BestCare Foods v Origin Energy
[2012] NSWSC 574
•31 May 2012
Supreme Court
New South Wales
Medium Neutral Citation: BestCare Foods v Origin Energy [2012] NSWSC 574 Hearing dates: 21/05/2012, 22/05/2012, 23/05/2012, 24/5/2012 Decision date: 31 May 2012 Jurisdiction: Equity Division - Commercial List Before: McDougall J Decision: Report to be adopted, save for two paragraphs and with one variation. Parties to bring in orders.
Catchwords: [PROCEDURE] - civil - discretion to adopt a referee's report pursuant to UCPR r 20.14 - whether referee's report, as to the amount of damages suffered by the plaintiffs, should be adopted, varied or rejected - whether referee erred in assessing the value of the loss of the opportunity to benefit from a contract.
[DAMAGES] - torts - negligence - loss of opportunity - standard of proof - whether court is required to asses the degree of probability of occurrence of the opportunity and reflect that degree of probability in the award of damages.Legislation Cited: Civil Liability Act 2002 (NSW)
Civil Procedure Act 2005 (NSW)
Supreme Court Rules 1970
Trade Practices Act 1974 (Cth)
Uniform Civil Procedure Rules 2005Cases Cited: Armory v Delamirie (1722) 1 Strange 506; 93 ER 664
BestCare Foods Ltd & Anor v Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) & Anor [2011] NSWSC 908
Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784
Houghton v Immer (No. 155) Pty Ltd (1977) 44 NSWLR 46
Hungry Jack's v Burger King [1999] NSWSC 112
Hungry Jack's v Burger King [2001] NSWCA 187
Malec v JC Hutton Pty Limited (1990) CLR 638
Mallett v McMonagle [1970] AC 166
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332
Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357
Spencer v The Commonwealth of Australia (1907) 5 CLR 418
Tabet v Gett (2010) 240 CLR 537Category: Principal judgment Parties: BestCare Foods Limited (Plaintiff)
BestCare Foods (Sales) Pty Limited (Second Plaintiff)
Origin Energy LPG Limited (formerly Boral Gas (NSW) Pty Limited) (First Defendant)
Origin Energy Retail Limited (Second Defendant)Representation: Counsel:
B J Sullivan QC / M L Williams SC / D S Weinberger / S A Lawrance (Plaintiffs)
B W Walker SC / E Romaniuk / B Smith / C G Catt / R D Glover (Defendants)
Solicitors:
McCabe Terrill Lawyers (Plaintiffs)
HWL Ebsworth Lawyers (Defendants)
File Number(s): 2005/270917
Judgment
The question for decision by me is whether a referee's report, as to the amount of damages suffered by the plaintiffs in the circumstances that I shall describe, should be adopted, varied (and, as varied, adopted) or rejected. That question arises against the following background.
Background
Prior to 25 January 2003, the plaintiffs (for convenience, I shall refer to them hereon in the singular: as BestCare) owned and operated a factory at Gunnedah. From that factory, they carried on the business of manufacture and sale of pet food.
On 25 January 2003, there was an explosion and fire at the factory. Those events effectively destroyed the utility of the factory, although some plant and equipment was salvaged.
BestCare did not reinstate the Gunnedah factory. Instead, and acting in mitigation of its loss, it applied the insurance proceeds that it received to the purchase and modification of a factory at Dubbo. It was common ground that it had been reasonable for BestCare so to act.
Unfortunately, the venture carried on from the Dubbo factory did not prosper. Administrators were appointed to BestCare on 24 November 2004. Those administrators sold the business, and the factory premises, on about 10 March 2005.
BestCare contended that the explosion and fire were occasioned by the leakage of gas into the Gunnedah factory, and that this was the responsibility of the defendants (again for convenience, I shall refer to them in the singular: but as Origin). Nicholas J concluded that the explosion and fire were indeed caused by the breach of contract and negligence of Origin, and that BestCare was entitled to damages to be assessed. See [2011] NSWSC 908.
The reference out
During the hearing (on liability, as it turned out) before Nicholas J, his Honour referred to the Honourable JMN Rolfe QC the question of assessment of the damages sustained by BestCare as a result of the events that, in the outcome, Nicholas J was to conclude were consequences of Origin's breach of contract and negligence.
On 30 August 2011, the referee reported that, in his view, BestCare was entitled to damages in the sum of $64,913,902.00 and to pre-judgment interest.
The damages assessed by the referee included the following components:
(1) an allowance for re-establishment costs;
(2) an amount for stock loss;
(3) an amount for trading losses incurred between 25 January 2003 and 24 November 2004;
(4) incidental (although not insignificant) amounts for legal costs and the costs of external administration; and
(5) an amount for loss of the opportunity to make profits in the future.
The first four items (as the referee assessed them) totalled $19,314,017.00. In addition, the referee allowed (net) $26,400,000.00 for the fifth item, to which he added a "gross-up" amount to cover income tax. The intention was that BestCare would recover thereby the net, or after tax, value of the future loss.
The issues on this application
Mr Williams of Senior Counsel, who appeared with Messrs Weinberger and Lawrance of Counsel for BestCare, stated that the issues were:
1. (a) Whether the award recommended by the Referee ($64.0 million) was an award which no reasonable tribunal of fact could have reached?
(b) If that is not established by the Defendants, whether it is necessary to consider any of the particular issues below?
2. Whether the Referee misunderstood the "IAMS 1" and IAMS 2" scenarios?
3. Whether any of the sale proceeds of the replacement factory (at Dubbo) should be deducted from the Plaintiffs' damages?
4. Whether the Referee misdirected himself on the law concerning standard of proof and, if so, whether that materially affected his finding that the explosion at the Gunnedah factory caused the insolvency of the Plaintiffs?
5. The Referee's selection of a discount rate of assessing the Plaintiffs' lost future profits.
6. Gross-up for taxation on the award for lost future profits:
(a) Whether the Defendants can run the point now, given the way in which they conducted their case before the Referee?
(b) If so, whether there should be a gross-up?
7. Whether the Plaintiffs' debt as at the date of the explosion should be deducted from their damages?
8. Whether the Referee should have awarded the Plaintiffs an additional amount on account of lost profits between the explosion and the date of administration?
9. Whether the Referee should have awarded the Plaintiffs an additional amount on account of trading losses actually incurred whilst under administration?
10. If any of the above issues is found to be a reason for not adopting the Report in its entirety, what order should then be made (require an explanation from Referee, remittal to Referee, variation of Report, rejection of the Report, etc.)?
Mr Walker of Senior Counsel, who appeared with Messrs Romaniuk, Smith, Catt and Glover of Counsel for Origin, accepted that the second to sixth and eighth to tenth issues arose. He did not accept that the first issue was an appropriate way of describing the relevant dispute, in the context of consideration of the adoption of a referee's report. The seventh issue, which was one raised by Origin, was not pressed.
