profitable from BestCare's point of view.
However, it seems to me that, so far as these matters are concerned, I am to a very large degree constrained by the views expressed by Ward JA (with whom Macfarlan JA and Hoeben CJ at CL agreed) in the April CofA Judgment. At [182] her Honour said: -
"That said, [this evidence] does not in my view assist BestCare. The fact that IAMS made surplus equipment available at a written down price is equally consistent with it seeking to extract some value for redundant equipment. The fact that IAMS assisted BestCare in other ways similarly says nothing about the likelihood of production levels at a particular tonnage or for a particular period and must be balanced against the fact that IAMS did enter a contract with BestCare it did not commit itself to any level of production and nor did it commit itself to an indefinite commercial relationship."
It is true that, immediately following that paragraph was the following (at [183]): -
"This category of evidence does not amount to evidence available reasonably to satisfy the decision maker as to, or to support, the assessment of the prospect of the IAMS 2 scenario at the level of 60% or higher."
However, as I read her Honour's judgment, the observations at [182] were made generally, and not only by reference to the IAMS 2 scenario.
In September 2004, IAMS advanced $700,000 to BestCare (by instalments of $200,000 and $500,000).
These funds were advanced pursuant to cl 5.1.1 of the Supply Agreement which was in the following terms: -
"5.1.1 IAMS' ADVANCE. IAMS agrees to provide BestCare up to A$1,000,000.00 (IAMS' ADVANCE) to be utilised to purchase the initial raw material inventory build (MATERIAL). All of which remains the absolute property of IAMS until such time as the whole of the sum of A$1,000,000.00 is reimbursed to IAMS (together with an amount equal to 6% of the IAMS' ADVANCE outstanding) via a decreased price per unit purchased for the initial 1,000,000 units shown in Exhibit III. IAMS will retain the title to all these MATERIALS purchased on IAMS' behalf and utilised by BestCare until BestCare pays back IAMS' advance in full after which BestCare will purchase and own all future MATERIALS." (underlined emphasis added)
Mr Williams relied upon this provision, and the advance of $700,000, as pointing to the probability of an ongoing commercial relationship between BestCare and IAMS.
The "Buyer's Advance" (which was to be "up to" A$1 million) was to be used by BestCare "to purchase the initial raw material inventory build". The advance was to be repaid by BestCare to IAMS (with interest at 6 per cent) "via a decreased price per unit" for the initial 1 million units of pet food purchased (which Mr Williams informed me amounted to approximately 10,000 tonnes of pet food).
The fact that IAMS agreed to make a "Buyer's Advance" of $1 million to BestCare, and in fact, prior to administration, advanced $700,000 of that sum, certainly suggests that IAMS anticipated purchasing at least 700,000 units of product from BestCare; this being the only means contemplated by the parties for the repayment by BestCare to IAMS of the advance.
The evidence before the Referee also established that, in order to secure the IAMS contract, BestCare had to expend some $1.6 million on capital works (to modify its "extruder line" and to improve hygiene, operations and install meat packing equipment). That capital expenditure is relevant to the profit BestCare alleges it would have made from dealings with IAMS, but for the explosion.
On 22 October 2004, IAMS created an update of the "task sheet" referred to at [70] to [72] above.
As I have mentioned, the "task sheet" is one of the few documents emanating from IAMS to which my attention was drawn.
Under the heading "Australia Co-Manufacturing", the first task mentioned was "Project Commitment". As at 22 October 2004, that task was estimated to take 402 days, to commence on 18 March 2004 and to finish on 30 September 2005.
The document indicated the "finish" date of many other tasks. For example, according to this document "formula/production validation" was to finish on 30 September 2005; "validation of permanent equipment" was to finish on 8 April 2005; "equipment installation" was to finish on 25 March 2005; "printing and lamination" of artwork was to finish on 29 June 2005; "laboratory test method validation" (before start of final production) was to finish on 8 April 2005. There are many other examples of tasks which, according to this document, were to "finish" well into 2005.
Before the Referee, Mr Goldring gave evidence that, at that time, it would have been necessary for BestCare to install some equipment for processing fresh meat in order to commence production of all of IAMS' products on a commercial scale. Mr Goldring estimated that, had BestCare not "encountered difficulties in raising funds in the latter part of 2004" BestCare would have commenced commercial production under the IAMS contract in early 2005.
