Foxeden Pty Ltd v IOOF Building Society Limited; Taylor v IOOF Building Society Limited
[2006] VSC 47
•17 February 2006
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL LIST
No. 2078 of 2000
| FOXEDEN PTY LTD (ACN 076 987 650) | Plaintiff |
| v | |
| IOOF BUILDING SOCIETY LIMITED (ACN 087 652 104) | Defendant |
| No. 2085 of 2000 | |
| KENNETH TAYLOR AND JANET TAYLOR | Plaintiffs |
| v | |
| IOOF BUILDING SOCIETY LIMITED (ACN 087 652 104) | Defendant |
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JUDGE: | HABERSBERGER J | |
WHERE HELD: | MELBOURNE | |
DATE OF HEARING: | 18, 20-22, 25-29 OCTOBER, 1, 3-5, 8, 10 and 11 | |
DATE OF JUDGMENT: | 17 FEBRUARY 2006 | |
CASE MAY BE CITED AS: | FOXEDEN PTY LTD v IOOF BUILDING SOCIETY LIMITED [No. 2] | |
MEDIUM NEUTRAL CITATION: | [2006] VSC 47 | |
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Damages for Breach of Contract – Failure to give one year's notice of termination – Different methods of calculating loss – Loss of building society commission income and financial planning income during the notice period – Loss of chance to earn financial planning income over time – Lost opportunity to negotiate compensation – Quantification of damages.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P.R. Hayes QC with Mr A.T. Broadfoot | Mallesons Stephen Jaques |
| For the Defendant | Mr F.G.A. Beaumont QC (on 18 and 20-22 October 2004) with Mr C.C. Macaulay SC and Mr M. Gurvich | Phillips Fox |
TABLE OF CONTENTS
Introduction........................................................................................................................................ 1
The Plaintiff’s Claim for Damages in the Foxeden Proceeding................................................ 2
The Plaintiffs’ Claim for Damages in the Taylor Proceeding................................................... 6
Applicable Legal Principles............................................................................................................. 9
The Damages Hearing..................................................................................................................... 11
The Entitlement of the Plaintiff(s) to the Financial Planning Income.................................. 12
Foxeden and Decagold Pty Ltd........................................................................................... 13
The Taylors and Pastel Manor Pty Ltd.............................................................................. 15
The Final Claims for Damages...................................................................................................... 16
The Loss of Commission Income During the Notice Period................................................... 19
Quantification of Foxeden’s Lost Commission Income.................................................. 19
Quantification of the Taylors’ Lost Commission Income............................................... 24
The Loss of the Chance to Earn Financial Planning Income Over Time.............................. 28
The Number of Financial Planning Clients Lost.............................................................. 29
The Average Investment...................................................................................................... 38
The Rates of Commission.................................................................................................... 44
The Length of Investments.................................................................................................. 44
The Appropriate Discount Rate.......................................................................................... 44
Quantifying Foxeden’s Lost Chance.................................................................................. 45Quantifying the Taylors’ Lost Chance............................................................................... 46
The Lost Opportunity to Transfer Customers............................................................................ 47
The Lost Opportunity to Negotiate Compensation.................................................................. 49
Mitigation of Damages................................................................................................................... 55
Summary of Foxeden's Claim........................................................................................................ 58
Summary of the Taylors' Claim.................................................................................................... 59
Conclusion......................................................................................................................................... 60
HIS HONOUR:
Introduction
On 19 September 2003 I published my reasons for judgment on liability in each of these proceedings.[1] Relevantly, in proceeding No. 2078 of 2000 (“the Foxeden proceeding”) I found that there was an implied term of the agreement between the plaintiff, Foxeden Pty Ltd (“Foxeden”), as the nominee of Mr Warwick Hawksworth, and the first defendant, IOOF Building Society Limited (“IOOF” or “the Building Society”), concerning the operation of IOOF’s Mildura branch that the agreement could be terminated by either party without cause on reasonable notice.[2] I also found that a period of one year would have been reasonable notice to Foxeden at the end of June 1999; and that IOOF repudiated the agreement by electronically transferring all of the Mildura branch customer accounts, including deposits and loans, to the nearest Bendigo Bank branch on 30 June 1999,[3] without any prior notice, let alone the required one year’s notice, to Foxeden of its intention to bring the agreement to an end, thereby denying Foxeden exclusive access to the customers of the Mildura branch and to the customer lists and depriving it of the opportunity to have personal dealings with these customers when they visited the branch during the ensuing notice period.[4]
[1][2003] VSC 356.
[2]At [348].
[3]At [361].
[4]At [313], [314] and [360].
In proceeding No. 2085 of 2000 (“the Taylor proceeding”) I found that, as from 24 March 1997, there was a term of the agreement between the plaintiffs, Kenneth and Janet Taylor, and IOOF, concerning the operation of IOOF’s Frankston branch that the agreement could be terminated by either party without cause on 60 days’ notice in writing, but that IOOF was estopped from relying upon or enforcing that term and that in order to make good the assumption on which the estoppel was based the matter should proceed on the footing that there was an implied term that the agreement could be terminated on reasonable notice.[5] I also found that a period of one year would have been reasonable notice to the Taylors at the end of June 1999;[6] and that IOOF repudiated the agreement by electronically transferring all of the Frankston branch customer accounts, including deposits and loans, to the nearest Bendigo Bank branch on 30 June 1999, without any prior notice, let alone the required one year’s notice, to the Taylors of its intention to bring the agreement to an end, thereby denying the Taylors exclusive access to the customers of the Frankston branch and to the customer lists and depriving them of the opportunity to have personal dealings with these customers when they visited the branch during the ensuing notice period.[7]
[5]At [298].
[6]At [318].
[7]At [313].
Following a further hearing, the outstanding issue for determination in each proceeding is the quantum of damages recoverable by the plaintiff(s) from IOOF, the sole remaining defendant. This has been an extremely complicated exercise, not the least for the reason that the plaintiff(s) have frequently changed the ways in which their claims were put. Without going into all of the detail of the calculations of the differing amounts, it is worth noting, as a starting point, how the articulation and quantification of each claim has varied from time to time.
The Plaintiff’s Claim for Damages in the Foxeden Proceeding
In its Statement of Claim dated 4 August 2000 Foxeden claimed:
(a)$149,441, being the amount of unpaid commissions payable by the Building Society for the period from 28 May 1997 to 30 June 1999, being the period during which Foxeden operated the Mildura branch;
(b)$1,792,286, being the loss of the value of the business; and
(c)$433,799, being the loss of the ability to recoup trading losses incurred by Foxeden during the period from 28 May 1997 to 30 April 2000. The figure of $433,799 was reduced to $131,013 in Foxeden’s Further and Better Particulars of the Statement of Claim dated 5 October 2000.
In its Further Amended Statement of Claim dated 4 April 2002 Foxeden claimed:
(a)$149,441 for unpaid commissions payable by the Building Society; and
(b)(i)$1,821,669 for loss of the opportunity to sell its exclusive rights to the customers to Bendigo Bank; alternatively
(ii)$1,821,669, alternatively $1,967,000, for loss of the opportunity to sell its exclusive rights to the customers to another financial institution; alternatively
(iii)$1,821,669, alternatively $1,967,000, alternatively $1,728,000, alternatively $1,580,000, for loss of the opportunity to be compensated by one or more of IOOF Limited, formerly IOOF of Victoria Friendly Society Limited (“IVFS”), (the ultimate owner of the shares in the Building Society), IOOF BS Holdings Pty Ltd (“BSH”), (the subsidiary which held all the shares in the Building Society), the Building Society and Bendigo Bank.
Each of these alternative amounts was calculated by using a different formula for valuing that part of the Building Society’s business represented by the Mildura branch.
(c)Alternatively to (b), $229,873, being the total of $176,566 for net lost building society commission during the period from 1 July 1999 to 31 August 2000 (12 months and 60 days) and $53,317 for net lost financial planning income during the same period. These figures were said to be based on gross earnings during the year ended 30 June 1999 of $184,500 in building society commissions and $106,635 in financial planning income.
Following the liability judgment, Foxeden filed a Statement of Loss and Damage dated 8 December 2003 in which it claimed:
(a)$87,762 for unpaid commissions payable by the Building Society, including $7,762 for commission on loans written through the Mildura branch after 28 May 1997; and
(b)$1,821,669 for loss of one or other of the three opportunities referred to in paragraph 5(b) above. It was said that the Mildura branch accounted for 4.78% of the Building Society’s total “funds under management” and $1,821,669 was 4.78% of the $38.1 million paid by Bendigo Bank for the shares in the Building Society.
(c)Alternatively to (b), $1,728,000, alternatively $1,580,000, being an amount representing compensation for the additional benefit derived by IVFS from selling the Building Society to Bendigo Bank for a consideration inflated by the wrongful inclusion of the figures for the Mildura branch’s business.
(d)Alternatively to (b) and (c),
(i)$353,000, being the total amount of lost building society commissions and financial planning income (less saved expenses of $112,000) for the period from 1 July 1999 to 30 June 2000. This figure was said to be based on anticipated gross earnings during that period of $260,000 in building society commissions and $215,000 in financial planning income (less $10,000 earned from IOOF customers); and
(ii)$213,960, being an amount representing the lost opportunity to increase the value of its financial planning business from its Mildura branch customers had it had the benefit of the agency for the period from 1 July 1999 to 30 June 2000. This figure was calculated as 6% of the anticipated increase in “funds under management” of $3,566,000. The figure of $213,960 was increased to $370,000 in Foxeden’s Amended Statement of Loss and Damage dated 2 April 2004, representing 6% of an increase in “funds under management” of $6,166,666.
Shortly before the damages hearing commenced, Foxeden filed a Further Amended Statement of Loss and Damage dated 11 August 2004 which changed its claim yet again. In this document, Foxeden deleted the claim referred to in paragraph 6(d)(ii) above and replaced it with a new principal claim of $3,802,428, being an amount representing the loss of the chance to earn financial planning income which would have been derived by Foxeden by obtaining financial planning clients who were depositors with the Mildura branch of the Building Society by using the IOOF customer list. The claim was based on 948 new clients with an average financial planning investment of $70,000. In addition, Foxeden claimed:
(a)$7,762 for unpaid commission payable by the Building Society on loans written through the Mildura branch after 28 May 1997; and
(b)$1,821,669 for loss of one or other of the three opportunities referred to in paragraph 6(b) above.
(c)Alternatively to (b), $1,728,000, alternatively $1,580,000, for the lost compensation referred to in paragraph 6(c) above.
(d)Alternatively to (b) and (c), $135,050 (instead of $353,000), for the lost building society commissions and financial planning income (less saved expenses of $112,000) for the period from 1 July 1999 to 30 June 2000. This figure resulted from changes to the anticipated gross earnings, to $115,000 (instead of $260,000) in building society commissions and to $150,000 (instead of $215,000) in financial planning income (less $17,950 and not $10,000 earned in that period).
