G Barrett and Assoc Pty Ltd v Ulysses Club Inc
[2015] VCC 1996
•9 December 2015
| IN THE COUNTY COURT OF VICTORIA AT MELBOURNE COMMERCIAL DIVISION GENERAL LIST | Revised Not Restricted Suitable for Publication |
Case No. CI-13-06323
| G BARRETT & ASSOCIATES PTY LTD | Plaintiff |
| v | |
| ULYSSES CLUB INCORPORATED | Defendant |
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JUDGE: | HIS HONOUR JUDGE MACNAMARA | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 6, 7, 8, 11, 12 May & 18, 19, 20, 23, 24, 25 November 2015 | |
DATE OF JUDGMENT: | 9 December 2015 | |
CASE MAY BE CITED AS: | G Barrett & Assoc Pty Ltd v Ulysses Club Inc | |
MEDIUM NEUTRAL CITATION: | [2015] VCC 1996 | |
1ST REVISION
REASONS FOR JUDGMENT
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Subject: Contract
Catchwords: Contract; whether contract perpetual or subject to termination on reasonable notice; contract renewable indefinitely subject to proper performance by plaintiff; damages for repudiation; whether overhead costs to be deducted to determine profitability of lost bargain; reduction for contingencies
Legislation Cited: Sections 76, 79 of the Evidence Act 2008
Cases Cited:Kitchen & Sons Pty Ltd v Stewart’s Cash and Carry Stores (1942) 66 CLR 116; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37; LLanelly Railway and Dock Company v London and North-Western Railway Co (1873) LR 8 Ch App 942; Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438; Martin-Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556; Sulphur Co v Aetna Life Insurance (1953) 206 F. 28d 5, 8; IOOF Building Society Pty Ltd v Foxeden Pty Ltd (2009) 23 VR 536 [123]; Husain v O & S Holdings (Vic) Pty Ltd [2005] VSC 269 at [56]; Barro Group Pty Ltd v Fraser [1985] VR 577; The Power Co Ltd v Gore District Council [1997] 1 NZLR 537; Fitzgerald v Masters (1956) 95 CLR 420; BS Stillwell & Co Pty Ltd v Budget Rent-a-Car System Pty Ltd [1990] VR 589; BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266; Anchor Butter Co Ltd v Tui Foods [1997] 3 NZLR 107; Spectra Pty Ltd v Pindari Pty Ltd [1974] 2 NSWLR 617; Codelfa Construction Pty Ltd v State Railway Authority of New South Wales (1982) 149 CLR 337; Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64; Gray v Richards [2014] HCA 40; Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625; Todorovic v Waller (1981) 150 CLR 402; and Commonwealth v Blackwell (1987) 163 CLR 428; Castel Electronics Pty Ltd v Toshiba Singapore Pte Ltd (2011) 277 ALR 117; Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588; Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (No 3) [2012] VSC 99; Philip Morris Ltd v Federal Commissioner of Taxation (1979) 38 FLR 383; Dart Industries Incorporated v Décor Corporation Pty Ltd (1993) 179 CLR 101; Bartonvale Management Services Pty Ltd v International Linen Services Pty Ltd [2002] SASC 254; North Sydney Leagues’ Club Ltd v Synergy Protection Agency Pty Ltd (2012) 83 NSWLR 710; Re Baker [1961] VR 641, 647; National Trustees Executors & Agency Company of Australasia Ltd v Attorney-General [1973] VR 610; Fry v Oddy [1999] 1 VR 557;
Judgment: 1. The parties to bring in short Minutes to give effect to these reasons on or before 20 January 2016. 2. Costs reserved
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D. Forbes | Madgwicks |
| For the Defendant | Mr PG Cawthorn QC with Mr JJ Rudd | Moray & Agnew |
HIS HONOUR:
Background
“We are not now that strength which in old days
Moved earth and heaven; that which we are, we are;
One equal temper of heroic hearts,
Made weak by time and fate, but strong in will
To strive, to seek, to find, and not to yield”
Alfred Lord Tennyson – Ulysses
1 It was no doubt with these lines from Lord Tennyson in mind that when a small group of older motorcyclists banded together to form a club for older motorcycle riders they described it as the “Ulysses Club”. This Club is the defendant in the present proceeding. It constitutes the polar opposite to the outlaw bikie gangs, which have in the last two decades been the subject of radical state anti-crime legislation, whose validity has occupied much of the time of the High Court of Australia in recent years.
2 Mr Gordon Barrett is a director of the plaintiff company. The other director and co-owner of the share capital is Ms Duthie, who is therefore Mr Barrett’s business partner. They were, at one stage, also domestic partners. Whilst they continue to reside in the same house, Mr Barrett said that there was no continuing domestic relationship. Indeed, they are in dispute as to a property settlement. Ms Duthie has lodged a caveat claiming an interest under a constructive trust on the residential property where they both reside.
3 The Club, at a less literary level, has adopted as its slogan “Growing old disgracefully”. The Club publishes a magazine entitled “Riding On”, which appears four times a year. Mr Barrett is a member of the Club, himself. His company and the Club entered into what is described as a “Contract Services Agreement” with effect from 1 December 2004. That agreement provides as follows:
“This Agreement is made the 1st day of December 2004
BETWEEN:
ULYSSES CLUB INCORPORATED (ABN 25 637 297 337)
of PO Box 122, Bargo, NSW 2574 hereafter referred to as ‘The Club’
and
G BARRETT & ASSOCIATES PTY LTD (ABN 31 069 228 628)
OF 11 Sheringham Drive, Wheelers Hill, Victoria 3150 hereafter referred to as ‘Barrett’
WHEREAS:
The Club is the publisher of Riding On Magazine and Barrett supplies its services to arrange and manage print, distribution and selling of advertising space in The Club’s publication Riding On under the conditions described in the ‘Proposal Outline’ dated November 8th 2004 and the following terms and conditions.
In this agreement unless there is something in the subject or context inconsistent therewith –
‘Advertising Sales’ refers to the total of all invoices submitted by Barrett to advertisers for the placement of advertisements in Riding On.
‘Low Performance Budget’ refers to advertising sales of $60,000 or less for a calendar year.
NOW THIS DEED WITNESSES as follows:
1.Barrett has sole and total rights to sell advertising in Riding On from the starting date of this agreement and all advertising revenues remain the property of Barrett.
2.Barrett will manage all aspects of advertising in collaboration with the editor.
3.Should the position of editor become vacant, Barrett reserves the right to be included in the selection committee to appoint the replacement.
4.Barrett has sole and total rights to appoint or terminate print and distribution suppliers.
5.Barrett at its own expense will be responsible for employing any support staff with all associated costs such as Workers Compensation insurance, superannuation, payroll tax and group tax in respect of that staff, motor vehicle expenses, telephone and any other costs associated with the selling and management of advertising and management of print and distribution suppliers.
6.Barrett at its own expense will be responsible for design and production of advertising promotional material, such as advertising kits, rate card, business cards etc. Barrett also agrees to be responsible for expenses of interstate travel where appropriate.
7.Advertising costs and profits are the property of Barrett. Barrett has no obligation to disclose costs, profits or identities of supporting companies, eg print and distribution suppliers.
8.Subject to satisfactory performance, Barrett shall automatically have this agreement renewed for each following year starting from 1/11/2005.
9.The Club will contribute an amount of $2.00 per member, per issue for the first two issues (February and May 2005) and $1.80 per member per issue thereafter. Number of members is denoted as the number of names and address (sic) on the database submitted by The Club for each issue of publication and any new members, which receive Riding On direct from The Club sources.
10.Upon approval of each magazine layout and pre-press proofs, The Club will forward The Club contribution of $2.00 per member, per issue (for the first two issues and $1.80 per member per issue thereafter) to a banking account chosen by Barrett.
11.The Club will maintain, update and forward the membership database to Barrett at the time of approving the magazine layout and pre-press proofs.