The sixth issue was in dispute. I said, in the course of argument, that if it became necessary to consider the question of taxation, I would deal with it by declaring, in substance, that Origin was liable to indemnify BestCare for any taxation liabilities incurred by BestCare in respect of the receipt of damages, and by making appropriate ancillary orders. Ultimately, the parties accepted that position.
Principles relevant to the discretion to adopt etc a referee's report
The power to refer questions to referees is given by UCPR r 20.14. The powers of the court, in relation to reports of referees, are set out in r 20.24. I set out those rules:
20.14 Orders of referral
(cf SCR Part 72, rule 2)
(1) At any stage of the proceedings, the court may make orders for reference to a referee appointed by the court for inquiry and report by the referee on the whole of the proceedings or on any question arising in the proceedings.
(2) The court must not make an order under subrule (1) in respect of a question to be tried with a jury.
...
20.24 Proceedings on the report
(cf SCR Part 72, rule 13)
(1) If a report is made under rule 20.23, the court may on a matter of fact or law, or both, do any of the following:
(a) it may adopt, vary or reject the report in whole or in part,
(b) it may require an explanation by way of report from the referee,
(c) it may, on any ground, remit for further consideration by the referee the whole or any part of the matter referred for a further report,
(d) it may decide any matter on the evidence taken before the referee, with or without additional evidence, and must, in any event, give such judgment or make such order as the court thinks fit.
(2) Evidence additional to the evidence taken before the referee may not be adduced before the court except by leave of the court.
The discretions conferred by r 20.24 are not subject to limitations or conditions stated in the rule itself. It follows that they are to be exercised judicially, and in accordance with the dictates of, in particular, s 56 of the Civil Procedure Act 2005 (NSW) (see s 56(2)).
Nonetheless, over the years, guidelines relevant to the exercise of the r 20.24 discretions (or the equivalent discretions under SCR pt 72 r 13) have been developed in many decided cases. I sought to collect the principles emerging from those cases in my judgment in Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784 at [6] to [8].
Since what I there said has received some measure of support in subsequent decisions, I venture to repeat those paragraphs:
6 The principles to be applied, in exercising the discretion conferred upon the Court by Pt 72 r 13 to adopt, vary or reject in whole or in part a report of a referee, are well established. There are a number of cases to which, customarily, reference is made. They include Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549; the unreported proceedings in that case before Giles J (19 May 1992: the relevant considerations referred to by his Honour are sufficiently extracted in the decision of the Court of Appeal); Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60; White Constructions (NT) Pty Ltd v Commonwealth of Australia (1990) 7 BCL 193; and Foxman Holdings Pty Ltd v NMBE Pty Ltd (1994) 38 NSWLR 615. As to the nature and content of the referee's obligation to give reasons, the relevant authorities include Xuereb v Viola (1989) 18 NSWLR 453 and Hughes Bros Pty Ltd v Minister for Public Works (Rolfe J, 17 August 1994, unreported; BC 9402885).
7 The relevant principles, distilled from those decisions, can be stated as follows:
(1) An application under Pt 72 r 13 is not an appeal either by way of hearing de novo or by way of rehearing.
(2) The discretion to adopt, vary or reject the report is to be exercised in a manner consistent with both the object and purpose of the rules and the wider setting in which they take their place. Subject to this, and to what is said in the next two sub paragraphs, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised.
(3) The purpose of Pt 72 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation, that purpose would be frustrated if the reference were to be treated as some kind of warm up for the real contest.
(4) In so far as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh.
(5) Where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for enquiry and report.
(6) If the referee's report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than "unsafe and unsatisfactory".
(7) Generally, the referee's findings of fact should not be re-agitated in the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence.
(8) The purpose of Pt 72 would be frustrated if the Court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was material on which the conclusions could be based.
(9) The Court is entitled to consider the futility and cost of re-litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee such evidence and submissions as they desire.
(10) Even if it were shown that the Court might have reached a different conclusion in some respect from that of the referee, it would not be (in the absence of any of the matters referred to in sub para (6) above) a proper exercise of the discretion conferred by Pt 72 r 13 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the report.
(11) Referees should give reasons for their opinion so as to enable the parties, the Court and the disinterested observer to know that the conclusion is not arbitrary, or influenced by improper considerations; but that it is the result of a process of logic and the application of a considered mind to the factual circumstances proved. The reasoning process must be sufficiently disclosed so that the Court can be satisfied that the conclusions are based upon such an intellectual exercise.
(12) The right to be heard does not involve the right to be heard twice.
(13) A question as to whether there was evidence on which the referee, without manifest unreasonableness, could have come to the decision to which he or she did come is not raised "by a mere suggestion of factual error such that, if it were made by a trial judge, an appeal judge would correct it". The real question is far more limited: "to the situation where it is seriously and reasonably contended that the referee has reached a decision which no reasonable tribunal of fact could have reached; that is, a decision that any reasonable referee would have known was against the evidence and weight of evidence".
(14) Where, although the referee's reasons on their face appear adequate, the party challenging the report contends that they are not adequate because there was very significant evidence against the referee's findings with which the referee did not at all deal, examination of the evidence may be undertaken to show that the reasons were in fact inadequate because they omitted any reference to significant evidence.
(15) Where the court decides that the reasons are flawed, either on their face or because they have been shown not to deal with important matters, the court has a choice. It may decline to adopt the report. Or it may itself look at the detail of the evidence to decide whether or not the expense of further proceedings before the referee (which would be the consequence of non adoption) is justified.
8. The twelfth point restates the aphorism of Mahoney JA in Super at 567. The thirteenth, fourteenth and fifteenth points are drawn (and include direct quotations) from the judgment of Hodgson CJ in Eq (with whom Priestley JA agreed and with whom, as to the relevant principles, Fitzgerald AJ also agreed) in Franks & Anor v Berem Constructions Pty Ltd (NSWCA 2 December 1998, unreported; BC 9806367). If I may say so with respect, I regard what his Honour said as giving content, on the facts of the particular case, to the operation of relevant principles rather than as stating any new principle.
I emphasise, however, that those guidelines do not confine or restrict the discretions. Nor do they override the central significance of s 56 of Civil Procedure Act. Having said that, in general and subject to the particular circumstances of each case, I remain of the view that those guidelines are relevant when considering the exercise of the r 20.24 discretions. In this case, the parties did not suggest otherwise.
Approach to resolution of the issues
For reasons that I hope will become apparent, I propose to deal in detail only with issues 2 to 5, 8 and 9. In doing so:
(1) my view on the questions of substance underlying issue 1 will be made clear; and
(2) likewise, the resolution of issue 10 will be made clear.
In addition, I will deal with issue 6 to the extent necessary to explain why it was that I said that I would handle the question of taxation in the way that I have summarised.