After considering some issues raised by IOOF at the commencement of the damages hearing, Foxeden filed its final Further Amended Statement of Loss and Damage dated 21 October 2004 (“Foxeden’s Claim”). In this document Foxeden reduced its principal claim for loss of the chance to earn financial planning income over time to $3,393,303 (instead of $3,802,428) by reducing the number of new clients to 846. In addition, Foxeden repeated the claims for $7,762 and $135,050 referred to in paragraph 7(a) and (d) above respectively; repeated the claim for the lost opportunity to maintain the benefits derived from operating the Mildura branch by transferring all of the customers to another building society agency or other similar banking agency on terms substantially similar to its agreement with IOOF (“the lost opportunity to transfer the Mildura customers to another financial institution”), and the claim for the lost opportunity to negotiate (either on its own behalf or in conjunction with the Taylors) with IVFS or the Building Society or Bendigo Bank for payment of an amount of compensation for agreeing to waive its entitlement to one year’s notice of termination of the agreement (“the lost opportunity to negotiate compensation for agreeing to waive the period of notice”) and increased the quantification of each claim to $3,393,303, alternatively the previous figure of $1,821,699; and deleted both the claim for the lost opportunity to sell its rights to the customers to Bendigo Bank, and the claim to an amount representing compensation for the additional benefit derived by IVFS from selling the Building Society for an inflated consideration.
One qualification to the calculation of the principal claim introduced at this time was that Foxeden purported to reserve the right to increase the amount of the average investment per client above $70,000 if the claimed number of financial planning clients lost was reduced below 846. In its Claim Foxeden had used the figure of $70,000 although it said that the actual average investment was approximately $78,000 per client.
Further, it was recognised in Foxeden’s Claim that this figure of $3,393,303 would have been received over a period of time and therefore that it had to be discounted to ascertain the net present value. Using calculations said to have been prepared by its expert witness, the figure was discounted to a net present value of $1,972,024. However, subsequently that expert witness produced another set of calculations, which were tendered, which resulted in a net present value of $2,849,250. The difference between the two figures was never satisfactorily explained.
Foxeden also accepted in its Claim that this figure might have to be further discounted “to the extent that the Court, having concluded that it is more probable than not that the plaintiff lost the chance referred to in this paragraph, assesses that there is a risk that the plaintiff would not have derived the full sum claimed.” Thus, the figure of $2,849,250 was the maximum amount that could be claimed, prior to any award of interest.
The Plaintiffs’ Claim for Damages in the Taylor Proceeding
In their Statement of Claim dated 29 August 2000 the Taylors claimed:
(a)$108,800, being the loss of anticipated commission income during the period from 1 July 1999 to 30 June 2000; and
(b)$1,558,000, being the loss of the value of the business.
In their Further Amended Statement of Claim dated 5 April 2002 the Taylors claimed:
(a)$108,800, being the loss of anticipated commission income during the period from 1 July 1999 to 30 June 2000; and
(b)(i)$1,558,000 for loss of the opportunity to sell their exclusive rights to the customers to Bendigo Bank, alternatively
(ii)$1,558,000, alternatively $1,824,000, for loss of the opportunity to sell their exclusive rights to the customers to another financial institution (“the lost opportunity to transfer the Frankston customers to another financial institution”), alternatively
(iii)$1,558,000, alternatively $1,824,000, alternatively $1,735,000, for loss of the opportunity to be compensated by one or more of IVFS, BSH, the Building Society and Bendigo Bank (“the lost opportunity to negotiate compensation for agreeing to waive the period of notice”).
Each of these alternative amounts was calculated by using a different formula for valuing that part of the Building Society’s business represented by the Frankston branch.
(c)Alternatively to (a) and (b), $452,666 for net lost income during the period from 1 July 1999 to 31 August 2000 (12 months and 60 days). This figure was said to be based on anticipated gross earnings during the year ended 30 June 2000 of $600,000 less expenses of $212,000.
Following the liability judgment, the Taylors filed a Statement of Loss and Damage dated 8 December 2003 in which they claimed:
(a)$168,125, being the total amount of lost building society commissions and financial planning income (less saved expenses of $65,000) for the period from 1 July 1999 to 30 June 2000. This figure was said to be based on anticipated gross earnings during that period of $106,985 in building society commissions and $571,450 in financial planning income (less $445,310 actually earned).
(b)$1,558,000 for loss of one or other of the three opportunities referred to in paragraph 12(b) above. It was said that the Frankston branch accounted for 4.11% of the Building Society’s total “funds under management” and $1,558,000 was 4.11% of the $38.1 million paid by Bendigo Bank for the shares in the Building Society.
(c)Alternatively to (a), $1,824,000, alternatively $1,022,794, being an amount representing compensation for the additional benefit derived by IVFS from selling the Building Society to Bendigo Bank for a consideration inflated by the wrongful inclusion of the figures for the Frankston branch’s business.
(d)$252,280, being an amount representing the lost opportunity to increase the value of their financial planning business from their Frankston branch customers had they had the benefit of the agency for the period from 1 July 1999 to 30 June 2000. This figure was calculated as 6% of the anticipated increase in “funds under management” of $4,205,000.
Shortly before the damages hearing commenced, the Taylors filed a Further Amended Statement of Loss and Damage dated 11 August 2004 which changed their claim yet again. In this document the Taylors deleted the claim referred to in paragraph 13(d) above and replaced it with a new principal claim of $2,576,093, being an amount representing the loss of the chance to earn financial planning income which would have been derived by them by obtaining financial planning clients who were depositors with the Frankston branch of the Building Society by using the IOOF customer list. The claim was based on 762 new clients with an average financial planning investment of $59,000. In addition, the Taylors claimed:
(a)$163,447 (instead of $168,125) for lost commission income during the period from 1 July 1999 to 30 June 2000. This figure resulted from changes to the anticipated gross earnings, to $104,994 (instead of $106,985) in building society commissions and to $568,763 (instead of $571,450) in financial planning income.
(b)Otherwise, they repeated the claims referred to in paragraph 13(b) and (c) above.
After considering some issues raised by IOOF at the commencement of the damages hearing commenced, the Taylors filed their final Further Amended Statement of Loss and Damage dated 21 October 2004 (“the Taylors’ Claim”). In this document the Taylors increased their principal claim for loss of the chance to earn financial planning income over time to $2,620,042 (instead of $2,576,093) by increasing the number of new clients to 775. In addition, the Taylors repeated the claim for $163,447 referred to in paragraph 14(b) above; repeated the claim for the lost opportunity to transfer the Frankston customers to another financial institution , and the claim for the lost opportunity to negotiate compensation for agreeing to waive the period of notice and increased the quantification of each claim to $2,620,042, alternatively the previous figure of $1,558,000; and deleted both the claim for the lost opportunity to sell its rights to the customers to the Bendigo Bank, and the claim to an amount representing compensation for the additional benefit derived by IVFS from selling the Building Society for an inflated consideration.
The Taylors also qualified the calculation of the principal claim introduced at this time by purporting to reserve the right to increase the amount of the average investment per client above $59,000 if the claimed number of financial planning clients lost was reduced below 775. In their Claim the Taylors had used the figure of $59,000 although they said that the actual average investment was approximately $82,000 per client.
The Taylors also recognised in their Claim that this figure of $2,620,042 would have to be discounted to a net present value, which was initially said to be $1,522,641, according to the expert witness' calculations. However, that witness' subsequent set of calculations, which were tendered, resulted in a net present value of $2,199,965. Again, the difference between the two figures was never satisfactorily explained.
It was also accepted that the figure of $2,199,965 was the maximum amount that could be claimed, prior to any award of interest, and that it might have to be further discounted to take account of the risk that the plaintiffs would not have derived the full sum claimed.
Applicable Legal Principles
It seems to me that the following statements of legal principle are applicable to the task of assessing the damages to be awarded to Foxeden and the Taylors:
(a)"… where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed" (per Parke B in Robinson v Harman[8]);
(b)"… the plaintiff is entitled to recover such damages as arise naturally, that is, according to the usual course of things, from the breach, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach" (per Mason CJ and Dawson J in The Commonwealth v Amann Aviation Pty Ltd[9] restating Alderson B's "renowned formulation" in Hadley v Baxendale[10]);
(c)"The award of damages for breaches of contract protects a plaintiff's expectation of receiving the defendant's performance" (per Mason CJ and Dawson J in Amann[11]);
(d)"… a plaintiff is not entitled, by the award of damages upon breach, to be placed in a superior position to that which he or she would have been in had the contract been performed" (per Mason CJ and Dawson J in Amann[12]) and "… the parties to the contract are kept to the benefits and the burdens of the contract they have made: the plaintiff recovers no more than the net benefit he would have received under the contract; the defendant acquires no right to profit by his breach" (per Brennan J in Amann[13]);
(e)"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 1 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" (per Deane, Gaudron and McHugh JJ in Malec v JC Hutton Pty Ltd[14]);
(f)"… the general standard of proof in civil actions will ordinarily govern the issue of causation and the issue whether the applicant has sustained loss or damage. 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" (per Mason CJ, Dawson, Toohey and Gaudron JJ in Sellars v Adelaide Petroleum NL[15]);
(g)"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" (per Lord Diplock in Mallett v McMonagle[16]); and
(h)"… mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can," sometimes even to the extent of being involved in "guess work rather than estimation" (per Mason CJ and Dawson J in Amann[17] referring to a passage from the judgment of Dixon and McTiernan JJ in Fink v Fink[18] and to a passage from the judgment of Menzies J in Jones v Schiffmann[19]).
[8](1848) 1 Ex 850 at 855 [154 ER 363 at 365]
[9](1991) 174 CLR 64 at 91-92
[10](1854) 9 Ex 341 at 354 [150 ER 145 at 151]
[11](1991) 174 CLR 64 at 80
[12](1991) 174 CLR 64 at 82
[13](1991) 174 CLR 64 at 99
[14](1990) 169 CLR 638 at 643
[15](1994) 179 CLR 332 at 355
[16][1970] AC 166 at 176
[17](1991) 174 CLR 64 at 83
[18](1946) 74 CLR 127 at 143
[19](1971) 124 CLR 303 at 308
The Damages Hearing
On the first day of the liability hearing I ordered that the two matters should be heard together and that the evidence in one proceeding be evidence in the other.[20] Subsequently, at an early stage of that hearing I ordered pursuant to r.47.04 of the Supreme Court Rules that liability in each proceeding be determined as a separate question.[21] Prior to the commencement of the damages hearing, on 16 September 2004, I ordered that, pursuant to r.40.11, the evidence taken at the liability hearing be evidence at the damages hearing.
[20][2004] VSC 356 at [38]
[21]At [39].