12.Riding On will publish four times per calendar year. Agreed publishing months are February, May, August & November. Publishing dates or frequency will not alter without agreement from Barrett.
13.Whenever onserts with the Riding On are required for The Club’s requirements, eg registration or voting forms, but excluding the address sheet, The Club will pay at or very close to cost price of the additional costs for printing the onserts. Any revenue from advertising onserts to be the property of Barrett.
14.This agreement to be renewable on an annual basis on November 1st each year providing Barrett has fulfilled its obligations and commitments as stated in its letter of 8th November 2004, if it is found Barrett has not done so and has been notified in writing of any discretion and without improvement after a reasonable period of time, The Club reserves the right to terminate this agreement with one month notice. If this agreement is terminated in this manner, there will be no entitlement whatsoever in respect of clause 15 of this agreement.
15.In the event that the magazine is sold during the course of this agreement to a third party, then a bonus determined as 20% of the total amount paid to The Club including the goodwill value of the magazine Riding On, by the third party shall be paid by The Club to Barrett.
16.In the event Barrett does not achieve the low performance budget, The Club reserves the right to terminate this agreement by giving one months (sic) notice in writing. If this agreement is terminated in this manner, there will be no entitlement whatsoever in respect of clause 15 of this agreement.
17.The Club will not change the name of Riding On, or establish another publication without the consent of Barrett.
18.Barrett may offer its services of advertisement production, e.g. concepts, design and copywriting to Riding On advertisers on a commercial basis.
19.This agreement in no way constitutes a contract of employment and as such, Barrett is responsible for its own taxation obligations, superannuation, payroll tax, workers compensation, sick leave and annual leave.
20.In the event of termination as per clauses 14 and 16, all intellectual property and information for the proper continuation of the Riding On is to be given at no charge and without hindrance to The Club immediately at, or before, the terminating month ends.
21.In the event Barrett withdraws its services, three months termination notice is to be given and all intellectual property and information for the proper continuation of the Riding On is to be given at no charge and without hindrance to The Club immediately at, or before, the completion of the termination period.
22.In the event there is a change of ownership of Barrett, The Club reserves the right to terminate this agreement.”
4 In forwarding the executed agreement to Mr Barrett at his home, the then treasurer of the Club, in a letter dated 10 December 2004, said:
“We are to understand this agreement is to be read in conjunction with your letter of the 8th November 2004, in which you set out your aims and objectives on the quality, presentation, and readability of the magazine to our members together with your intent to maintain a ratio of approximately sixty percent editorial to forty percent advertising content.” — Court Book (“CB”) 247
A copy of the 8 November letter appears as an attachment to this judgment.
5 The effect of the arrangement was that the plaintiff company, which I will refer to simply as “Barrett”, would produce the `Riding On’ magazine. It would arrange for the printing and mail-out of the publication. It would sell advertising as principal; that is, the advertising fees for material in the magazine would be its absolute property. The editorial material was to be provided by the Club, but clause 3 gave Barrett an entitlement to be included in the selection committee to appoint the replacement of the editor. In the period from December 2004 until Barrett ceased to produce the magazine, in practice it did not exercise any right to be involved in the editorial changes which occurred along the way.
6 The scheme of the agreement was that the magazine would be provided to members of the Club, as ascertained from the Club’s membership database. The Club was obliged to contribute a per capita fee of $2 per issue for the initial two issues and, thereafter, $1.80 per issue. Barrett said that the figure of $1.80 was not in practice adopted because it was selected without regard to the operation of the Goods and Services Tax. In fact, the per capita contribution received by Barrett commenced at $2 and never went below that figure. Barrett was entitled, independently of the services it was providing to the Club, to offer its services for advertisement production by way of concept, design and copywriting to magazine advertisers “on a commercial basis” (clause 18). Clause 21 assumes the existence of an entitlement in Barrett to withdraw its services subject to “three months’ termination notice”. If the magazine were sold “during the course of this agreement to a third party”, then 20 per cent of the price was to be paid by the Club to Barrett (clause 15). Clause 16 gave the Club a right of termination if Barrett “did not achieve the low performance budget”. “Low performance budget” referred to $60,000 of advertising sales per calendar year. During the term that Barrett produced the magazine, attainment of this budget was not an issue.
7 Clause 8 provided:
“Subject to satisfactory performance, Barrett shall automatically have this agreement renewed for each following year starting from 1/11/2005.”
8 Clause 14 also provided for a right of termination for the Club in the circumstances there described. As will appear, something seems to have gone wrong with the language in this clause and it will be necessary to say more as to how it should properly be read and as to its operation.
9 By letter dated 27 August 2013 over the signature of the National President, addressed to Barrett, the Club stated:
“Take notice that the National Committee of Ulysses Club Incorporated (ABN 25 637 297 337) (NatCom) has decided not to renew the contract services agreement with Gordon Barrett & Associates Pty Ltd (GBA) when it falls due on November 1st 2013” – CB 574.
10 This letter was followed up with a further, longer letter asserting that the National Committee of the Club believed that Barrett had sought to undermine the National Committee’s integrity in an email, making what was said to be false allegations about spending, missing money and mismanagement of Club funds. The letter said that Barrett had thereby “breached its Confidentiality Agreement with Ulysses Club Incorporated by disclosing Confidential Information to persons who are not entitled to receive it”. The letter closed by saying the committee regarded Barrett’s behaviour as “unsatisfactory performance” for the purposes of the 2004 agreement and “hereby notifies Barrett that the Contract Services Agreement … will not be renewed from 1 November 2013”.
11 Barrett took the view that the Club was not entitled to terminate the agreement and its actions constituted a repudiation. It said that the automatic renewal provisions of the contract meant that Barrett enjoyed a perpetual entitlement under the contract. Its solicitors, therefore, commenced the present proceeding seeking damages which, at the opening of the trial, were calculated at $7.7 million.
12 Per capita payments by the Club, in effect the price per issue of the magazine payable to Barrett, increased from an initial $2 to $2.20, $2.27, $2.35 and $2.42 for the final Barrett issue of `Riding On’, published in August 2013. In a presentation to the National Committee by email of 7 June 2013, Barrett, speaking for his company, said amongst other things:
“Publishing costs since 2004 have escalated enormously since 2004. Magazines within the Australian motorcycling industry now have a cover price between $7.95 and $9.95. I am confident this is contributing to their continued decline in sales figures, whereas members haven’t suffered similar increases – and it’d be totally false for them to believe the magazine’s costs contribute to another membership fee increase. This is why I saw the published $30,339 attributed to increased Riding On costs as vital to address and correct. …”
Barrett believed that the Club’s accounts wrongly attributed an outlay of $30,339 to the costs of the magazine produced by Barrett and he sought, amongst other things, to correct this error in the presentation that he made. He also said:
“If the membership continues to reduce, (from families reducing to one member per family or simply not renewing – for whatever unconfirmed reason) the unit price for printing will rise.” (Exhibit 1)
Barrett complained of relentless increases in postage costs.
13 Various editors controlled the editorial content of the magazine in the period 2005 to 2013. In fact, a pdf version of the magazine was despatched by Barrett to the Club’s New South Wales headquarters and, upon approval of this pdf version, Barrett would render a $50,000 invoice to the Club, inclusive of Goods and Services Tax. When there was a final reconciliation of the numbers of magazines printed and despatched by the mailing house engaged by Barrett, with allowance being made for extra copies for the Club, advertisers, archives, etc, a final invoice was rendered.
14 Clause 13 of the Contract Services Agreement provided for what were described as “onserts”. Barrett explained that an onsert is an additional page or pages inserted on mailing in the same wrapper as the magazine, but not contained within the magazine. The effect of clause 13 was to give Barrett an entitlement to be paid at cost for the production of onserts. Initially, documents relative to the Club’s Annual General Meeting were done by way of onsert and Barrett became entitled to a supplementary payment representing the cost of production of the onsert. Later, however, this material was inserted in the folds of the magazine, presumably as editorial material. The cost of this material had to be absorbed by Barrett and this became something of a bone of contention. In addition, Barrett undertook design responsibility for the magazine, which Barrett did not regard was one of its obligations under the agreement.