I do not propose to deal in detail with all the submissions put for the parties, nor indeed with all the detailed findings made by the referee. The referee's report is, on any view, a comprehensive and detailed analysis of a huge mass of evidence. I was told, without objection, that the reference occupied some 39 hearing days; that there were some ten thousand pages of exhibits; and that the transcript exceeded 3200 pages in length. On any view, the referee's task was onerous. But there is no need to inflict an equivalent task on myself, or the outcome of its performance on the reader of these reasons.
Second issue: the "IAMS" scenarios
IAMS is a corporation that is part of the multinational Proctor and Gamble Group. It carries on, worldwide, the business of manufacture and supply of what it calls "super-premium" pet foods.
In 2003 and 2004, IAMS was interested in carrying on business in Australia. It conducted extensive discussions with BestCare. On any view, there were extensive consultations between officers of IAMS and of BestCare, and substantial offers of assistance from IAMS to BestCare, to enable BestCare to manufacture product to IAMS' specifications.
A contract (the IAMS contract) for the supply of pet food products was made on 28 May 2004 between BestCare and IAMS, after BestCare had relocated its business to Dubbo. That contract had a duration of four years. It provided for five optional cumulative yearly extensions. Under the contract, IAMS estimated that it would require a quantity of fourteen thousand tonnes of products per year. (There is some confusion, or lack of specificity, in the evidence between metric tonnes and American tons. For convenience, although perhaps from time to time inaccurately, I will use the metric usage throughout these reasons.) However, there was no minimum, or "take or pay", purchase obligation.
The IAMS contract provided, in effect, that each sale of products under it would constitute a separate contract, evidenced by purchase order and invoice, and incorporating the terms of the IAMS contract.
It was clear that IAMS might take more than 14,000 tonnes of products from BestCare in any year. Obviously, BestCare hoped that it would. The contract that was made was an "open book" cost plus contract. Under that contract, BestCare was entitled to receive an agreed margin on the cost of production; and IAMS was entitled to have full access to BestCare's records to satisfy itself as to the costs of production. Thus, the relationship was inherently profitable for BestCare, and the dollar (although not necessarily percentage) value of the business would increase with increasing production. In fact, if production volumes increased, there might be efficiencies or amortisations of overheads that would increase the profitability to BestCare in any event.
IAMS did not proceed with the contract. The referee found that this was a result of the supervening administration of BestCare. In my view, the referee's finding on that point was soundly based; and in any event, being an available factual conclusion based on a comprehensive review of the evidence, is one that should stand. Further, the referee found, the explosion and fire were either the or a cause of the administration, in the sense that they were a necessary condition to the occurrence of the administration. (I have expressed this in terms of s 5D of the Civil Liability Act 2002; the referee used the language of the common law. Nothing turns on the difference.) Again, in my view, the referee's finding was soundly based on the evidence; and again, in any event, being an available finding of fact, it is one that should stand.
The experts retained by BestCare for the purposes of the reference assessed damages on the basis of two alternative assumptions as to the quantities of products that BestCare would manufacture and sell to IAMS. Those scenarios were known as "IAMS 1" and "IAMS 2". The quantities projected did not include such quantities as might be taken by other purchasers (including Nestlé, Doane, and Safcol).
IAMS 1 and IAMS 2 were alternative projections that the relevant experts were asked to assume, for the purpose of calculating loss of profit, of the quantities that might be sold and delivered under the IAMS contract. They were not, as the referee appeared to suggest at some points, separate and cumulative contracts, or possible contracts, that BestCare had made or might make.
The referee concluded that it was appropriate for loss to be assessed on the IAMS 2 scenario. He did so because he was satisfied that:
"All of the evidence about IAMS' approach to the contract, in which I include that trial products had proved successful, satisfies me that, in all probability, the IAMS 2 contract (sic) would have gone ahead, but for the explosion" (R549).
Further, the referee concluded:
"... I am satisfied that in so far as the experts worked on assumptions to be proved by the evidence of Messrs Strobl and Goldring, those assumptions have been established" (R905).
Messrs Goldring and Strobl were executive directors of BestCare, who between them effectively had responsibility for the conduct of its business. In particular, Mr Goldring was the point of contact with IAMS. The referee formed a favourable view of the credibility of each of those gentleman.
Assessment of the value of a lost opportunity
As will be seen from what I have said, the question, in relation to future profits, was one of the assessment of the value of what the referee concluded was the opportunity to make profits in the future that had been lost by reason of what (as is now established by the conclusions of Nicholas J) was the breach of contract and negligence of Origin. The referee was thus required to consider, necessarily by hypothesis, what was likely to have happened but for the explosion, the fire and the consequent (as the referee found it was) administration of BestCare.
That task requires a consideration of the principles discussed in Malec v J C Hutton Pty Limited (1990) 169 CLR 638 and subsequent cases.
Mr Malec was a labourer employed by the defendant, Hutton, in its meatworks. He contracted brucellosis in the course of his employment, and as a result of Hutton's negligence. The brucellosis in turn led to a neurotic condition, the effect of which was to make Mr Malec permanently unemployable. He was thus, at least prima facie, entitled to be compensated for loss of earning capacity over the remainder of his working life. However, he suffered from an unrelated degenerative condition of the lumbar and cervical regions of his spine, which might also have led to a neurotic condition rendering him unemployable.
In the High Court, the majority (Deane, Gaudron and McHugh JJ) stated, at 640, that the issue for decision was the assessment of damage caused to Mr Malec by Hutton's tortious conduct, in the light of a finding "that it is more likely than not that the damage would have occurred in any event as the result of conditions or events for which the defendant is not legally responsible".
At 642-643, Deane, Gaudron and McHugh JJ discussed the principles governing the assessment of damages for future or potential events. Their Honours drew a distinction between events that had occurred and events that were to, or might, occur. As to the former, they said, the question was whether, on the balance of probabilities, the event had occurred. Thus, if the court is satisfied that the probability of occurrence is greater than the probability of non-occurrence, it decides that the event did occur; and conversely, if the probability of non-occurrence is greater than the probability of occurrence, it decides that the event did not occur.
However, as to the future, their Honours noted that a different approach had to be taken. They said that the court is required to assess the degree of probability of occurrence of the event, and to reflect that degree of probability in the award of damages. Their Honours accepted that there were limiting cases where the probabilities were so high as to be certain (over 99%) or so low as to be speculative (below 1%). I set out the relevant passage of their Honours' reasons:
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. Hence, in respect of events which have or have not occurred, damages are assessed on an all or nothing approach. 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. See Mallett v. McMonagle (9); Davies v.Taylor (10); McIntosh v. Williams (11). The approach is the same whether it is alleged that the event would have occurred before or might occur after the assessment of damages takes place.
Brennan and Dawson JJ, in a joint judgment, agreed with the reasons of Deane, Gaudron and McHugh JJ "subject to some brief observations" (see at 639). Their Honours drew an analogy between hypothetical past situations and future possibilities (again at 639):
... in one case the court must form an estimate of the likelihood that the hypothetical situation would have occurred, in the other the court must form an estimate of the likelihood that the possibility will occur.