The plaintiff(s) called eight witnesses. Mr Hawksworth and Mr Greg Smart, the former manager of the Mildura branch, gave evidence concerning Foxeden’s claim and Mr and Mrs Taylor gave evidence concerning their claim. A witness statement by Mr William Cleland, a former partner of a firm of solicitors in Frankston, White Cleland, was tendered on behalf of the Taylors, but he was not cross‑examined. Mr Andrew Mainprize, a former General Manager of the Building Society, and Ms Glenda Robson, a financial planner employed by Foxeden at the Shepparton financial planning office, were also called by the plaintiff(s). Finally, the plaintiff(s) called as an expert, Professor Wesley McMaster, an Adjunct Professor of Financial Planning at RMIT University and the principal of McMaster Securities Pty Ltd, a business consultancy specialising in financial services. Much of Professor McMaster’s evidence was based on the Dashboard Report concerning financial planners for the year ended 30 June 2003 prepared by Strategic Consulting and Training Pty Ltd; the Principal Member Survey, Professional Practice prepared for the Financial Planning Association of Australia Ltd (“FPAA”) by Professor McMaster in November 2003; and the Consumer Sentiment Survey prepared for FPAA by Professor McMaster in May 2003.
During the damages hearing, on the application of the plaintiff(s), I ruled[22] that two of the witnesses who had given evidence on behalf of the defendants at the liability hearing, Mr Raymond Schoer, the former Chairman of the Building Society’s Board of Directors, and Mr Alan Mollison, the former finance manager of the Building Society, should be recalled by the sole remaining defendant, IOOF, for the purpose of being cross-examined by the plaintiff(s) as part of the damages hearing.
[22]Ruling given 26 October 2004
Apart from the special circumstances of Mr Schoer and Mr Mollision, IOOF called only two witnesses. The first, Dr Allen Truslove, a director of Cumpston Sarjeant Truslove Pty Ltd, was a former Government Actuary and had been the Consulting Actuary to the IOOF Friendly Society since 1994. The second witness was Ms Piera Murone, a partner of PKF Chartered Accountants and Business Advisers and a director of PKF Corporate Advisory Services (Vic) Pty Ltd, who had prepared an expert report in respect of the damages claims of the plaintiff(s).
The Entitlement of the Plaintiff(s) to the Financial Planning Income
Before examining the Claims of the plaintiff(s) in each proceeding in detail, I turn first to consider an important preliminary point raised by the Building Society, namely whether Foxeden and the Taylors were entitled to receive the financial planning income and, if not, whether they in fact suffered any relevant loss. As will be seen, this defence relates only to the financial planning income and does not affect any entitlement of the plaintiff(s) to damages for lost building society commissions, or for the loss of the opportunity to negotiate compensation for waiving the period of notice, or for the loss of the opportunity to transfer the customers to another financial institution.
Foxeden and Decagold Pty Ltd
IOOF submitted that if there had been any loss of financial planning income as a result of its repudiation of the agreement with Foxeden, that loss was sustained by Decagold Pty Ltd (“Decagold”) and not Foxeden.
Decagold was a company incorporated by Mr Hawksworth in February 1998 in the following circumstances. Winchcombe Carson Financial Planning Pty Ltd (“Winchcombe Carson”) was a subsidiary of, and the financial planning arm of, IVFS. Mr Hawksworth was an authorised representative of Winchcombe Carson. He owned a series of eight Winchcombe Carson franchise offices throughout Victoria. When Foxeden took over the operation of the Building Society’s branch office in Mildura on 28 May 1997 Mr Hawksworth remained an authorised representative of Winchcombe Carson, entitled to the financial planning commission. At no stage did Foxeden have an authority from Winchcombe Carson. However, according to Mr Hawksworth, he passed on the financial planning commission he received from Winchcombe Carson to Foxeden because it was incurring all of the expenses of operating the Mildura branch.
It appears that following an approach by Mr Hawksworth to Winchcombe Carson about him having to pay PAYE tax on the financial planning commission, he was advised by Mr Adrian Hondros of Winchcombe Carson that the only way he could avoid paying PAYE tax was to form a separate company. Mr Hawksworth maintained, and I find, that Winchcombe Carson wanted one separate company to receive the commission, rather than Foxeden, in respect of the Mildura, Shepparton and Echuca branches and Portmark Pty Ltd in respect of the other branches. After the incorporation of Decagold in February 1998, at the direction of Mr Hawksworth Winchcombe Carson paid the financial planning commissions to it. Although Decagold never entered into any written agreement with Winchcombe Carson, drafts of such an agreement were prepared.
How then did Foxeden claim that it had lost financial planning income? Mr Hawksworth said that he controlled both companies and that, although there was no agreement in writing between Decagold and Foxeden, there was an agreement between them that Decagold would receive the financial planning commissions as the nominee of Foxeden and would pass on that income to Foxeden. This claim was strongly criticised by IOOF. It submitted that Mr Hawksworth was not an employee of Foxeden so that Foxeden had no entitlement to receive the financial planning commissions due to him; that the financial statements and books of account of Foxeden and Decagold did not show all of the commissions received by Decagold being paid by it to Foxeden; that Decagold was not a mere nominee company and that its taxation returns described it as operating a financial planning business and not as a nominee; that there was no credible evidence that there had ever been any agreement between Decagold and Foxeden regarding the collection or payment of the financial planning commission; and that the appointment of Decagold as the entity entitled to financial planning commission from Winchcombe Carson was made to obtain a taxation advantage and that Foxeden could not now contend that it was not effective.
Although Mr Hawksworth’s evidence on this issue was at times confusing, if not contradictory, I accept that as far as he was concerned, as the controlling mind of both Decagold and Foxeden, Decagold was receiving the financial planning commissions on behalf of Foxeden and that all, or some, of that income would be remitted to Foxeden to enable it as far as possible to meet its expenses. After that had been done, I consider that any remaining income would have been distributed in the most tax effective way. As far as Mr Hawksworth was concerned, Foxeden had earned some or all of the financial planning income because it had incurred all of the expenses in running the Mildura branch of the Building Society, through which the financial planning income had been, or would have been, generated. Simply stating in the taxation return of Decagold that it was operating in the financial planning category of business activities does not detract from Mr Hawksworth’s evidence that Decagold was only a nominee for Foxeden.
It therefore seems to me that Foxeden can legitimately claim to have suffered a loss as a result of the Building Society’s breach of their agreement in that Foxeden lost the chance to receive all or part of the financial planning income which, at the direction of Mr Hawksworth, would have been paid by Winchcombe Carson to Decagold, over the following years as a result of the efforts of Mr Hawksworth to generate that income during the period of the one year’s notice of termination, and which in turn would have been paid by Decagold to Foxeden.
The same analysis applies to the financial planning income which would have been paid by Winchcombe Carson to Mr Greg Smart, the manager of the Mildura branch office, over the following years as a result of his efforts to generate that income during the period of notice. I accept the evidence that, although Winchcombe Carson insisted that this commission had to be paid to Mr Smart or his nominee company, pursuant to the terms of his employment by Foxeden Mr Smart was obliged to pay all of the commission income he received to Foxeden.
The Taylors and Pastel Manor Pty Ltd
IOOF also submitted that if there had been any loss of financial planning income as a result of its repudiation of the agreement with the Taylors, that loss was sustained by Pastel Manor Pty Ltd (“Pastel Manor”) and not the Taylors. Pastel Manor was the trustee of the Taylor Family Trust.
In 1990, and later in May 1991, Pastel Manor and Winchcombe Carson entered into an agreement pursuant to which Pastel Manor was appointed the agent of Winchcombe Carson responsible for providing the financial planning services of the authorised representative Mr Taylor. Pastel Manor was entitled to receive the commission which Winchcombe Carson paid in respect of those services. Pursuant to the agreement Pastel Manor was responsible for the remuneration of Mr Taylor. In fact, by June 1999 both Mr and Mrs Taylor were employed by Pastel Manor and were paid a salary by it.
IOOF submitted that merely because Pastel Manor paid the Taylors to provide some services did not make them the people entitled to the commission from Winchcombe Carson. Whilst I agree with that proposition, it does not follow, in my opinion, that the Taylors cannot legitimately claim to have suffered a loss as a result of the Building Society’s breach of their agreement. Mr Taylor gave evidence that he and his wife determined the level of their salaries each year and that it was calculated by ascertaining “what was left over after paying expenses”. He said that all of the commissions earned from the financial planning services received by Pastel Manor was either spent on expenses or paid to Mr and Mrs Taylor in the form of salaries. Therefore, the Taylors lost the chance to have their remuneration increased by Pastel Manor receiving the financial planning income from Winchcombe Carson over the following years as a result of the efforts of Mr Taylor to generate that income during the period of the one year’s notice of termination. It therefore seems to me that the Taylors are entitled to look at lost financial planning income as one possible way of calculating the damages payable to them by IOOF.
The Final Claims for Damages
The claim by Foxeden for $7,762 for unpaid commission payable by the Building Society on loans written through the Mildura branch after 28 May 1997 can be put to one side. As I understand it, IOOF accepted during the hearing that this amount was payable, but it is not clear to me whether it was actually paid and whether interest on the outstanding sum was taken into account. If the amount of $7,762 and/or interest thereon is still outstanding, then Foxeden is entitled to have the appropriate amount included in the judgment.
The next point is that after the evidence had been completed and final written submissions exchanged, both Foxeden and the Taylors sought to amend their Claims yet again. Although IOOF objected to leave being granted to make any further amendments at this late stage of the hearing, it was content to argue the matter as part of the final submissions.
The first proposed amendment was to the principal claim in paragraph 1(d) of Foxeden's Claim. It sought to add the following words to the existing claim that the average investment for each lost financial planning client was not less than $70,000 and that the actual average investment was approximately $78,000 per client:
"… and the Plaintiff will rely upon a higher average investment figure in lieu of $70,000 if the figure of 60% in (c) above is reduced, on the basis that a relatively small number of building society customers were likely to have held a disproportionately large amount of funds available for investment."
A similar amendment was proposed to the principal claim in paragraph 1(d) of the Taylors' Claim except that the figures in question were $59,000 and $82,000.
It seems to me that, as submitted by the plaintiff(s), these proposed amendments did no more than clarify in express terms what had clearly been understood throughout the hearing as the reasoning behind the claim by the plaintiff(s) that Foxeden and the Taylors were entitled to increase the amount of the average investment in the formula used for calculating the lost financial planning income over time as the number of financial planning clients lost was reduced below 846 and 775 respectively. Accordingly, I consider that leave to make the first proposed amendment to each of the claims should be granted.
The second proposed amendment was to add the following words at the end of the description of the principal claim in paragraph 1 of the Foxeden Claim:
"This paragraph is put on the basis that the commissions claimed would have been earned in a 6 year period commencing 1 July 1999 if the right to terminate on 12 months' notice had been exercised on 30 June 1999. Alternatively, the Plaintiff says that the commissions would have been earned had the sale not proceeded, in which case it is unlikely that the right to terminate would have been exercised at all given the parties' expectation of a long term franchise."
