Hudson Resources Limited v Australian Diatomite Mining Pty Limited - [2002] NSWSC 314

CITATION: Hudson Resources Limited v Australian Diatomite Mining Pty Limited & Anor [2002] NSWSC 314

FILE NUMBER(S): SC 50001/01

HEARING DATE(S): 8/04/02, 9/04/02, 10/04/02, 11/04/02, 12/04/02

JUDGMENT DATE: 3 May 2002

PARTIES :

Hudson Resources Limited (Plaintiff)
Australian Diatomite Mining Pty Limited (First Defendant)
Supersorb Minerals NL (Second Defendant)

JUDGMENT OF: Einstein J

COUNSEL : Mr PM Wood (Plaintiff)
Mr M Cashion SC, Mr AP Coleman (Defendants)

SOLICITORS:
The Argyle Partnership (Plaintiff)
Kemp Strang (Defendants)

CATCHWORDS: Contract - Implied term - A 'best efforts' clause is ordinarily inserted in a contract between parties at arms length to give protection to a licensor by imposing an obligation on a licensee to promote the sale of the licensor's products - An obligation to use "best endeavours" does not require the person who undertakes the obligation to do more than he reasonably can in the circumstances to achieve the contractual object - An undertaking to use 'best endeavours' or 'best efforts' to promote the sale of one product does not necessarily impose an obligation not to sell a competing product, although it may do so in some circumstances - A party subject to a 'best endeavours' or 'best efforts' obligation to promote the sale of one product will have breached that obligation "if he prepared a product of his own and promoted the sale of that product with the deliberate intention of appropriating for himself the market which he had in effect promised to do all he reasonably could, to secure for the person to whom he had given the undertaking" - A 'best endeavours' or 'best efforts' obligation in a contract includes an obligation not to hinder or prevent the fulfilment of the purpose of the contract - There is no material distinction of substance between the implied terms of reasonableness and good faith and a close association of ideas between the terms unreasonableness, lack of good faith and unconscionability - Misleading and deceptive conduct - Whether representation made that the plaintiff's product was being deleted and replaced by the second defendant's new product. - Passing off - Whether second defendant purposely copied the get up of the plaintiff's product packaging with the intention of misleading purchasers - Damages - Account of profits - Whether plaintiff's product likely to regain shelf space

LEGISLATION CITED: Trade Practices Act 1974

CASES CITED: Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187
Cadbury Schweppes Pty Ltd v Pub Squash Co Pty Ltd [1980] 2 NSWLR 851
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589
Rahme v Commonwealth Bank of Australia, (Unreported, 20/12/1991 NSWCA, CA 40155)
Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234
Sheffield District Railway v Great Central Railway Co (1911) 27 TLR 451
Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359
Slazenger & Son's v Feltham & Co [1889] 6 RPC 531
Sterling Winthrop Pty Ltd v R & C Products Pty Ltd (1994) 16 ATPR 41 - 308
Terrell v Mabie Todd & Co Ltd (1952) 69 RPC 234
Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83

DECISION: Reasons for judgment generally upholding the plaintiff's cases based upon breach of contract and passing off and otherwise as set out in the judgment.; The proceedings are to be listed for the taking of any further submissions thrown up by the above reasons and for the bringing in of short minutes of order which may now be able to be agreed by the parties with the assistance of their experts.

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

Einstein J

Friday 3 May 2002

50001/01 Hudson Resources Limited v Australian Diatomite Mining Pty Limited

JUDGMENT

The Proceedings

1 These proceedings concern a licence agreement ("the agreement"] entered into on 4 June 1998 between Hudson Resources Ltd " [“the plaintiff” or “Hudson”] as "licensor” of the one part and Australian Diatomite Mining Pty Ltd [“the first defendant” or “ADM”] as "licensee" of the other part. As the recitals to the agreement make plain, in general terms the licence covered the right to manufacture, pack, distribute and sell the plaintiff’s brand name, "Thrifty Cat", within Australia. A royalty was payable upon the tonnage of product sold.

2 The agreement provided for a licence term of 18 months (to commence on 15 July 1998 and to end on 14 January 2000) but included a conditional option of a further 12 month period. On 28 October 1999 the first defendant purported to exercise the option, which, if valid, would have extended the term to 14 January 2001. The plaintiff contended that the exercise of the option was invalid.

3 Shortly thereafter, on 1 November 1999, the first defendant purported by Deed of Assignment to assign all of its rights and obligations under the agreement to its then parent company, the second defendant, Supersorb Minerals NL [“the second defendant” or “Supersorb”]. The second defendant had in June 1999 acquired all of the issued shares in the first defendant.

4 Upon receipt of notification of the alleged assignment the plaintiffs commenced proceedings in this Court [No. 30138 of 1999] ["the first proceedings"] against the first defendant claiming declarations that the 28 October 1999 notice purporting to extend the agreement was invalid, that the duration of the agreement had not been extended beyond 14 January 2000 by such notice, and that the first defendant was not entitled to give notice to the plaintiff pursuant to clause 5 of the agreement extending the duration of the agreement. The summons was later amended to join the second defendant and the plaintiff sought also a declaration that the second defendant was not entitled to give notice pursuant to clause 5 extending the duration of the agreement. The amendment in the Contentions pleaded that on 15 November 1999 the plaintiff had received written notice from the first defendant stating the fact of the assignment of its rights and obligations under the agreement to the second defendant. No defence was ever filed by either defendant.

5 The amended summons essentially pleaded that by reason of certain alleged breaches of the agreement pleaded in paragraphs 5, 6, 7, and 8 of the Contentions, the first defendant had become disentitled to exercise the option to extend the agreement for the reason that the entitlement to exercise the option had been expressly conditioned upon the licensee not having breached any provision of the agreement [Agreement clause 5].

6 The first proceedings were settled pursuant to a Deed of Settlement and Release ["the Settlement Deed"] dated 10 February 2000. A copy of the Deed is annexed to this Judgment and marked as Annexure "A". For present purposes it is sufficient to note:

· that clause 2.2 provided for the agreement to terminate on 30 April 2000.

· that "Licensee" was defined as meaning [“the first defendant]”or its assignee [“the second defendant”] either jointly or severally”.

· that the plaintiff released and discharged both defendants and each of them "from all claims it has or may have in connection with the [first] proceedings"

· that the agreement provided that the Deed "may be pleaded by any party …as a bar to any demand or legal proceedings arising out of or in any way connected with the [first] proceedings."

7 Orders were made dismissing the proceedings.

8 Ultimately by informal arrangement all parties agreed that the date fixed by the Settlement Deed for the agreement to terminate, namely 30 April 2000, should be extended for two months up to 30 June 2000.

9 It is particularly important to bear in mind the above described central framework of the cross contentions between the parties essentially covering the period from late 1999 until mid 2000. The plaintiff's claims made in the proceedings require to be understood in terms of a close focus upon the relevant cross contentions as to the status of and parties to the agreement at material points during this period of time.

10 As will appear from what follows, one of the central issues in the case concerns the obligations of the licensee under the agreement during the period leading up to the terminal date of the agreement. There is no doubt but that at all material times from mid 1999, the second defendant was a direct competitor of the plaintiff in respect of cat litter products. Indeed a central contention of the plaintiff concerns the proposition that the first and/or second defendants by a course of conduct constituting both breaches of the agreement as well as passing off, has, by its dealings both during the term of the agreement and thereafter, effectively induced a state of affairs whereby the plaintiff’s Thrifty Cat product has been replaced by retailers with the second defendant’s Kitty-Mite product. A core contention of the plaintiff is that during the term of the agreement the first, or alternatively the second, defendant made representations to Coles Ltd [“Coles”], a retailer of cat litter products which had for approximately 10 years stocked and sold the Thrifty Cat product, these representations essentially being as follows:

· that the Thrifty Cat product was being replaced by a new product, being the second defendant’s Kitty-Mite product;

· that the Thrifty Cat product would no longer be available for sale to or by the retailers; and

· that the replacement product was a new product.

11 The evidence covered an extremely close examination of the dealings at material times between the first and/or second defendant with buyers responsible for the purchasing of products for sale, for example at supermarkets, throughout Australia. The most critical such evidence related to the position of Mr Spark who, during the period up to August 2000, was employed by Grocery Holdings Pty Ltd [“Grocery Holdings”] as its National Senior Buyer of pet food. Grocery Holdings is a subsidiary of Coles and represents Coles Supermarkets and Bi Lo Supermarkets when purchasing products for sale at supermarkets throughout Australia. Grocery Holdings received orders from Coles Supermarkets and Bi Lo Supermarkets.

12 Mr Botham was at all material times a director of his own company, Talara House Pty Ltd [“Talara”], which operated a food brokerage business. Talara had between October 1998 and July 1999 been engaged by IMM to provide marketing consulting services in relation to the absorbent cat litter market in Australia. Mr Botham had provided marketing services to the plaintiff, through Talara, for some years prior to the second defendant acquiring the shares in the first defendant. Upon that acquisition Mr Botham through Talara ceased his previous involvement and relationship with the plaintiff and became, in effect, responsible for the marketing and distribution of the second defendant’s absorbent cat litter products to retailers throughout Australia.

13 A particularly important single factual issue in the case concerns the terms of conversations between Mr Botham and Mr Spark in about December 1999, with the plaintiff pleading that it was in these conversations that the above-described representations were made.

14 In approximately June 1998 the plaintiff had appointed Industrial Minerals Marketing Pty Ltd [“IMM”] to distribute its products other than Thrifty Cat. IMM continued to deal with such products and during the first half of 2000 commenced to prepare for taking over as distributor of Thrifty Cat upon the completion of the licence agreement term on 30 June 2000.

Identity of contracting party

15 The plaintiff seeks to litigate questions concerning the identity of the contracting party to the agreement after the Settlement Deed. The issue is particularly technical and at the end of the day does not appear to be of particular moment for the reason that in the event of the plaintiff succeeding in substance upon its pleaded cases, all that seems to follow from the issue is the determination of whether it be the first or the second defendant which relevantly breached the agreement during its pendency. In any event the Contentions are replete with many references to the alternatives, as in claims that the first and/or second defendant has relevant liability for the particular alleged wrongdoing.

16 The Court is able at this early stage to make plain that the defendants submissions on this issue are of substance and are accepted as correct. In short, the plaintiff is estopped from raising the issue of the identity of the contracting party to the agreement for the reason that this issue was resolved by the Settlement Deed in the first proceedings and the orders made in consequence thereof. In my view the validity of the assignment was directly raised by the first set of proceedings. That deed and the consent orders entered as part of the settlement concerned inter alia the identity of the contracting party to the agreement. Clearly the identity of the contracting parties to the agreement was one which properly belonged to the subject of the litigation in the first proceedings and the substance of the issue on this point sought to be re-litigated by the plaintiff in the present proceedings concerns precisely that issue. Whilst the matter is more properly regarded as determined by the terms of the Settlement Deed it is also likely that the appropriate way to regard the issue is in terms of an Anshun [Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589] estoppel. [cf Rahme v Commonwealth Bank of Australia, unreported, 20 December 1991, NSWCA, CA 40155 - at 7].