As their Honours said at 639 - 640, those situations were to be distinguished from events said to have been actually occurred. As to this, they quoted from the speech of Lord Diplock in Mallett v McMonagle [1970] AC 166 at 176:
The role of the court in making an assessment of damages
which depends upon its view as to what will be and what
would have been is to be contrasted with its ordinary function
in civil actions of determining what was. In determining what
did happen in the past a court decides on the balance of
probabilities. Anything that is more probable than not it treats
as certain. But in assessing damages which depend upon its
view as to what will happen in the future or would have
happened in the future if something had not happened in the
past, the court must make an estimate as to what are the
chances that a particular thing will or would have happened
and reflect those chances, whether they are more or less than
even, in the amount of damages which it awards.
In Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, the plurality (Mason CJ, Dawson, Toohey and Gaudron JJ) said at 350 that the approach taken in Malec (their Honours had referred to the passage in the reasons of Deane, Gaudron and McHugh JJ that I have set out at [38] above) were not confined to the assessment of damages for personal injury. They said that, on the contrary, that the approach applies with equal force to the assessment of damages for loss of a commercial opportunity.
After a detailed review of the authorities, the plurality stated the principles relating to loss of opportunity. Their Honours said at 355 that, once some loss of damage was shown, the value of the loss of opportunity was to be ascertained by reference to the probability of its occurrence. Their Honours emphasised that it was inappropriate to say that if the opportunity was not proved on the balance of probabilities then it should be regarded as valueless. I set out the relevant passage of their Honour's reasons:
... Hence the applicant must prove on the balance of probabilities that he or she has sustained some loss or damage. However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities. It is no answer to that way of viewing an applicant's case to say that the commercial opportunity was valueless on the balance of probabilities because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable.
In the same case, Brennan J (who agreed that the appeal should be dismissed, but gave separate reasons) noted at 364 (in a passage cited with approval by Gummow ACJ in Tabet v Gett (2010) 240 CLR 537 at [34]) that a commercial opportunity may be valuable both because it may produce a financial return and because of the prospect of the substance of that return. I set out the relevant paragraph of his Honour's reasons:
As a matter of common experience, opportunities to acquire commercial benefits are frequently valuable in themselves, not only when they will probably fructify in a financial return but also when they offer a substantial prospect of a financial return. The volatility of the market for speculative shares testifies to both the valuable character of commercial opportunities and the difficulty of assessing the value of opportunities which are subject to serious contingencies. 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 my respectful opinion, although his Honour was speaking in the context of s 82(1) of the Trade Practices Act 1974 (Cth), his Honour's observations are of more general application.
Nonetheless, as Brennan J pointed out at 364 and again at 367 (in a passage to which Kiefel J referred, apparently with approval, in Tabet at [136]), there is nonetheless a need to prove:
... a causal relationship between the loss of such an opportunity and the defendant's contravening or tortious conduct... before any issue of assessment of the amount of the loss arises.
...
Although the loss of a valuable opportunity and the assessment of its amount are concepts that can be logically separated, in practice it will usually be the same body of evidence that tends to establish both the existence of a loss and the amount to be recovered. That evidence may establish the loss of a valuable opportunity more clearly than the value of the opportunity lost. The court approaches the determination of these issues in different ways... .
Returning to the reasons of Deane, Gaudron and McHugh JJ in Malec at 643, what is required to be proved is the existence and loss of an opportunity that is more than speculative. But it is not necessary to prove that, more probably than not, the opportunity would have arisen for exploitation. On the contrary, once it is concluded that the existence of the opportunity is shown to have been more than merely speculative, the probability of its occurrence is reflected in the assessment of the value of what has been lost.
As Gummow ACJ pointed out in Tabet at [48], where breach of contract is shown the plaintiff is normally entitled at least to nominal damages for loss of the contractual benefit: the opportunity to profit from performance of the defendant's broken obligation. However, as his Honour said at [50], in other cases where damage is the gist of the action, some compensable loss or damage must be proved, as a question of causation, before any question of assessment arises.
Kiefel J dealt with the same question in Tabet at, among other places, [135] and following. I set out what her Honour said at [135] to [137]:
[135] It is important to bear in mind, in connection with this aspect of the appellant's argument, the distinction between the loss or damage necessary to found an action in negligence, which is the injury itself and its foreseeable consequences, and damages, which are awarded as compensation for each item or aspect of the injury (215).
[136] Different standards apply to proof of damage from those that are involved in the assessment of damages. Sellars v Adelaide Petroleum NL confirms that the general standard of proof is to be maintained with respect to the issue of causation and whether the plaintiff has suffered loss or damage (216). In relation to the assessment of damages, as was said in Malec v J C Hutton Pty Ltd, "the hypothetical may be conjectured" (217). The court may adjust its award to reflect the degree of probability of a loss eventuating. This follows from the requirement that the courts must do the best they can in estimating damages; mere difficulty in that regard is not permitted to render an award uncertain or impossible (218).
[137] Thus in the case of the loss of a commercial opportunity, the plaintiff must first establish the fact of the loss, for example by reference to the fact that it had a commercial interest of value which is no longer available to be pursued because of the defendant's negligence. The damages assessed of that loss, the estimation of its value, reflect the chance, often expressed in a percentage, that the opportunity would have been pursued to a successful outcome. The award is proportionate in that sense.
It is apparent that, if damage is not the gist of the action, or if at least nominal damage follows from the defendant's breach, then loss of opportunity, as an element of causation, ceases to remain relevant. The focus turns to assessment of damages.
Allsop P (with whom Beazley JA agreed) dealt with this question in SilverbrookResearch Pty Ltd v Lindley [2010] NSWCA 357 at [2] and following. His Honour said at [2] that damages for loss of an opportunity will be recoverable in contract where the contract as a whole or its particular provisions promise an opportunity of benefit. Further, his Honour said, such damages will be recoverable where a commercial opportunity is lost, within the rules of remoteness, as the consequence of a breach of contract. In those circumstances, his Honour said:
The task is to identify and characterise what, in substance was promised and what has been lost or denied by the breach of contract.
In that case, the plaintiff claimed to have lost a bonus which was expressed to be payable "entirely within the discretion of" his employer. As Allsop P said at [5], the task was thus to assess both the prospect that the bonus would have been paid, and the amount likely to have been paid. That in turn focused attention on (at least) the nature of the discretion, the purposes of the contract intended to be served by the promise of a bonus, and the question of whether the discretion could be exercised capriciously or arbitrarily or unreasonably.