A similar amendment was proposed to the description of the principal claim in paragraph 1 of the Taylors' Claim.
I consider that the first sentence in these proposed amendments to be unnecessary because the fact that it was being claimed that the commissions would have been earned over a six year period had already been made clear by paragraph 1(c) of each claim.
I turn then to the second sentence which contained the real point of these proposed amendments. What the plaintiff(s) were seeking to include was a further alternative scenario, namely that if it had been known that the one year period of notice was required to be given, then given the problems that would have caused it was unlikely that IOOF would have sought to terminate the agreements so that the plaintiff(s) had suffered loss by being deprived of commissions which they would otherwise have continued to earn over the long term.
IOOF strenuously objected to this part of the second proposed amendments. It submitted that the suggestion that notice of termination might not have been given was a completely new way of putting the plaintiff(s)' claims and that it was quite unfair for such a change to be made after the evidence had closed. It was also submitted that this approach contradicted the findings made in the liability trial.
I agree. It seems to me that the plaintiff(s)' claims in the damages hearing were always based on the various attempts to quantify the loss suffered by the plaintiff(s) as a result of IOOF's failure to give, as I found in the liability trial, the required one year's notice of termination. To now suggest that another way of quantifying the plaintiff(s)' loss was to proceed on the basis that no notice of termination would have been given is simply to fly in the face of not only the findings made at the liability trial but also of the approach adopted by the plaintiff(s) up until that stage at the damages trial. I therefore refuse the application for leave to make the second proposed amendment to each Claim on the grounds that, in my opinion, it would be inappropriate and unfair to the defendant to allow such amendments.
In any event, even if I allowed the second proposed amendments, it seems to me that I could not be satisfied that any such opportunity had been lost. For the reasons given below when discussing the claim based on the lost opportunity to negotiate compensation, I consider it so likely that IVFS would have decided not to proceed with the sale of the Building Society that the chance of it occurring has to be discounted completely.
This means that I have to consider the four different ways in which Foxeden and the Taylors have articulated and quantified their claims for damages. I propose to consider each of these different ways in the following order:
(a)loss of building society commissions and financial planning commissions which would have been received in the one year’s period of notice of termination;
(b)loss of the chance to earn financial planning income over time by using the one year’s period of notice to convert depositors with the respective branch of the Building Society, either during that year or in subsequent years, into financial planning clients (“the lost chance to earn financial planning income over time”);
(c)the lost opportunity to transfer the customers of the branch to another financial institution; or
(d)the lost opportunity to negotiate compensation for agreeing to waive the period of notice.
The Loss of Commission Income During the Notice Period
There was no dispute that, had Foxeden and the Taylors been given the required one year’s period of notice of termination, on the balance of probabilities they would have continued to earn building society commissions and financial planning income during that period. The amount of that lost income, less any expenses saved by not having to run the branch, is therefore a legitimate method of attempting to quantify the damages payable to the plaintiff(s). Rather surprisingly, quantification of the amount of the damages pursuant to this method was a strongly contested issue and what should have been a relatively straightforward calculation of lost income during the period of notice turned out to be quite confusing, mainly due, it would appear, to the lack of proper records by both Foxeden and the Taylors on the one hand, and IOOF and Winchcombe Carson on the other.
Quantification of Foxeden’s Lost Commission Income
In its final written submissions, Foxeden submitted that the claim for lost building society commissions and financial planning income for the period from 1 July 1999 to 30 June 2000 should be assessed at $80,845, calculated as follows:
Anticipated building society commissions
$108,750
Anticipated financial planning commissions
$150,000
Expected income
$258,750
Less savings in expenses
$112,000
$146,750
Less actual income received
$ 65,905
$ 80,845
This calculation contained one change from the final version of Foxeden’s Claim in that the figure for anticipated building society commissions was reduced from $115,000 to $108,850, as set out below.
It will have been noticed that Foxeden’s original claim in this category was not for lost profits but for the loss of the ability to recoup trading losses incurred by Foxeden during the period it operated the Mildura branch. It is therefore not surprising that IOOF’s principal submission in respect of this way of putting the claim for damages was that Foxeden was trading at a loss and therefore was saved from further loss by not continuing to run the agency in the financial year ended 30 June 2000.
In its final written submissions, IOOF set out how it justified its argument that Foxeden had suffered no loss:
Anticipated building society commissions
$101,000
Anticipated financial planning commissions
$ 12,000
Expected income
$113,000
Less savings in expenses
$ 55,500
$ 57,500
Less actual income received
$ 65,905
Net benefit of not operating the business
($ 8,405)
IOOF calculated the financial planning commissions which would have been earned in the 2000 financial year as follows. Rather than just taking account of income which would have actually been received in that year, IOOF purported to calculate the total amount lost both in up front commissions and trail commissions over seven years and discounted to produce a net present value. It based its calculation on 14 new financial planning clients from the building society base for the 2000 financial year with an average investment of $18,000. Foxeden's calculations under this approach and IOOF's criticisms of them are examined in detail in the next category of loss and I will not pursue them further here. For present purposes I note that, in order to compare like with like, the actual income which it was said by IOOF would have been received in the 2000 financial year on the above basis was only $8,600.
On the other hand, Foxeden claimed that in the financial year 2000 it would have approximately doubled its financial planning income of $76,605 for the previous financial year to $150,000. I consider this rate of increase to be reasonable, given that Foxeden was still in the early stages of its development of financial planning income and the income from financial planning in the 1998 financial year had been $43,644 and had therefore increased 75% in the 1999 financial year. I also take into account that considerable time and effort would no doubt have been devoted to attempting to convert building society customers into financial planning clients in the notice period.
The amount of building society commissions earned by Foxeden depended on the amount of the deposits in the various accounts held at the Mildura branch. The available figures clearly show that over the period Foxeden operated the Mildura branch the number of accounts and the balances held in those accounts fell:
Date Savings Number Savings Balances Investments Number Investments Balances Combined Number Combined Balances 31 May 97 3,266 $7,659,214 556 $7,627,433 3,822 $15,286,648 30 June 98 2,350 $6,966,431 569 $7,694,600 2,919 $14,691,031 23 Feb 99 1,733 $6,122,516 518 $8,466,333 2,251 $14,588,850 25 June 99 1,601 $5,536,517 484 $8,303,976 2,085 $13,840,494
A number of explanations were advanced for the fall in the number of accounts. In particular, it was suggested that the introduction of fees led to customers consolidating separate accounts into one. But this should not have resulted in any reduction in the amount of the balances held in the lesser number of accounts. Another explanation was that funds had been transferred from the building society accounts to other IOOF Group products. On the other hand, Foxeden drew attention to the fact that the figures in the above table showed that of the total decline in combined balances of $1,446,154 between 31 May 1997 and 25 June 1999, $697,798 had been lost by 23 February 1999 and $748,356 in the next four months. That is, over half of the total decline occurred in the months after the sale was announced. Foxeden therefore submitted that “if there were no sale, the deposit balances of the Mildura branches would have stabilised at around $14,500,000”. Its figure of $108,750 for anticipated building society commissions was arrived at by calculating the commission at the rate of 0.75% on $14,500,000.
However, I consider that this calculation proceeds on the false premise of the sale not occurring. On the contrary, the relevant hypothetical fact situation in which damages have to be assessed is that the sale of the Building Society to Bendigo Bank proceeded but that IOOF was bound to give Foxeden and the Taylors one year’s notice of termination of the agency agreement which would have expired on 30 June 2000. Therefore, it seems to me that the assumption that the amounts of the deposits would have “stabilised” at around $14,500,000 is not justifiable. A more likely outcome, in my opinion, taking into account all of the uncertainties and before allowing for the impact on deposits of increased financial planning investments, is that the deposits would have “stabilised” at the June 1999 total of approximately $13,800,000. This would mean that the figure for the lost building society commission would be $103,500.
IOOF calculated the building society commissions which would have been earned in the 2000 financial year at $101,000 as follows. It submitted that the building society commissions earned by Foxeden during the time it operated the Mildura branch decreased not increased, dropping from approximately $118,996 in the 1998 financial year to approximately $114,854 in the 1999 financial year, because the total amount of the funds deposited at the Mildura branch was reducing. Even assuming that Foxeden’s earlier estimate of at least $115,000 in building society commissions in the 2000 financial year was likely rather than a continued decrease, IOOF submitted that Foxeden had not taken into account the fact that, if as Foxeden claimed many building society customers would have been converted into financial planning clients during the notice period, the total amount of the funds deposited with the Building Society would have been substantially reduced with a consequent reduction in the amount of the building society commission. IOOF argued that Foxeden’s claimed increase of 100% or $75,000 in financial planning business earning 3% commission would have meant that approximately $2,500,000 would have been transferred from building society deposits into financial planning products. It was said that the lost commission of 0.55% on this $2,500,000 would have been $14,000, thus producing the figure of $101,000. (In fact, the precise calculation would have resulted in lost commission of $13,750.)
I do not consider that all of this deduction of $14,000, or even $13,750, is justifiable. I am satisfied that the evidence of Mr Hawksworth and Mr Taylor that most of the funds invested by newly converted financial planning clients came not from their building society deposits but from other sources, such as superannuation or bequests from deceased estates or simply other more significant investments, meant that the successful conversion of Building Society depositors would not have significantly affected the total amount of the funds deposited with the Mildura branch. I therefore consider that about one third of IOOF’s actual figure, or $4,585, is an appropriate reduction on this basis. When the $4,585 is deducted from $103,500 the final figure for lost building society commission comes to $98,915.
During the course of argument, I pointed out to counsel for Foxeden that in my opinion the figure given by Foxeden for savings in expenses of $112,000 was not correct. The suggested savings totalled $90,000 and it seemed to me that it was this figure, if correct, not the continuing expenses of $112,000, which should be brought to account. After considering the matter, Foxeden accepted that the deduction of $112,000 was not correct, and re-affirmed that the savings in expenses were indeed $90,000, made up of $33,000 in rent, $52,000 in salaries and $5,000 in superannuation. I still consider this deduction to be too much. The $33,000 savings in rent came about because Foxeden moved premises at about this time. But this reduced rent would have occurred even if the one year's notice had been given and, therefore, it seems to me that it is not correct to treat the $33,000 as a savings in expenses which would have been incurred in the notice period but which were not in fact incurred because no notice was given. The resulting figure of $57,000 for savings in expenses is very close to Ms Murone's estimate of $55,500. The average of the two estimates is $56,250 which seems to be the appropriate figure to use.