17 Further, in my view the deed of settlement constituted an agreement that the first and/or second defendants at their election, were at and after the settlement was reached, accepted as the licensee for all purposes concerning the continued pendency of the agreement. The terms of the deed of settlement both then and now bind the plaintiff to an acceptance that the identity, as between the first and/or second defendants, as to who was the licensee at material times, became a matter of indifference to the plaintiff which agreed to be bound by the election of the defendants. The defendants’ election appears to have been that the second defendant was to be regarded as the licensee at those material times.

18 In terms of the Agreed Statement of Issues set out below :

· The answer to question 1 (a) is: "Not necessary for decision"

· The answer to questions 1 (b) (c) and (d) are in the affirmative

· The answer to question 1 (e) is: "see the reasons for Judgment"

19 The result of this holding is that it becomes essentially unnecessary during the course of the balance of this Judgment to distinguish between the first and second defendants in relation to the conduct of which the plaintiff complains and the causes of action pursued by the plaintiff. In any event the clear evidence is that by reason of the first defendant being the wholly-owned subsidiary of the second defendant there is no material significance in drawing a distinction between the two companies. In the event that there be some relevance not presently discerned by the court in relation to the issue, it is appropriate to make clear that it is probable that on and after the entry into of the settlement agreement it was the second defendant which stepped into the shoes of the first defendant and effectively conducted itself in the manner relevantly complained of and did so with the acquiescence and knowledge of the first defendant.

20 Without pre-empting the findings as to fact which appear below, sufficient of the general circumstances litigated has now been outlined for the purpose of making plain that the plaintiff in general terms and as the main causes of action relies upon:

· alleged breaches of the agreement by the first and/or second defendants;

· claims that the first and/or second defendants engaged in misleading and deceptive conduct in breach of section 52 of the Trade Practices Act;

· alleged breaches of the agreement by the second defendant.

Agreed Statement of Issues

21 The convenient approach is to set out the document entitled "Agreed Statement of Issues" which serves to identify the way in which the case was litigated:

“AGREED STATEMENT OF ISSUES

A. BREACH OF CONTRACT CLAIM / FIRST SECTION 52 CLAIM

1. Whether:

(a) on or about 1 November 1999 the First Defendant, by way of Deed of Assignment, validly assigned to the Second Defendant its obligations under the Licence Agreement between the Plaintiff and the First Defendant dated 4 June 1998 (“the Licence Agreement”),

(b) the Plaintiff is barred or estopped from raising the issue of the validity of the assignment as a consequence of the dismissal of the earlier proceedings No. 50138 of 1999, because that issue was a subject of those proceedings,

(c) the Plaintiff by entering into the Deed of Settlement and Release dated 10 February 2000 (“the Deed of Settlement and Release”) consented to or acquiesced in the assignment of the Licence Agreement to the Second Defendant and is estopped from further raising that issue,

(d) the release in clause 4.1 or the bar in clause 8 of the Deed of Settlement and Release preclude the Plaintiff from claiming the assignment was invalid,

(e) as a consequence of (a) to (d) above, the First Defendant or the Second Defendant was the contracting party to and bound by the Licence Agreement (as amended by the Deed of Settlement and Release).

2. Whether in about December 1999 Mr Botham, on behalf of the First Defendant, or the Second Defendant, represented to Mr Spark on behalf of Grocery Holdings (a subsidiary of Coles which represented Coles Supermarkets and Bi Lo Supermarkets) that:

(a) the Thrifty Cat Product was being replaced by a new product being the Second Defendant’s Kitty-Mite Product,

(b) the Thrifty Cat Product would no longer be available for sale to or by retailers,

3. Whether by making the Representations and by providing presentation material to Grocery Holdings and other retailers the First Defendant, or the Second Defendant, breached:

(a) clause 4.2 (a) of the Licence Agreement,

(b) clause 4.2 (b) of the Licence Agreement.

4. Whether the Representations were false or misleading.

5. Whether by making the Representations the First Defendant, or the Second Defendant, contravened s. 52 of the Trade Practices Act, 1974 (“the TPA”).

6. Whether from about December 1999 the First Defendant, or the Second Defendant, took no, or no adequate steps, to endeavour to comply with the obligations under:

(a) clause 4.2 (a) of the Licence Agreement,

(b) clause 4.2 (b) of the Licence Agreement.

7. Whether the Plaintiff suffered loss as a result of breaches of clause 4.2 (a) or clause 4.2 (b) of the Licence Agreement, or as a result of contravention of s. 52 of the TPA.

8. Whether any losses suffered by the Plaintiff were a consequence of the Plaintiff’s own actions in failing to engage a qualified distribution agent, or otherwise take adequate steps to market the Thrifty Cat Product following termination of the Licence Agreement.

9. The quantification of loss and damage and in particular:

(a) the appropriate discount rate to be applied to future annual profits (12.5% - 24%),

(b) the duration of the loss of the market for the Thrifty Cat Product,

(d) the applicability of the agreements between the Plaintiff and Industrial Minerals Marketing to the hypothetical future sales of the Thrifty Cat Product.

B. PASSING OFF CLAIM / SECOND SECTION 52 CLAIM

10. Whether, by the first half of 2000:

(a) the packaging of the Thrifty Cat Product was identifying and distinguished the product as the product of the Plaintiff,

(b) the Thrifty Cat Product and the name Thrifty Cat had become known in the trade and to the general public as signifying cat litter products of the Plaintiff,

(c) the Plaintiff had, by use of the get-up and otherwise, acquired a substantial reputation in the Thrifty Cat brand and name and in the Thrifty Cat Product.

11. Whether the change by the Second Defendant in about May 2000 of the packaging of its Kitty-Mite Product from a yellow bag with green, black and white get-up and writing to an orange bag with black and white get-up and writing resulted in the characteristics of the packaging and get-up of the Kitty-Mite Product becoming similar to the characteristics of the packaging and get-up of the Thrifty Cat Product.

12. Whether the Second Defendant:

(a) purposely made the changes in the packaging of the Kitty-Mite Product to resemble in appearance the packaging of the Plaintiff’s Thrifty Cat Product with the intention of misleading the ultimate purchasers of Cat litter products,

(b) wrongfully marketed, sold, distributed and passed off its product as and for the Plaintiff’s product.

13. Whether the conduct of the Second Defendant referred to in 12:

(a) was calculated to and did in fact mislead the trade and the general public into the belief that the Second Defendant’s products were the Plaintiff’s products and into buying the Second Defendant’s products as and for the Plaintiff’s products,

(b) constituted contraventions of s. 52 of the TPA.

14. Whether the Plaintiff suffered losses as a result of any passing off or contravention of s. 52 of the TPA.

15. The quantification of such losses, and in particular:

(a) the entitlement of the Plaintiff to an account of profits,

(b) the appropriate sales figure for Kitty-Mite Product in the year ended 30 June 2001 (3,041 tonnes – 2,390 tonnes).”

22 Following the adducing of evidence Mr Wood made clear that the breaches of contract were pressed in terms of three particular matters:

· the 9 December 1999 statement by Mr Botham to Mr Spark that Thrifty Cat was being replaced with the Kitty- Mite product;

· the November and December presentation material to the various retailers;

· the failure by the first or second defendants to carry out the customary promotional or marketing activities of the type generally described in the evidence given by Mr Spark during the course of his cross-examination and by Mr Botham at the commencement of his cross-examination.

The Evidence

The plaintiff’s intellectual property

23 The plaintiff commenced manufacturing, packaging and marketing Thrifty Cat products in 1989, was allocated an Australian product number for Thrifty Cat Australia on 23 May 1989, arranged (through its subsidiary) for the design of the Thrifty Cat packaging in 1991 and obtained registration of Thrifty Cat with a smiling cat as a trademark on 21 November 1995.

Modes of advertising the Thrifty Cat product

24 Prior to June 1998 the plaintiff advertised the Thrifty Cat product by co-operative advertising, promotional pricing with wholesale customers and brochures.

Packaging

The Thrifty Cat Product

25 From June 1995 to 1998 the 4 kilogram Thrifty Cat packaging was in orange and black colours and from 4 June 1998 that Thrifty Cat product was packaged in the way illustrated by the example at page 10 of Exhibit BWM1 to Mr McLeod’s affidavit sworn 23 August 2001 [now exhibit P1].

“(A) FRONT OF BAG

(i) the face of a smiling cat,

(ii) the words “Natural Cat Litter”,

(iii) the words “excellent odour control”,

(iv) the words “Highly absorbent”,

(v) the words “maintains Hygiene”,

(i) the face of a smiling cat,

(ii) the wording under the heading “Directions for Use”,

26 The courts finding is that:

· the packaging of the Thrifty Cat product identified and distinguished the product as the product of the plaintiff;

· the Thrifty Cat product and the name Thrifty Cat had become known in the trade and to the general public as signifying cat litter products of the plaintiff;

· the plaintiff had acquired a substantial reputation in and by the use of the get-up, the Thrifty Cat brand and name and in the Thrifty Cat product.

The Kitty-Mite Product

27 In or about May 2000 the second defendant changed the packaging of its Kitty-Mite product which had only been sold by Woolworths Ltd [“Woolworths”] from a yellow bag with green, black and white get-up (page 11 of Exhibit BWM1 to Mr McLeod’s affidavit sworn 23 August 2001) [now exhibit P2] to an orange bag with black and white get-up and writing (page 12 of Exhibit BWM1 to Mr McLeod’s affidavit sworn 23 August 2001) [now exhibit P3] and commenced marketing, promoting, selling and distributing the Kitty-Mite product in the new packaging (paragraphs 24 (a) and (c) of the Defence).

Similarities in the packaging

28 The new Kitty-Mite bags had characteristics of packaging and get-up closely similar to those of the Thrifty Cat bags which are identified in paragraph 25 above.

The relevant chronology

29 Between 1997 and April 2000 the following of the second defendant’s products were sold in Grocery Holdings stores, nationally. Not all of those products were sold in every state:

· Kao Kat superfine litter, 4 kg;

· Kao Kat cats litter, 5 kg;

· Kao Kat superfine litter, 8 kg;

· Eco Litter, 5 kg;

· Eco Litter, 10 kg.

30 The design and layout of the 8 kg Kao Kat packaging was identical to that used for the 4 kg product.

31 In addition to the Original Coles Range, the Thrifty Cat product was manufactured and distributed by the second defendant until 30 June 2000.

The plaintiff’s ten-year product history [1990-2001]

32 A convenient graph recording the plaintiff’s ten-year [1990-2001] product history appears in Exhibit PX 2 at page 177 which is appended to this judgment as Annexure “B”.

Since 1989

33 Since 1989 Thrifty Cat has been sold commercially across Australia, appearing on supermarket shelves such as Woolworths, Franklins and Coles. It is common ground that until early 2000 Thrifty Cat's major customer was Grocery Holdings, the buying company for Coles Supermarkets.

Approximately January 1998

34 The first defendant provided all of the sales and marketing for the "Chandler" and "Cat' s Choice" litter products produced by the plaintiff. The first defendant also manufactured and distributed one of the plaintiff’s absorbent cat litter products, sold under the brand name at Thrifty Cat".