I was not directed to any submissions addressed to the Referee as to how the evidence from Mr Goldring referred to at [118] was to be reconciled with the "task sheet". Mr Hutley submitted that the "task sheet" suggested that commercial production by January 2005 was not, in fact, achievable.
BestCare had not started making commercial quantities of pet food for IAMS when it was placed into voluntary administration on 24 November 2004.
At some time thereafter, IAMS terminated the Supply Agreement. My attention was not directed to any evidence that revealed precisely when, or on what grounds, if any, IAMS terminated the Supply Agreement.
As I have mentioned, the term of the Supply Agreement was for four years (with five one year options, at the sole discretion of IAMS).
The Supply Agreement provided for early termination in two circumstances. The first was if BestCare was in breach of any obligation under the Supply Agreement. The second was if BestCare terminated or liquidated its business or if, in effect, an insolvency event occurred in relation to BestCare or its business.
The appointment of administrators to BestCare thus provided IAMS with an entitlement to terminate under the second of these grounds. Whether IAMS was so motivated, when it terminated the Supply Agreement, is another matter to which I will return.
After BestCare was placed into administration, Mr Goldring commenced work as a consultant to another Australian pet food manufacturer, VIP Pet Foods.
In April 2005, while Mr Goldring was at VIP Pet Foods, VIP received a request for tender from IAMS. The request for tender sought quotes for the manufacture of: -
(a) approximately 40,000 tonnes of dry pet food in the first 12 months; and
(b) up to 80,000 tonnes per annum of dry pet food in subsequent periods.
Mr Goldring prepared a number of quotations that VIP submitted to IAMS for production at those levels.
IAMS did not proceed with a contract for the manufacture of pet food in Australia with VIP, or any other company.
Nonetheless, IAMS continued to sell pet food (manufactured outside Australia) in the Australian market.
Stage one of the enquiry: loss of a chance?
The first stage of the enquiry requires consideration of whether it is more probable than not that BestCare has lost a chance or opportunity of "real" or "not negligible" value to derive profits from its relationship with IAMS.
In the April CofA Judgment, Ward JA said at [109]: -
"Mr Walker [SC who appeared for Origin] accepts that there was a basis for finding that there was a loss of a commercial opportunity to sell pet food to IAMS on a profitable basis..."
That passage records what appears to me to be a concession by Mr Walker that BestCare had satisfied stage one of the enquiry.
It is true that [109] continued: -
''... but submits that the prospect of the IAMS commercial relationship maturing into something that enabled an assessment to be valued by reference to the IAMS 2 scenario was a matter for BestCare to prove (albeit that it would not, on that hypothesis, be required to do so on the balance of probability). Mr Walker submits that it must be a commercial opportunity with a sufficient identity to be the subject of evidence."
However, as I read Ward JA's judgment, the second of these extracts records that Mr Walker, having accepted that stage one of the enquiry was satisfied, then made submissions directed to stage two of the enquiry.
Before me, Mr Hutley, ever candid, acknowledged the strength of the argument that stage one had been satisfied. Mr Hutley said of the Supply Agreement: -
"There was an estimate by the purchaser under the contract by the usage of 14,000 tonnes per annum. Now I can't say that if that was all there was, that... your Honour couldn't find that to that extent there was a valuable opportunity - again, there was an opportunity, a substantial and not merely speculative prospect of acquiring benefit.
...but your Honour at least has a statement of estimate and that may be sufficient to say it's substantial. I don't make the concession but I understand the argument with respect."
Mr Hutley did qualify this statement by reference to his submission that the Supply Agreement was no more than a "call option" and by reference to what he submitted was the "confounding circumstances" that, during 2005, IAMS ceased to have its manufacturing performed in Australia. I have dealt with the "call option" submission and will return to the significance of IAMS' decision not to proceed with domestic manufacture of its products when considering stage two of the enquiry.