I have therefore reached the conclusion that assessing Foxeden’s damages by the first way in which it put its claim results in a figure of $126,760. The calculations leading to this figure are as follows:
Anticipated building society commissions
$ 98,915
Anticipated financial planning commissions
$150,000
Expected income
$248,915
Less savings in expenses
$ 56,250
$192,665
Less actual income received
$ 65,905
$126,760
Quantification of the Taylors’ Lost Commission Income
In their final written submissions, the Taylors submitted that the claim for lost building society commissions and financial planning income for the period from 1 July 1999 to 30 June 2000 should be assessed at $150,400, calculated as follows:
Anticipated building society commissions $ 91,947 Anticipated financial planning commissions $568,763 Expected income $660,710 Less savings in expenses $ 65,000 $595,710 Less actual income received $445,310 $150,400
This calculation contained one change from the final version of the Taylors’ Claim in that the figure for anticipated building society commissions was reduced from $104,994 to $91,947, as set out below.
In its final written submissions, IOOF submitted that in respect of this way of putting their claim for damages, the loss suffered by the Taylors totalled only $16,000. It justified that figure as follows:
Anticipated building society commissions
$ 42,000
Anticipated financial planning commissions
$469,310
Expected income
$511,310
Less savings in expenses
$ 50,000
$461,310
Less actual income received
$445,310
$ 16,000
The available figures for the number of accounts and the balances held in those accounts over the period the Taylors operated the Frankston branch show the following:
Date Savings Number Savings Balances Investments Number Investments Balances Combined Number Combined Balances 30 April 96
2,011
$2,142,765
456
$6,009,155
2,467
$8,151,920
30 June 97
2,501
$3,432,567
428
$6,523,607
2,929
$9,956,175
30 June 98
1,674
$2,276,142
407
$7,332,174
2,081
$9,598,316
31 Dec 98
1,289
$3,560,057
410
$8,135,910
1,699
$11,695,968
23 Feb 99
1,255
$3,717,053
394
$7,884,645
1,649
$11,601,699
31 Mar 99
1,212
$3,572,900
388
$7,905,151
1,600
$11,478,052
31 May 99
1,215
$2,844,841
381
$7,737,203
1,596
$10,582,045
25 June 99
1,236
$2,717,708
381
$7,850,698
1,617
$10,568,406
Overall the total amount held in both the savings accounts and the term deposits increased, but there was a significant fall in the number of accounts from a high at 30 June 1997. Again there was a sharp decline in the balances held in those accounts in the months after the sale was announced. In the four months between 23 February and 25 June 1999, $999,345 was lost from the savings accounts and $33,947 from the investment accounts. The Taylors submitted that the figures in the above table showed an overall increase of approximately 10% per annum and therefore that “if there were no sale, the Frankston deposit balances would have continued to increase at a rate of about 10% per annum during the 12 month notice period”. A 10% increase on what was said to be the building society commission earned in the 1999 financial year of $83,588 (and 1998 financial year of $72,078) was the figure of $91,947.
IOOF calculated the building society commissions which would have been earned in the 2000 financial year as follows. It submitted that, in calculating the lost building society commissions initially, the Taylors had wrongly claimed that building society deposit and loan balances were increasing by 20% per annum. This had been brought about by the Taylors mistakenly omitting the deposits of just over $2 million obtained through the solicitors White Cleland from the commencement figure but including the White Cleland deposits of $2.26 million in the final figure. This meant that, in fact, the increase over the period was more like 8%. Ms Murone’s analysis of the amount of, and the growth in, building society commission income, suggested that the appropriate figures to use for calculating the income in the 2000 financial year were an 11% increase on $60,000, resulting in a figure of $66,600.
For the reasons already given, the Taylors' calculation, based on a 10% increase in deposits and commission, proceeds on the false premise of the sale not occurring. A more likely outcome, in my opinion, taking into account all of the uncertainties and before allowing for the impact on deposits of increased financial planning investments, is that the deposits would have "stabilised" at approximately $12,850,000, or slightly more than the June 1999 total, including the White Cleland deposits. This would mean that the figure for the lost building society commission would be approximately $70,675, which is not that different from Ms Murone's figure.
Further, for the reasons already given, I do not consider that IOOF was justified in reducing its figure of $66,600 by $24,000, being 0.55% of the extra financial planning investments of $4,370,000, calculated by using the Taylors’ claimed increase of 30% or $131,000 in financial planning business earning 3% commission, on the basis that all of these investments would have come from the building society deposits. Instead, I consider that one third of IOOF’s figure, or $8,000, is an appropriate reduction on this basis. When the $8,000 is deducted from $70,675 the final figure for lost building society commission comes to $62,675.
Again, for the reasons already given, I do not accept the approach adopted by IOOF in calculating the figure of $24,000 for lost financial planning commissions. The Taylors' calculations under this approach and IOOF's criticisms of them are examined in detail in the next category of loss. It is sufficient for present purposes to note that IOOF based its calculation on 28 new financial planning clients from the building society base with an average investment of $19,000. This would have produced actual income in the 2000 financial year of $18,100.
The Taylors claimed that their financial planning commission income would have increased by at least 30%, based on the following historical figures:
Income
Increase
Year ended 30 June 1997
$225,166
Year ended 30 June 1998
$236,599
5.08%
Year ended 30 June 1999
$437,540
84.93%
It is difficult to discern any real trend in these figures, nevertheless, in the circumstances, it may not be unreasonable to suggest that there would be an approximate 30% increase of $131,262 resulting in a figure of about $568,800 by my calculations, or $568,763 according to the Taylors’ submissions.
I have therefore reached the conclusion that assessing the Taylors’ damages by the first way in which they put their claim results in a figure of $136,165. The calculations leading to this figure are as follows:
Anticipated building society commissions
$ 62,675
Anticipated financial planning commissions
$568,800
Expected income
$631,475
Less savings in expenses
$ 50,000
$581,475
Less actual income received
$445,310
$136,165
The Loss of the Chance to Earn Financial Planning Income Over Time
I turn then to consider the second way in which Foxeden and the Taylors put the claim for damages. It was alleged that it and they lost the chance to earn financial planning income over a number of years by using the one year’s period of notice to convert depositors with the respective branch of the Building Society, either during that year or in subsequent years, into financial planning clients. It seems to me that logic and common sense support the proposition that, had Foxeden and the Taylors been given the required one year’s period of notice of termination, it and they would have continued to earn financial planning income not just in that period but over a longer period. I am therefore satisfied, on the balance of probabilities, that contact made with the depositors of the Building Society branch during that year would have resulted in some depositors being converted into financial planning clients both during the one year’s notice period and in subsequent years and that Foxeden and the Taylors thus lost both up front commission and trail commission.
As set out above, Foxeden submitted that the maximum amount which could be claimed for its lost chance expressed in net present value terms was $2,849,250. Its starting figure of $3,393,303 was calculated by claiming that, if Foxeden had been given the required one year’s notice of termination, during that period and for up to five years thereafter 846 customers of the Mildura branch (or 60% of the 1,410 depositors who were not already financial planning clients of Foxeden) would have become financial planning clients with an average investment of not less than $70,000 thus generating over time funds of $59,220,000. It was further claimed that the up front commission on those funds would have been 3% and that the trail commission would have been 0.39% per year over the likely investment period of seven years. The lost up front and trail commission on the $59,220,000 was therefore said to be $1,776,600 and $1,616,706 respectively. Thus, the correct total was actually $3,393,306, not $3,393,303.
As also set out above, the Taylors submitted that the maximum amount which could be claimed for the lost chance expressed in net present value terms was $2,199,965. Their starting figure of $2,620,042 was calculated by claiming that, if they had been given the required one year’s notice of termination, during that period and for up to five years thereafter 775 customers of the Frankston branch (or 60% of the 1292 depositors who were not already financial planning clients of the Taylors) would have become financial planning clients with an average investment of not less than $59,000 thus generating over time funds of $45,725,000. It was further claimed that the up front commission on those funds would have been 3% and that the trail commission would have been 0.39% per year over the likely investment period of seven years. The lost up front and trail commission on the $45,725,000 was therefore said to be $1,371,750 and $1,248,292 respectively.
The Number of Financial Planning Clients Lost
Mr Hawksworth gave evidence that had he been given one year’s notice, he would have taken steps to accelerate the growth of the financial planning business through the exclusive access to the customer lists. He said that he believed that had he had the opportunity to undertake an intensive marketing and interviewing exercise, he could have placed funds in alternative investments on behalf of about 90% of the savings account holders and term depositors at the Mildura branch over the notice period of one year and a further period of about five years. Not surprisingly, he said that he would have first approached the high net worth customers (presumably as indicated by their deposits with the Building Society).
Foxeden submitted that the exercise proposed by Mr Hawksworth of interviewing each of the 1410 customers of the Mildura branch who were not already financial planning clients of Foxeden in order to obtain basic information from them, such as name, address, telephone number, age, assets, liabilities, income, expenses and risk profile, for later use by the financial planners once the branch had been closed, was well within the physical capability of Mr Hawksworth and Mr Smart and their staff, with the possible assistance of other financial planners employed by Foxeden at other of its financial planning branches.
Mr Taylor also gave evidence about the marketing activities which he would have undertaken, had he been given one year’s notice. He said that he believed that he could have placed investments for approximately 85% of the customers of the Frankston branch who were not already financial planning clients over the notice period of one year and a further period of about five years. He said that he would have “targeted high worth customers first”.
The Taylors submitted that they had adequate resources to enable Mr Taylor, Mrs Taylor and their son Greg Taylor to interview 1292 customers and gather information necessary to enable them to prioritise customers and then pursue the best prospects. They pointed out that an initial 20 minutes interview for each of the 1292 customers would take 430.66 hours, or 143.5 hours per interviewer. This amounted to less than three hours per week for each interviewer if spread over the whole 52 week period. Further, it was said that additional staff could have been hired, if necessary.
The plaintiff(s) further submitted that not only was the figure of 60% less than Mr Hawksworth’s claimed 90% rate and Mr Taylor’s claimed 85% rate, it was also supported by Mr McMaster’s evidence and the Dashboard Report. They therefore submitted that 60% was a conservative estimate.
There was a considerable body of evidence which supported the plaintiff(s)' submissions that their claims that as financial planners they would have been able "to harvest" the customer base of the Building Society over time accorded with the thinking of the IOOF Group prior to the making of the agreements with Foxeden and the Taylors. It was also submitted that by mid 1999 these customers were, in a sense, "ripe for the picking". A majority of the members of the Building Society were over 55. Most of these people, who were approaching retirement, increasingly had superannuation and other assets apart from their deposits with the Building Society. The building society branches were seen by the IOOF Group as the "distribution channels" into the financial planning business. As was said in the Group's December 1997 draft strategic plan:
"IOOF has a unique position, with businesses spanning a cross-section of the financial services/funds management and retirement related service industry sectors. This enables IOOF to capitalise on Australia's rapidly ageing population, retirement investment and lifestyle needs."