The present proceeding
15 In its Amended Statement of Claim, the plaintiff alleged that the Club’s actions in purporting to cancel the contract between the parties was repudiatory and that, by letter from its solicitors of 30 September 2013, Barrett accepted that repudiation. It sought damages in the sum of $7,078,000 [eventually modified to $7,525,994], calculating those damages on the footing that Barrett’s rights under the contract were perpetual. It said its annual profit under the contract was $364,516 according to its most recent recalculation. According to Barrett, it suffered direct losses as a result of the loss of its per capita income from the Club and its entitlement to retain the advertising income derived by the magazine, and that it derived further indirect benefits arising, for instance, out of its entitlement to undertake separate work for `Riding On’ advertisers additional to any work relating to the magazine itself. These additional entitlements were described as “indirect net profit”. According to the schedule to the Second Amended Statement of Claim, these indirect profits included the cost of arranging and supplying magazine inserts and providing design services to `Riding On’ advertisers. The third category was providing other services to `Riding On’ advertisers and the fourth was providing services to a particular advertiser known as `Armstrong Driver Education’. The plaintiff allowed a 20 per cent reduction for vicissitudes for direct profits and a 40 per cent reduction for indirect profits, applying a discount rate of 3.75 per cent which was said to be the interest rates charged on the longest maturity Commonwealth Government Securities available at the figure of $7,705,962 as the quantification of damages was adopted.
16 To meet a contention that if, as the defendant alleged, the contract between the parties was terminable upon reasonable notice, Barrett said that the notice in fact given was less than reasonable. Therefore, an amendment was made so as to claim five quarters of profit, being $469,731, upon the basis that a reasonable notice period would have been the period ending 1 November 2014 [presumably calculated from the termination notice actually given in August 2013].
Defence
17 The defendant denied that, in the circumstances, Barrett had a perpetual entitlement. It said that the agreement was terminable upon reasonable notice, either as an implied term or a term which could be derived by way of construction from the express terms in the agreement. The Club challenged the calculation of Barrett’s alleged loss. It further asserted that Barrett had failed adequately to mitigate its loss.
Term of Contract
18 The first and most important issue to determine is whether the contract between the parties is, as the plaintiff contends, perpetual or subject to cancellation or non-renewal by the defendant Club either without notice or upon reasonable notice, as the defendant has it.
Plaintiff’s contentions
19 Aside from the invocation of an implied term for cancellation by the Club upon no notice or reasonable notice as contended for by the Club, the case was argued simply upon the terms of the agreement itself. No one suggested that the formation of the contract was affected by mistake or misrepresentation. There was no reliance placed upon any doctrine of unconscionability, either based upon case law and the principles of equity or upon statutory provision such as the Trade Practices Act 1974 or the Fair Trading Act 1999, which were the relevant statutes in force at the time of formation of the contract. This is pre-eminently a case of construction of the written contract.
20 Mr Forbes placed primary reliance upon a 1942 decision of the High Court of Australia in J Kitchen & Sons Pty Ltd v Stewart’s Cash and Carry Stores (1942) 66 CLR 116, where the Court upheld an arrangement establishing resale price maintenance relative to the sale of laundry detergent, holding that neither party to the arrangement had a right independently of breach by the other party to determine the contract which was therefore of indefinite or perpetual operation.
21 On the question of construction, Mr Forbes relied upon a number of decisions, principally of the High Court of Australia determined in the last 30 years. During a lengthy adjournment of the trial between May and November, the High Court of Australia published its decision in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd [2015] HCA 37, which he submitted constituted the High Court’s most recent summation of these matters.
22 Application of these principles led, he submitted, to the conclusion that the present contract should be regarded as having perpetual operation. He drew particular attention to clause 8 of the agreement and clause 14. He also submitted that the operation of these clauses needed to be judged in the light of the terms of the letter described in the recital as “Proposal Outline” dated 8 November 2014 which was also mentioned in clause 14 itself.
Defendant’s contention
23 Mr Cawthorn QC and Mr Rudd took me first to the decision of the Court of Appeal in Chancery, LLanelly Railway and Dock Company v London and North-Western Railway Co (1873) LR 8 Ch App 942, 949, where James LJ said:
“I start with this proposition, that prima facie every contract is permanent and irrevocable, and that it lies upon a person who says that it is revocable or determinable to shew either some expression in the contract itself, or something in the nature of the contract, from which it is reasonably to be implied that it was not intended to be permanent and perpetual …’”
24 His Lordship nevertheless noted a number of classes of contract which it would be reasonable to presume were not intended to be permanent or perpetual but subject to termination or cancellation. He referred to partnerships, master and servant contracts, agency contracts and so forth. These types of contracts involved in his Lordship’s words:
“… more or less of trust and confidence, more or less of delegation of authority, more or less of the necessity of being mutually satisfied with each other’s conduct, more or less of personal relations between the parties.”
25 They submitted that the House of Lords on appeal did not disagree with this part of the judgment of James LJ: (1875) LR 7 HL 550, 559 (per Lord Cairns, 556 per Lord Hatherley).
26 Next, they said that more modern authorities saw the presumption running the other way; that is, in favour of terminability. They took me to a decision of the New South Wales Court of Appeal in Crawford Fitting Co v Sydney Valve & Fittings Pty Ltd (1988) 14 NSWLR 438 and the principal judgment delivered by McHugh JA (as he then was). The effect was, they submitted, to create a presumption in favour of terminability in commercial contracts upon reasonable notice with the reasonableness of the notice being judged by reference to the ability of the recipient to redeploy labour and equipment in alternative employment, carry out commitments, bring current negotiations to fruition and wind up the association in a businesslike manner. They also relied upon the judgment of McNair J in Martin-Baker Aircraft Co Ltd v Canadian Flight Equipment Ltd [1955] 2 QB 556 and an article by Carnegie, “Contracts of Unspecified Duration” (1969) 85 LQR 392, where the author suggested the presumption was now in favour of revocability based on the decision of the United States District Court in Freeport Sulphur Co v Aetna Life Insurance (1953) 206 F. 28d 5, 8. They also referred to IOOF Building Society Pty Ltd v Foxeden Pty Ltd (2009) 23 VR 536 [123] and Husain v O & S Holdings (Vic) Pty Ltd [2005] VSC 269 at [56] and Barro Group Pty Ltd v Fraser [1985] VR 577, 583. They submitted that, where a contract provided mutual obligations and required co-operation, there was invariably an implied term that it would be terminable on reasonable notice. They referred to the Martin-Baker case [1955] 2 QB 556, 577.
27 Based on these principles, they said:
“Whether a contract is non-renewable or terminable is a question of construction of the contract. In this case the contract was terminable: it was not permanent.”
28 They submitted that the non-perpetual aspect of the contract was manifested by the parties, “altering the amount payable under clause 10 from time to time”.
29 Next, they said that in this case the Club gave a notice that it was not renewing the contract, not a notice of termination. They said that unless any action was taken, the contract “was a 12 month renewable contract”. They said, further, that there were express provisions for termination; namely, clauses 4, 16, 21 and 22, and this distinguished the present case from Kitchen’s case, The Power Co Ltd v Gore District Council [1997] 1 NZLR 537, 550.
30 They noted the mutual assistance in performance which was essential to the operation of the contract as between Barrett as the publisher and the person designated as editor. The editor controlled editorial comment and Barrett had the right to be included in the selection committee if the office of editor became vacant: clause 3. It was only upon the Club’s approval of the magazine layout that the member’s contribution became payable: clause 10:
“Thus, the Club could withhold payment if it was not content with the layout.”