Further, as Mr Williams submitted, in the April CofA Judgment, the Court of Appeal appears to have proceeded upon the basis that stage one of the enquiry had been satisfied. Thus Ward JA said: -
"Treating the relevant loss of opportunity (for present purposes) as the more broadly expressed loss of the opportunity to make profits from the sale of pet food (which would include the loss of opportunity to make profits from the sale of pet food "under" the IAMS contract or other supply contracts), it does appear to be disputed that there was evidence on the balance of probabilities that such an opportunity was lost". (at [106])
And: -
"Once the loss of the opportunity to make profits (a general proposition), or the opportunity to make profits under the IAMS contract, was proved on the balance of probabilities, the question is whether there was evidence that on a principled approach (with reference to the "no evidence" test as explained above) enabled the Court to adopt the conclusion reached by the referee." (at [110])
The heading preceding [107] was in the following terms: -
"On the basis that the relevant loss of opportunity was simply the opportunity to make profits under the 2004 IAMS contract (and other supply contracts) to the maximum term of those contracts, was there sufficient evidence available to the referee to satisfy a reasonable decision-maker that the prospects of production on the IAMS 2 level were in the order of 60%?"
As I read these passages, Ward JA either found it not to be disputed, or at least was prepared to assume (for the purpose of considering the "no evidence" point in relation to the IAMS 2 scenario) that BestCare had established that, on the balance of probabilities, it had lost a chance or an opportunity of "real" or "not negligible" value to make profits under the IAMS Supply Agreement to the maximum term of that contract (that is, four years to 28 May 2008).
Whether her Honour's observations were a finding, or merely an assumption, the conclusion to which I have come is that BestCare has established the existence of such a loss of opportunity or chance sufficient to satisfy the first stage of the two stage test to which I have referred.
In coming to that conclusion, I accept that, under the Supply Agreement, and as her Honour found at [182], IAMS: -
"... did not commit itself to any level of production and nor did it commit itself to an indefinite commercial relationship".
However, for the reasons that I have set out above, I do not accept Mr Hutley's submission that the Supply Agreement was no more than a "call option". I accept Mr Williams' submission that, on the proper construction of the Supply Agreement, it imposed an obligation on IAMS to make any domestic pet food purchase from BestCare, unless one of the "otherwise otiose" provisions to which Mr Williams referred was engaged.
Considerable uncertainties surround those circumstances; but my conclusion is that BestCare has nonetheless established, on the probabilities, a loss of a chance or opportunity of real value to derive profits from its relationship with IAMS.
Stage two of the enquiry: the value of that lost chance
The task involved in stage two of the enquiry was discussed by Deane, Gaudron and McHugh JJ in Malec v JC Hutton Pty Ltd [1990] HCA 20; (1990) 169 CLR 638 at 642 - 3: -
"When liability has been established and a common law court has to assess damages, its approach to events that allegedly would have occurred, but cannot now occur, or that allegedly might occur, is different from its approach to events which allegedly have occurred. A common law court determines on the balance of probabilities whether an event has occurred. If the probability of the event having occurred is greater than it not having occurred, the occurrence of the event is treated as certain; if the probability of it having occurred is less than it not having occurred, it is treated as not having occurred...
But in the case of an event which it is alleged would or would not have occurred, or might or might not yet occur, the approach of the court is different. The future may be predicted and the hypothetical may be conjectured. But questions as to the future or hypothetical effect of physical injury or degeneration are not commonly susceptible of scientific demonstration or proof. If the law is to take account of future or hypothetical events in assessing damages, it can only do so in terms of the degree of probability of those events occurring. The probability may be very high - 99.9 per cent - or very low - 0.1 per cent. But unless the chance is so low as to be regarded as speculative - say less than I per cent - or so high as to be practically certain - say over 99 per cent - the court will take that chance into account in assessing the damages. Where proof is necessarily unattainable, it would be unfair to treat as certain a prediction which has a 51 per cent probability of occurring, but to ignore altogether a prediction which has a 49 per cent probability of occurring. Thus, the court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect the degree of probability.
The adjustment may increase or decrease the amount of damages otherwise to be awarded." (emphasis added)
Mr Williams, somewhat pithily, summarised the effect of their Honours' observations as being "unless you can say [the chance] was zero you have to give them something for it".
There is, in my opinion, considerable uncertainty as to the value of the chance or opportunity available to BestCare referrable to its relationship with IAMS. The uncertainly relates to both the longevity of BestCare's likely relationship with IAMS, and as to the volume of sales that BestCare would have achieved during its relationship with IAMS. There must then be consideration of the likely profits derived from such sales.
