Coastal Blue Investments Pty Ltd v PROTECT-A-WINDOW Australia Pty Ltd - [2023] WASC 233

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION:   COASTAL BLUE INVESTMENTS PTY LTD -v- PROTECT-A-WINDOW AUSTRALIA PTY LTD [2023] WASC 233
CORAM:   MASTER SANDERSON
HEARD:   ON THE PAPERS
DELIVERED          :   28 JUNE 2023
FILE NO/S:   CIV 1016 of 2011
BETWEEN:   COASTAL BLUE INVESTMENTS PTY LTD
Plaintiff

AND

PROTECT-A-WINDOW AUSTRALIA PTY LTD
Defendant

Catchwords:

Assessment of damages - Turns on own facts

Legislation:

Nil

Result:

Damage assessed at $1,135,844 plus interest and costs

Category: B

Representation:

Counsel:

Plaintiff	:	No appearance
Defendant	:	No appearance

Solicitors:

Plaintiff	:	Sweeney Legal
Defendant	:	In person

Case(s) referred to in decision(s):

Nil

MASTER SANDERSON:

These reasons deal with an assessment of the damages owed by the defendant to the plaintiff.
The writ of summons was issued on 7 January 2011. A conditional appearance was filed on 15 April 2011. The matter proceeded in the usual way, albeit at a leisurely pace. A statement of claim was enclosed on the writ. A defence was filed as was a reply. It appears the defendant changed solicitors in July of 2014 and on 23 March 2015 judgment was entered against the defendant with damages to be assessed. A summons seeking to assess damages was filed on 14 March 2016. Various programming orders were made and evidence and expert evidence was lodged on or before 22 July 2021. Submissions in support of the application were lodged on 21 July 2022. An assessment of damages should never be rushed. It is to be hoped I will not be seen to be acting with undue haste if I now take a stab at it.
Ms Eva Pages‑Oliver is the plaintiff's sole director. In a witness statement she provides the non‑expert evidence upon which the plaintiff relies. Taken from this statement the relevant facts can be summarised as follows.
In the years prior 2008, the plaintiff was a contractor to the construction industry. It developed a niche market in the Perth metropolitan area in relation to commercial buildings and high‑end residential buildings. One of the difficulties in the construction industry was the risk that builders and sub‑contractors, in carrying out building work, could damage work that had been done already - that is to say damage the surfaces of key building components that had already been installed in a building. Prior to 2008, there were developed what are known as temporary removable protective coatings. The plaintiff's business then evolved to include the use of temporary removable protective coatings. Ms Pages‑Oliver says the plaintiff's building was growing during the years immediately prior to 2008 and I accept her evidence.
Both during and prior to 2008, the plaintiff and the defendant had a contractual relationship by means of which the defendant acted as franchisor and the plaintiff acted as franchisee.
The defendant promoted the use of temporary removable protective coatings in the construction industry and to some extent in industries other than the construction industry. Franchisees such as the plaintiff in turn acquired the goods and used them in dealings with their own customers.
Prior to 2007, the plaintiff was a party to a franchise agreement with the defendant that was entered into on 14 July 2004. That agreement was superseded by a subsequent written agreement between the defendant as franchisor and the plaintiff as franchisee.
On 16 April 2007, the defendant wrote to the plaintiff, enclosing copies of a new franchise agreement, and advised that the agreement would come into effect 'as of the 1^st July 2007'. The plaintiff executed the franchise agreement on 6 November 2007. After the agreement was executed the document was sent by post to the defendant's office in Burleigh Town, Queensland.
Shortly after, the plaintiff through Ms Pages‑Oliver received from the defendant a letter dated 19 November 2007 together with various enclosures. A number of the pages, being pages 6 to 8, 11 to 15, 105 to 107, 109 and 111 of the bundle, showed two sets of initials. On each occasion, one of the sets of initials is that of Ms Pages‑Oliver and the other is not that of any representative of the plaintiff. Ms Pages‑Oliver says that of her own knowledge, based upon having seen other documents that one John Gregory on behalf of the defendant had executed, that the other set of initials is that of Mr Gregory. I accept that evidence and I accept that the document in question represents the written agreement between the parties.
Clause 2.1 of the franchise agreement required the plaintiff to pay the defendant a franchise fee. The plaintiff paid the franchise fee to the defendant on or about 12 June 2007. The franchise agreement is to the effect the plaintiff was an 'Area Manager Franchisee', as that term is defined in the franchise agreement. Pursuant to item 11 of a particular schedule to the franchise agreement (the schedule) the term of the franchise agreement was five years from the commencement date of the franchise agreement - that is from 1 July 2007 to 30 June 2012. Item 34 of the schedule (the renewal term) allowed for the franchise agreement to be renewed for up to five years.