The referee's reasons
The referee concluded that it was more likely than not that BestCare would have achieved sales to IAMS at the level projected in the IAMS 2 scenario. Having done so, he proceeded to assess the net present value of those sales, and then to discount the valuation to reflect the possibility that sales at that level might not have been achieved. At R908 of his report, the referee referred to a number of decisions including Malec, Sellars, his own decision (when a judge of this Court) in Hungry Jack's v Burger King [1999] NSWSC 112 and the Court of Appeal's decision in the same case [2001] NSWCA 187. The referee quoted from [606] of his reasons in Hungry Jack's.
In the present case I consider that the probability is that HJPL would have continued to develop restaurants, but for the breach by BKC. However, I cannot be 'practically certain', to the extent of 99%, that such development would have proceeded over each of the five years, at the rate of 17 restaurants per year. Therefore, I must take the chance that it would not have into account. The fact that I am satisfied, on the balance of probabilities, that HJPL would have proceeded to develop restaurants, does not entitle it, as a matter of law, to all the damages it claims on the hypothesis that it would have developed 17 restaurants each year, because I must assess that there was a risk that that might not have happened, such adjustment reflecting the chance that factors unconnected with the breach might have precluded its happening".
The referee's assessment of damages included past items, as to which the "Malec" approach did not apply. But that approach did apply, as he recognised, to the claim for loss of the opportunity to make future profits. The referee was satisfied that, "in all probability", sales would have been achieved at the IAMS 2 level. However, his reasons for achieving that state of satisfaction were confined, at least expressly, to the last sentence of R549, which I have set out at [30] above. It may be, however, that the referee intended those reasons to be supplemented by what he had said at R905, as set out at [31] above.
Although the express reasoning of the referee, as to sales at the IAMS 2 level, was confined in the manner set out in the previous paragraph, it is clear from a reading of the whole of the report that the finding must be read in the context of the referee's detailed discussion of the evidence which preceded it. It is clear that the referee paid close attention to the evidence of the relevant witnesses. Those witnesses included (although they were not limited to) Messrs Goldring, Strobl and Morkunas. I have mentioned the role of Messrs Goldring and Strobl.
Mr Morkunas was an expert in the pet food industry called by Origin. It is clear that the referee thought that his evidence, to the extent that it was admitted, provided support for BestCare's case. In particular, it is clear that the referee thought that the evidence of Mr Morkunas provided support for the conclusion that, under the control of Messrs Goldring and Strobl, and but for the explosion and fire, the business of BestCare would have grown and expanded, as did the business of a company controlled by Mr Morkunas (which was ultimately sold for about $95 million).
In short, I think, the referee's reasoning was to the effect that, based on his detailed review and analysis of, and conclusions drawn from, the evidence of (in particular) the three witnesses to whom I have referred, the last sentence of R549 followed as a matter of inference and conclusion.
The parties' submissions
The essential issue disputed between the parties was whether there was evidence on the basis of which the referee could have reached the degree of satisfaction stated at R549.
Mr Walker (who by agreement between counsel addressed first, and thus in reply) submitted that there was simply no evidence to support the referee's conclusion, at R549, "that, in all probability the IAMS 2 contract would have gone ahead, but for the explosion".
Mr Walker submitted that the "evidence" as to sales at the IAMS 2 level of production was evidence of calculation or assessment based on assumptions that such a level of sales would be achieved. Equally, he submitted, the "evidence" as to sales at the IAMS 1 level was similarly limited.
Mr Walker noted that no one called for BestCare had expressed the opinion that it might achieve sales at the IAMS 2 (or, for that matter, IAMS 1) level. Nor, he noted, had anyone been called from IAMS to give such evidence. In those circumstances, he submitted, the best evidence of the lost opportunity was the way in which it had been characterised in various internal documents of BestCare, and in the largely unchallenged evidence as to how IAMS had in fact acted following the administration of BestCare.
As to the former: Mr Walker pointed to various documents in which BestCare (in particular, through Messrs Goldring and Strobl) had projected sales, and produced financial budgets or forecasts. In none of those were sales projected at the IAMS 2 level. As to the latter: Mr Walker pointed to the fact that after extremely detailed investigations and negotiations, the only contract that IAMS was prepared to enter into was the one in which there was no stipulation as to quantity, and merely an estimate that 14,000 tonnes per annum might be taken.
Mr Walker pointed to records of BestCare which, he submitted, identified the real commercial value of the IAMS contract as being not so much the level of production (or prospects of a level of production anywhere near the IAMS 2 quantities) but, rather, the security of what was viewed as a "nine year contract" with a major participant in the pet food industry.
Mr Walker dealt further, and at length, with the evidence of various witnesses on whom BestCare relied to support its case as to the strength and value of the relationship with IAMS.
Mr Williams referred, with some degree of hyperbole, to what he characterised variously as a "wealth" or a "mountain" of evidence available to support the referee's finding. That evidence included:
(1) the extent and detail of the negotiations between BestCare and IAMS;
(2) as part of those negotiations, the extensive investigations that IAMS carried out of BestCare's production facilities and methods;
(3) the very substantial technical help provided by IAMS to BestCare;
(4) the very valuable concessions and promises undoubtedly made by IAMS to BestCare: for example, that IAMS would sell plant and equipment to BestCare at 30% of its written down value; and that IAMS would bear the costs of raw materials used in the manufacture of products for it, so that BestCare would not have a financing cost in respect of those raw materials;
(5) the undoubted expertise of the relevant executives of BestCare, in particular Mr Goldring;
(6) the fact (apparently, clearly demonstrated) that IAMS held Mr Goldring in particular in very high regard; and
(7) what he characterised as significant concessions made by witnesses called for Origin that support the case for BestCare.
In addition, Mr Williams relied on two specific pieces of evidence. One was an offer apparently made by a Mr Rutemiller of IAMS to say, if it would help BestCare in its application for finance, that IAMS would take up to 80,000 tonnes of products per annum.
The other was a request made by IAMS, after BestCare went into administration, of a company known as VIP Petfoods (VIP) to quote for the supply of products. At that stage Mr Goldring was retained as a consultant to VIP. Mr Williams submitted that this demonstrated, among other things, the esteem in which IAMS held Mr Goldring. Be that as it may, the significance of the quotation, on Mr Williams' analysis, was that VIP was requested to quote to supply on two alternative bases:
(1) "Bid A": at the rate of about 17,000 tonnes per annum; and
(2) "Bid B": at the rate of 40,000 tonnes per annum, increasing to 80,000 tonnes per annum.
VIP provided the requested quotations. In a later email from IAMS (or Proctor and Gamble) to VIP, IAMS specified three phases of production, at 44,500, 60,900 and 79,700 tonnes per annum.
That material showed, Mr Williams submitted, that IAMS was interested in taking products for sale in Australia and Asia at up to the rates specified.