31 The Club was required to maintain, update and provide its membership database to Barrett under clause 11 and Barrett was dependent on this information in determining how many copies of `Riding On’ should be printed. The frequency of publication of the magazine could change by agreement. They said all of these matters of necessary cooperation were confirmed by the evidence as to how the contract was in fact administered. Therefore, they submitted:
“There was such a degree of cooperation required that the contract was not indefinite, that is to say renewable perpetually …”
32 They noted that the magazine might be sold with Barrett being a percentage of the price: clause 15:
“Presumably the sale could occur without notice.”
33 Barrett inserted that clause so that his company was compensated for loss of income (T319, L4) and Barrett could veto a change of name: clause 17. Clause 20 provided for the consequences of termination; viz that intellectual property would revert to the Club: clause 20. They said this provision “… presupposes that there was going to be a termination (at some stage).” The Club was given a right to terminate if the ownership of Barrett changed. Thus, if Barrett or Ms Duthie died the contract could be terminated. They asked rhetorically, if the contract was to be perpetual, why were a series of one year terms provided for? They noted that clause 15 referred to “the course” of the agreement, thereby implicitly accepting that the contract was for a finite time.
34 They submitted that insofar as clause 14 referred to renewal of the contract on 1 November of each year, the clause referred to renewal either by Barrett or by the Club. Clause 8 provided for automatic renewal “subject to satisfactory performance” by Barrett. They submitted that the comma in clause 14, following the words “providing Barrett has fulfilled its obligations and commitments as stated in its letter of 8 November 2004…” should in fact be a full stop. They relied on the joint judgment in Fitzgerald v Masters (1956) 95 CLR 420, 426-7. The words that follow the full stop, they submitted, ought ideally to have been made a new and separate clause. The reference to “discretion” should be read as “indiscretion”. Both of these proposed corrections to clause 14 were not opposed by Mr Forbes, counsel for Barrett.
35 Next, they noted that clause 16 refers to default by Barrett, that is, failure to achieve the low performance budget which is defined in the recitals to the deed. This would enable the contract to be terminated on one month’s notice. They noted that Barrett was entitled, under clause 21, to withdraw its services upon three months’ notice. They said:
“Clause 8 and the first limb of clause 14 are provisions that deal with renewal. Clause 8 expressly addresses Barrett’s right to renewal referring as it does to ‘satisfactory performance’. It is consistent with the reference in the first two lines of clause 14 to Barrett fulfilling its ‘obligations’. The first part of clause 14 refers to renewability. It is to be inferred that it deals with something different from clause 8. Thus, while clause 8 deals with renewability by Barrett only, clause 14 deals with renewability generally (by both Barrett and the Club).” [Emphasis in the original]
36 Insofar as renewal by Barrett was concerned, they said that clause 8 and the first limb of clause 14 were similar to options to renew in leases rendered subject to conditions precedent like compliance with covenants in the lease. They referred to BS Stillwell & Co Pty Ltd v Budget Rent-a-Car System Pty Ltd [1990] VR 589. The references to `subject to satisfactory performance’, they said, are references to preconditions for automatic renewal by Barrett. Since they are conditions precedent if they are not fulfilled, Barrett does not have a right of automatic renewal, they said.
37 Conditions precedent, however, were not imposed upon the Club. Therefore, the Club could renew or not renew unconditionally but Barrett could only renew if it had satisfactorily performed its obligation. They submitted that clause 8 was a “mechanical provision since it enabled the contract to be renewed ‘automatically’, without the necessity of any other formality”. They said that this construction was supported “by consideration of the general nature of the contract”. They said that if the contract were to remain on foot, as long as there was no default by Barrett, “there was no reason for making it a contract for a series of one year terms”.
38 They submitted that, on the true construction of the contract and in accordance with the principles stated in Crawford’s case:
“(a)either party could chose or elect to renew towards the end of each successive term (where there would otherwise be automatic renewal by Barrett because the pre-conditions were met), and in addition
(b)the Club could terminate during the term for de fault (clauses 14 and 16); and
(c)Barrett could terminate at any time on 3 months’ notice (clause 21).”
39 They said the right to renew did not reside solely with Barrett but inured to the benefit of the Club as well.
40 Then, Mr Cawthorn QC and Mr Rudd turned to the issue of terminability, submitting that there was an implied term of the contract that it be terminable on reasonable notice. They referred to Crawford’s case. They said that this implied term met the requirements stated by the majority of the Judicial Committee of the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266, 282-3. In particular, they submitted, such a term does not contradict any other term of the contract. “Plainly, there are other terms of terminability to be implied. Since the magazine could be sold and, if it was, a capital sum (20%) would be paid to Barrett (clause 15), it was an implied term that if that was to occur the contract would come to an end: see T904, 905.”
41 Dealing with termination expressly did not exclude the possibility that a contract was terminable upon reasonable notice being implied (Anchor Butter Co Ltd v Tui Foods [1997] 3 NZLR 107). The effect, then, of the provisions as to renewal and terminability was, they said:
“(a) the contract was for 12 months;
(b)the contract was renewable on an annual basis on 1 November each year. The Club or Barrett could decline to renew, which would mean the contract would not renew irrespective of the other party’s position. If Barrett was performing satisfactorily but made no decision to renew or not to renew, and the Club failed to intimate that it was declining to renew, renewal would be automatic. Barrett could only renew if its performance was satisfactory as referred to in clauses 8 and 14;
(c)during a 12 month term the contract could be terminable on one month’s notice by the Club but only:
(i)if it has given, in effect, a warning to Barrett that it must improve its performance and it fails to heed that warning (the second limb of clause 14); or
(ii)Barrett fails to achieve the low performance budget (clause 16).
There is a right in the Club to terminate on one month’s notice at any time during the currency of a period of 12 months, for poor performance by Barrett.”
42 In the present instance they submitted that, since the Club could decide not to renew toward the end of a 12 month period, it should be regarded as having made that determination by giving the notice of 27 August 2013 that the contract would end on the term expiring on 1 November 2013. This notice was lawful and not a repudiation, as alleged by Barrett.
43 The power of non-renewal could be exercised within any time before the end of the relevant preceding one year term in the same way as an option to renew a lease without a specific time stipulation is exercisable at any time before the expiry of the primary lease term. They referred to Spectra Pty Ltd v Pindari Pty Ltd [1974] 2 NSWLR 617, 620. Alternatively, they said the power of non-renewal could be exercised a reasonable time before the expiry of the relevant preceding term.
Plaintiff’s submissions in reply
44 Mr Forbes submitted that the provisions in the contract for renewability and termination needed to be read in light of Barrett’s letter to the Club of 8 November 2004 which stated inter alia:
“The toughest aspect of any publication is obtaining and maintaining advertising clients, but once the successful formula is in place, with the right personnel, it runs like a well-oiled machine (as I achieved with Two Wheels Magazine). It’s after this time that other parties may want to take control. Therefore, we must have an automatic renewal of contract in place so long as GBA [that is, Barrett] continues to produce results.” (CB 225)
Conclusions
45 I did not understand Crawford’s case and the authorities from which it proceeded to state any inflexible rule of law which applied despite the express terms of any contract which the parties might reach. In the present case, if the express terms of the contract said nothing as to its duration, I would unquestionably conclude that (a) its commercial nature, (b) the fact that the obligations which it purported to create were positive rather than purely negative as in Kitchen’s case, and (c) the fact that the obligations were mutual, requiring co-operation and requiring the Club to repose confidence in Barrett both as to financial integrity and as its representative with advertisers in its Club Journal, would lead inevitably to a conclusion that the contract was terminable by either party upon reasonable notice. The operation of these sorts of presumptions as to an implied power of terminability was neatly stated by Penlington J in the High Court of New Zealand in Anchor Butter Co Ltd v Tui Foods where, referring to a registered user agreement relative to a trademark, his Honour said:
“Having concluded that the contract is not unequivocally perpetual on its face and that the termination clause in it does not preclude a term that the contract is terminable on reasonable notice, I next addressed the question whether on a true construction of the contract or as a matter of implication the parties intended that it was terminable on reasonable notice.” [1997] NSLR 107, 119
46 In the same way as his Honour concluded, the inclusion of express powers of termination in a contract of this type did not preclude the implication of a further term allowing termination on reasonable notice, I reject the submission, more flirted with than put in direct terms, that the existence in this contract of any provisions for termination necessarily precluded its having perpetual or indefinite operation.