4 June 1998

35 Clauses 4.2 (a) and 4.2 (b) of the Licence Agreement are in the following terms:

“The Licensee agrees to:

Devote sufficient time, skill, attention and best efforts to promote the marketing, sale and distribution of the Products in accordance with the rights granted herein,

Manufacture, market, distribute, sell and promote the sale of Products and to conduct itself in a manner which will uphold and enhance the reputation of the Product”.

May 1999 - May 2000

A.C Nielsen statistics

36 Exhibit P5 is a set of statistics of AC Nielsen which it is convenient to annex to this judgment as Annexure “C”. Importantly Thrifty Cat’s Coles sales across the relevant period running from 16 May 1999 up to 14 May 2000 were ranked second in relation to the 10 kg product and seventh in relation to the 4 kg product. These are impressive statistics bearing in mind that there were no further Coles sales on and from 1 July 2000 when the defendants’ Kitty-Mite product replaced Thrifty Cat on Coles shelves.

On or about 4 June 1999

37 On or about 4 June 1999 Mr McLeod a director (the chairman) of the plaintiff, spoke with Mr Trott, a director of ADM and joint managing director of the second defendant, who informed him that he wished to have a meeting with Mr McLeod to discuss aspects of the acquisition by the second defendant of the first defendant. Mr McLeod stated that the arrangement then in place with the first defendant was that if it was sold, the Thrifty Cat licence would be terminated. Mr Trott said that he did not think that this was the case and would like to put forward a proposition that the second defendant acquire the plaintiff’s mineral operations. They arranged to meet to discuss this proposal.

On or about 24 June 1999

38 Mr McLeod on or about 24 June 1999 attended a meeting with Mr Trott where words to the following effect were said:-

“Mr Trott: ADM needs Thrifty Cat to support the economies of scale at the plant and that way all parties could benefit if a manufacturing arrangement could be worked out between the companies.
Mr McLeod: We’d look at that proposal, which may include a manufacturing agreement where Supersorb would manufacture Hudson products at a set price.” [para 30]

[emphasis added]

39 Following subsequent telephone conversations with Mr Trott and a meeting with the Supersorb staff to negotiate an acceptable manufacturing agreement. An offer was received from the second defendant to acquire 100 percent of the plaintiff’s absorbent business.

On or about 28 July 1999

40 On or about 28 July 1999 Mr McLeod had a telephone conversation with Mr Trott in which words to the following effect were said:-

“ Mr McLeod : I have received your letter. The offer is rejected. The business is worth much more than that offer.”

[para 37]

41 In the course of the same conversation, Mr Trott said words to the effect:-

“Mr Trott: A manufacturing proposal has not been completed by 30 June 1999. There is no point in Supersorb continuing to manufacture Thrifty Cat. I think there should be an orderly return of the product to Hudson and avoid any disruption to customers. The Licence Agreement will be terminated at the end of September 1999. Supersorb remains serious about its offer to acquire the business.

Mr McLeod: The licence is to come to an end in January. I think the offer is inadequate, but I will respond to it later today.”

42 Later in the day, Mr McLeod had further telephone conversation with Mr Trott, who was very aggressive and abusive, with words to the effect:-

“Mr McLeod: Laurie, I’m just ringing to let you know that the offer is rejected. Hudson wants the licence to come to an end in January 2000 and that we would like to make arrangements for the return of the Thrifty Cat product.

Mr Trott: The only deal I’m interested in is either the acquisition of Hudson’s pet litter business or continuing with the ADM Agreement. I’m not interested in any other deals.”

43 As is made plain later in this judgment, Mr Trott was not called by the defendants to give evidence. Mr McLeod's evidence as to this telephone conversation is accepted as reliable. It is perfectly clear that the second defendant apparently required or believed it required Thrifty Cat to support the economies of scale at its plant and the proper inference from the state of affairs which by then obtained is that the second defendant was far from content at the turn of events when as suitor, its advances has had been rejected.

August 1999

44 In about August 1999, Hudson retained Nationwide Brokers ["Nationwide"] to promote the sale of its products, Cats Choice cat litter and Chandler cat litter, to Coles, Bi Lo and Safeway.

28 October 1999

45 As already indicated the first defendant purported to extend the licence for a period of 12 months and the plaintiff, believing that the first defendant had breached the terms of the Licence Agreement, refused to accept the validity of the purported extension of the licence.

In or about mid November 1999

46 In or about November 1999 Mr McLeod had a telephone conversation with Mr Botham with words to the effect:-

“Mr Botham: Bruce, just following up from our last discussions to see if Hudson is interested to sell its commercial minerals business or make some arrangement for Supersorb to manage the business?
McLeod: It would be difficult for Hudson to sell its commercial minerals operations as Hudson do not believe that Supersorb will pay what the directors think it is worth, therefore leading to negative balance sheet ramifications.” [para 41]

15 November 1999

47 The first proceedings were commenced.

Evidence of Mr Spark including 9 December 1999 meeting

Reliability

48 In my view the evidence given by Mr Spark may be regarded as reliable. His evidence was given quite clearly. His evidence was consistent with the contemporaneous documents. In relation to the critical meeting with Mr Botham he had been able to use his contemporaneous handwritten notes to assist his recollection of what had taken place. I was impressed with the frankness with which he accepted matters where he could not be certain. However he was not shaken in cross-examination in terms of the essential gravamen of his affidavit evidence.

9 December 1999 meeting

49 Mr Spark gave evidence in his affidavit of 31 August 2001 that on or about 9 December 1999 Mr Botham gave him a presentation of about six of the second defendant’s products and said words to the following effect:

“We’re updating our range of products and this is a new product we have got. We should have this available from March 2000.”

He recalled Mr Botham showing him a presentation of cat litter products of different sizes, including the product “Kitty-Mite”.

“The Thrifty Cat product is being deleted.”

His evidence was that during the presentation, Mr Botham gave him a presentation document. On my findings that document was in the form of Exhibit P4. A copy of the Exhibit is annexed to this judgment as Annexure “D”.

change over for Thrifty

50 Mr Spark was strongly cross-examined in relation to his recollection of this presentation.

51 Early in his cross-examination Mr Spark gave evidence that the terminology within the industry when a supplier who had been supplying to Coles, ceased supply of the product, was to use the word "deleting" or "delete". That was the expression appropriate for the situation in which the supplier decided no longer to carry a particular product. [Transcript page 34]

52 He fairly accepted that he had relied upon his note to jog his memory and that he could not recall each individual word spoken at the meeting but maintained that he recalled "the spirit of the conversation". It was put to him that he had used the note to reconstruct, in his own mind, the words which were said. In accepting this proposition he explained what he meant by his understanding of the cross-examiners use of the word "reconstructed":

"I am assuming that he means that because I can't remember every single word that was spoken in that meeting therefore I have taken the notes, and the normal way in which I would conduct business, and the expectations I would have of a product coming in to the market, therefore, there would be an expectation that one would be exiting the market, in this particular market, I have recalled the spirit of the meeting that I have written that there as a result of Thrifty Cat being removed from the market, from the supply of Supersorb."

53 It was put to Mr Spark that at no stage during the meeting did Mr Botham tell him that Thrifty Cat was being replaced by Kitty-Mite. [His evidence was that this would not have been what was said because it was inconsistent with his note "change over for".] It was put to him in cross-examination that the reason why he decided at the meeting to change over Kitty- Mite for Thrifty Cat was that he was concerned about the reliability of the Thrifty Cat product. His evidence was that his concern certainly was with the continuing supply of the Thrifty Cat product "because it was going to be replaced with the Kitty-Mite product". [Transcript page 42].

54 Mr Spark was quite clear during the cross-examination that Mr Botham had not told him during the meeting about a dispute between the parties who were involved in the supplying of Thrifty Cat. He had not been aware of that. It was not a question of his not now being able to recall that.

55 It was put to Mr Spark that in early October 1999 Mr Botham had a discussion with him and he recalled consistently with some of the information in the affidavits, such a discussion "about some research they were conducting on that market". Whilst one of his early answers at transcript page 42.42 appeared to indicate that Mr Botham might have discussed with him something which caused him some concern about whether or not the supply of Thrifty Cat would be reliable, his following answers make quite plain on my findings that he rejected the proposition that at that time Mr Botham told him that the reason why there was some problem in relation to the reliability of supply of Thrifty Cat was that there was a dispute between the parties involved in the supplying of Thrifty Cat. He gave evidence to the following effect:

“Q. Would you accept that he may have told you at that time that the reason why there was some problem in relation to the reliability of supply of Thrifty Cat was that there was a dispute between the parties involved in the supplying of Thrifty Cat?
A. No, I wouldn't agree with that.

Q. Would you agree that it's possible that he did tell you that and you have now forgotten?
A. No, I don't think so.

HIS HONOUR: Q. Why not?
A. Because, what I do recall quite vividly is the first time I was aware that Thrifty was actually made under licence on behalf of another company, when a representative from a brokerage rang me some time in the year 2000, I think it was after June , in my affidavit, when he asked to represent the product. I remember being quite surprised when he told me it was never ADM's product in the first place , it was a licensing agreement, therefore, he was coming to re-present it. That is clear . I can link back to the previous discussions and say I wasn't aware of that circumstance because that was the first time I can recall being made aware of it….

CASHION: Q. Mr Spark, is this a fair statement of your position in light of what you have just said in answer to his Honour; that your position is that some time in about July of 2000 you became aware for the first time that Thrifty Cat was a product owned by Hudson, is that right?
A. Yes.

Q. And that using that fact you are able to say that in conversations in 1999 with Mr Botham he never mentioned the involvement of another party, that is other than ADM, in the context of Thrifty Cat, is that your thinking?
A. Yes.

Q. Is it fair to say that you have no real recollection of what was said and what wasn't said between yourself and Mr Botham in that respect in 1999, correct?
A. No, not necessarily.

Q. But what you are principally doing --.

HIS HONOUR: Q. When you say "no, not necessarily" I don't understand whether you are agreeing with Mr Cashion or disagreeing with him?

A. I would have to say I disagree then.”

56 Mr Spark gave evidence to the following effect:

“Q. You gave some evidence a few moments ago about having, as at December 1999, some concern about the reliability of supply of the Thrifty Cat product, yes?

A. Yes, because it was going to be changed over for this product, by definition the supply would have been at threat…

Q. I suggest to you that the reason you were concerned about reliability of supply was because Mr Botham told you about a dispute between parties involved in the supplying of Thrifty Cat, do you agree or not?

A. No.

Q. And I suggest to you that that is why you decided to change over Kitty-Mite for Thrifty Cat, do you agree?
A. No.

Q. And that's why you wrote the words "change over for Thrifty Cat" on the presentation material given to you by Mr Botham, correct?