Decision
For the reasons that I have given, and putting aside for the moment that what I am concerned with is the question of adoption of a referee's report, the starting point of the analysis should be whether it has been shown that the breach of contract and negligence of Origin caused BestCare to lose an opportunity of commercial value. If that question of causation is answered in favour of BestCare, the second stage of the inquiry is to value the opportunity that is lost. If I may say so with respect, I think that the submissions of counsel did not focus with sufficient clarity on the two stages of the inquiry. In particular, they did not focus on the task identified by Allsop P in Silverbrook Research, of identifying with precision what it was that was lost or denied by the wrongful conduct of Origin.
There is no doubt that BestCare had a commercial opportunity of value available to it. That opportunity was the opportunity represented by the IAMS contract: to sell pet food to IAMS on a profitable basis. True it is that IAMS was not obliged to take any particular quantity of pet food in any given year. But it can hardly be thought that IAMS would have engaged in the very detailed process of negotiation, cooperation and what the referee characterised as "due diligence", simply to make a contract that had no commercial purpose.
I shall not recount the referee's findings as to the extent and detail of the pre-contractual dealings between BestCare and IAMS; let alone the underlying evidence, to part of which I was referred, that provides more than ample support for those findings. It is clear that IAMS contracted with BestCare because it wanted to become established in the pet food market in Australia. It did so in a way that would allow for the possibility of growth, by entering into a contract under which there were neither minimum nor maximum requirements for the sale and delivery of products, but under which it could order on an as "needs" basis.
It is equally clear, on the referee's findings, that the benefit of that contract was lost to BestCare because it went into administration; and that the or a cause of the administration, in the relevant legal sense, was the explosion and fire caused by the breach of contract and negligence of Origin.
Thus, the question of causation is satisfied.
I should mention that I do not think that this was in dispute. I have dealt with it simply because it is necessary, as a matter of correct analysis, to resolve the question of causation before turning to the question of loss; and identification of the value of the loss will depend on showing what it was that was lost. What was lost was the opportunity to derive the benefits that were available (although not assured, for the reasons I have indicated) to BestCare under the IAMS contract.
It is at this point that identification of the lost opportunity becomes important. Mr Walker identified it as the loss of the opportunity to sell 80,000 tonnes per annum. Mr Williams did not deal with the point explicitly, but appeared to agree with that characterisation. If he did not agree, he did not put any alternative characterisation. However, in my view, that is not the correct characterisation of the opportunity that was lost.
BestCare lost the opportunity to receive and fulfil orders from IAMS, and to profit from those orders, under the IAMS contract. The question of valuation of the loss of that opportunity thus depends, necessarily, on assumptions as to what the volume of those orders might have been. The contract was not one for the sale of 80,000 tonnes (or any other tonnage) per annum. The lost opportunity was therefore not loss of an opportunity to sell either at 80,000 tonnes per annum or, more generally, at the IAMS 2 levels. To that extent, I disagree with the referee's analysis.
However, that does mean that the IAMS 2 scenario therefore becomes irrelevant to the assessment of loss.
Once it is established that BestCare lost the opportunity to benefit from the performance of the IAMS contract, the question becomes one of assessment of the value of that lost opportunity. Clearly enough, that assessment can only be made by projecting profitability at various assumed levels of annual production over the assumed life of the contract. As to the latter: the initial term of the contract was four years. It provided for five optional accumulative one year extensions. It is thus necessary to make some assumption as to whether any, or all, of those optional extensions would have been taken up.
It is in the context of the former set of assumptions - as to levels of annual production - that, in my view, the IAMS 1 and IAMS 2 scenarios are relevant. Each provides a guide to the measure of loss on the assumption that production at the levels postulated by it would have been achieved. It is thus a legitimate method of analysis to take one of those scenarios, assess the loss flowing on the assumption that the tonnages postulated by it would have been achieved, and then to ask, in effect: "what was the prospect that quantities of that magnitude would in fact have been sold and delivered?"
In my view, this is precisely what, in substance, the referee did. As a matter of commonsense or pragmatic analysis, it could be said that the referee assessed the value of the lost opportunity on the basis that, over the expected life of the contract (and I shall return to this), production was likely to have been achieved at about 60% of the IAMS 2 levels. That is not an exact way of analysing what the referee did, because his allowance for vicissitudes necessarily encompasses not only levels of production but also the likely duration of the contract (specifically, how many of the extensions might have been taken up) and other possible supervening events that would have impacted on the rate and total, and hence value, of production over the life of the contract.
To put it slightly differently: it would have been open to the referee, based on the material before him, to reach a conclusion as to the likely duration of the contract (perhaps nine years in all); and to reach a conclusion as to the average annual rate of sales under that contract (X tonnes per annum). Having done so, and using the information provided by the experts, the referee could have reached a conclusion as to the likely value of those sales, discounted back to the agreed starting point. Once that was done, it would have been open to the referee, again based on all the relevant material, to reach a conclusion as to the appropriate allowance for other vicissitudes.
The referee's analysis did not include all those steps. Perhaps it did not do so because the parties did not identify the task with the degree of precision, particularly in relation to the two-stage process of determination of causation and identification of the opportunity lost thereby, which in my view is necessary. But the fact that the referee compressed the process (as, apparently, did the parties) does not seem to me to be a reason for rejecting his conclusions, if the basic methodology is justifiable, according to applicable principles, on the facts proved before the referee. In my view, as a matter of methodology or principle, what the referee did is justifiable.
That turns attention to the detail. Was it open to the referee to conclude, as he did, that the loss of opportunity should be valued, in effect, at 60% of the net present value of sales at the IAMS 2 level? In essence, that is a question of fact which must be answered on a review of all the material. The referee had the advantage (and, I would add, burden) of hearing and considering all the evidence on this point. He was not, as was I, merely referred to snippets selected by each party for the purpose of advancing its case on adoption, variation or rejection of the report. Unless it can be shown that the referee could not have reached the conclusion that he did on all the material that he had, the court ought adopt his conclusion.
It is in this context that, I think, the attack on the referee's reasoning and conclusions suffers from a failure to confront precisely what it was that the referee was required to do. He was not required to be satisfied that the opportunity was one of the loss of the benefit of a contract under which it was more likely than not that BestCare would have sold to IAMS at the IAMS 2 tonnages. He was required to consider.
(1) whether BestCare had a valuable opportunity available to it under the IAMS contract (undoubtedly, it did);
(2) whether it lost that opportunity because of Origin's breach of contract or negligence (on the findings of Nicholas J, it did);
(3) whether, thereby, it suffered loss (undoubtedly, it did); and
(4) what was the amount of that loss.
For the reasons that I have sought to demonstrate, it is only at the last stage of this process that the assumption of a level of production becomes relevant. At the risk of repetition; it is not necessary to make that assumption at the stage of causation.
The referee heard all the evidence relating to the commercial relationship between BestCare and IAMS. He heard from, and clearly was impressed by, Messrs Goldring and Strobl. He was given, and no doubt considered closely, the relevant documentation. He knew that IAMS had expressed interest in receiving quotations for supplies of products at various annual tonnages. It was up to him to consider whether, in the light of all the evidence, an analysis based on supply at the IAMS 2 levels, but discounted for vicissitudes, was appropriate.