47 Having said so much, I must now determine whether the express terms of the contract are such as to exclude the implication which the law would most certainly make relative to the terms of this contract that it may be brought to an end by reasonable notice.
48 Only a few weeks ago, the High Court published its judgment in Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd. In the joint judgment of French CJ, Nettle and Gordon JJ, their Honours summarised the rules as to construction of written contracts and the resort to extraneous materials surrounding circumstances and the like which have been the subject of controversy in recent years, in particular, as to whether extraneous materials and circumstances can be resorted to in the face of an apparently plain meaning in the written terms of the contract itself.
49 This question was answered in the resounding negative by Sir Anthony Mason in his seminal judgment in Codelfa Construction Pty Ltd v State Railway Authority of New South Wales (1982) 149 CLR 337, 352. A number of decisions since, especially in the New South Wales Court of Appeal, have suggested that, while the High Court of Australia has never formally renounced Sir Anthony’s analysis on this point, a consideration of the methods which the court has used in construing contracts, indicated its abandonment.
50 Their Honours, in their joint judgment in Mount Bruce Mining at [46]-[52], re-asserted the Codelfa orthodoxy, which I reproduce without footnotes. These paragraphs constitute the most authoritative and contemporary synthesis of the High Court’s approach to these matters:
“46. The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. (My emphasis)
47. In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That enquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract.
48. Ordinarily, this process of construction is possible by reference to the contract alone. Indeed, if an expression in a contract is unambiguous or susceptible of only one meaning, evidence of surrounding circumstances (events, circumstances and things external to the contract) cannot be adduced to contradict its plain meaning.
49. However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
50. Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties' statements and actions reflecting their actual intentions and expectations.
51. Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties ... intended to produce a commercial result’. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.
52. These observations are not intended to state any departure from the law as set out in Codelfa Construction Pty Ltd v State Rail Authority of New South Wales and Electricity Generation Corporation v Woodside Energy Ltd. We agree with the observations of Kiefel and Keane JJ with respect to Western Export Services Inc v Jireh International Pty Ltd.”
51 Based on these principles, the express terms of the written contract exclude the implication of terminability upon reasonable notice which the case law would dictate in the absence of express provision to the contrary in the text. The passage quoted from the letter of 8 November makes plain how the somewhat confusing provisions as renewal and termination should be read. The letter of 8 November is expressly invoked, not only in the recital but also in the pivotal clause as to automatic renewability. This letter is available as part of the constructional materials to which resort may be had in accordance with paragraph [46] of the joint judgment without establishment of any overt ambiguity in the written contract. If I were wrong in this, it could be resorted to in accordance with paragraph [49] of the joint judgment as one of the relevant surrounding circumstances known to the parties, since the complex interaction of the concepts of renewal and termination can be seen as presenting “a constructional choice”.
52 The defendant Club submits through its counsel that the letter “forms part of the contract only to the extent that it refers to ‘obligations and commitments of Barrett’ and that it can ‘accordingly, be ignored’.”, I reject that submission to the extent that it is inconsistent with the analysis which I have just adopted.
53 There is no evidence as to the provenance of this form of contract. Certainly, it contains infelicities in the issues of punctuation and clause numbering as referred to by defendant’s counsel. More pertinently, the failure, perhaps, to draw a clear distinction between the related but distinct concepts of renewability and termination suggests that it was not put into its final form by a professional draftsperson of contracts.
54 Nevertheless, other parts of the document do show evidence of a skilled draftsperson’s hand. One may infer that the parties have taken a professionally drawn original used for `Riding On’ or, perhaps, another similar publication and adapted it. In those circumstances accepting, as I do, that there is a tension between a provision for rolling annual renewals on the one hand and the concept of perpetuity on the other that tension does not outweigh the effect of the express matters, both in the agreement itself and in the letter of 8 November, which point in favour of the contract’s operating indefinitely. More generally, it is perhaps like a tenancy from year-to-year which may persist indefinitely. The annual cycle might be regarded as providing a “break” option for the Club in light of any unsatisfactory performance by Barrett.
55 In the present case, the Club in its second termination or non-renewal notice appeared to allege breaches of obligation and perhaps “indiscretions” on the part of Barrett. These allegations were not persisted with in the present proceeding.
56 Subject, perhaps, to “indiscretions” and subject to “satisfactory performance”, Barrett was entitled to have the contract continue indefinitely. It follows that the Club’s actions in the second half of 2013 in sacking Barrett as the producer of the magazine constituted a repudiation and Barrett is entitled to damages for the loss of its bargain in light of its acceptance of the repudiation.
Damages
57 In bringing this proceeding, Barrett accepted the Club’s repudiation of contract and sought damages for the loss which it suffered. In accordance with orthodox analysis, the damages should be fixed on the basis of placing Barrett in the same position that it would have been had the contract been performed. In describing the damages which may be recovered in these circumstances, Mason CJ and Dawson J said, in a joint judgment in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64, 81:
“In the ordinary course of commercial dealings, a party supplying goods or rendering services will enter into a contract with a view to securing a profit, that is to say, that party will expect a certain margin of gain to be achieved in addition to the recouping of any expenses reasonably incurred by it in the discharge of its contractual obligations. It is for this reason that expectation damages are often described as damages for loss of profits. Damages recoverable as lost profits are constituted by the combination of expenses justifiably incurred by a plaintiff in the discharge of contractual obligations and any amount by which gross receipts would have exceeded those expenses. This second amount is the net profit.”
Plaintiff’s contentions
58 Mr Forbes, having referred to Amann Aviation, noted that in assessing damages in accordance with these principles it was necessary to discount the present value of future losses. He referred to Gray v Richards [2014] HCA 40; Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625; Todorovic v Waller (1981) 150 CLR 402; and Commonwealth v Blackwell (1987) 163 CLR 428.
59 Mr Forbes referred to analyses carried out by Ms Duthie, a director of the plaintiff company and the person responsible for its bookkeeping, based upon the last four financial years. It was appropriate, he submitted, for there to be a reduction of 40 per cent for vicissitudes. (T105, L8) In making that assessment, he said, “I accept that because we are dealing with speculation, as the court takes, that some allowance has to be made for vicissitudes” (Ibid, L3-5) for “indirect” profits and 20 per cent for “direct” profits.
60 Mr Forbes suggested a discount rate of 3.75 per cent. (T117, L17) This rate equated to the rate for the longest term Commonwealth Government Treasury Bonds according to the rates published on the Commonwealth Government Treasury website, and also the deposit rate of 3.70 per cent offered by deposit-taking organisation, ING.
61 As to the profitability of the `Riding On’ contract which the plaintiff has lost by reason of the repudiation, Mr Forbes relied on the evidence of Ms Duthie in Exhibit V as to the sources of income derived by Barrett as a result of its position as the party contracted to produce `Riding On’. She said that Barrett:
“(a)provided additional services to the defendant on a commercial basis such as designing and printing the layout for the defendant’s proposed new constitution and the book called “The Ulysses’ Story”;
(b)earned revenue from the defendant for the per member per issue charge referred to in clause 9 [of the contract];
(c)earned revenue from advertisers for advertisements placed in `Riding On’ as referred to in clause 1 of the Contract;
(d)earned revenue from designing some of the advertisements that appeared in Riding On as stated in clause 18;
(e)provided additional services outside of `Riding On’ such as placing advertisements in other magazines to parties who were originally advertisers in Riding On as also stated in clause 18;
(f)provided additional services outside of `Riding On’ to Armstrong’s Driver Education which was also originally a Riding On advertiser. Armstrong’s Driver Education was a significant client of the plaintiff for the 2012 and 2013 financial years but Armstrong’s Driver Education terminated the arrangement because they decided to bring their advertising activities in-house.”