Likely longevity of Bestcare's relationship with IAMS
So far as concerns the likely longevity of BestCare's relationship with IAMS, the starting point is that the term of the Supply Agreement was four years. Thereafter, IAMS (but not BestCare) had options to renew the agreement for one year, up to a total of five years.
I see no basis in the evidence to reach any conclusion as to whether IAMS would have exercised any one of those options, let alone whether IAMS would have continued to deal with BestCare beyond the last of those option periods (that is, beyond 2013).
As I have mentioned, there was no evidence before the Referee from IAMS, the one party that must have known the true position, or at least been in the best position to express an opinion about it.
Mr Williams relied upon various factors "strongly suggesting" that IAMS regarded "the contract as a long-term relationship". These included that: -
(a) IAMS had negotiated the terms of the Supply Agreement over a period of nine months;
(b) IAMS had devoted significant resources to establish BestCare as its contract manufacturer in Australia;
(c) IAMS had provided the $700,000 cash advance to which I have referred;
(d) the industry expert called by Origin, Mr Morkunas, thought that IAMS' approach indicated a long-term commitment to BestCare;
(e) IAMS had estimated likely purchase levels in the Supply Agreement itself and had subsequently asked BestCare for quotes for higher tonnages; and
(f) contemporaneous documents show that, in early 2005, IAMS was telling VIP Pet Foods that it should assume purchases of 40,000 tonnes in the first year of production and up to 80,000 tonnes in subsequent years.
In my opinion, none of these matters, whether taken individually, or in combination, enables me to do any more than speculate as to what IAMS would have done at the end of the four year term of the Supply Agreement.
Another factor said to be relevant to the likely longevity of the relationship between BestCare and IAMS is what Mr Hutley described as being the "confounding" circumstance of IAMS' "exit" from the Australian domestic market in 2005.
In my opinion, there is limited weight that I can give to this circumstance. It is true that there is no evidence from IAMS as to why, after losing BestCare as its domestic producer, it did not appoint an alternative domestic producer and why it decided to continue business in Australia as an importer of pet food.
So far as concerns the failure of IAMS to engage VIP Pet Foods, Mr Goldring gave evidence that he thought that this was because after some time in 2005 he would no longer be working at VIP; from 2005 and for most of 2006 Mr Goldring was a consultant at another company, Bush's Pet Foods (see April CofA Judgment at [137] per Ward JA). That may be so, but I have no basis upon which to draw any conclusion about what actually motivated IAMS.
What is significant, in my opinion, is that, as I have mentioned, IAMS did terminate the Supply Agreement. If its view was that the Supply Agreement was no more than a "call option" and that it was free to purchase domestic product elsewhere, there would be no reason why it would bother to terminate the agreement.
Further, the only basis available to IAMS to terminate the Supply Agreement was the appointment of the administrator to BestCare. As Mr Williams submitted, that does point to the probability that IAMS terminated its relationship with BestCare for that reason, and for no other reason.
That in turn points to the possibility, if not the probability, that, but for the explosion, it would have continued to deal with BestCare in accordance with the Supply Agreement for the four year term of that agreement.
My conclusion, therefore, is that although the matter is by no means certain, there was a significant prospect of IAMS continuing to purchase its Australian domestic product from BestCare during that four year term; that is, until May 2008.
Likely volume of sales
The question that next arises is as to the volume of sales during that period.
The "Buyer's Advance" of $700,000 made by IAMS (see [108] to [112] above) provided IAMS with an incentive to purchase at least 10,000 tonnes of product in the first year of the agreement.
On the other hand, little, if any, weight can in my opinion be placed upon quotations sought by IAMS from BestCare or estimates made by BestCare that are not reflected in the terms of the Supply Agreement itself. Although higher tonnages were referred to in communications between the parties (and indeed, in the pricing referred to in the schedule to the Supply Agreement) at the end of the day, IAMS did no more, in the Supply Agreement itself, than estimate annual purchases of 14,000 tonnes.
However, in my opinion, it is possible to say, from the terms of the Supply Agreement itself, that IAMS may well have purchased the estimated amount of pet food of 14,000 tonnes per annum from BestCare throughout the four year term of the agreement. IAMS had no obligation, in terms, to purchase any quantity of product. But, in my opinion, it could not buy product from another Australian producer unless one of the "otherwise otiose" clauses in the Supply Agreement applied. It had stated what its estimated requirement was. My conclusion is that there is a real chance that it would have purchased from BestCare that estimated quantity.