A. No, not because of what you said.”

[Transcript page 44]

57 Mr Spark gave evidence that as a result of Mr Botham’s presentation, Thrifty Cat was deleted and replaced with Kitty-Mite. He ceased to purchase Thrifty Cat products and added Kitty-Mite products (4 kg and 10 kg) to the Grocery Holdings supermarket lines. Subsequently he authorised Grocery Holdings’ warehouse to fill orders for Coles Supermarkets and Bi Lo Supermarkets with the Kitty-Mite product. [Affidavit para 8]

June 2000

58 Mr Spark gave evidence that in about June 2000 he had a telephone conversation with Mr Capp, the sales manager with Nationwide brokers who represent the plaintiff, in which Mr Capp said that Hudson had previously given the first defendant a licence to sell Thrifty Cat and that the plaintiff had now taken the product back. He recalled that Mr Capp asked to re-present Thrifty Cat to Grocery Holdings. Mr Spark then said words to the effect:-

“That was in, but now it is now deleted. I won’t be doing a review of the Cat section until later this year.”

59 Mr Spark also gave evidence that sometime later, he had had a further conversation with Mr Capp, in which words to the following effect were said:-

“ Mr Capp: …I’ve been forwarded some data from Robert Taylor indicating that Coles are still selling Thrifty Cat. I thought from our previous conversation that the product was deleted.

Mr Spark: Yes, it’s possible the figures are showing sales. That would be because of warehouse stock that is still being run out.”

Mr Capp: Why was it deleted?
Mr Spark: I was told that Thrifty Cat deleted [sic] by its supplier. ”

[para 11]

Other evidence given by Mr Spark

60 Mr Spark gave evidence on a number of matters including the following:

· During 2000 he was assisted by Ms Coleman, a buyers assistant, who primarily carried out functions such as raising the necessary paperwork to change the status of lines and to change the price of lines. As a consequence of his conversation with Mr Botham concerning the Thrifty Cat product in December 1999, he gave her a written instruction in the form annexed as "B" to his second affidavit which, in accordance with the then business practices, would be executed by Ms Coleman in replacing and deleting the six products referred to in his handwriting by the products which were to the right on the form. In the result, that translated into the replacement of the Thrifty Cat 4 kg and 10 kg product respectively by the Kitty-Mite Cat Litter 6 litre and 14 litre product.

· There would have been, in the context of Kitty-Mite, discussion between himself and Mr Botham in relation to a discount or other incentive for Coles to take Kitty-Mite. [Transcript page 37.24]

· As at December 1999 Kitty-Mite was a reasonably significant product as far as he was concerned in the budget end of the market. It was a product which he could not do without, in terms of needing it or a like product. [Transcript page 44]

· While he was National Senior Buyer of pet food, there was no formal Coles strategy of reducing the number of products stocked in cat litter in terms of the range. Coles however had its own pet litter brands. He gave evidence to the following effect:

“the Savings brand which is Coles own brand in the budget end of the cat litter market, the absorbent as opposed to clumping cat litters, which are premium. It may have changed but there was only room for a certain amount of stock keeping units to be stocked on the shelves because the Savings brand was increasing at that time. The contract had only been renewed some time that year, I believe, from recollection, I was involved in that. So, the bigger the Savings brand got the smaller the other budget brands got within that segment. So, if somebody wanted to bring a new budget brand in to that segment, a current budget brand had to go, there wouldn't have been room to expand that range.

Q. So, as the sales of the Savings brand grew more stock would be ordered, correct?
A. Yes.

Q. And that would have the consequence of less of a third party budget brands being purchased and sold, correct?
A. Yes….

CASHION: Q. Mr Spark, whilst you were national senior buyer the fact was that the Savings brand was increasing as a proportion of the budget market category?
A. Yes.

Q. With the consequential decreasing of third party brands in that category?
A. In volume, yes.

Q. And I asking you that by about the middle of 1999, at the latest, it was really only a matter of time until Coles ceased to carry Thrifty Cat and filled that market share by supplying the Savings brand, being its own brand?
A. That wasn't a plan.

Q. But that was what was happening, wasn't it?
A. As a result of the volume increase, yes, it put extra pressure on maintaining all the stock keeping units in that market.

Q. But as time went by the volume or amount of Savings brand increased as a percentage of sales in that budget category, correct?
A. That would be fair, yes.

Q. And there was a consequential decrease over time in the volume of other brands sold in that market category, do you agree?
A. In the total category, yes, that would be fair.

HIS HONOUR: Q. The type of budget category?
A. Yes.

CASHION: Q. It would follow from that, Mr Spark, that by at least the middle of 1999, I suggest, it was only a matter of time until Coles ceased to carry the Thrifty Cat line and supplied as the budget category product its own Savings brand, do you agree with that?
A. Not wholly, no. I mean not wholly in that not the only brand on the shelf.

Q. Presumably if the sales by volume, if you like, of a third party supplied product fell low enough that would be a factor which would be taken into account in deciding whether or not to delete that product from the Coles range, correct?
A. No. I can qualify that if you like?

Q. You don't say it is irrelevant to the decision?
A. Okay.

Q. You answer my question?
A. No, your question was over time would those other proprietor brand products be deleted out of the range.

Q. Yes?
A. It wasn't the retailer’s strategy to only have a Savings brand or generic brand being the only one in that supermarket. So, therefore the market brand would not have been deleted even if the sales went to quite a low level. Because the retailer's strategy was to have at least one proprietary brand product operating in a subcategory.

HIS HONOUR: Q. Do you mean by subcategory the budget category?
A. Yes.

CASHION: Q. However, I understand what you are saying, tell me this, if the proprietary brand, which was in the same budget category as the Savings brand, if its sales fell low enough would you as a buyer have considered replacing that proprietary brand with another proprietary brand?
A. We will use two brands; if the Thrifty product became an insignificant share of that subcategory would I replace it with an another budget brand?

Q. Another proprietary budget brand?
A. Probably not, because the market forces would have been saying no, hence they were not purchasing it.

Q. Would that not be a delete it?
A. If it wasn't commercially viable any more that decision would have to be seriously looked at it.

Q. It would be shelf space?
A. If it had that decision would have seriously considered.

Q. If you have a proprietary brand the harsh reality at the end of the day is that it goes?
A. Depends how much money you make out of it.

HIS HONOUR: Q. When you have been asked some questions and given some answers just recently about the increase in volume of the Savings brand and the consequential decrease in volume of proprietary brands you were essentially asked questions and answered questions as if in this budget subcategory there was only in play the Coles Savings brand and the Thrifty Cat brand. Am I to understand that that was the case or were there some other proprietary brands aside from Thrifty Cat competing with the Coles Savings brand at the time from say mid 99 onwards?
A. I think there was some other brands as well, I can't recollect what they were, I think there were some brands state based rather than nationally supplied products.

CASHION: Q. If that was the position, namely, that there was more than one proprietary brand in the budget category an available course would have been to delete one of those brands because it would have left you with the objective of having the Savings brand and one proprietary brand in the category?
A. That would be a fair statement.

Q. Presumably if you were going to delete one of the proprietary brands in that category you delete one which was not going well?
A. Yes, if you were looking at the whole range as well.

Q. And one way of telling whether something is going well or not is how sales are going?

A. Yes.”

[Transcript pages 46-49]

61 Mr Spark's further evidence related to the GST blackout which Coles and introduced during 2000. The procedure had been that unless Coles received certain information relating to a product by the commencement of the blackout, it would not introduce or reintroduce the product until the blackout had ended. There was a form that every manufacturer had to complete which included relevant detail of their product and what percentage GST would be applied to the product, the onus being on the supplier to supply the correct GST rate. The goods and services tax was introduced into Australia effective on 1 July 2000. His evidence which I accept as reliable, was that the Coles GST blackout period commenced on 1 April 2000 and came to an end on 10 July 2000. [Transcript page 54]

62 Mr Spark gave evidence, which I accept as reliable, that it was only in June or July 2000 that he became aware for the first time that Thrifty Cat had been a product owned by the plaintiff. Although he had been aware in mid 1999 that Mr Botham had some commercial or agency arrangement with Hudson, he had not been aware that this extended to Thrifty Cat. It had not crossed his mind that this might be the case. [Transcript page 54]

63 Mr Spark gave evidence that in about the middle of 1999 Mr Botham had come to his office representing both defendants, having formerly been to his office representing the plaintiff. Some discussion had taken place as to what was Mr Botham's relationship with the plaintiff, the question in Mr Spark's opinion being "there was going to be a conflict of interest in [that] one representative was going to represent different companies products at my office" [Transcript page 55]. However his concern had nothing whatever to do with Thrifty Cat or Kitty-Mite. [Transcript page 56]. His evidence was:

"It had to do with Mr Botham representing two different companies irrespective of the product supplied. In my mind Thrifty Cat was a product supplied by ADM or Supersorb, I wasn't aware there was any relationship or licensing agreement between that company and Hudson so therefore it wasn't a question that would be in my mind. My question was Mr Botham's relationship with the two companies given that they were competing companies."

64 I interpolate that in my view the evidence given by Mr Spark should be accepted as reliable in contradistinction to the evidence given by Mr Botham in paragraph 12 of his affidavit, to the effect that in about June 1999 he was present at a meeting at which Mr Spark and Mr Trott were present when reference was made by Mr Botham to contractual arrangements whereunder the plaintiff would “be supplying Thrifty ongoing”.

65 Mr Spark was asked about the timing of the change over of supply between one supplier and another in terms of the period of notice Coles would need to be given if there was not to be any interruption with supply. His evidence was:

“A. It was a standard requirement of GHPL that any change to any product, either through pricing or supply, required a minimum of four weeks notice for the business to adjust all the computer systems to reflect who the product was going to be purchased from or the change in price of that product or any other detail specific to a product.

Q. Did that timing, was that timing effected by the nature of the change that was contemplated, whether it was a price change or an identity of product change or product description change?

A. No, any of those would require the four weeks notice.”

[Transcript page 58]

66 Mr Spark gave evidence that there were basically two or three categories of cat litter or pet litter product. One clear category was the budget category. He then added:

“The other one is products generally referred to as clumping cat litters which perform a different function to the other. They are premium to the absorbent cat litter and command a premium price. The third would probably be the products that had been introduced to the market since 99 which were the fragrance added products, which this presentation here was primarily about introducing those products to the market. It would be fair to say after these products that are represented on this page are introduced to the market that would probably have created a third segment.”

67 Mr Spark identified one of the proprietary products other than Thrifty Cat which were in the budget range as Budget Smart Cat litter. [Transcript page 59]

68 Mr Spark gave evidence as follows:

"Q. And you were asked questions concerning the deletion of products, was there any criteria or basis upon which decisions were made about whether a product would or would not be deleted that was presently being stocked by Coles?
A. Yes, there was a number of criteria you would measure.

Q. Could you tell his Honour what those criteria would be?
A. When I mentioned we do a range review, which was done biannually, in the process of that you would strike a, like a limited volume, if you like, an average sales unit, and anything that fell below that you would question whether you would keep it in the range or not. That is when the other decisions would come in, is it the only player, does it represent a significantly higher profit level than others would in that market. That is through the range review process.

Q. So I can understand, sorry to interrupt your answer, first criteria relates to volume, is that what you said?
A. Yes.

Q. If it is below some average then maybe it might be a candidate for being deleted?
A. Yes.

Q. And the second one you identified related to whether there is some aspect other than volume that could influence the decision being profitability?
A. Profitability.