Nevertheless, I consider that both the figure for Foxeden of 846 customers, being 60% of 1410 customers, and the figure for the Taylors of 775 customers, being 60% of 1,292 customers, were, as IOOF submitted in its final submissions, “grossly overestimated”. First, such a claim assumes that each of the 1410 customers of the Mildura branch of the Building Society and each of the 1,292 customers of the Frankston branch of the Building Society were likely candidates for becoming a client of a financial planner. There is no basis for this assumption, in my opinion, and runs counter to the evidence that no more than about 20% of the Australian population have engaged financial planners. There is no reason why the proportion would be any higher in this group. On the contrary, there was evidence to suggest that the depositors with IOOF were in the lower socio-economic groups in the community and at “the lower net worth end of the market”. Whilst it is not only the rich who would benefit from the services of a financial planner, there must come a point when the amount of assets available for investment by a depositor is so small or virtually non-existent that it is ridiculous to suggest that the depositor is likely to become a client of a financial planner. Further, some of the depositors may already have engaged their own financial planner or they may have obtained financial advice from other people such as accountants, stockbrokers, family or friends.
Another way of reaching the same conclusion is to look at the breakdown of the amounts invested at both the Mildura and Frankston branches. These figures are complicated because there were more accounts than customers, that is some customers must have had more than one account, and yet most of the breakdown is in terms of accounts rather than customers. A further complication was that some of the savings accounts had a negative balance.
Nevertheless, the following picture of each branch clearly emerges. At Mildura, there were 1,171 savings accounts, including those with a negative balance, with less than $2,000 invested. The average amount in the savings accounts with a positive balance was only $4,161. At Frankston, there were 1,047 savings accounts, including those with a negative balance, with less than $2,000 invested. The average amount in the savings accounts with a positive balance was only $3,094. In my opinion, these figures indicated that it was probable that many of the customers at each of the two branches would not have had the funds to warrant them being considered as potential financial planning clients.
Professor McMaster referred to a Consumer Sentiment Survey which he had prepared in May 2003 for the Financial Planning Association of Australia Ltd. This survey revealed that in 1999 51% of respondents had obtained financial advice from any source and that 29% to 30% of those obtaining financial advice had consulted financial planners, and that in 2003 41% of respondents had obtained financial advice from any source and that 39% to 40% of those obtaining financial advice had consulted financial planners. Of the approximately 16% of the respondents in 2003 who had consulted financial planners, the use of financial planners as distinct from other sources of advice increased as the clients’ income and age rose.
Secondly, the success rates of 60% and above have been achieved in what were called “prospecting appointments”. This was defined in the Dashboard Report as an “appointment with a prospective client for the purpose of discussing services provided by the adviser” and “conducting a fact find on the prospective client, presenting a financial plan or completing initial paperwork to commence the client/adviser relationship”. Foxeden submitted that because of the personal relationship which would have already been built up between the building society customers and Mr Hawksworth and Mr Smart, the proposed interview of each of the 1410 customers could be regarded as a “prospecting interview”. This is obviously not correct, in my opinion. The proposed form of the interviews during the notice period of the 1410 customers would not be the same as one where a potential client has agreed to meet the financial planner to discuss matters such as what the financial planner has to offer and to decide whether he or she wished to engage the services of the financial planner. Mr Taylor seemed to accept that the basic interview with each of the 1,292 depositors would have to be followed up with a longer interview, which could be considered to be similar to a “prospecting interview”.
Thirdly, the proposed form of the universal interview was likely, in my opinion, to put off some depositors from considering becoming financial planning clients, rather than building a productive relationship. Simply obtaining basic personal details in order to build up a data base, without providing any subsequent advice, is hardly conducive to encouraging a positive view by the potential client of the hopeful financial planner. For example, Professor McMaster observed that whether a customer gets something of real benefit from an interview is a matter which might influence the prospect of the interview becoming successful and that conversely the prospects of success could actually be harmed by poor service.
Fourthly, as Professor McMaster said, a good guide to the success rate of a financial planner was to look at what the historical success rate of the adviser had been. Over the two years approximately during which Foxeden had run the Mildura branch of the Building Society, only about 17 depositors had become financial planning clients of Winchcombe Carson, perhaps seven in the first year and ten in the second year. In order to obtain these clients, Mr Hawksworth had conducted at least 120 interviews with prospective financial planning clients, which was neither a 90% nor a 60% success rate. It was more like 20%.
The historical success rate of the Taylors was also not encouraging. Over the three and a quarter years during which they Taylors had run the Frankston branch of the Building Society, only 85 depositors had become financial planning clients of Winchcombe Carson, an average of about 26 per year. In order to obtain these clients, Mr Taylor had conducted at least 300 interviews with prospective financial planning clients, which was neither an 85% nor a 60% success rate. It was more like 30%.
Fifthly, Foxeden had already been marketing the financial planning business to Building Society depositors over the preceding two years and therefore the scope for a really substantial increase over a short space of time did not exist. Evidence was given that approaches by letter and telephone had been made to customers, in particular those with maturing term deposits, and that all of the branch staff were well trained in looking for cross-selling opportunities when dealing with the depositors at the counter. Indeed, Mr Hawksworth agreed that, at the liability hearing, he had said that he had already identified and approached the best prospects from the customer list. Mr Smart also acknowledged that, at the liability hearing, he had agreed with the proposition that during the period between 28 May 1997 and 30 June 1999 he had approached a large number of the building society customers “for the purposes of financial planning”.
I do not accept the evidence given in this hearing by Mr Hawksworth and Mr Smart that there was no urgency in transforming the depositors into financial planning clients and that their past efforts had been concentrated on building up the customer base and not “pillaging” the Building Society depositors. In my opinion, there were a number of reasons why Mr Hawksworth, and to a lesser degree Mr Smart, would always have been aiming at attracting financial planning business. That was the whole purpose of taking on the burden and cost of running the Mildura branch. The commission from financial planning was better than the modest building society commission. The need for people to engage a financial planner usually was at its highest when people retired or their parents died and these events would have been occurring throughout the period in which Foxeden ran the branch. Mr Hawksworth believed that generally clients did not leave an advisor once the relationship was consummated by the making of investments and there was competition in the area from other financial planners. Mr Hawksworth also believed, correctly, that most of the funds invested by newly converted financial planning clients came not from their building society deposits but from other sources. Therefore, it seems to me that Mr Hawksworth would have been keen to learn as much as possible about the most likely prospects amongst the depositors in order not to miss the chance to convert them into his financial planning clients should they come into funds and would not have been concerned that the successful conversion of depositors into financial planning clients would significantly reduce the total amount of funds deposited with the Mildura branch. Finally, as IOOF submitted, if Mr Hawksworth and Mr Smart were so concerned with maintaining the amount of the funds in the Building Society, one would have expected that they would have been aware of the decline in balances and account numbers, and yet, quite extraordinarily neither of them was, prior to it being pointed out to them when giving evidence at the damages hearing.
The same analysis applies to the Taylors. Similar evidence was given by Mr Taylor about the marketing of his services that had occurred over the preceding three and a quarter years. Indeed, Mr Taylor agreed that in his witness statement at the liability hearing he had said:
“After Janet and I took control of the Frankston branch, we used the customer list to grow our financial planning business … We began actively cross-selling financial planning services to branch customers.”
He also agreed that his wife had said that she and Mr Taylor had utilised the client base to cross sell their businesses by, for example:
The Appropriate Discount Rate
Finally, there is the question of the appropriate discount rate. This is required, in my opinion, to take into account two separate matters. The first is to build into the above calculations the degree of probability that the above matters might not have come to pass in part or at all. After all, the figures are simply my best estimates of what might have occurred in terms of the plaintiff(s) receiving some financial return, direct or indirect, from the new clients gained in the notice period and five years thereafter. Notwithstanding the reductions made in my calculations to the number of new clients and the amount of the average financial planning investment, I consider that in order to cater for these risks a discount of between 20% and 25% still needs to be applied.
The second matter to be taken into account is that any lost income would have been received over time and not all at once on 1 July 1999. It was assumed for this purpose that 50% of the amount invested would have been invested in year one, 25% in year two, 12.5% in year three, 7.5% in year four and 5% in year five and that in each year only 50% of the trailing commission on the amount invested in that year would be received in the year it would have been invested because it would have been progressively invested over the course of the year and paid monthly.
Although the parties agreed that there had to be a discount to establish the net present value of any amount received over time, they disagreed over the appropriate rate. Professor McMaster simply used the average monthly interest rate on 90 day bank bills in the period from 1 July 1999 to 30 June 2004 of 5.22% per annum. Ms Murone, on the other hand, applied a 10% to 15% discount rate. She regarded this as the rate applicable to the future income stream of a financial planning business with a moderately low risk of attaining the projected income. She said that this future income stream was still susceptible to the normal vicissitudes affecting any business – the ongoing health of key personnel; the effect of new competitors; changes to the local environment affecting customer flows; the ebb and flow of the financial services industry generally, and so on. It was submitted that none of these risk sensitivities were taken into account by a discount for the mere time value of money. It seems to me that Ms Murone's approach was the correct one, and therefore that a 10% to 15% discount should also be applied.
Adding the two discounts together leads to a range of 30% to 40%, and I have decided that the appropriate discount rate to use is the mid-point or 35%.
Quantifying Foxeden’s Lost Chance
The result of the above is that, in my opinion, the appropriate calculation of Foxeden’s lost chance to earn financial planning income over time is as follows:
212 clients at an average financial investment of $48,800 each resulting in an additional $10,345,600 in investments over seven years. The lost 3% up front commission is therefore $310,368 and the lost 0.39% trail commission is $282,435. This totals $592,803, which discounted by 35% comes to a net present value as at 1 July 1999 of $385,322, or $385,320 in round figures.
As what has been lost is the chance to earn further financial planning income, I do not consider it appropriate to make any deduction for any financial planning income actually received in the 2000 financial year. That income flowed from efforts made in the previous years or from business not related to the building society customers and not from the efforts which would have been made in the one year’s period of notice to convert building society customers into financial planning clients. Nor do I consider it to be necessary to include a figure for any savings in expenses given that the work proposed in my calculations could have been handled with the existing resources.
Quantifying the Taylors’ Lost Chance
The result of the above is that, in my opinion, the appropriate calculation of the Taylor’s lost chance to earn financial planning income over time is as follows:
233 clients at an average financial investment of $45,220 each resulting in an additional $10,536,260 in investments over seven years. The lost 3% up front commission is therefore $316,088 and the lost 0.39% trail commission is $287,640. This totals $603,728, which discounted by 35% comes to a net present value as at 1 July 1999 of $392,423, or $392,425 in round figures.
Again, as what has been lost is the chance to earn further financial planning income, I do not consider it appropriate to make any deduction for any financial planning income actually received in the 2000 financial year. That income flowed from efforts made in the previous years or from business not related to the building society customers and not from the efforts which would have been made in the one year’s period of notice to convert building society customers into financial planning clients. Nor do I consider it necessary to include a figure for any savings in expenses given that the work proposed in my calculations could have been handled with the existing resources.