Taking into account the guidelines that are relevant to (although they do not limit or control) the exercise of the discretions given by UCPR r 20.24, and taking into account all the matters that I have just mentioned, I think that the Court should adopt the referee's conclusions on this aspect of BestCare's claim for damages.
Before I move to the next issue, I should mention three matters.
The first is that the referee was not confined to the IAMS 2 scenario. He was also presented with the IAMS 1 scenario, and with the detailed analysis and reasoning of the experts based on that, as an alternative to IAMS 2. It would have been open to the referee, had he thought that the prospects of BestCare's achieving sales at the IAMS 2 level were so remote as to be speculative, to turn instead to the IAMS 1 scenario.
Equally, for that matter, it would have been open to the referee, had he thought that the prospects of BestCare's achieving sales at either the IAMS 2 or the IAMS 1 level were so remote as to be speculative, to consider sales at the estimated level referred to in the IAMS contract (14,000 tonnes per annum) for the minimum life of that contract (four years), or for some longer period, allowing for one or more extensions.
I mention those matters to emphasise the point that, in my view, the various figures that were in evidence before the referee provided alternative quantitative materials bearing on the amount of damages, on which the referee was entitled to draw for the purpose of making his assessment. It was a question for him, based on the whole of the evidence, as to whether any of those alternatives provided an appropriate basis for the process of assessment. He concluded that the IAMS 2 scenario did. It does not follow, in my view, that it was necessary for him to find that it was more likely than not that BestCare would have achieved sales at the IAMS 2 level. But having so found, it was appropriate for the referee to assess damages on that basis, by making an allowance for the degree of probability inherent in that finding. This, in substance, he did.
The second matter is that, as issue 2 is expressed, and as at least the written submissions for Origin were framed, the argument that was put was that the referee had misled himself by considering IAMS 1 and IAMS 2 as alternative contracts, rather than as possible "scenarios" for production (ie, sale and delivery) under the IAMS contract.
It is correct to say, and I have adverted to this already, that there is from time to time some degree of confusion in the way that the referee referred to the IAMS 1 and 2 scenarios. But it is clear that, when the referee came to carry out his analysis of loss, he did so on the basis that it was a loss of the opportunities under the IAMS contract, which he assessed by reference to his estimate of the probabilities that production at the IAMS 2 levels would have been achieved. In short, whatever confusion of language there may have been from time to time in the report, that confusion is not reflected in any underlying error of reasoning.
The third matter to be mentioned is that there was, before the referee, a significant debate as to whether BestCare could have raised the funds to gear up (including, by refitting and extending its production facilities) to cope with production at the IAMS 1 and IAMS 2 levels. The referee concluded that it could. There was ample material in the evidence for him so to conclude. This aspect of the attack was not pressed before me, as part of the submissions on issue 2.
Third issue: deduction of sale proceeds
Mr Walker submitted that the referee had erred, in his assessment of the total amount of damages payable by Origin to BestCare, by failing to deduct the proceeds of sale of BestCare's business and of the Dubbo factory (including plant, equipment and stock). The basis for this submission was that the referee had assessed damages on an "enterprise" basis, by reference to the diminution in the value of BestCare's enterprise as a result of the explosion and fire. Thus, Mr Walker submitted, it was necessary to give credit for what BestCare had retained; and what it had retained was the value of the proceeds of sale.
The referee's approach to quantification of losses does not suggest that he did so on an "enterprise" basis. On the contrary, he identified separate heads of loss, and quantified each of them. However, Mr Walker submitted, in quantifying the value of the lost opportunity, the referee had adopted (as did the relevant experts) a discounted cash flow (DCF) basis of assessment.
It is, I think, correct to say that the experts assessed the value, at the assumed starting date, of the cashflows that have been lost as a result of what was, at the time of their assessment, the assumed breach of contract or negligence of Origin. However, it is not in my view correct to say that, thereby, they valued the business on an enterprise basis.
The value of a business reflects its exchange value, on the "Spencer" principle (Spencer v The Commonwealth of Australia (1907) 5 CLR 418), between hypothetical properly informed and willing but not over-anxious vendor and purchaser. The assessment of value will depend, among other things, on whether the business is being sold on a "going concern" basis. If it is, then clearly enough the cashflows, and hence profits, that can be derived from the business will be a matter of prime importance to the purchaser. Thus, as is notorious, one method of valuing a business is to seek to ascertain the future maintainable earnings, and profitability, of that business, and then to consider what price (usually expressed on a "multiples" basis) the purchaser might pay for those future maintainable earnings.
In performing such an analysis, a DCF will often be employed. But one would not expect the purchaser of a business to pay the full amount of its estimated DCF over some period of years. Such a purchaser would be doing no more than paying the net present value of those expected future cash flows. On the contrary, a purchaser would normally pay some fraction or percentage of that DCF, based on its assessment of the business and other relevant factors.
Accordingly, I do not accept that the analysis of loss of opportunity on a DCF basis (or on a basis including DCF analysis) necessarily means that the product of that analysis is the enterprise value of the business. Nor do I accept that in this case, either in fact or as a matter of outcome, that is what the referee achieved.
I conclude that it was not appropriate for the referee to deduct the sale proceeds from the amount otherwise to be recommended as the damages suffered by BestCare.
I note that the referee appeared to hold a different view. He said at R916 that Origin was "entitled to a credit for a sale of a business, prior to judgment, provided that there is not shown to be any profit element in that receipt". However, he did not make that adjustment to his calculations.
Since I have concluded that the referee was correct not to make the deduction, it follows that this anomaly can be dealt with by declining to adopt para 916 of the report.
Fourth issue: standard of proof
This issue arose because the referee, from time to time when dealing with the question of causation, appeared to consider that the principle of robust assessment against wrongdoers assisted his reaching the conclusion that causation (in the sense of showing that the explosion and fire were in law a cause of the ultimate damage claimed by BestCare) was established.
That principle finds its origin in the decision of Pratt CJ in Armory v Delamirie (1722) 1 Strange 506; 93 ER 664. That principle is relevant to the assessment of damages where the defendant, by its actions, makes an accurate assessment impossible. See (among many other citations) Houghton v Immer (No. 155) Pty Ltd (1997) 44 NSWLR 46.
Mr Walker accepted, in the course of submissions, that even if the referee had erred, in his apparent reliance on that principle on the question of causation, it went nowhere because there was ample other evidence to support the referee's conclusion, and thus that his conclusion was unchallengeable on the adoption application.
In my view, that concession was rightly made. Accordingly, it is unnecessary to give further consideration to this aspect of the referee's reasons.
Fifth issue: discount rate
The referee concluded that the appropriate discount rate, for the purposes of the DCF analysis to which I have referred, was a mid-point between two rates appearing in the expert evidence, namely 18.9% and 15.4%.