Q. And the other one you mentioned was a characteristic peculiar to the product?
A. Yes, if it was an unique product.

Q. Sorry to interrupt?

A. An unique product you may keep it even though the volume was very low because your customers demanded that product, albeit not many of them may have purchased it. The other criteria would be outside of that if a supplier came to you and firstly just said they were going to delete a product. That's one component or typical of a negotiation if a supplier brought new products to you to present, where they already had products that were in that market that occupied the same place in that market, then as a buyer it's a fair expectation that it is going to be an one in one out.

If you want to put another product in to replace an existing product the expectation is that product would be deleted that's existing. So, in that, in the Thrifty scenario it fell in to that category, that there was another budget product being presented so the expectation what was going on and what was going out was Thrifty.

Q. Can you clarify one aspect of your answer, if it is a case that it is not a new product coming in to substitute for a product that the manufacturer is already supplying to you can you give his Honour an indication, in terms of importance, which of the criteria you have identified sit at the top?
A. Sorry?

Q. If it is not a supplier coming to you and saying, I have a new product, even though I am supplying an existing product, and you are going to delete one and substitute the other, assume that scenario is not existing?
A. Okay.

Q. In the criteria you have identified can you indicate which stands at the top and which stands at the bottom in terms of the decision making process at Coles in 2000?
A. If someone was presenting a new product?

Q. Yes?
A. We would look at the range in the market and look at the product that wasn't performing for that incoming product to replace.

Q. What do you mean by "performing"?

A. Generally sales volume and again the criteria I mentioned before may override that. A product may be very low on the sales list it may offer significant profitability than one above it so the one above it might actually go even though it might not be the lowest sales volume.”

[Transcript page 59 and following]

Evidence of Mr Botham

69 Mr Botham accepted under cross-examination that he had not, as at the time when on 9 December 1999 he gave Mr Spark a presentation, himself looked at the licence agreement and hence he had no idea as to what it said in terms of any obligations of the licensee towards the licensor. [transcript page 112] In fact he never saw the licence agreement and no one had told him its terms. [transcript page 97] He was never given any written instructions by either of the defendants as to how he should carry out his activities insofar as they related to the licence agreement. On his evidence his personal understanding was that the defendants were obliged to represent the product at the buyer level, also at store level with merchandising, and as part of that responsibility would have actively promoted the product and the promotional activities [transcript page 97]. His evidence was that his understanding or knowledge as to the first defendant’s obligations flowed from:

“Simply the fact that we had the product, we were supplying the product. It was stocked by one of our major customers therefore it, to me, just followed a natural course that the product would be looked after correctly, as if it was any other brand that we were distributing or manufacturing.”

70 I do not accept the reliability of Mr Botham's evidence insofar as he had deposed in paragraph 12 of his affidavit that in about June 1999 he knew that Mr Spark was aware that the first defendant and the plaintiff had an ongoing arrangement under the licence whereby the first defendant would market and distribute the Thrifty Cat product.

71 Mr Botham gave evidence in his affidavit that in mid September 1999 he had made a telephone call to Mr Spark, following market research which he had arranged on behalf of the second defendant into the consumer market for cat litter amongst current users and non users. On his evidence Mr Spark asked how things were going with the plaintiff and said that he had seen that the plaintiff was using Nationwide as their broker and that Mr Spark had thought the defendants were going to do a deal. Mr Botham had replied that this was still the case and Mr Spark had asked for information as to what was happening with Thrifty. Mr Botham deposed that he had responded:

“We are in negotiations about changing the structure of the arrangement. They made it very difficult from the moment we bought ADM. As far as I am concerned, we will be supplying Thrifty as I don’t believe they want the brand back. The deal is too good at the moment.”

Mr Spark had said ”Fair enough”.”

72 Mr Botham’s further evidence was that he arranged an appointment with Mr Spark on 6 October 1999 during the course of which he referred to a proposed presentation following the results of incoming market research. This would involve odour research being the first step in elevating the market from the budget and generic sectors. His evidence was that the discussion continued:

“Mr Botham: In relation to Thrifty, it seems that Hudson want to make a real issue with us about Thrifty. As you know, Supersorb bought ADM with the Thrifty contract intact. Hudson has, from day one, attempted to destabilise the agreement. At this point in time they are seeking to terminate the contract legally, which we are arguing strongly”

Mr Spark: What’s it all mean?

Mr Botham: Well, we may be forced to not be able to supply, which is a shame when we have done a good job with the product, particularly in your business. Just have a look at this sales chart”

73 Mr Botham gave evidence that a copy of a sales chart was then handed to Mr Spark and that the conversation continued as follows:

“Mr Spark: I can see what they are about – you’ve grown the business at your expense, and now they want it back.

Mr Botham: I agree.

Mr Spark: So, where do you go from here?

Mr Botham: As I said before , we may not be able to supply Thrifty if we cannot sort the matter out legally . They are suggesting that we enter into some other agreement, but I don’t understand it completely. I think they simply do not want us to be successful and it’s not as if it isn’t a good deal for them financially, as they get paid a royalty for every tonne we sell.

Mr Spark: Well, I can’t be without product while they frig around with you guys.

Mr Botham: Well, there are two options, wait and see what happens, or consider ranging one of our other brands.

Mr Spark: Like what?

Mr Botham: We have been selling Kitty-Mite in Woolworths very successfully, but it has always been an agreement that the market was evenly shared between Thrifty and Kitty-Mite.

Mr Spark: I don’t care about any of those arrangements, I just want to be able to fill the slot. I must have product.

Mr Botham: Look, if you’re serious about Kitty-Mite, you may as well wait for the new product we’re developing along with the other brands. We could supply what we are selling at Woolworths, but that will change in time anyway.

Mr Spark: We should wait for the new product, but if you are not able to supply Thrifty at any stage, I may have to change it then.”

[Mr Botham’s Affidavit of 26 November 2001 paragraph 18 pages 7 – 8] [emphasis added]

The critical conversation - 9 December 1999

74 Mr Botham gave the following evidence in his affidavit of 26 November 2001:

“Mr Spark: Before we look at Kitty-Mite, what’s happening with Thrifty?

Mr Botham: We have agreed to hand back Thrifty on 30 April 2000.

Mr Spark: And what happens then?

Mr Botham: They want us to enter into a supply agreement.

Mr Spark: Sounds a bit iffy to me. And have you come to any arrangement?

Mr Botham: Not at this stage.

Mr Spark: Still unsatisfactory to me. Continue with the presentation.

I then continued with the presentation of the Second Range. Some time later, and during the presentation, my conversation with Mr Spark continued in words to the following effect:

Mr Spark: You have re-think your strategy with Kitty-Mite, as it is quite obvious that as the Savings product grows, it does so at the expense of the budget brands. You have to come up with a point of difference to influence the Savings customers to your brand.

Mr Botham: I agree it is obvious from these figures that this segment of the market is the most vulnerable to brand swapping, as indicated in our research.”

[Mr Botham’s Affidavit of 26 November 2001 paragraph 20 from page 9]

75 I do not accept Mr Botham's evidence as to the content of this conversation as reliable. Under cross-examination he was asked whether there was any aspect of the conversation which he recalled better than any other aspect. His answer was that he recalled what Mr Spark had first said and equally well the answer which he gave. He was here referring to so much of the conversation as included the following:

"Mr Spark: Before we look at Kitty-Mite, what's happening with Thrifty?

Mr Botham: We have agreed to hand back Thrifty on 30 April 2000."

76 Further cross-examination took the form of questioning Mr Botham as to what was his source of knowledge in having been able to inform Mr Spark that the defendants had agreed to hand back Thrifty Cat on the date in question, namely 30 April 2000. Mr Botham first gave evidence that the source of this information involved in part discussions that were had with Mr McLeod and in part discussions with Mr Parry and Mr Trott of the second defendant. Mr Botham then gave evidence that he had not spoken to Mr McLeod about agreeing to anything. He then gave evidence that his source of the information was discussions with Mr McLeod, but not specific to date. He then was unable to recall who provided the information as to the 30 April date to him. The universe of possible persons who provided that information to him had already been named. He gave evidence as follows:

" Q. Do you have a clear recollection that before you met with Mr Spark someone had told you that Hudson, that Supersorb or ADM had agreed to give back Thrifty on 30 April?
A. I certainly was aware that it, Thrifty, was going back to Hudsons.

Q. Because that had been an agreement struck between you, is that right?
A. Correct.

Q. I would like to suggest, Mr Botham, that you were not told any such information at all before 9 December 1999?
A. That's not correct.

Q. You will notice from the summons - did you have discussions with Mr Trott or Mr Parry after the proceedings commenced concerning whether they were going to try and negotiate a settlement of them?
A. Settlement on the proceedings, I can't answer that, I certainly know there was discussions with Hudsons on the continuation of supply of Thrifty.

Q. What I want to suggest to you Mr Botham is that as at 9 December neither Hudsons nor Supersorb were suggesting, let alone agreeing, upon a date of 30 April 2000 for the hand back of Thrifty Cat?
A. Look, I can't recall to the dates but I am certainly aware that there was an issue, there was a period when they would hand back Thrifty.

Q. When you say you can't recall the dates, are you talking about the date of 30 April or are you talking of the date of 9 December 1999 at your meeting with Mr Spark?
A. No, I am referring to the actual hand back date of 30 April.

Q. You have put in this conversation words to the effect that the hand back was going to happen on 30 April, haven't you?
A. Correct.

Q. I want to suggest that you had no knowledge of that kind at all at 9 December 1999 when you had this conversation with Mr Spark?

A. No, that's not correct.

77 A sequence of correspondence passing between the respective solicitors for the plaintiff and for the defendants on 7 December 1999 and on 14 December 1999 was shown to Mr Botham and he then gave evidence as follows:

" Q. Having looked at those documents I want to suggest to you Mr Botham that prior to 9 December 1999 there was no information given to you that 30 April had been agreed as the date upon which the Thrifty Cat product would be handed back to Hudsons, do you agree with that, having looked at those documents?
A. No, in reference to the date I was certainly aware that Thrifty was being handed back, if I was incorrect on 30 April, that is my mistake, I was certainly aware it was being handed back.

Q. Do you accept that you were incorrect in your recollection incorrect in identifying that 30 April date in your conversation with Mr Spark?

A. Yes.

[Transcript page 130]

78 In my view this circumstance is confirmatory of the lack of reliability of Mr Botham's evidence. It throws very clear doubt upon the whole of his evidence in relation to the conversation. In my view, as already made plain, Mr Spark's evidence as to the conversation and presentation generally is to be accepted as the more reliable.

79 As is made plain elsewhere in the judgment, another matter is of significance in assessing the reliability of Mr Botham's evidence, namely his failure to notify Mr Spark after the settlement of the first proceedings had occurred in early February 2000 of this fact and of the consequential resolution of problems with supply of the type he had raised with Mr Spark earlier.