All of these matters are pleaded in the statement of claim. The allegation as to the term of the franchise agreement is then undisputed. It is upon this basis that damages must be assessed.
Prior to August 2007, the plaintiff acquired from the defendant, and used in its business, a product named WindowSKIN PAW55 (PAW55). The defendant supplied PAW55 to the plaintiff under the terms of the franchise agreement and had done so under the terms of the earlier agreement. PAW55 was a temporary removable protective coating. Traditionally the plaintiff applied temporary removable protective coatings over glass surfaces, commercial anodised aluminium frames and commercial powder‑coated frames. PAW55 was suitable for use on these surfaces. The plaintiff did not apply PAW55 to other surfaces.
Between May 2007 and August 2007, Mr Gregory and Ms Pages‑Oliver had numerous conversations about a new product. This product was named MultiSKIN. Mr Gregory urged Ms Pages‑Oliver to have the plaintiff discontinue the use of PAW55 and instead acquire from the defendant, and use in the plaintiff's business, quantities of MultiSKIN. Mr Gregory advised Ms Pages‑Oliver that MultiSKIN was designed to coat and protect a large array of surfaces, including performance glass, conventional glass, anodised aluminium commercial window frames, powder‑coated commercial and residential window frames, timber frames, profiled surfaces, porous surfaces such as limestone walls, stone surfaces such as marble and travertine, laminated surfaces, grout lines, acrylic surfaces, synthetic surfaces, ceramic tiles and metallic surfaces such as stainless steel surfaces in lifts. In other words, it was represented to Ms Pages‑Oliver by Mr Gregory that MultiSKIN was a far more versatile product than PAW55. Ms Pages‑Oliver was won over by the representations.
At the time of the making of the representations the plaintiff was engaged in a large contract at premises situated at 180 Mill Point Road, South Perth. Ms Pages‑Oliver spoke to Mr Gregory and told him that she proposed applying MultiSKIN to various surfaces of an outdoor swimming pool. In particular, she said she intended to use the product on mosaic tiles and vertical and horizontal grout lines. Mr Gregory told Ms Pages‑Oliver MultiSKIN was suitable for that use. Accordingly, from early August 2007 onwards, the plaintiff bought quantities of MultiSKIN from the defendant. The defendant supplied MultiSKIN in 20 litre drums. On 7 August 2007, the plaintiff bought 40 litres of MultiSKIN, and on 21 August 2007, the plaintiff bought 320 litres of MultiSKIN. In the latter case, the defendant's tax invoice referred to the product being supplied as 'Tilesskin'. Ms Pages‑Oliver noticed the reference to Tilesskin and spoke to Mr Gregory about the difference. Mr Gregory advised the two products were the same but simply had different names applied to them. Between September 2007 and December 2007, the defendant supplied the plaintiff with 1040 litres of MultiSKIN, resulting in a total supplied quantity of 1400 litres.
Between August 2007 and December 2007, the plaintiff used MultiSKIN on a number of different jobs it was undertaking. In her statement, Ms Pages‑Oliver provides a table which sets out the use of MultiSKIN, the months during which the use occurred and the surfaces to which it was applied.
The use of MultiSKIN proved to be an unmitigated disaster. Although it was supposed to be temporary and removable it proved to be neither temporary nor removable. Its 'peelability' was extremely limited. It adhered aggressively and excessively to all substrates to which it was applied. This made it impossible, or at least extremely difficult, to remove MultiSKIN from surfaces. Eventually it was removed from most surfaces but that required a large amount of time and effort. Moreover, if it could be removed its application and removal tended to cause damage to the substrates to which it had been applied. In some cases the damage was so severe that the items to which it had been applied had to be replaced.
As a consequence of the failure of MultiSKIN, on or about 30 January 2008 the plaintiff terminated the franchise agreement.
However, the damage had been done. Ms Pages‑Oliver spoke to many of the plaintiff's customers and attempted to reassure them that the problem was MultiSKIN and that PAW55 was still an effective product which would not damage the surfaces to which it was applied. Ms Pages‑Oliver's efforts were in vein. The plaintiff's business virtually collapsed. Moreover, because the franchise agreement had been cancelled the plaintiff could not obtain supplies of PAW55 from the defendant. She was unable to source an alternative product. All of this meant a business that had been growing prior to January 2008 was effectively undermined and ruined.
In calculating the damages to which the plaintiff claims to be entitled, reliance was placed on an expert report of Jay Anderson Roberts of Jay Roberts Consulting dated 19 March 2018 (Roberts Report). Mr Roberts graduated from the University of Western Australia with a Bachelor of Commerce Degree. He is a Fellow of CPA Australia. He has very extensive experience as a partner or owner of accounting practices. He also has extensive experience in undertaking business valuations for professional purposes. He has provided expert reports in a number of court actions. I have no hesitation in accepting he is a suitably qualified expert.