It is possible that IAMS may have purchased more than 14,000 tonnes in any one year. But I see no basis on the evidence to do more than speculate about that possibility.
Other uncertainties
As I have mentioned, there are further uncertainties surrounding these matters; including the contemplation by the parties that IAMS could buy elsewhere if the equivalent product was available at a lower price than that offered by BestCare (see cl 5.3 referred to at [87] above).
Further, there is, to my mind, uncertainty as to when production would have commenced, but for the explosion. As I have mentioned, although Mr Goldring gave evidence that production would have commenced in January 2005, the "task sheet" suggests it may have been a considerable time later; in which event the product sold by BestCare to IAMS in the first year of the four year term of the Supply Agreement is likely to have been considerably less than IAMS' estimate of 14,000 tonnes.
In addition to those matters, I must take into account the exigencies and uncertainties which inevitably surround any trading enterprise; particularly one which, as in this case, was still very much in "start up" mode when the explosion occurred.
Likely profit
Both parties adduced expert evidence of the net present value, at the date of the explosion, of the profits that BestCare would have achieved on various assumptions as to volume and longevity of dealings.
It is common ground that the discount to be applied to assess the net present value of the appropriate profit figure (itself to be discounted to reflect vicissitudes; see below) is 17.17 per cent.
Mr Fayad, BestCare's accounting expert, opined that the value to BestCare of the IAMS contract, assuming purchases of 14,000 tonnes a year to 28 May 2008 (the end of the four year term in the Supply Agreement), adopting the agreed discount rate to reflect net present value as at the date of the explosion, was $1,657,100.
Origin's expert, Mr Ivey, calculated the value of the discounted cash flow at $1,081,130. That figure, however, made no allowance for recovery of the capital expenditure of $1.6 million referred to at [113] above, and was also infected with an error, conceded by Mr Hutley in argument, concerning margin sales.
I propose to adopt Mr Fayad's figure of $1,657,100.
I must consider the extent to which I should discount that figure to reflect vicissitudes.
Discount for vicissitudes
To return to the observations of the High Court in Malec v JC Hutton, I cannot conclude that there is a 99.9 per cent certainty that, but for the explosion, IAMS would have purchased 14,000 tonnes of pet food each year from BestCare over the four year term of the Supply Agreement. Nor can I conclude that the prospects of that occurring are so low (for example, 0.1 per cent) that I should conclude that there was no possibility of this occurring.
In the April CofA Judgment, Ward JA drew attention to the observations of Toohey J in Commonwealth v Amann Aviation that the task before me may necessarily involve "guess work rather than estimation" (see [40] above).
I must "assess a figure to take into account the vicissitudes or contingencies to which the damages award must be subjected" (Hungry Jack's Pty Ltd v Burger King Corp [1999] NSWSC 1029 at [608] per Rolfe J; this aspect not questioned by the Court of Appeal in Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187; (2001) 69 NSWLR 558). The task involves an exercise of judgment, which takes account of the dealings between BestCare and IAMS up to November 2004, and which, necessarily, cannot be scientific or mathematical in nature, nor susceptible to a detailed process of reasoning. To a large extent, I find the process to be one of impression. It is, to adopt the words of Emmett JA in Manuel v Lane [2013] NSWCA 61 at [9] (which, I accept, were said in a very different context but which, if I may respectfully say so, are most apt here), "an evaluative determination of a discretionary nature, not susceptible of complete exposition" which is "inexact, non-scientific, not narrow or purely mathematical, and fact and circumstance specific".
In all the circumstances, the discount I propose to adopt to reflect the exigencies and uncertainties is 45 per cent.
I must apply that discount to the figure representing the net present value as at the date of the explosion of the likely profit that BestCare would have made over the four year term of the Supply Agreement; namely $1,657,100. The resultant figure is $911,405. Subject to the matter referred to in the note to [234] of the April CofA Judgment (see [23] above), interest will run on that figure from the date of the explosion.