80 Likewise his evidence suggesting that the products set out in the presentation document of December comprised the ‘second range’ which superseded existing products suggests a lack of reliability in his evidence. In fact that range was to replace existing product and importantly, the only ‘budget’ category product shown in the presentation brochure was Kitty-Mite. Any form of characterisation of the presentation brochure in terms of replacing an existing product would be disadvantageous to the defendants’ case. This suggests a degree of partisanship in Mr Botham’s evidence.

81 Another area in respect of which Mr Botham's evidence was unreliable concerns his evidence in relation to the letter from Mr McLeod of 15 June 2000 [appearing at Exhibit PX1 page 174] which included a request that, as requested by Nationwide brokers, there be forwarded to Mr McLeod the promotional program for Thrifty Cat for the second half of 2000 as well as a schedule of the Thrifty Cat products “ranging and pricing for each customer”. Mr Botham recalled receiving the letter and gave evidence that he did forward the promotional program to Nationwide. Some two weeks later, namely on 27 June 2000, Mr McLeod repeated the previous request in a letter to the second defendant. On my findings the promotional program and schedule which had been requested were in fact not furnished to Mr McLeod or to Nationwide. In the course of his cross-examination, Mr Botham, on being shown the later letter, entered into what seems to have been a dispute about semantics in that, on his evidence, he had told the cross-examiner that he had sent the material ‘shortly after’ 15 June 2000 but was then asserting that ‘up to or more than 12 days’ later fell within that description. He had not, on his evidence, seen any urgency at the time of responding to the request. I reject this evidence as unreliable.

82 Further, save as otherwise the subject of findings in this judgment, in so far as the evidence given by Mr Botham was inconsistent with that given by Mr McLeod, the evidence given by the latter is accepted as the more reliable.

Mr Botham's involvement in the design brief for the new packaging for Kitty-Mite

83 Mr Botham accepted that he had been involved in the design brief for the new packaging for the Kitty-Mite product which commenced in or before February 2000. As best he could recall, that packaging was completed by about May 2000. The new packaging which had come out for Kitty-Mite was orange in colour. This was the only product supplied by either of the defendants in the orange coloured bag. Orange was exactly the colour that the Thrifty Cat bag had been. The change had been from the yellow with the green writing that Kitty-Mite had been using earlier. The first and most important such change of an impressionistic nature which hits the eye, as Mr Botham accepted [transcript page 136], was the change from yellow to orange.

84 It is plain on the evidence that Kitty-Mite was not sold in Coles prior to 1 July 2000 and that after July 2000 Thrifty Cat had virtually no sales at all in Coles. Mr Botham gave evidence to the following effect:

"Q. Didn't it occur to you, Mr Botham, that this scenario was developing, the extension of the licence agreement in October 99, that we looked at yesterday, meant that ADM had controlled the marketing and sale of Thrifty Cat up until the end of the licence, did that occur to you as fact number one?
A. Correct.

Q. Fact number two, did it occur to you that the second range of products you were developing was a range that did not include, in its presentation or its identification, the Thrifty Cat product?
A. Are you talking specifically to Coles or are you talking to --

Q. Generally?
A. Generally, yes.

Q. The third fact is that in March, at the end of March of 2000 Coles had made a decision to accept seven of the products that you had presented to Mr Spark in December?

A. Correct.

………….

Q. It is the case, isn't it, that as at the end of March you were fully aware that there were products being deleted as a consequence of acceptance of your presentation in December to Mr Spark?
A. Not in March I didn't realise.

Q. Shortly after March, maybe the beginning of April?
A. Yes.

Q. It is the case that you were aware that if Kitty-Mite took some market away from Thrifty Cat that was going to be financial advantage of Supersorb because it didn't have to pay royalty?
A. It could be a scenario, yes, certainly the $40 a tonne was a difference in, the only differential.

Q. You were also aware, weren't you, that Supersorb had changed from a yellow bag to an orange bag for the sale of Kitty-Mite product?
A. Yes, I am.

Q. Wasn't this, Mr Botham, a deliberate strategy to take the market away from Thrifty Cat and to give it to Kitty-Mite?

A. No, it wasn't”

85 I reject as unreliable, the last answer. The strategy was on my findings precisely as suggested by the cross-examiner.

86 On my findings whilst the presentation brochure exhibit P4 included with reference to all products depicted with the exception of Kitty-Mite, innovations in respect for example of an odour control system, that was not an innovation put forward in relation to the Kitty-Mite product either in the brochure or at the time of the presentation by Mr Botham to Mr Spark. I do not accept that on the evidence, the reference in the brochure insofar as it treated with Kitty-Mite, to "new material blend provides excellent moisture absorbency" comprised a materially significant aspect by way of some significantly important innovation. In short as Mr Cashion submitted early in the course of his commencement of treatment with this topic:

" it's clear from the affidavit of Mr Botham and from references to an odour control system in this presentation document in the context of every product other than Kitty Mite that odour control in respect of each of the products other than Kitty Mite was a new innovation in respect of that product, and although it may not say that in terms of on the document --

…, what Mr Botham was doing by means of this document was presenting a range which included as to all but Kitty Mite a new product in the sense that it was a previous product which now had odour control, which it didn't previously have."

87 Zeolite, as Mr Cashion accepted in address at transcript 12 April page 348, did not come onto the scene and was not put into the Kitty-Mite product until well after the 9 December meeting. It was only as a result of that meeting that the defendants determined to add zeolite to the product which apparently had significant absorption properties. The transcript [at 12 April page 349] then summarises the situation as follows:

" HIS HONOUR: Now, apropos that, I see what Mr Botham says happened. He had the meeting, in the light of the importance of that odour control in the research it was decided to add a mineral, all after the meeting, to Kitty Mite. What I want to know, if I may, from you on your submissions as to the evidence is this: does the evidence establish that Mr Spark was, after 9 December, at some stage told, "By the way, Mr Spark, we have now added zeolite to our Kitty Mite product. We never told you - we never discussed that we would with you on 9 December. Here it is. This is our Kitty Mite product. It's got zeolite. It is good. You should put it on the shelves" and so on or not? I don't know that there is any evidence of that.

CASHION: I must say, I may well be about to be corrected, but I can't think of any evidence one way or the other on that.

HIS HONOUR: So that the next step, as it were, in the evidentiary tapestry is Mr Spark's assistant receiving a facsimile from Mr Botham and there is nothing on that about it either and she goes and makes the change and so the product goes on to the shelves round about March-April. In short, as I gather, the first time anyone purchased Kitty Mite from Coles after the end of the licence agreement, it was a zeolite thing they were purchasing.

CASHION: Correct."

88 In the result the submission put by Mr Cashion to the effect that Thrifty Cat did not have to be presented in every document which the defendants presented to buyers and that the particular presentation brochure of was for an entirely different purpose which was to present the so-called Supersorb "Second Range" misses the point. The significance of the brochure to the issues in the case is concerned with the simultaneity of:

· the mis-information that the Thrifty Cat product was going to be replaced with the Kitty-Mite product and

· the presentation of the promotional brochure which represented a range of product being promoted, with only the one 'budget' category product, namely Kitty-Mite, included.

89 The finding is that the decision by Coles to replace the Thrifty Cat product with the Kitty-Mite product had nothing whatever to do with any materially significant innovation or changed aspect concerning the product. The matter effectively moved from the presentation by Mr Botham to Mr Spark of early December directly to the 27 March 2000 facsimile and effective replacement of Thrifty Cat product by the defendants’ Kitty-Mite product.

Promotion of the Thrifty Cat product

90 An issue arises as to whether there is any evidence before the Court of a reliable nature proving promotional activity by the defendants of Thrifty Cat during the period covering the last four or so months prior to 30 June 2000. The Court holding is that there is no such evidence of a reliable nature. If and to the extent that any evidence given by Mr Botham may be suggested as probative of such promotional activity during this period it is rejected as unreliable.

91 This holding of fact stands as derived from all of the evidence, including inferences appropriate to be drawn from that evidence.

92 It seems to me that the course of the hearing indicates a matter which may be relied upon as confirmatory of the above holding of fact. It is referred to below, but I make clear that this matter does not influence the above holding of fact so that whether or not I be correct in relation to the reasoning which is set out in the following paragraph, the holding of fact is independently arrived at.

93 The matter which may arguably relied upon as confirmatory of the above described holding of fact concerns the events which followed Mr Cashion in re-examination putting the re-examination question and response. Mr Cashion then asked Mr Botham, in relation to the kind of promotional activity and promotional marketing which had been referred to, for how long it had continued and when it had come to an end if it had. I made plain to the defendant’s senior counsel that I did not see that the Court could be assisted in relation to questions on this topic without specificity. The defendants were granted an opportunity to consider whether, and if so how, to further treat in re-examination with this issue, in terms of necessary detail. Following Mr Cashion being given an opportunity to speak with Mr Botham and obtain instructions, he made plain that he did not wish to further avail himself of the opportunity to adduce such further evidence from Mr Botham. In my view it is clearly arguable that the Court is entitled to infer that the defendants were not able to adduce any evidence of any specificity in support of the proposition that the defendants engaged in serious promotional activities in terms of Thrifty Cat during this period. To my mind this inference, if it is appropriate that it be drawn from these circumstance, would be to the effect that no such activities were undertaken or that such activities, if undertaken, were minimal in the extreme. The inference issue is by no means determinant of the finding of fact for the reason that the finding of fact is drawn in the manner earlier indicated.

March 1999: LM = 0.285
June 1999: LM = 0.387
September 1999: LM = 0.666
December 1999: LM = 0.696
March 2000: LM = 0.950
June 2000: LM = 0.849

200 Mr Pascoe was prepared to accept that these figures were in excess of 0.050, although he was not prepared to say those figures were well in excess of 0.050- as he was not familiar with how the LM statistic is actually calculated or as to what the degree of difference to the figures would mean. [Transcript, 180(34) – (44); 181(17) – (20), (35) – (37), (51) – (53); 182(9) – (11), (49) – (52)] This led to the following exchange in cross-examination:

“Q. I suggest to you that because each of the LM statistics, namely, each of the LM statistic for each of the periods about which I have asked you exceeds the 0.050 figure, that the OLS figure, rather than the SW beta figure, is the more appropriate in the present context, do you agree?
A. I would agree that that was what the Graduate School of Management recommends, yes.

Q. I don't mean to be critical in saying this but Mr Pascoe I take it from your answers you gave previously that you are in no position to disagree with the Australian Graduate School of Management's position in that regard, correct?
A. Yes.
Q. You are agreeing with the proposition I am putting to you, are you?
A. Yes.”
[Transcript, 10/04, p182-83] [emphasis added]

201 To my mind the cross-examination did succeed in establishing that the more appropriate of the figures to be taken into account was the OLS as opposed to the SW figure in the present context.