62 On Ms Duthie’s analysis, these income streams represented the available revenue categories. Ms Duthie gave lengthy evidence and various matters arose which led to the revision of certain figures. The approach which I propose following is to make my determination as a matter of principle, leaving matters of final calculation to be resolved by the parties and brought in as Minutes to give effect to my reasons.
63 What is important for the purposes of this judgment is to determine the matters of principle. If inadvertently I have referred at any point to figures other than those which represented the latest iteration of Ms Duthie’s evidence, I apologise but, for present purposes, it is the matters of principle that are important.
64 Ms Duthie calculated the average direct net profit derived by the plaintiff at $317,575 and indirect profit averaged at $46,941 for the four preceding financial years, making a total average profitability for the plaintiff in performance of the contract at $364,516. She calculated the net profit which she said the plaintiff derived without deduction of a large number of fixed costs or costs which she said should properly be regarded as overheads, generally deducting only those matters which she said were direct costs of performance. She swore a series of affidavits necessitated by my having upheld objections by the defendant to what I found represented the expression of non-expert opinions in the original affidavit material aimed at explaining what the expenses excluded from the calculation were and why it was proper to exclude them. The explanations were generally in accordance with the principles already described.
65 The principal component of “indirect profit” was an arrangement with Armstrong Driver Education, which terminated before the termination by the contract with the Club and for unrelated reasons. Mr Forbes submitted, however, that these matters were properly to be allowed for as indirect profit because the likelihood was that other opportunities of a similar type would present themselves during Barrett’s incumbency as the producer of Riding On.
66 Mr Forbes made lengthy submissions to the effect that all “opinion” elements of the evidence of Chartered Accountant, Mr Sincock, referred to below, upon which the defendant relied should be excluded for a variety of reasons.
Defendant’s contentions
67 Mr Cawthorn QC and Mr Rudd, on behalf of the defendant, relied upon expert evidence from Mr Geoffrey Sincock, a chartered accountant. Ms Duthie’s calculations were contained in a revised version of Table 1 to the plaintiff’s Statement of Claim. Commenting upon those calculations, Mr Sincock concluded that some 92.5 per cent of any financial year’s transactions on average related to `Riding On’. Insofar as a wide range of fixed or overhead expenses had been excluded as part of the cost of performance of the contract, Mr Sincock reasoned that some 92.5 per cent of those expenses were properly chargeable against the profits of the performance of the `Riding On’ contract.
68 Mr Sincock made the same point relative to most or all of the expenses excluded in Ms Duthie’s calculation in the course of his written material which was admitted to evidence as Exhibit 13. He was particularly critical of the exclusion of salary and superannuation contributions from the calculations. (Paragraph [23])
69 He said at paragraph [24]:
“Ms Duthie’s affidavit attempts to represent that the Riding On business was more profitable than was ever historically achieved by ignoring substantial expenses that can only be logically considered as being directly attributable to the Riding On business.”
70 At page 5 of his report, Mr Sincock said:
“If the net profit before tax is estimated by applying the average of Riding On revenue compared to total revenue after excluding [scil] Armstrong’s Driver Education of 80.9 per cent…the average net profit before tax amounts to $53,261.”
71 Mr Sincock excluded the income from Armstrong Driver Education which he said he now knew was “non-recurring”. He said he also excluded expenses which Barrett “nominated as director relating to Armstrong Driver Education”.
72 Mr Sincock said that the proper discount rate to apply was 12 per cent:
“…on the basis that there appear to have been considerable risks associated with the longevity of the business. Those risks when compared to other opportunities for investment were estimated as risk factors and inflation 3 to 4 per cent, investment opportunity rates or unsecured borrowing costs 8 per cent to 8.75 per cent.”
73 He also added a further 4.92 per cent negative growth rate so that the calculation by way of discount was at a total rate of 16.92 per cent. This negative growth rate he derived by graphs which noted a decline in profit and in membership of the Club.
74 Mr Sincock was of the view that there are particular risks associated with print publications because of the trend towards their obsoletion in favour of the publication and advertising “online”.
Conclusions
75 As to Mr Sincock’s evidence, Mr Forbes conceded that it was admissible insofar as it merely summarised the accounts of the plaintiff. He referred to the decision of the Full Federal Court of Australia of Keane CJ, Lander and Besanko JJ in Castel Electronics Pty Ltd v Toshiba Singapore Pte Ltd (2011) 277 ALR 117, 144-145 [202]-[205]. Insofar as opinions and inferences were concerned, however, he submitted that this material was inadmissible.
76 Section 76 of the Evidence Act 2008 generally excludes opinion evidence from admissibility. Section 79(1) of the Act establishes an exception to this rule for expert evidence in the following terms:
“If a person has specialised knowledge based on the person's training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge.”
77 Mr Forbes’ submission relative to Mr Sincock was that he was not shown to have specialised knowledge based on training, study or experience and, even if he were, then the opinions that he expressed were not “wholly or substantially based on that knowledge”.
78 In Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588, the High Court disapproved a process whereby evidence is received subject to objection on the footing that the Court will rule upon it in its final determination.
79 As it was, Mr Sincock was the final witness to give evidence and, for reasons similar to those which led John Dixon J to defer determination of objections to expert evidence to final submissions in Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (No 3) [2012] VSC 99 [82], with the consent of the parties, I did likewise. As to the broad points of objection, I regard them as without foundation.
80 Mr Sincock gave evidence that he had made similar assessments of future income streams for the purpose of calculating the value of businesses. He said that he had undertaken these sorts of calculations in the course of writing expert reports in a range of commercial disputes and has acted as a special referee in the Supreme Court where he “had to do a calculation in relation to future cash flows that were going to be received”. He referred to documentation from “Biz Exchange” which published an index from time-to-time, providing Australian private businesses “with a version of expected rates of returns and the capitalisation rates that might be applied to them”. (T1083-1085)
81 In my view, Mr Sincock’s training as a chartered accountant and his experience in the roles which he described in the quoted pages from the transcript provide him with the specialised knowledge to express the opinion which he did express as to the valuation of future cash flow.
82 When I challenged Mr Forbes to indicate what form of expert would be qualified to offer opinions on these matters, if not a chartered accountant, he suggested “a business broker”. (T1037, L28)
83 As I understood the suggestion as to a business broker being qualified in a way that a chartered accountant was not, it was that the broker was involved in the cut and thrust of negotiation between sellers and purchasers of business in a way that a chartered accountant was not. Without necessarily accepting this premise, Mr Sincock’s evidence is that he gave many of his valuations in the context of commercial disputes.
84 Again, in my view, the opinions which Mr Sincock expressed were shown properly to proceed from his specialised knowledge. To use a phrase which has gained a certain vogue in appellate scrutiny of trial judges’ decisions, he disclosed his “pathway of reasoning”. This is not to say that the reasoning is necessarily compelling or that, ruling on admissibility I record myself as convinced by it; but the reasoning is exposed and it is related to the specialised knowledge. I overrule the objection to the admissibility of Mr Sincock’s evidence.
85 First, I turn to the question as to what items of expense should be charged against profit in performance of the `Riding On’ contract. The competing contentions being, according to Mr Forbes and Ms Duthie, only matters of direct cost excluding a wide range of expenses or, according to Mr Sincock, “full absorption” costs.
86 In Philip Morris Ltd v Federal Commissioner of Taxation (1979) 38 FLR 383, Jenkinson J (then of the Supreme Court of Victoria) had to consider the applicability of full absorption costing for the purposes of valuing the trading stock of a cigarette manufacturing company.