Nestlé, Safcol and Doane
The matter for consideration in relation to these three entities is whether BestCare has established that it has lost a chance of "real value" to make profits from the sale of pet food to these entities after 30 June 2008. The award of the Referee already makes provision for lost profits up to that date.
Nestlé
When BestCare commenced operations in July 2001, Nestlé was manufacturing "Lucky Dog" biscuits at premises at Blayney.
Discussions took place between BestCare and Nestlé from 2001.
Those discussions progressed to the point where, on 8 January 2003 (a little over two weeks before the explosion on 25 January 2003), Mr Strobl reported to the BestCare board: -
"BestCare has the opportunity to acquire the Farrells brand... from Nestlé Australia. BestCare also has the opportunity to re-quote for the contract manufacture of Lucky Dog biscuits..."
On 23 January 2003 (two days before the explosion), Mr Goldring prepared a formal proposal for submission to Nestlé. The proposal envisaged the acquisition of the Farrells brand together with a proposal to manufacture Nestlé's range of dog biscuits. The proposal assumed production of 2,700 tonnes of Lucky Dog and 900 tonnes of Farrells biscuits per annum.
Notwithstanding the explosion on 25 January 2003, the 23 January 2003 proposal was, at the request of Nestlé, sent to Nestlé on 3 February 2003.
During March 2003, Mr Goldring and Mr Strobl had discussions with representatives of Nestlé about the possibility of Nestlé manufacturing products for BestCare while BestCare was out of production. During those discussions, the representatives of Nestlé indicated to Mr Goldring and Mr Strobl that Nestlé intended to close its factory at Dubbo and may be prepared to sell the Dubbo factory to BestCare.
Thus, in July 2003, BestCare exchanged contracts with Nestlé to purchase Nestlé's Dubbo factory for some $7.3 million. The contract was completed on or around 18 July 2003 and BestCare occupied the Dubbo factory from that time.
Later in 2003, BestCare acquired from Nestlé the Farrells brand of pet food; the sale was effective from 15 October 2003.
On 30 January 2004, BestCare entered into a "Manufacturing Agreement" with Nestlé in relation to Lucky Dog products.
The Manufacturing Agreement: -
(a) had a termination date of 31 December 2006 (and thus was, in effect, for a three year term);
(b) did not impose upon Nestlé the obligation to purchase any particular amount of product;
(c) provided that, if either party became unable, wholly or in part, to carry out an obligation under the agreement (other than an obligation to pay money) due to an event beyond its reasonable control (described as a "force majeure"), that party could terminate the agreement if the force majeure "continues for 3 months"; and
(d) otherwise provided for breach on the happening of an insolvency event.
At around this time, Nestlé dismantled its baking line at its Blayney factory and sold that equipment to BestCare. Consequently, Mr Williams submitted, Nestlé no longer had the equipment necessary to manufacture Lucky Dog biscuits.
The packing equipment of Blayney was installed at Dubbo and commissioned on 19 January 2004.
By an email of 2 March 2004, Nestlé expressed satisfaction with the quality of the product produced.
On 8 April 2004, Nestle proposed, and shortly thereafter BestCare agreed, that the Manufacturing Agreement be varied to provide that it continue for the "Initial Term" (i.e. until 31 December 2006) and then until either party terminated on giving 12 months notice, such notice not to be given before 30 September 2006.
Mr Williams submitted that this change "signalled Nestlé's ambition to secure a long term relationship with BestCare".
Mr Goldring gave evidence before the Referee that manufacturing for Nestlé was a very lucrative business for BestCare. He said that a significant portion of BestCare's profit from Nestlé arose from the fact that BestCare and Nestlé had agreed upon fixed amounts for factory overheads, depreciation, administration overheads and additional insurance which exceeded BestCare's cost of those items. He said that the Nestlé contract added "next to nothing" in terms of depreciation.
BestCare's sales ledger reveals monthly sales to Nestlé of Lucky Dog products as follows: -
July 04
Aug 04
Sept 04
Oct 04
Nov 04
Dec 04
Jan 05
Feb 05
Mar 05
463,034
405,559
292,793
245,662
286,638
83,338
312,384
590,975
192,763
Total sales over the period July 2004 to March 2005 were $2,873,146. Sales continued during the administration period and up to March 2005 when the administrator sold the BestCare business.