Mr Roberts has assessed the loss of profit which the plaintiff suffered in the four and a half year period from the beginning of 2008 until 30 June 2012. This period was used because the plaintiff had a contractual entitlement to continue as an area manager franchisee until 30 June 2012. Mr Roberts came to the conclusion the plaintiff's loss of profit suffered between 1 January 2008 and 30 June 2012 was between the range of $1,009,966 to $1,261,722. He adopted as his preferred measure an amount of $1,135,844. This is a pre‑tax figure. It is that amount the plaintiff is seeking by way of damages. It is now necessary to look at Mr Roberts' methodology to see whether the amount claimed can be justified.
In order to assess the loss of profits Mr Roberts says he undertook the following steps:
(a)he assessed the level of the plaintiff's profitability before January 2008 and the individual cost characteristics of its business;
(b)he reviewed business and industry trends that would likely have had an impact upon the plaintiff's business operations after January 2008;
(c)he calculated the potential revenue forgone for the plaintiff given the business environment in which it was operating in between 2008 and 2012;
(d)he considered the net profit forgone after allowing for anticipated costs for the plaintiff between 2008 and 2012; and
(e)he considered other factors that may or may not have influenced the final determination of the likely net profit for the plaintiff for the relevant period.
Turning first to profitability, Mr Roberts produced a chart. This chart covered the years from 2006 to 2012, with each year referring to the relevant financial year. By way of example, for the financial year 2007 the sales amounted to $712,000. From that had to be deducted the 'contribution margin'. The contribution margin is the net amount received after taking into account direct costs of producing the sales. Typical costs that are taken into account include cleaning products and window film (including MultiSKIN and PAW55 products), contractors' fees and hire of plant. Overheads were then deducted and in the case of the 2007 financial year the overheads were $129,000. That produced an EBITDA (earnings before interest, taxes, depreciation and amortisation) of $170,000. The contribution margin varied from a high of 47.5% in 2006 to a low of 30% in 2009. Mr Roberts noted the contribution margin for the 2009 financial year was lower than 40% due to extra rectification work required on jobs. He was of the opinion that a reasonable contribution margin is in the vicinity of 40% of revenue.
Overheads as a percentage of revenue tend to decrease as revenue increases. The plaintiff's fixed overheads were consistent up to December 2008 at a rate of 18% of the revenue. Given the nature of the plaintiff's work and the overheads required to run a business of up to $2 million of revenue per year, Mr Roberts did not consider the overhead structure of the plaintiff's business would have altered in any material way as revenue increased. This was because the plaintiff operated from a home office with the majority of its overheads related to vehicle costs, insurance and wages to contractors. Accordingly, Mr Roberts considered there would have been no material variation to the plaintiff's overheads as revenue increased and he concluded that the overheads should be calculated in the range of 15‑17% for projected revenues.
The plaintiff's client numbers for the period of 2007 to 2009 indicated that from 2007 to 2008 the number of active clients for the plaintiff grew from 99 to 149. That is a 35.3% increase. From 2008 to 2009, the number of active clients reduced from 149 to 67. That is a decrease of 122.4%. It was Mr Roberts' view the combination of loss of active clients and the clear reduction in sales and profitability after 1 January 2008 were directly related. The profitability of the plaintiff's business was largely determined by its revenue. The plaintiff's expenses, be they of a direct nature or of an overhead nature, were not the cause of the loss of profitability for the period post 1 January 2008.
As to business and industry trends, Mr Roberts noted the plaintiff operated as a contracting service business to the building and construction sector. As such, the performance of that sector had a direct impact upon the plaintiff's income. Typical for contractors in this sector the plaintiff had no or minimal fixed term contracts with any client for its services. It operated in the general Perth metropolitan area. Throughout the period 2008 to 2012, Perth was experiencing a building boom. As a consequence, the plaintiff's business grew significantly from 2007 to mid‑2008. For the period 1 July 2007 to 31 December 2007, the plaintiff continued to aggressively grow its business. For those six months, the plaintiff's revenue was 95% of its entire revenue for the 2007 financial year.