Short summary of Mr Pascoe's cross examination on beta factor

202 It's convenient to set out a short summary of the relevant cross-examination on the Beta factor:

· the Beta factor is at the heart of Mr Pascoe’s query with Mr Potter’s discount rate calculation [transcript, 173(56) – 174(14)];

· Mr Pascoe accepted that neither Iluka Resources Ltd nor Consolidated Rutile Ltd are comparable companies to Hudson (or of limited comparability). This concession undermines his analysis;

· there are two forms of beta measure: SW beta and OLS beta. Both figures are provided by the Australian Graduate School of Management;

· Mr Pascoe used a SW beta measure, while Mr Potter used an OLS beta measure;

· Mr Pascoe agrees that where company shares are thinly traded, the SW beta is the more appropriate to be used;

· Mr Pascoe used the SW beta as he concluded that Hudson’s shares were thinly traded. He did so notwithstanding the following:

· the LM statistic for relevant periods March 1999 – June 2000 was greater than 0.050 (the figure below which the AGSM suggests the SW beta estimates is likely to be more reliable than the OLS beta estimates). [Transcript, 180]

· the AGSM recommended the use of the OLS beta where the LM statistic is above 0.050 – and he was in no position to disagree with that approach. [Transcript, 182-83]

· his reliance on share trading figures that were subsequent to the periods in which the beta statistics were calculated. [Transcript, 184]

· the AGSM statement in its guidelines that the sample period of trading is to be the previous four years to which the beta statistic relates. [Transcript, 184]

203 I note that Mr Cashion, using Mr Pascoe’s discount rate of 12.5%, computed Hudson’s beta factor to be either:

· Approx 0.9 (using the CAPM method)

· Approx 1.2 (using the weighted average capital formula)

204 It was accepted by Mr Pascoe that, assuming a beta factor of 0.9 or 1.2 for Hudson, the fact that one of the blue chip companies has a higher beta factor than Hudson is an indicator that Hudson’s would be a less risky investment than the blue chip concerned.

205 Mr Pascoe conceded that Hudson is likely to be a more risky investment than any of the blue chips listed. [Transcript, 188 - 89]

206 In re-examination, Mr Pascoe referred to Annexure O to his second report, specifically the Risk Measurement Service figures for September 2001 [PX (2) p. 106]. He noted the OLS Beta figure is 2.92 and that this figure would have taken into account the trading figures, he was referred to in cross-examination (namely the 12 months up to August 2001). Then, in explaining why his use of these trading figures in conjunction with the June 2000 Beta figure (ie. subsequent trading figures to the beta statistic, contrary to the AGSM recommended method) was not totally irrelevant, Mr Pascoe gave evidence as follows:

The reason why I said it was not totally irrelevant is because of the similarity between the beta factor as at September 2001 which has been affected by those trading figures to the beta factor of 2.86 which was the beta factor at June 2000. So, the conclusion based on that is that if the beta factor at September 2001 has been affected by what could be regarded as (inaudible) in the company’s shares, then the June 2000 beta may have been similarly affected.

207 I find difficulty in following why Mr Pascoe’s approach to the use of the subsequent trading figures with the older beta factor should be regarded as reliable for the reason only that the beta factors in both September 2001 and June 2000 are nearly similar. Likewise it is by no means clear to me why it is that Mr Pascoe is able to place reliance on the OLS Beta factor for these periods when he uses the SW beta factor for the purposes of his discount rate calculation.

Evidence given by Mr Potter

208 Mr Potter was also subjected to a careful cross-examination in relation to his reports and opinions. Following and upon the basis of the cross-examination the plaintiff’s counsel produced a document shortly summarising the suggested difficulties in accepting Mr Potter's opinions. That document albeit in shorthand format was in the following terms:

· Industry category for the plaintiff showed a rate of return (or discount rate) of 15% (T231.51-T232.22). Mr Potter’s 24% for Thrifty Cat product implies unjustifiably, that the product is more than 1.5 times as risky as average mining company shares.

· Using the S-W Beta at 30 June 2000 (1.59) results in a discount rate of 14.91% (T251.21-T251.47). The use of the S-W beta, and not the OLS beta, is justified by reference to the history of share trading in the plaintiff’s shares (Exhibit D1, Tab 33; T250.23-T251.19) the fates of Pasminco and Anaconda Nickel (T251.49-T254.29), the similarity of the beta for the plaintiff at 30 June 2000 and 30 September 2001 (which followed a year of thin trading) (Exhibit PX2, pages 83-84; T205.22-T206.02) and the counter-intuitive betas for Telstra and TAB Corp (Exhibit D1, page 7; T255.49-T256.27).

· Prospect of Beta not indicating accurately the risk premium for small companies such as the plaintiff (T235.43-T236.34).

· The multiple businesses of the Plaintiff may mean that its beta is not truly indicative of the risks attaching to one business line involving a single product with an established product history, large financial safe customers and a straight forward manufacturing process (T237.1-T246.01).

· An increase in the discount rate to account for declining sales is not justified, as there have been core sales of over 3,600 tonnes in each in the preceding 5 years (Exhibit PX2, page 41; T218.08-T231.40).

· Mr Potter’s cost of equity, which exceeds 26%, is disproportionately high relative to the cost of debt (pre-tax - 3.26%, post tax - 4.94%) and the risk free rate of return (6.16%) (T256.29-T257.3).

209 Whilst I accept the seeming validity of the plaintiff’s submission that all or some of the above described matters may justify a reduction of the appropriate discount rate from the 24% figure which in Mr Potter's opinion was appropriate in the circumstances, it seems to me that the area is one of sufficient expertise and complexity to require the court to treat very carefully indeed before stepping in to an area requiring expertise and specialised knowledge. At the end of the day both counsel as well as both Mr Potter and Mr Pascoe appeared, as I understood it, to clearly accept that selection of the appropriate discount rate is a judgmental matter. In all of the circumstances to my mind the attack upon Mr Potter's opinions is insufficient to require the court to regard the opinions as unreliable.

210 In this regard Mr Potter gave evidence to the following effect which seemed to me to suggest that his opinions should be given proper weight in terms of his background and approach:

" Q. In determining your discount rate of 24 per cent, what regard did you pay to the rates of return available generally in the marketplace?
A. A fair amount of regard.

Q. And which particular returns in the marketplace or rates of return in the marketplace can you identify to His Honour you took into account?
A. I looked at the beta rate for the stock exchange industry category that Hudson and Talon Resources were in. Hudson was in I think it's called Other Metals that had a beta factor of 1.56. …- I put that into my calculations and believe that that industry had a, using that rate, 15 per cent return or risk, if you like.

Q. So perhaps you should be specific about that. Do you mean risk or do you mean return, or do you mean both?
A. Well, the valuation, the whole theory behind the valuation method both Mr Pascoe and I have undertaken is that the two are the same: what people will pay for an asset or a share reflects the risk of the assets you're paying for.

Q. And the industry average that you derived from the Other Metals group was 15 per cent, was it?
A. Yes, and there were some other issues I looked at. I considered some other matters I'd worked on and other work I'd done. I'd done some goldmining work - I appreciate it's a different type of mining, but I was reflecting on there's very few mining companies that do cat litter, so I had to look at other types of mining. Goldmining companies - some of the other matters I'd worked on, I'd looked at, rates between 17 to 19 per cent was generally the rate. Then I looked at --

Q. If I can just interrupt you there so we're clear in your answer, if I may interrupt you, when you say other matters you'd worked on, are these matters in respect of which you were giving expert evidence in a case or preparing an expert valuation for some purpose or other?
A. Yes.

Q. They weren't situations in which there was a definitive and ascertainable return but, rather, you as an expert forming an opinion about the return. Is that right?
A. That's correct.

…
Then you will appreciate that the analysis of the discount rate or risk for Thrifty Cat requires not only an examination of mining risks but also the risk of selling to supermarkets, and it's --

Q. - are you still focusing upon rates of return available in the marketplace in giving this answer or have you strayed to an analysis of Thrifty Cat and its risks?
A. No, I'm trying to put the returns I've seen in the marketing context.

Q. Just before we get to the context of what the market returns tell us, could you please just tell me what market returns you took into account other than the ones you've told me so far in arriving at your discount rate?

A. Yes. In the past 18 months or two years I've looked at approximately 30 claims by distributors selling to retailers and other stores in the tobacco industry. Those distributors were telling us that they - on average between I think it's about 20 to 28 per cent was sort of the range of amounts they were looking at, and, finally, in the past I've worked on a number of receiverships and administrations of supermarkets, and seen a number of valuations and endeavoured to, or participated in processes to sell a number of those supermarkets, and this is for the Davids group, so they're not Coles-type supermarkets; they're your smaller independent supermarkets.

The rates of return which the valuers were putting on them and the sort of sales we got - and this is supermarkets, not that they've collapsed in a group and aren't trading. This is - a few of them were groups where the supermarkets were trading well. It wasn't the insolvency that caused the sale of supermarkets. Those rates were in the range of 25 to 33 per cent".

…

“Q. Can you unravel another mystery - at least, a mystery to me - in this CAPM, if we can find it somewhere in your report? Would you go to page 21 of your first report, please?
A. Yes, I have that.

Q. You refer on that page, among other things, to the required rate of return on market portfolio, which you explain on the next page under the heading, "Market risk premium"?
A. Yes.

Q. That integer in the equation is meant to represent the difference between the equity risk on a market portfolio comprising the entire stock market over the government bond yield, isn't it?
A. That's correct.

Q. And if one goes to the beta aspect of that equation and the way that the betas published by the AGSM are concerned, they are derived from the equity market statistics over the four-year period relating to a number of companies, some of which carry on mixed businesses, I presume?
A. Correct.

Q. One of the uncertainties or inadequacy of using betas is that different businesses of one company may have significantly different risks. Wouldn't you agree?
A. Yes.

Q. In a perfect model where you're trying to value the loss of one business of a multi-business company, you would try and work out a beta for that particular line of business alone, wouldn't you?
A. You can do two things. You can try --

Q. I am sorry, in a perfect world would you do that, or not?
A. I would try but I don't know how you could in a lot of cases.

Q. I think you might be right, but please go on.

A. I've seen in some matters where other experts have filed reports efforts are made to take out that line of business from the company and work out a beta. That effort is normally to - and it happens sometimes in Australia where normally you have to go overseas to find a company that just has that type of business, so you might go to the United States and see if there's a company that just does a single line of business and try and get that beta. Then, unfortunately, the stock markets between the two countries have different market premiums, so you have to convert that beta to an Australian beta. It's incredibly complex and fraught with difficulty.

So what I prefer, and what I think a lot of professionals prefer, is to - having derived the mathematical type of weighted average cost of capital using the CAPM model and the beta, you re-examine that rate to see if it differs or it should be adjusted up or down for a number of factors, one of which is obviously whether that line of business within the company should have a different type of risk to the business as a whole.”

“Q. You also in your second report - sorry, the fates of Pasminco Limited and Anaconda Nickel, have they caused you to be concerned as to whether the betas you were using for Hudson were truly indicative of the risks of these companies now that we have the benefit of hindsight two years later?

A. No, they don't for, I guess, two reasons. In relation to Pasminco and Anaconda, I can recall from the press releases the cause of the Pasminco collapse was an adverse change in hedging contracts in 2001. This beta was collected in June, this is the beta score as at June 2001, so the date of these figures pre-date the events you are talking about. Anaconda Nickel, I don't know why it is in trouble.