Stage one of the enquiry
The question is whether it is more probable than not that BestCare has lost a chance or opportunity of "real" or "not negligible" value to derive profits from its relationship with Nestlé after 30 June 2008.
The evidence reveals steady sales from BestCare to Nestlé up to February 2005, notwithstanding that BestCare was by then in administration. The Manufacturing Agreement between BestCare and Nestlé was due to expire some 22 months later, on 31 December 2006. I am asked to consider whether it is probable that there was a "real" or "not negligible" chance that the relationship between BestCare and Nestlé would have subsisted beyond a date two years after that, on 30 June 2008.
As I have mentioned, Mr Williams points to the fact that Nestlé had sold its Dubbo factory, and Blayney equipment, to BestCare and thus no longer had the equipment necessary to manufacture one of its product ranges. Mr Williams submitted that, in effect, Nestlé had thereby become captive to BestCare and had no option but to continue to source its product from BestCare.
Mr Williams also relied upon the 12 month termination period as bespeaking a commitment by Nestlé to its relationship with BestCare. The fact that it was Nestlé, not BestCare, that proposed the change suggests that Nestlé thought such change was to its advantage; perhaps to ensure that BestCare could not cease supply without 12 months notice. However, it is true that the effect of the April 2004 variation to the Manufacturing Agreement was that it would endure until, at least, 9 months from 30 September 2006; ie until the end of March 2007.
No doubt it is possible that, in all these circumstances, Nestlé would have continued to purchase product from BestCare after 30 June 2008. But consideration of that possibility requires a high degree of speculation as to how matters would have developed between February 2005 (when Nestlé last purchased from BestCare) and a date over three years later.
As with IAMS, BestCare has not adduced any evidence from Nestlé as to what its intentions were in regard to its future relationship with BestCare. I was not directed to any evidence of what arrangements Nestlé in fact made once BestCare ceased to be available as a supplier. Did it deal with the entity that purchased the business from BestCare? Was its supply of product still derived from the Dubbo premises from which BestCare conducted business? I simply do not know. There was evidence before the Referee that Nestlé remained in the market; indeed it increased its market share from 2005 to 2006. How it managed that, absent BestCare as a player in the market, is a matter about which I can only speculate.
In all of these circumstances, I do not consider that the evidence that I have referred provides any basis upon which I could form any opinion about whether Nestlé was likely to continue to deal with BestCare beyond 30 June 2008.
Accordingly, my opinion is that BestCare has failed to establish, on the probabilities, the loss of any opportunity or chance of real, not negligible, value so far as concerns Nestlé.
Accordingly, the questions that would otherwise arise at stage two of the enquiry do not need to be considered.
Doane
Doane is a large manufacturer of generic dry pet food in the United States.
On 15 January 2004, Mr Goldring sent to Doane a contract manufacturing proposal. The proposal stated: -
"BestCare... wish to propose that it be considered as a long term manufacturer of Doane International Pet Products... dry pet products (under an agreement to be discussed and arranged) and further that it form a strategic alliance with Doane in pet food."
The proposal suggested a contract period of "potentially 3-5 years" and that any contract manufacturing fee be on cost plus basis, with an agreed margin to BestCare and fixed costs.
On 13 February 2004, a meeting took place between Mr Strobl, Mr Goldring and representatives of Doane, including its president, Mr Greg Dorin. One matter that was discussed was the possibility of BestCare offering: -
"Doane exclusivity to agreed markets for a period (min) 12 months to enable to Doane to achieve market development."
Notes prepared after the meeting stated that Mr Dorin would: -
"Draft an agreement for mutual consideration. A tentative agreement was reached for the review period to be 12 months".
Prior to that meeting, a representative of Doane, Mr Jay Pokorny, had conducted an inspection of BestCare's Dubbo plant.
Mr Pokorny noted "an overall lack of adherence to Good Manufacturing Practices" but concluded: -
"Even with all the maintenance, sanitation and [Good Manufacturing Practices] issues that I have mentioned throughout this report, I believe that the plant has an enormous amount of potential. They have good, caring employees and very good equipment. They just need more time to get to know how to properly use what they have, and to tidy things up a bit. If these things are followed through on, I think they can do a very good job servicing [Doane's] needs for a long time to come."
During 2004, BestCare formulated, tested and produced 15 new products for Doane and commenced shipments to Doane's customers in Asia.