There is no doubt that it was open to the referee to take that approach. However, the attack was more limited. That approach was said to have been one expressed by the experts in the context of a business that was not "immature", or in start-up phase. That approach was taken because the experts assessed damages as at the date of administration, 29 November 2004. However, the referee concluded that he should assess damages at the date of the wrong, namely 25 January 2003. Mr Walker submitted that the business was then in an immature, or start-up phase. Thus, he submitted, the discount rate was inapplicable.
The referee referred to this aspect of the dispute at R4(e). He concluded:
In the end there seemed to be agreement between Messrs Fayad and Gower that the range of any such discount was 15% to 18%, although Mr Gleeson submitted that if I found BestCare to be an immature company, I should not apply a discount within that range, but rather a higher discount based on the immaturity of BestCare.
Mr Fayed was an expert called by BestCare. The referee accepted his evidence. Mr Gower was an expert called by Origin. In general, the referee did not accept his evidence, except to the extent that it supported BestCare's case. I do not think that there was any acceptable evidence to show what might be an appropriate higher discount rate if, as Mr Gleeson of Queens Counsel (who had appeared for Origin before the referee) submitted, it should be found to have been an immature company at the time of the explosion and fire.
The referee did find that BestCare was, as at 25 January 2003, an immature company. However, the answer seems to me to be that the experts carried out their DCF analysis as at the date of administration, 29 November 2004, and undertook their DCF analysis so as to bring the projected loss of profits back to a net figure as at that date. On that basis, the referee's approach is not open to criticism.
To the extent that it matters, I note that when Mr Gower was being cross-examined before the referee (see T2904), he accepted that the ultimate discount rate to which he had come was 15 to 18% for the purpose of the DCF analysis, and did not suggest that his view was dependent on the rate being applied at any particular time.
Sixth issue: gross-up for taxation
I have set out above the way in which I indicated to the parties how I thought this issue should be dealt with. Ultimately, the parties accepted this position, and brought in an agreed form of orders (MFI B) to deal with the question of taxation.
It seems to me that for the Court to allow, as a component of damages, a sum representing BestCare's potential tax liability on the net receipts, the Court would be required to consider in detail each element of the assessment, and its possible tax treatment. In circumstances where (as was common ground) BestCare was entitled to receive damages on a net basis, and thus was entitled to be indemnified against any liability to tax on any component of those damages, it is I think clear that the just, quick and cheap way of dealing with the dispute is to make a declaration as to entitlement to indemnity.
That outcome is "just" because the liability of Origin will be only such liability as is actually brought home to BestCare, and not some liability determined by the Court as the likely amount of any taxation impost.
Another reason why that outcome is just is that (as indeed happened) the parties should be able to agree upon, and incorporate into their draft orders, a regime governing the steps to be taken in determining the amount of the tax liability. The regime that was agreed includes providing Origin with the opportunity to object, at its own expense but in the name of BestCare, to any assessment of tax that might be made. I am not sure that it would have been open to the Court to impose such a regime on the parties; and I am quite sure that the parties are better placed than the Court to construct the fine detail of such a regime.
The course that I indicated was both quick and cheap because it avoided substantial argument on and decision of a very difficult point.
Eighth issue: damages on account of loss profits between 25 January 2003 and 29 November 2004
Mr Walker accepted that, if I came to the conclusion that I have reached in relation to issue 2, then this issue should be answered in favour of BestCare. Further, he accepted, the appropriate allowance was the sum of $4,002,850.00 calculated by Mr Williams on the basis of the methodology adopted by the referee. As I understand it, that sum does not include any gross-up for tax.
Ninth issue: trading losses incurred after 29 November 2004
BestCare claimed trading losses incurred whilst the administrators carried on its business. It submitted that this was necessary, because the basis of assessment of damages was that it would receive:
(1) losses actually incurred as a result of the explosion and fire; and
(2) the value of the opportunity to make profits that it had lost by reason of the explosion of fire.
It appeared to be accepted that that this was in principle an appropriate way to go about the process of assessment of damages.
The referee noted that there was a claim for $ 560,000.00 for trading losses incurred after the administration. However, he did not allow that element of the claim because he thought there might be some element of double counting (R921).
As I have said already, the referee had both the advantage and the burden of hearing and reading the whole of the evidence. It might or might not be correct to say that there is an element of double counting; and his reasons for thinking that there may have been might or might not be correct. But in circumstances where I have not had the benefit of all that evidence, and bearing in mind as I have said before the principles applicable to adoption of reports, I do not propose to come to a view different to that of the referee.
I should note, in this context, that Origin disputed that there was any evidence of the amount of the losses. BestCare submitted that one of Origin's experts, Mr Watt, had conceded this. However, on a reading of the relevant passage of Mr Watt's evidence, it is by no means clear that he did. That appears from his cross-examination at T2254 - 2255. It is clear that the amount of losses (said to be $140,000.00 per month) was put to him as an assumption that he was asked to make. He said that it may or may not have been correct but that "it's a safe assumption". The referee appeared to regard this as showing that the assumption was correct as a matter of fact (R424). Whether that is correct as a matter of interpretation is open to doubt; but again, I remind myself that the referee heard the whole of Mr Watt's evidence, and, no doubt, studied carefully the underlying report or reports.
Nonetheless, given the way in which the alleged concession was made, I regard this as an alternative possible basis for supporting, although not for the reasons given by the referee, the ultimate conclusion to which, on this question, he came.
I should note that there is no inconsistency between those two paragraphs of the referee's reasons (as, at one stage, was suggested). In the earlier paragraph, the referee expressed the conclusion, as a matter of fact, that there were monthly losses of the order put to Mr Watt. In the later passage, the referee expressed the view, at least tentatively, that those losses should not be allowed for the period in question because of the possibility of double counting.
Tenth issue: form of orders
It follows that the report should be adopted, to the extent that I have indicated. However, I do not propose to adopt paras 916 and 942. As to the former: although it goes beyond the question of deduction of the sale proceeds, non-adoption does not have any other adverse impact on the substance of the report. As to the latter: it requires variation to allow for the sum of $4,002,850.00 to which I have referred earlier in these reasons.
The parties should bring in orders to give effect to these reasons, including by providing for:
(1) the variation and adoption of the report in the manner just indicated;
(2) interest on the sums comprised in the calculation of loss;
(3) judgment accordingly;
(4) declarations and other orders in accordance with MFI B; and
(5) the return of the exhibits.
If the parties are able to agree on costs, they can include the agreed orders. If they are unable to do so, I will deal with the question of costs when the matter is brought back for the making of final orders.
I make the following orders:
(1) stand the matter over to 9:30am on 15 June 2012 for making of final orders;
(2) direct the parties to provide to my Associate, by 12 June 2012, draft orders to give effect to these reasons;
**********
Decision last updated: 01 June 2012
14
10
5