Given the combination of a buoyant building and construction sector and the plaintiff's record of growing revenues, Mr Roberts could see no reason why the business would not have continued to grow and expand, subject to the normal risks of running a small business. Between 2009 and 2012, the plaintiff experienced a continued and material decline in its revenue from a peak of annualised earnings in the first half of 2008 of $1.4 million to an annual revenue of only $219,102 in the 2012 financial year. Mr Roberts was of the view this decline in revenue was due to the faulty MultiSKIN product. Mr Roberts also noted the decline in revenue ran counter to the level of activity in the construction industry in Western Australia in the relevant years.
Turning then to potential earnings, the plaintiff's revenue for the 18 months prior to January 2008 was $712,352 in 2007 and $679,359 between 1 July 2007 and 31 December 2007. After allowing for the normal Christmas shut down period of the construction industry over the Christmas/New Year period, approximately 53% of a financial year's income is earned in the period 1 July to 31 December and 47% for the period 1 January to 30 June. On that basis, the potential revenue for the plaintiff for the period 1 January 2008 to 30 June 2008 would have been in the vicinity of $602,450, and the plaintiff's total revenue for the 2008 financial year would have been $1,281,800.
The plaintiff was already operating at a growth rate of almost 100% which would have equated to an annual revenue of $1.4 million. Mr Roberts formed the view that the plaintiff's expected revenue for the 2008 financial year would have been in the range of $1.3 million to $1.35 million. That equates to the plaintiff having a potential revenue for the period of 1 January 2008 to 30 June 2008 of between $620,641 and $670,641. The plaintiff's actual earnings for the six month period from 1 January 2008 to 30 June 2008 was $370,541. On this basis, he concluded the potential lost revenue for the plaintiff for the period 1 January 2008 to 30 June 2008 was in the range of $250,099 to $300,099.
The value of building and construction work for 2009 increased in Western Australia by 9.1%. The plaintiff's business prior to 2008 had undergone a rapid increase in revenue with sales growth well in excess of that amount. Taking into account the expected continuing business growth of the plaintiff and the building sector growth rates, Mr Roberts thought it reasonable to assume the plaintiff would have experienced the growth rate in the 2009 financial year of a minimum of 9%. He did not consider it reasonable to assume the building sector would continue to grow at the that rate. However, he did consider that the upper range of growth for the plaintiff in the 2009 financial year was 20%. On that basis, the likely revenue for the plaintiff in the 2009 financial year would have been in the range of $1.417 million to $1.62 million.
Assessing the 2010 to 2012 financial years presented as difficult. Mr Roberts decided that given the decline in the business performance of the plaintiff, he did not consider actual performance of the plaintiff to be a reliable guide to its likely performance in those years. He analysed the growth in the construction sector for those years and felt it was reasonable to assume the plaintiff's business would have grown at a similar rate. Therefore, for the 2010 and 2011 financial years he assumed a growth rate of 4% and 6% respectively.
As to the 2012 financial year, the construction sector in Western Australia grew by 38%. Mr Roberts did not consider it reasonable to assume the plaintiff's performance would have sustained such an increase over a one year period. It did not have the management structure to support such growth. Mr Roberts was satisfied that a growth rate of between 10% and 15% was achievable by the plaintiff for the 2012 financial year.
Mr Roberts then tabulated the results. He looked at potential revenue, actual revenue and the potential revenue forgone. He used a higher and lower figure for the potential revenue and for the potential revenue forgone. For instance in the 2009 year he put the potential revenue forgone at between a high of $736,175 and a low of $533,175.

It was then a matter of calculating the loss of profit. That was done by assessing the contribution margin on the forgone income and deducting from that amount the extra overheads likely to be incurred as the business increased. As was noted above, the contribution margin was set at 40%. The overheads ranged between 15% and 17%. The total loss of profit then for the period 1 January 2008 to 30 June 2012 was between $1,009,966 and $1,261,722. He averaged this range to produce a loss of profit figure of $1,135,844.
Mr Roberts' report was detailed and comprehensive and in my view the figures he used were in all of the circumstances reasonable. There was nothing in the methodology which struck me as extravagant or unreasonable. The report was carefully considered and very detailed. I have no hesitation in accepting the final figure reached by Mr Roberts.
The damages will be assessed at $1,135,844 to which should be added interest. The defendant should also pay the plaintiff's costs of the action including the costs of assessing damages.

I certify that the preceding paragraph(s) comprise the reasons for decision of the Supreme Court of Western Australia.
CM
Associate
28 JUNE 2023