87 The Income Tax Assessment Act 1936 provided that a tax payer company’s assessable income included the increase in value of trading stock on hand from the beginning of the tax year to its close. The tax payer sought to have its trading stock valued on a direct cost basis, only. The Commissioner assessed and sought to uphold his assessment on appeal to the Supreme Court based upon full absorption costing. The tax payer noted that, when the items of trading stock which were on hand at the close of the fiscal year were manufactured, nearly all of the costs such as wages and salaries, rent and depreciation and so forth, had been incurred already. Therefore, the cost of manufacture of the last few thousand cigarettes of the year was minimal.
88 The Income Tax Assessment Act provided for the stock to be valued “at cost price”. His Honour said that cost price of an item of trading stock for a manufacturer was calculated by:
“…ascertainment of the expenditure which has been incurred by the tax payer, in the course of his materials purchasing and manufacturing activities to bring the article to the state in which it was when it became part of his trading stock on hand…Because the calculation of expenditure of that kind is made for successive periods of a year, the ascertainment of expenditure referrable to one of very many identical manufactured articles is, I think, ordinarily to be achieved by allocating to each of the articles manufactured during a year an equal share of the year’s expenditure incurred in manufacturing them all.” (1979) 38 FLR 383, 393
89 His Honour continued:
“I think that each cigarette manufactured during a year of income should in the absence of evidence that some of them required more time for their manufacture than others or that in the course of manufacture some of them occupied more time of the fixers or the inspectors than others of them occupied, be found to have occasioned in its manufacture an equal share of the expenditure incurred by the appellant on account of the wages earned in that year by those employees. Therefore the cost of each of the finished cigarettes forming part of trading stock on hand at the end of the year will include an amount equal to the amount of that share.” (1979) 38 FLR 383, 394
90 This view of things seems to be supportive of Mr Sincock and such as might lead to the rejection of the plaintiff’s assessment of loss; but the evaluation of trading stock for tax purposes may be considered a context very different and remote from the present dispute. Somewhat closer to the present situation is the decision of the High Court of Australia in Dart Industries Incorporated v Décor Corporation Pty Ltd (1993) 179 CLR 101.
91 In that case, the Court had to consider the proper assessment of an account of profits which were earned by a defendant found to have infringed upon the plaintiff’s patent. In the present case, a higher damages award will flow from minimising the expenses which are charged against the profit on the repudiated contract. In the matter before the High Court, the defendant was concerned to maximise the number of expenses charged against the profit made by infringement of the plaintiff’s patent so as to lead to a finding of a smaller profit upon the taking of the account.
92 On appeal, the infringing defendant submitted that full absorption costing should be applied and, therefore, the profit found to have been made would be minimised. This approach had been adopted in the United States, in particular, in one decision of the United States Court of Appeal for the 8th Circuit. McHugh J in dissent supported this view. In a joint judgment, Mason CJ, Deane, Dawson and Toohey JJ said:
“Whether Decor and Rian should succeed in their contentions depends upon whether, as a matter of fact and substance, the overheads which they seek to have deducted are attributable to the manufacture and sale of the infringing product. In arriving at an answer, the Court must consider such questions as whether the overheads in any particular category were increased by the manufacture or sale of the product, whether they represent costs which would have been reduced or would have been incurred in any event, and whether they were surplus capacity or would, in the absence of the infringing product, have been used in the manufacture or sale of other products. Dealing with the last of these questions may require the use of the concept of opportunity cost. If any of the categories are to be brought into account, the proportion to be allocated to the infringing product must be determined and it is here that approximation rather than precision may be necessary.” (1993) 179 CLR 101, 119
93 Closer still to the present dispute is the decision of the Full Supreme Court of South Australia in Bartonvale Management Services Pty Ltd v International Linen Services Pty Ltd [2002] SASC 254. The plaintiff was seeking damages for the repudiation of the contract which it had with the defendant for the supply of laundry services. The trial judge broadly confined the deductions which he made against the profitability of the contract which he found the plaintiff had been deprived of the advantage of, to direct costs, excluding overheads.
94 On appeal, Doyle CJ broadly upheld the trial judge’s approach but concluded that the estimate of revenue loss should be reduced by some 20 per cent because he considered that certain expenses had been inadequately allowed for. Williams and Gray JJ concurred.
95 Crucially, the trial judge found that the earnings derived by the plaintiff from the repudiated contract “were only one per cent of the plaintiff’s total earnings”. [2002] SASC 254 [13]
96 A further example of damages for a repudiated contract is to be found in the decision of the New South Wales Court of Appeal in North Sydney Leagues’ Club Ltd v Synergy Protection Agency Pty Ltd (2012) 83 NSWLR 710. An appeal was brought against the assessment of damages by a trial judge, Einstein J. The Court of Appeal Beazley, Macfarlan and Whealy JJA dismissed the appeal. Delivering the leading judgment, Beazley JA (as she then was) noted the general rule that damages for the repudiation of a contract were intended to place the plaintiff in the same position as he, she or it would have been had the contract been observed.
97 The Court considered a number of authorities, including Dart Industries and Bartonvale Management Services, and her Honour concluded:
“These authorities are clear that, in respect of a claim for expectation damages, there is no absolute principle, as submitted by the appellant, that account must be taken of overhead expenses. Nor, in my opinion, as a matter of general principle, is the alternate approach for which the appellant contended, correct. That approach requires that overhead expenses be taken into account proportionately, that is, proportionate to the value of the contract to the overall business, unless the evidence demonstrates some different deduction should be made.” (2012) 83 NSWLR 710, 718-19 [46]
98 Einstein J specifically rejected any contention that the overhead costs which were debited against the profitability of the contract should be allocated simply on the basis of the proportion which they represented of the plaintiff’s total undertaking.
99 The Court of Appeal judgment discloses that the repudiated contract represented 38 per cent of the totality of the plaintiff’s undertaking. ((2012) 83 NSWLR 710, 715 [27])
100 In the judgment under appeal, the fourth judgment which he had given in the proceeding, Einstein J adopted a direct costing method as advocated by Synergy Protection Agency Pty Ltd. At paragraph [43] he said:
“In order to dispel the widespread confusion over allowing for different costs, I now seek to set out by way of example why Synergy’s approach is the only one that accords with the principle of expectation damages.”
101 He then proceeded with an example which entailed the award of expectation damages for breach of one of the three contracts which constituted a plaintiff company’s undertaking, concluding that no amount of overhead costs should be charged against the profits which it would have derived from the repudiated contract.
102 The Court of Appeal was concerned to determine and reject the proposition that there was an inflexible rule of law requiring the apportionment to the costing of profit derived from the repudiated contract of an aliquot share of the plaintiff company’s overhead costs. Einstein J, as explained, proceeded upon the footing that there was a strict rule of law to the opposite effect, namely, that the damages should be awarded without any apportionment of overhead cost. ([2011] NSWSC 286))
103 In this present case, we are concerned with a situation where the repudiated contract represented not one per cent of the plaintiff’s undertaking, as in the Bartonvale case, nor 38 per cent, as in the North Sydney Leagues’ Club case but, depending upon the view which one takes of the Armstrong Driver Education business, either 80.9 per cent of the plaintiff’s undertaking or 92.5 per cent of it.
104 If the New South Wales Court of Appeal had determined there was an inflexible rule of law that direct costing methods be used in a situation such as this to the exclusion of absorption costing in accordance with established precedent rules, I would be bound to apply that principle here.
105 The Court of Appeal, however, merely rejected the suggestion that there was an inflexible rule of law to the opposite effect, leaving it open for particular cases to be determined according to their particular facts.
106 Here, whichever analysis is adopted relative to Armstrong Driver Education, the repudiated contract constituted so large a percentage of Barrett’s undertaking that it would be artificial and unjust to calculate damages based upon a profitability for this contract without allocation of a share of overhead costs. Not to allow for wages and salaries in judging the profitability of the `Riding On’ contract would be most misleading. It would have the profitability judged on a basis more akin to a passive investment where the income simply rolls in whereas here, hard full-time work is needed by the plaintiff’s principals, Mr Barrett and Ms Duthie, to derive the income.