BestCare's sales ledger showed the following sales to Doane: -
July 04
Aug 04
Sept 04
30,441
256,535
48,414
Thus, sales to Doane concluded in September 2004, and BestCare did not, thereafter, enter into any formal manufacturing or supply agreement with Doane.
In those circumstances, there is simply no basis at all upon which I could form any view as to the value of the chance or opportunity of BestCare supplying product to Doane after 30 June 2008; 39 months later.
Safcol
BestCare's dealings with Safcol
On 1 September 2004, a business agent wrote to BestCare stating: -
"An agreement has been reached for BestCare Foods to supply Safcol Australia with a complete dry cat product range. This will be an extension of the very successful Snappy Tom range of wet (cans and pouches) products. Safcol will be investing heavily to promote the product both above and below the line - a national Television campaign will begin in February 2005."
During October 2004, BestCare and Safcol entered negotiations for a Production Agreement. A draft was produced, but not executed when the administrator was appointed. The draft provided for a four year term but did not commit Safcol to any minimum purchase (the draft provided "there is no minimum order requirement under this agreement").
According to BestCare's sales ledger, BestCare sold the following amount of product to Safcol between July 2004 and February 2005: -
July 04
Aug 04
Sept 04
Oct 04
Nov 04
Dec 04
Jan 05
Feb 05
30,441
228,673
146,794
152,849
-
202,784
172,845
210,301
On 31 May 2007, the administrators of BestCare and Safcol entered a Deed of Release. That deed recited that Safcol alleged that: -
"BestCare Foods is liable to Safcol for a claim arising out of the alleged supply of faulty product and/or packaging, and direct costs and consequential losses associated with that supply up to the date of the appointment of [the administrator] of BestCare Foods.
Safcol also alleges that BestCare Foods and the Receivers and Managers are liable to Safcol for a claim arising out of the alleged supply of faulty product and/or packaging, and direct costs and consequential losses associated with that supply during the period for which the Receivers and Managers were receivers and managers". (emphasis added)
Pursuant to the deed, the administrator accepted a proof of debt from Safcol in the sum of $225,000.
That material suggests that Safcol made complaint in relation to "faulty product and/or packaging" during the periods before, and after, the appointment of the administrators.
Before the Referee, BestCare's accounting expert, Mr Dolman, was asked about this matter and gave this evidence: -
"Q. You were aware that there was a claim made by Safcol against BestCare?
A. Yes.
Q. That resulted in eventually a settlement, but leave that aside for the moment, Mr Dolman, that's a business risk that every business faces?
Y. Yes, it is.
Q. It's a fact that occurred, as you're aware?
A. Yes.
Q. So I suggest to you it would be unwise to suggest that, as a certainly, the business with Safcol would have continued?...
A. I don't know the answer to that, but it's not unusual in business generally, as you mentioned, to have disputes that come up from time to time with customers. Many of them get resolved and many don't. So I don't know enough of the details to be able to answer one way or the other.
Q. But you enough of the details based upon your training and experience to know that you could not assume as a certainty that the business would continue till 2008?
A. Yes."
Stage one of the enquiry
Once again, the question is whether it is more probable than not that BestCare has lost a chance or opportunity of "real" or "not negligible" value to derive profits from its relationship with Safcol.
No agreement was reached between BestCare and Safcol although, at the time of the appointment of the administrator to BestCare, BestCare and Safcol were discussing entering into an agreement for a four year term; albeit one which did not oblige Safcol to order any particular quantity of product.
Nonetheless, between July 2004 and February 2005, Safcol placed orders for product as I have set out above.
However, it appears from the evidence that, both before and after the appointment of the administrators, some difficulty arose between the parties concerning quality of product.
Once again, there was no evidence from Safcol to cast any light on what its intentions were during the four year term the parties were discussing in November 2004.
In those circumstances, my opinion is that, it is a matter of pure speculation as to what product Safcol would have ordered during that period, especially during the four month period following 30 June 2008.
In my opinion, BestCare has failed to establish any loss of opportunity of "real" or "not negligible" value so far as concerns Safcol.
Conclusion
I invite submissions from the parties as to what steps should now be taken to finalise determination of BestCare's claim for damages.
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Decision last updated: 10 September 2013
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