The second reason is that when you look at the history of the catalytic pricing bond on the betas, it was a theory invented or it was created, the portfolio theory you mentioned earlier in 1952. In 1964 the Caseum theory was developed. In the 1970s there were a vast number of tests and alternative theories proposed and none of those caused any damage, really, to or any claims that I know of of any significance that this theory doesn't work and that was 25, 30 years ago and it is still applied generally by everyone I have come across who does this sort of work.”

“ Q. Can I finalise this by taking you to page 7 of your second report?
A. Yes.

Q. Where you list out these blue chip entities, does that mean that TAB Corporation is less risky than Telstra according to the betas that you have set out on that page?
A. Yes.

Q. You wouldn't regard that as a correct indication of the relative risks of those two companies, would you?
A. Well, actually Telstra has been under - hasn't been going too well.

Q. Can you answer my question? Do you regard that as a good indication of the relative risks of Telstra and TAB Corporation?
A. Yes.

Q. And you understand Telstra is over 50 per cent owned by the Government, don't you?
A. Yes.

Q. There are not many risks attaching to investment in Telstra in terms of losing your money, are there?
A. There are a lot of risks. Warrants were issued - I think they are called warrants - for trading below their issued price at present and they have been for two years. You have got Telstra's investment in PCCW in Hong Kong which has been disastrous. There has been a lot of reports in the paper about Telstra's relative poor performance.

Q. You determine a discount rate of 24 per cent, correct?
A. Yes.

Q. That is almost four times the risk free rate that you used in your report, isn't it?
A. Yes.

Q. Which was 6.16 per cent, correct?
A. Yes.

Q. Your 24 per cent implies, doesn't it, a costed equity in excess of 26 per cent?
A. Yes.

Q. And that is in a circumstance where the cost of debt for Hudson Resources pre tax was 4.94 per cent?
A. That's correct.

Q. And the post tax cost of debt was only 3.26 per cent that you have used, correct?
A. Yes.

Q. Don't you regard the differential between your 24 per cent and the risk free rate and the differential between the cost of equity implied by your discount rate and the cost of debt as being far too conservative to value the future income stream of this product?

A. No, I actually think I have been overly conservative.”

[Transcript 2 55-2 57]

211 One further example concerned is his reliance upon and examination of what the Beta measure was:

"Could you tell His Honour if a company is seriously counter-cyclical relative to in terms of the conduct of its business - sorry, in terms of its share performance relative to the market generally, is that going to provide - is that going to produce a very high beta for it?
A. Yes, yes. If the price moves in, you know, quite differently to what the market does, then ordinarily, yes.

Q. And a beta for a company of that kind would not be a very good gauge of risk, would it?
A. In applying the theory, yes, there is a good gauge. When I say a good gauge, it is a starting point.

Q. Let me threaten the world with this hypothetical. Imagine Ferrier Hodgson Incorporated enlisting on the stock exchange and, please, I wasn't meaning to be offensive by that, but assume that Ferrier Hodgson's only business was that of insolvency and the insolvency business of it depended upon companies doing incredibly poorly in the corporate world. Can you assume those facts?
A. Yes.

Q. And perhaps I should retract Ferrier Hodgson and call it Wood & Associates. Wouldn't it be the case that its fortunes were inversely linked to the fortunes of all the other companies on the index?
A. No.

Q. But if its revenue stream depended upon the misfortune of other companies, then it is more likely than not, isn't it, that its share price is going to move in different ways than the share prices of these other companies?
A. Not necessarily. The beta is a measure of the way in which the shares in a particular company move to the market. Now, if it is a company that has a high beta and, therefore, a high risk, if the share market goes up generally, generally the company will follow but it might be far greater or it might be far less.

Q. If the market generally falls?
A. No, it could go both ways. If, let's say, the market on average goes up $10, the higher risk beta of 2, it could go up to $20 or it could go to half of 10. It could be $5. It doesn't have to - it is just quite a difference between what the market does in this document.

Q. What I want to suggest to you, Mr Potter, what I'm driving at is this: having regard to the way beta is calculated, it is a co-variance between the movement in a share price by reference to 48 different monthly periods with the variance in share price of every stock on the market, isn't that right?
A. Yes.

Q. And it really doesn't, I would like to suggest to you, give you a very clear indication of the risk attaching to any one particular stock on that market?

I disagree. I don't have them in front of me but we have got decades of testing of the theory. I know of one study. I don't know if you want me to start quoting, but it is a matter that has been around for almost 40 years, tested so much and it is still accepted by accountants, by stock brokers. It is the foundation of the valuation theory.”

[Transcript 253-254]

212 In my view Mr Potter's opinions should be accepted as reliable. The Court’s finding is that the appropriate discount rate in effect of the loss of profits claim is 24 percent as contended for by Mr Potter.

213 As the evidence discloses Mr Pascoe used the SW beta factor of 1.59 and various other adjustments ultimately arriving at a discount rate of 12.5%. Mr Potter used the OLS beta factor of 2.86 to arrive at a resultant discount rate of 22.29 percent for Hudson, adjusted up to 24 percent on the basis of his assessment of the risk of the particular product line in issue.

214 Ultimately it seems to me that there is a considerable difference between:

· The court on the one hand being in a position to and proceeding to assess whether the SW or the OLS beta factor is more appropriate to be used

· The court on the other hand itself endeavouring to assess what the appropriate adjustments should be to the discount rate initially arrived using the beta factor, in order to assess a final discount rate.

215 In relation to the first of these matters, the Court’s holding is that on the balance of probabilities and on the basis of the expert evidence adduced, the appropriate beta factor to be used was the OLS beta factor.

216 In relation to the second of these matters, as earlier indicated, in my view for a court to engage in assessing what are in essence by and large judgmental matters involving a high degree of complexity and expertise, involves an inherently dangerous exercise of real difficulty. For those reasons and essentially on the basis of an acceptance of the strength of the evidence given by Mr Potter through a careful cross-examination, it seems to me appropriate to hold as I do that his final discount rate figure of 24 percent is shown to be based upon reliable reasoning and is accepted as correct.

217 In terms of the Agreed Statement of issues:

· The answer to question 9 (a) is: "24 percent";

· The answer to question 9 (b) is: "six years";

· The answer to question 9 (c) is: "simple average";

· The answer to question 9 (d) is: "the agreements are applicable"

· The answer to question 15 (a) is in the affirmative;

· The answer to question 15 (b) is: "2,390 tonnes."

Cross-Claim

218 During the course of opening addresses reference was made to the cross-claim. The cross-claim relates to clause 2.4 of the settlement deed which obliged the plaintiff within 14 days after termination of the licence, to purchase from the licensee all good, saleable and usable packaging material held by the licensee and certain good, saleable stock held by the licensee at named premises.

219 Mr Cashion made clear that he had not focused on the cross-claim to any extent or at all by reason of his recollection that the amounts in issue were minimal. The transcript then recorded that all issues of or related to the cross claim would be quarantined for the time being to be dealt with after the evidence and address on all other aspects of the proceedings. As a matter of form and purely in order to regularise the position which obtained during the hearing, I formally order that the cross-claim issues be heard and determined separately from all other issues in the proceedings. Presumably there is a high prospect that the cross-claim issues will now be settled but if no settlement is capable of being achieved, my disposition is to order that the issue be referred to mediation. Absent a consensual settlement of this issue I intend to investigate the courts jurisdiction, if any, to procure that the proceedings be heard by the District Court or by the Local Court. Alternatively, a part 72 reference out will be considered.

Short Notes of Order

220 The proceedings are to be listed for the taking of any further submissions thrown up by the above reasons and for the bringing in of short minutes of order which may now be able to be agreed by the parties with the assistance of their experts.

I certify that paragraphs 1 – 220
are a true copy of the reasons
for judgment herein of the
Hon. Justice Einstein
given on 3 May 2002

Susan Piggott

Associate

3 May 2002

Last Modified: 06/21/2002

CITATION:	Hudson Resources Limited v Australian Diatomite Mining Pty Limited & Anor [2002] NSWSC 314
FILE NUMBER(S):	SC 50001/01
HEARING DATE(S):	8/04/02, 9/04/02, 10/04/02, 11/04/02, 12/04/02
JUDGMENT DATE:	3 May 2002
PARTIES :	Hudson Resources Limited (Plaintiff) Australian Diatomite Mining Pty Limited (First Defendant) Supersorb Minerals NL (Second Defendant)
JUDGMENT OF:	Einstein J

COUNSEL :	Mr PM Wood (Plaintiff) Mr M Cashion SC, Mr AP Coleman (Defendants)
SOLICITORS:	The Argyle Partnership (Plaintiff) Kemp Strang (Defendants)
CATCHWORDS:	Contract - Implied term - A 'best efforts' clause is ordinarily inserted in a contract between parties at arms length to give protection to a licensor by imposing an obligation on a licensee to promote the sale of the licensor's products - An obligation to use "best endeavours" does not require the person who undertakes the obligation to do more than he reasonably can in the circumstances to achieve the contractual object - An undertaking to use 'best endeavours' or 'best efforts' to promote the sale of one product does not necessarily impose an obligation not to sell a competing product, although it may do so in some circumstances - A party subject to a 'best endeavours' or 'best efforts' obligation to promote the sale of one product will have breached that obligation "if he prepared a product of his own and promoted the sale of that product with the deliberate intention of appropriating for himself the market which he had in effect promised to do all he reasonably could, to secure for the person to whom he had given the undertaking" - A 'best endeavours' or 'best efforts' obligation in a contract includes an obligation not to hinder or prevent the fulfilment of the purpose of the contract - There is no material distinction of substance between the implied terms of reasonableness and good faith and a close association of ideas between the terms unreasonableness, lack of good faith and unconscionability - Misleading and deceptive conduct - Whether representation made that the plaintiff's product was being deleted and replaced by the second defendant's new product. - Passing off - Whether second defendant purposely copied the get up of the plaintiff's product packaging with the intention of misleading purchasers - Damages - Account of profits - Whether plaintiff's product likely to regain shelf space
LEGISLATION CITED:	Trade Practices Act 1974
CASES CITED:	Burger King Corp v Hungry Jack's Pty Ltd [2001] NSWCA 187 Cadbury Schweppes Pty Ltd v Pub Squash Co Pty Ltd [1980] 2 NSWLR 851 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 Port of Melbourne Authority v Anshun Pty Ltd (1981) 147 CLR 589 Rahme v Commonwealth Bank of Australia, (Unreported, 20/12/1991 NSWCA, CA 40155) Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 Sheffield District Railway v Great Central Railway Co (1911) 27 TLR 451 Shepherd v Felt and Textiles of Australia Ltd (1931) 45 CLR 359 Slazenger & Son's v Feltham & Co [1889] 6 RPC 531 Sterling Winthrop Pty Ltd v R & C Products Pty Ltd (1994) 16 ATPR 41 - 308 Terrell v Mabie Todd & Co Ltd (1952) 69 RPC 234 Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83
DECISION:	Reasons for judgment generally upholding the plaintiff's cases based upon breach of contract and passing off and otherwise as set out in the judgment.; The proceedings are to be listed for the taking of any further submissions thrown up by the above reasons and for the bringing in of short minutes of order which may now be able to be agreed by the parties with the assistance of their experts.