107 The exclusion of the business from Armstrong Driver Education made by Mr Sincock appears to be appropriate. As he remarked, it is non-recurring and came to an end for reasons independent of the Club’s repudiation of contract. No doubt the position which the Club enjoyed as the incumbent producer of `Riding On’ had the potential to throw up opportunity, such as Armstrong; but it has not been established that this was a probability rather than a mere possibility. To put it another way, there is no evidence which establishes on the balance of probabilities that some new class of business of the same order of magnitude or a combination of such pieces of business would arrive to replace the lost business from Armstrong. I therefore accept that average maintainable earnings of $53,261 are proved as being derived by the plaintiff arising out of the repudiated contract and this should constitute the basis for the assessment of damages in accordance with Mr Sincock’s analysis.
108 The plaintiff’s case was that these damages should be assessed upon the footing that the plaintiff’s entitlement was perpetual. The leading case relied on was the High Court’s decision in Kitchen. A consideration of the events since the Court’s decision in 1944 shows how unreal this view of the plaintiff’s entitlement is.
109 It may be doubted that the company carried on a grocery business and entered into the resale price maintenance agreement is still trading. J Kitchen & Sons Pty Ltd appears to have become part of the multinational Unilever Group. Whether it still exists as a separate entity we do not know. To the best of my knowledge, Persil washing powder is no longer marketed in Australia. Even if it were, it may be open to doubt that anyone would be seeking to sell it for less than five cents a box. (Five cents being the decimal equivalent of the sixpence benchmark in the resale price maintenance agreement.)
110 Resale price maintenance arrangements were rendered illegal with the enactment of the Trade Practices Act 1974. Perpetuity has turned out not to be very perpetual.
111 Mr Forbes was scathing in his attacks upon Mr Sincock’s calculations and resort to discount rates and negative growth rates for the calculation of a lump sum of damages. He referred to answers obtained in cross-examination suggesting that there had been double counting of issues such as credit risk. He said further that the negative growth factor relied on by Mr Sincock represented an artificial and distorted view of events failing to allow for particular reasons for the fall in Club membership, such as a large increase in membership charges. When these matters were excluded, as he submitted they properly should be, an image of steady membership and therefore steady income presented itself in contrast to the decline predicted by Mr Sincock.
112 On the other hand, choice of a different starting date for the trend calculations might have shown an even more marked decline trend. (CB 882)
113 Mr Forbes was inclined to diminish the significance of the alleged threatened demise, or at least significant decline, of print periodicals. Both he and Barrett suggested that the present agreement could cater for the production of an entirely online magazine with enhanced economic prospects for Barrett because of the removal of the costs of print and mailing.
114 Mr Cawthorn QC and Mr Rudd, however, correctly observed that the terms of the agreement clearly did contemplate that `Riding On’ would be printed. They noted that clause 10 provided for the approval of “prepress proofs” with payments by the Club “per issue”. Clause 11 again referred to prepress proofs. Clause 13 referred to the cost of printing onserts. I note the terms of the letter of 8 November 2004, which is referred to in the agreement, clearly does contemplate that there will be a hard copy rather than an online magazine. Again, it mentions “loose inserts” as well as “loose onserts” and speaks of envelopes or plastic bags as the medium for despatch.
115 Far from exaggerating the contingencies and events which might have brought this agreement to a relatively early end, Mr Sincock gave what might be thought to be less than adequate attention to, most notably, clause 22. Any change in ownership of the plaintiff company would have given the Club an entitlement to terminate the agreement. The shares in the plaintiff company was held by Barrett and Ms Duthie. (T4, L9-12) Whilst these individuals may have no immediate plans to dispose of their shares or otherwise modify their ownership, unexpected circumstances may arise. More pertinently, all of us are mortal.
116 Mr Barrett is now aged 57 and Ms Duthie is 52. Any testamentary succession to the shareholding on either of them would necessarily invoke the operation of clause 22. Again, the per issue contribution of the Club to the publication of the magazine is stated in clause 10 as a fixed sum without an entitlement in Barrett to have that figure indexed for inflation. Even in the low inflation environment in which the Club has been operating in the new millennium, Barrett has had to make repeated requests for increases in the per member contribution which the Club was not obliged to grant.
117 Had the contract not ended in the manner in which it did, it seems likely or, at any rate, not unlikely, that the Club might chafe under the apparently unfair arrangement which gave Barrett the entitlement to withdraw from the arrangement under clause 21 on three months’ notice but bound the Club to continue whether it wished to or not. The Club might force the issue by refusing a request by Barrett to “index” the per issue contribution.
118 In 1973, McInerney J heard an application by a trustee company for authority to broaden the scope of the securities in which it could invest the assets of a number of testamentary charitable trusts. He quoted remarks of Adam J in 1961 where his Honour said:
“Quite apart from the expert evidence, I would have been tempted to take judicial notice of the fact that our economy, in common with that of the United Kingdom and many other countries, has now for many years shown a progressive inflationary trend, and the probabilities are that this trend will continue for many years. Further, even without expert evidence I would feel disposed to conclude that as a measure of protection against inflation, it would be expedient that the trustees of a charitable fund should have power to invest portion, at least, of the funds in suitable ‘equity’ shares.” (Re Baker [1961] VR 641, 647)
119 McInerney J added his own views as at March 1973, stating:
“I myself am of the view that, having regard to the material which exists on various files scattered through the archives of this Court, members of this Court ought now be presumed to have judicial knowledge of the existence of an overall inflationary trend which, although it has its surges and recessions, is nevertheless, when regard is had to the history of this country in the last 80 years a trend which is ‘upward ever upward’ (The Man From Snowy River).” (National Trustees Executors & Agency Company of Australasia Ltd v Attorney-General [1973] VR 610, 612)
120 As a law student in that era, the numbers of cases to which I was referred as to the obligations of defaulting trustees to make good losses to a trust estate perceived an element of unreality in judicial statements based upon three per cent per annum representing the return on a secure investment and five or six per cent as the return upon a speculative one.
121 These statements seemed to come from the era of Uriah Heep and Soames Forsyte (see Fry v Oddy [1999] 1 VR 557, 567 [34] per Brooking JA). Yet, as the material relied on by Mr Forbes indicates, we are now back in an era of low interest rates and low inflation, something which would scarcely have been anticipated by Adam J in 1961, or McInerney J in 1973. All of this goes to show why the relatively high discount rate and negative growth factor adopted by Mr Sincock represents reality as to a projection of the likely future of an “indefinite” contract in contrast to the appeals to perpetuity made by Mr Forbes. The only predictable thing in the nation’s economy is its unpredictability.
122 Further, there was much to be said for the pessimism as to the future of print periodicals which appears to focus upon the loss of advertising revenue for those periodicals. In his evidence in May of this year, Barrett referred to a daily “giveaway” distributed to evening commuters at central city railway stations known as “MX” as an example of the continued vigour of print publications. A few weeks after he gave that evidence, and during the time when the case stood adjourned, MX ceased publication after a decade of apparent success. Since it had no cover price, being given away free, the economic problem which led to its closure must have been related to advertising revenue.
123 For all these reasons, I prefer the assessment of damages made by Mr Sincock to the one advocated by Mr Forbes based upon the calculations of Ms Duthie.
124 There should be judgment in favour of the plaintiff for the sum which represents the present value of the plaintiff’s entitlements under this contract based upon annual maintainable earnings of $53,261, discounted in accordance with the discount rate adopted by Mr Sincock in Exhibit 13 and other factors, viz $314,781 (T1155, L19-23)
125 I direct the parties to bring in short Minutes to give effect to these reasons on or before 20 January 2016.
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