The Lost Opportunity to Transfer Customers
I turn now to consider the third alternative way in which Foxeden and the Taylors put the claim for damages, namely the lost opportunity to transfer customers to another financial institution.
Both Mr Hawksworth and Mr Taylor gave similar evidence about how they would have gone about arranging to transfer the customers to another financial institution had they been given the required one year’s period of notice. It was said that there were 18 financial institutions with the appropriate characteristics to make them possible candidates to be approached to take over the $26 to $28 million approximately in deposits from the Mildura and Frankston branches. Although it was said that one of the requisite characteristics of the alternative deposit taken was that it was currently operating in Victoria, only one of the 18 institutions satisfied this criterion. More importantly, there was simply no evidence from any of these financial institutions that they would have had the slightest interest in pursuing the suggestion by Mr Hawksworth and Mr Taylor.
It was eventually accepted by the plaintiff(s) that their duty of fidelity to the Building Society would have prevented them from transferring their customers to another institution during the notice period. Nevertheless, they submitted that their duty of fidelity did not prevent them from contacting or making arrangements with an alternative deposit taker during the notice period and then transferring the customers at the conclusion of that period. Even accepting that arrangements could have legitimately been made with an alternative deposit taker during the notice period, the plaintiff(s) still faced the difficult task of attempting to persuade their former customers to transfer to the new financial institution when they would have ceased virtually overnight to be customers of the plaintiff(s).
A further difficulty is that seeking to transfer depositors from one financial institution to another is not the same as persuading financial planning clients to stick with their personal financial planner even though he or she might change employer. In my opinion, the relationship is quite different. And yet this was the basis on which it was said that there was evidence to support the claim that all or a significant proportion of the customers would have agreed to move. For many of the customers the decision might well turn on the interest rates being offered and obviously, in the absence of any evidence from a potential alternative deposit taker, there was simply no credible evidence as to what the competing rates might have been.
I consider it extremely unlikely that any of the borrowers would have been prepared to substitute their loan from the Building Society with a loan from the new financial institution without some real incentive in terms of a savings in interest, and again there is no evidence that this was available. The holders of term deposits were unlikely to agree to move those deposits prior to them maturing and by then in most cases the personal link would have been broken. For other customers, the effort of having to withdraw their money from the Building Society and transfer it to the new financial institution may have been too much. Mr Hawksworth agreed in cross‑examination that he really had no idea of what the outcome would have been in terms of transferring the loans and deposits.
For all of these reasons I am not satisfied that IOOF’s repudiation of the agreement meant that either Foxeden or the Taylors in fact lost the opportunity to transfer customers to another financial institution. The state of the evidence is such that I have reached the conclusion that the chance of this happening is so low that it has to be regarded as purely speculative. Therefore, this is not an appropriate way in which to put the claim for damages. Accordingly, it is not necessary to consider the criticisms made by IOOF of the method relied on by the plaintiff(s) of calculating the value of the alleged lost opportunity.
The Lost Opportunity to Negotiate Compensation
The final way in which the plaintiff(s) put the claim for damages was that Foxeden and the Taylors lost the opportunity to negotiate with one or more of IVFS, the Building Society or Bendigo Bank for compensation for agreeing to waive the one year’s period of notice.
IOOF submitted that this was not an appropriate method of quantifying the damages because such an eventuality was not part of the parties’ expectations and that the damages were meant to be compensation for what the plaintiff(s) were entitled to expect from the agreement and lost because of IOOF’s repudiation. I do not agree with this submission. As I see the hypothetical situation, the question is what might IVFS or the Building Society have done about the agreements if, the Building Society having been sold to Bendigo Bank, IOOF then found that one year’s notice of termination of the agreement was required to be given to both Foxeden and the Taylors, that is before the customers in those branches could have been switched to the Bendigo Bank. This hypothetical situation assumes that initially the parties’ expectations are given effect to, by the requirement of one year’s notice, but asks what might have then happened, without any breach of the two agreements occurring. It seems to me that it was logically possible that in these circumstances IVFS or the Building Society might have negotiated with both Foxeden and the Taylors to pay them a lump sum in return for them agreeing to waive the period of notice. This would not be a hypothesis which postulated the continued breach by the defendant of the agreements, or the continued non-performance by it of the relevant contractual term, as submitted by IOOF. Rather, the relevant contractual term is given effect to, but the possibility is raised that the parties might by agreement have brought about a different outcome. The loss of that chance could therefore be a legitimate way of putting the claim for the damages flowing from IOOF’s repudiation of the agreements.
The important remaining questions, which now need to be addressed, are whether there was some probability that such an opportunity would have occurred, and if so, what is the proper quantification of the lost opportunity. I turn then to the first of these questions.
I accept the submission of the plaintiff(s) that the opportunity to negotiate a payment in lieu of notice was a real and valuable opportunity by virtue of a number of matters. First, it was submitted that the price obtained for the sale of the Building Society of approximately $38 million was, as Dr Truslove described it, “too good to be refused”. The price was far higher than the figure in IOOF’s books for the value of the Building Society and well in excess of the valuation of approximately $8 million given by Dr Truslove in 1997. Dr Truslove estimated the profit at not less than $22 million in February 1999 whilst Mr Stephen Ryan, the General Manager–Finance of IVFS, prepared a report in March 1999 which estimated the profit on the sale at between $16 million and $20.6 million. Further, according to a position paper on the proposed sale of the Building Society to Bendigo Bank, presumably prepared by Mr Turner:
"The market is currently 'hot' for this type of asset to the right acquirers. It has a lot of value on an in-market basis and there is no guarantee that the same fundamentals will be there in the years ahead, particularly if the instability of the early part of this decade were to be repeated for whatever reasons …
Bendigo are an ideal partner for our proposed distribution arrangement. They are in need of funds management expertise and are the only Victorian based bank with a network that does not already have their own funds management products to distribute. This is a rare opportunity and it will not last. Bendigo can sell anyone's products. They do not need IOOF."
I find that the sale was therefore a most attractive proposition for IOOF.
Secondly, it was submitted that there was significant pressure on IVFS to sell the Building Society. One source of concern was the question of the sole ownership of the Building Society, which was contrary to the position sought by ASIC and later APRA. The Victorian Financial Institutions Commission had never granted a permanent exemption, notwithstanding that submissions for one to be granted had been made. I do not accept Mr Schoer’s evidence that this problem had gone away completely in mid 1997. His evidence on this point in the damages trial was contrary to his evidence at the liability trial. Further, the documents Mr Schoer referred to did not, as far as I could see, support his contention. For example, recommendation 45 of the Financial System Inquiry Final Report (the Wallis Inquiry) of March 1997 was that "the principle of spread of ownership should be retained and regulation rationalised." The discussion leading to that recommendation contained the following passage:
"Spread of ownership protects institutions against undue influence by a major shareholder and creates a broad interest group in the shareholder base. A dispersed ownership base also protects against a form of contagion risk that may otherwise occur if a financial institution is associated with adverse changes in the fortunes of a major shareholder.
The Inquiry considers that the concept has sufficient weight to justify the continued application of the spread of ownership objective as a general principle for DTIs."
In my opinion, despite what Dr Truslove said in evidence, the situation was aptly summarised by him when he wrote in his letter to the Board of IVFS dated 1 March 1999:
“The present ownership exemption expires on 30 June 1999. To address this matter plans are well advanced to sell IOOF BS Holdings and thus ownership of IOOF Building Society. … It is most unlikely that IOOF Friendly Society will be given a further temporary ownership exemption. IOOF intends to sell IOOF Building Society prior to that date.”
Another source of pressure was the need for the Building Society to satisfy the Prudential Standards. It appears to me that the Building Society would have had real difficulty in staying above the 13% liquidity requirements without the $20 million deposit from the Friendly Society. Yet all efforts to find alternative finance had been put on hold by the Building Society pending completion of the sale to Bendigo Bank and there was no fall back or contingency plan in case the sale did not go through. The Westpac facility had only been agreed to be extended on the basis of the sale. According to a report to the Board of IVFS for its 11 December 1998 meeting:
"The Building Society now has many projects on hold, awaiting the outcome of sale discussions. Projects such as the mortgage processing, securitisation and credit card outsourcing have effectively come to a complete standstill. The projects involving Westpac will be extremely difficult to recommence, if the need arises."
As at January 1999 the Building Society had a need for $35 million in the following six to eight weeks. In any event, selling mortgages would have reduced the assets of the Building Society with a likely consequential reduction in the sale price.
Thirdly, I consider that it was simply not practical for the sale to proceed without the Mildura and Frankston branches being transferred to Bendigo Bank. It is not realistic, in my opinion, to suggest that during the notice period Bendigo Bank could have traded as IOOF at those two branches whilst everything else was changed to Bendigo Bank. Dr Truslove gave evidence that from his "20 years of experience as a public servant responsible for the supervision of these entities, that it is not possible to sell a branch like that." Alternatively, IOOF would have had to retain the two branches with the associated costs of maintaining the existing systems for a limited number of customers which would have made the process quite uncommercial. Apart from the chaotic situation that would have prevailed during the one year’s period of notice, reducing the amount of the deposits by approximately $26 to $28 million, even if only for the period of one year, might have led Bendigo Bank either to abandon the purchase or significantly reduce the purchase price. Neither course would have suited IVFS.
Fourthly, preserving the rights of the plaintiff(s) to exclusive access to the customers of each branch until the end of the one year’s period of notice termination would likely have caused considerable problems for IOOF and Bendigo Bank whenever the instant transfer was attempted. It seems to me that the only sensible way to overcome these problems was for IOOF to give Bendigo Bank access to these customers before they were to be transferred, yet this could not be done without breaching the agreements with Foxeden and the Taylors.
I am, therefore, satisfied, that there was some reasonable possibility that, if IVFS had found that one year’s notice of termination of the agreement was required to be given, it would have entered into negotiations with Foxeden and the Taylors in order to persuade them to waive the period of notice, rather than jeopardising the sale of the Building Society to Bendigo Bank. The payment of monetary compensation for the earlier than expected end of the agreements was the most obvious form of compensation. After all, payment in lieu of a period of notice, a well known concept in other areas such as an employment context, would not have been that unfamiliar to either side in the negotiations. Moreover, the Taylors had already attempted to raise the question of compensation in their meeting with Mr Turner, Ms Pearce and Mr Mollison in January 1999[23] and Mr Hawksworth had done likewise in his telephone conversation with Ms Pearce in about April 1999[24] and his telephone conversation with Mr Mollison in about May 1999.[25] Further, by a letter dated 3 May 1999 Feingold Partners had written on behalf of the Taylors and Mr Hawksworth to the Managing Director of IOOF. One matter mentioned was the clients' wish that there be "full, proper and reasonable negotiations in relation to our clients' rights and entitlements."[26] Finally, on 26 May 1999 Mr Taylor and Mr Hawksworth met with Mr Hondros, Mr Mollison and Ms Pearce. Notes of that meeting record that Mr Taylor and Mr Hawksworth both said that they believed that they were entitled to financial compensation for the loss of clients when the Building Society was sold.[27] All of these attempts to open negotiations on the question of compensation failed, of course, because IOOF simply ignored the plaintiff(s)' contractual entitlements. It would not be able to adopt this high-handed stance in the hypothetical situation.
[23][2004] VSC 356 at [123]
[24]At [176]
[25]At [178]
[26]At [127]
[27]At [252]
I am strengthened in this conclusion by the absence of any evidence from Mr Robert Turner, the Group Managing Director. The question of what the Building Society would have done had it been faced with the requirement to give one year's notice of termination of the agreements with the plaintiff(s) is only one of many issues, in both the liability trial and the damages trial, on which one would have thought Mr Turner's evidence was absolutely critical. And yet, as senior counsel for the plaintiff(s) never tired of pointing out, Mr Turner stayed well away from the witness box.
The next question is, therefore, what is the proper quantification of this lost opportunity? The plaintiff(s) submitted that the amounts of well in excess of $1 million claimed, say $1.5 million to $1.6 million, could be justified on the basis that:
(a)the plaintiff(s) would have come to the table expecting not less than the amount claimed for the lost opportunity to earn future income, as representing the amount of money which they expected to earn from running the business if they were not to be terminated;
(b)IOOF would, objectively, have been prepared to pay up to the full amount of the premium it saw itself as receiving over and above its perception of fair value;
(c)the plaintiff(s) would have held a number of “aces”, in that they had the ability to let the deal proceed or not if they were not properly compensated, as would have been the mutual expectation of the parties to the respective agreements in the event that the duration of the agreements was cut short due to the commercial requirements of IOOF.
I do not accept that the plaintiff(s) would have entered the negotiation expecting not less than $1.5 million. The difficulty the plaintiff(s) have had in articulating their claims and their many changes in the claims shows just how uncertain they were of the value of what it was that they had lost by IOOF’s repudiation. I accept that both Mr Hawksworth on behalf of Foxeden and Mr and Mrs Taylor would have entered the negotiations with a genuine sense of grievance at IOOF’s conduct and the belief that they had lost a valuable right, but I have concluded that the likely position was that both Foxeden and the Taylors would have been prepared to accept an offer of much less than $1.5 million to give up their right to one year’s notice of termination.
In reaching this conclusion I have discounted the submission that the plaintiff(s) would have held a number of “aces”. It seems to me that the likely situation would have been that they would not have appreciated just what pressures there were on IOOF as this information was only revealed through IOOF’s belated discovery. On the other hand, I do believe that IOOF would have been very keen to persuade the plaintiff(s) to agree to waive the notice period.
In attempting to put a value on this lost opportunity I have not drawn any distinction between Foxeden and the Taylors. Almost certainly they would have negotiated with IOOF together, and despite the minor factual differences between their breaches, I consider that the likely result would have been that the agreed figure for compensation would have been the same for both Foxeden and the Taylors.
Doing the best I can in attempting to estimate what the likely figure for compensation might have been and then discounting that quite significantly, by say 20% to 25%, for the risk that such a course of action may not have occurred and for all of the uncertainties surrounding a task such as this, I have concluded that the value of the lost opportunity to negotiate an amount of compensation for agreeing to waive the one year’s notice of termination should be assessed at $400,000. Clearly, it would have been a term of any such agreement that the compensation would have been in full and final settlement of all outstanding claims by the plaintiff(s).
Mitigation of Damages
IOOF submitted that any damages otherwise payable to the plaintiff(s) should be reduced by reason of the failure of Foxeden to mitigate its loss and the failure of the Taylors to mitigate their loss. It was said that there were two aspects to the alleged failure to mitigate. First, the failure to use the customer lists which had been retained to attempt to contact former customers in order to convert them into (potential) financial planning clients, and secondly, the failure to accept the offer of an agency with Bendigo Bank.
The onus of proving that the plaintiff(s) have not fulfilled their duty to mitigate and the extent to which they have not done so rests on the defendant.[28] After considering the relevant evidence I am not satisfied that it has been established that either Foxeden or the Taylors failed to mitigate the damage caused by IOOF's breach.
[28]TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 158 per Hope JA, with whom Priestley and Meagher JJA agreed.
The evidence concerning what customer lists were retained by the plaintiff(s) and what was contained in them was quite confusing. It appears that Foxeden had lists of term depositors of the Mildura branch which contained the names and addresses of these customers. But Foxeden did not have or retain any list containing the names and addresses of those customers with savings accounts.
It appears that the Taylors had three lists in their possession:
(a) the take on list from March 1996, which was incomplete and out of date;
(b)the term deposit action lists, which were at least 18 months out of date and possibly incomplete; and
(c)the monthly commission statements, which did not contain the addresses or telephone numbers of customers.
It could hardly be said, therefore, that either Foxeden or the Taylors retained complete, fully detailed and up to date customer lists after IOOF's repudiation of the agreements. In any event, what was undoubtedly lost, which was crucial to the hopes of the plaintiff(s) of converting the customers into financial planning clients, was the regular contract with, and the conveying of information by, the customers when they attended the branch. I accept that this would have significantly reduced the utility of the plaintiff(s) attempting to contact the former customers.
Whether or not Mr Hawksworth and the Taylors were given oral advice by their then solicitors that upon the sale of the Building Society they had lost the right to use the customer lists, which I rather doubt given the way in which this topic was belatedly mentioned, is not to the point in my opinion. More importantly, I accept the evidence of Mr Ken Taylor and Mr Smart that they considered that it would have been unethical to use the lists after the sale to Bendigo. Mr Smart in particular gave very persuasive evidence about his concerns:
"… I felt that upon the sale of the branch to the Bendigo Bank that it was highly unethical to be approaching Bendigo Bank clients after that date, and I elected not to, purely because I could see getting into legal trouble by doing so. …
I was frightened to use it [the customer list], because it would have only taken one client to mention to the Bendigo Bank that I was ringing them up and, in a sense, poaching their clients, that it would have got me into serious trouble. …
Using what is in a sense a client list of the Bendigo Bank, I just didn't feel that was right at all. They were – from 30 June 99 onwards, they were a client of the Bendigo Bank and for me to be using a print-out, even though it was produced within the IOOF days, I just felt that was just not right at all, not – I just didn't feel it was ethical after that date and I just didn't want to get into trouble doing it."
Given all of this evidence and the knowledge of the plaintiff(s) that IOOF regarded the customer lists as containing valuable confidential information and the very real confusion surrounding just what rights the plaintiff(s) had under their agreements with IOOF, I am not persuaded that the plaintiff(s) could be said to have failed to take reasonable steps to mitigate their damages by refraining from using the customer lists, or even their own knowledge of the customers, which they had to attempt to make contact with their former customers.
Secondly, it does not seem to me to have been disputed that the terms and conditions of the offer from Bendigo Bank were considerably less favourable to the plaintiff(s) than the agreements they had with IOOF. I accept that the most significant difference from the point of view of the plaintiff(s) was that they would not have been able to operate the branch and their financial planning business in the same way as they had with IOOF, and that they would therefore have been deprived of the day to day personal contact with the customers which was considered essential for the long term growth of their financial planning businesses. Accordingly, I consider that the plaintiff(s) did not act unreasonably and did not fail to mitigate their damages by not accepting the offer from Bendigo Bank. In reaching that conclusion, I have not overlooked that both Mr Hawksworth and Mr Taylor acknowledged that a factor in not accepting Bendigo Bank's offer was the concern that acceptance would compromise any claim they might have arising out of IVFS's sale of the Building Society to Bendigo Bank and IOOF's conduct in repudiating their agreements. Without that matter being resolved by Bendigo Bank and IOOF in particular, the plaintiff(s)' conduct was, in my opinion, not unreasonable.[29]
[29]TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 158 per Hope JA, with whom Priestley and Meagher JJA agreed.
Summary of Foxeden's Claim
The result of the above findings and analysis is that in respect of Foxeden I have assessed the different ways in which it has sought to quantify its claim for damages as follows:
(a)loss of building society commissions and financial planning commissions which would have been received in the one year's period of notice: $126,760;
(b) the lost chance to earn financial planning income over time: $385,320;
(c)the lost opportunity to transfer the customers of the branch to another financial institution: nil; and
(d)the lost opportunity to negotiate compensation for agreeing to waive the period of notice: $400,000.
Apart from what follows, each of these methods of assessing the damages stood on its own as alternatives. However, whilst the lost chance to earn financial planning income over time was an alternative to the rather simplistic claim for lost financial planning income during the notice period, it was not an alternative to that part of the first method of calculating the damages which related to the lost building society commissions during the notice period. It therefore seems to me that Foxeden is entitled to combine these two claims to reflect more accurately the extent of its damages. The result of the combined approach is that Foxeden's damages are assessed at $427,985, calculated as follows:
Anticipated building society commissions
$98,915
Less savings in expenses $56,250
$42,665
Lost chance to earn further financial planning income over time $385,320
$427,985
I see no reason why Foxeden would not seek to rely on the combined approach, which results in the largest figure, as the true measure of its damages.
Summary of the Taylors' Claim
The result of the above findings and analysis is that in respect of the Taylors I have assessed the different ways in which they have sought to quantify their claim for damages as follows:
(a)loss of building society commissions and financial planning commissions which would have been received in the one year's period of notice: $136,165;
(b) the lost chance to earn financial planning income over time: $392,425;
(c)the lost opportunity to transfer the customers of the branch to another financial institution: nil; and
(d)the lost opportunity to negotiate compensation for agreeing to waive the period of notice: $400,000.
Apart from what follows, each of these methods of assessing the damages stood on its own as alternatives. However, whilst the lost chance to earn financial planning income over time was an alternative to the rather simplistic claim for lost financial planning income during the notice period, it was not an alternative to that part of the first method of calculating the damages which related to the lost building society commissions during the notice period. It therefore seems to me that the Taylors are entitled to combine these two claims to reflect more accurately the extent of their damages. The result of the combined approach is that the Taylors' damages are assessed at $405,100, calculated as follows:
Anticipated building society commissions
$62,675
Less savings in expenses $50,000
$12,675
Lost chance to earn further financial planning income over time $392,425
$405,100
Conclusion
Accordingly, subject to clarification of the question of the $7,762 for unpaid commission on loans, there should be judgment for the plaintiff in the Foxeden proceeding for damages in the sum of $427,985 and judgment for the plaintiffs in the Taylor proceeding for damages in the sum of $405,100.
Once the parties have had an opportunity to consider these reasons, I will hear submissions on the questions of interest and costs.
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