McCartney v Orica Investments Pty Ltd
[2011] NSWCA 337
•08 November 2011
Court of Appeal
Supreme Court
New South Wales
- Amendment notes
Medium Neutral Citation: McCartney & Ors v Orica Investments Pty Ltd & Ors [2011] NSWCA 337 Hearing dates: 16 and 17 August 2011 Decision date: 08 November 2011 Before: Giles JA at [1], Macfarlan JA at [192],
Young JA at [193]Decision: 1. Direct that no later than 18 November 2011 the parties inform the Associate to Giles JA by joint memorandum of any correction to the calculation of damages and whether the Court's orders are to include an order for the limited new trial.
2. Direct that the parties file and serve their respective submissions accompanied by draft orders -
(a) if necessary, as to repayment of the judgment sum and costs; and
(b) as to costs of the hearing before the primary judge and on appeal; the appellants no later than 23 November 2011 and the respondents no later than 28 November 2011.
Unless the parties request an oral hearing, in which case the Court will consider but not necessarily agree to the request, or the Court considers that an oral hearing is necessary, the Court will determine these remaining matters on the written submissions.
[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]
Catchwords: DAMAGES - breach causing supplier of goods to cease supply - likelihood that supplier would have ceased supply in any event - whether error in rejecting supplier's evidence - whether error in assessing likelihood - appellate review of credibility-based findings - nature of appellate review of assessment of likelihood - inferences in favour of plaintiff where defendant's wrong makes quantification difficult. Cases Cited: Abalos v Australian Postal Commission (1990) 171 CLR 167;
Allen v Tobias [1958] HCA 13; 98 CLR 367;
Armory v Delamirie (1722) 1 Stra 505; 93 ER 664;
Backwell v AAA (1997) 1 VR 182;
Beech v Advanced Management Consulting Pty Ltd [2002] NSWCA 311;
Blatch v Archer (1774) 1 Cowp 63; 98 ER 969;
Bourne v Fosbrooke (1865) 18 CB (NS) 515; 144 ER 545;
Bosebe Pty Ltd v Bakavgas [2009] NSWCA 117;
Burden v Rath (1986) Aust Torts Rep 80-050;
Calder v Boyne Smelters Ltd (1991) 1 Qd R 325;
Childrens v Saxby (1683) 1 Vern 207; 23 ER 417;
Clunnes v Pezzey (1807) 1 Camp 8; 170 ER 857;
Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64;
Davis v Veigel [2011] NSWCA 170;
Diamond v Simpson (No 1) [2003] NSWCA 67; (2003) Aust Torts Rep 81-695;
Donald v McKeown [2004] NSWCA 285;
Dwyer v Calco Timbers Pty Ltd [2008] HCA 13; (2008) 234 CLR 124;
Dyer v Tymewell (1690) 2 Vern 123; 23 ER 688;
East India Company v Evans (1684) 1 Vern 308; 23 ER 486;
Fox v Percy [2003] HCA 22; (2003) 214 CLR 118;
Fuller v Galvin [1995] NSWCA 157;
Golosky v Golosky (CA, 5 October 1983, unreported;
Government Insurance Office of New South Wales v Case (1976) 9 ALR 194;
Gray v Haig (1855) 20 Beav 219; 52 ER 587;
Hammersmith & City Railway Company v Brand (1869) LR 4 HL 171;
Harper v Bangalow Motors (CA, 24 July 2990, unreported);
Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46;
Indian Oil Corporation Ltd v Greenstone Shipping SA (Panama) [1988] QB 345;
Lavender View Pty Ltd v North Sydney Council [1999] NSWSC 255; (1999) 104 LGERA 255;
Lawton v Sweeney (1844) 8 Jurist 964;
LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (No 2) (1989) 24 NSWLR 499;
LMI Australasia Pty Ltd v Baulderstone Hornibrook Pty Ltd [2003] NSWCA 74;
Lujans v Yarrabee Coal Company Pty Ltd [2008] HCA 51; (2008) 249 ALR 663;
Lupton v White (1808) 15 Ves Jun 432; 33 ER 817;
Macedonian Orthodox Community Church St Petka Incorporated v His Eminence Petar the Diocesan Bishop of Macedonian Orthodox Diocese of Australia and New Zealand [2008] HCA 42; (2008) 237 CLR 66;
Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268; (2010) 15 BPR 28,563;
Malec v J C Hutton Pty Ltd (1990) 169 CLR 638;
Moran v McMahon (1985) 3 NSWLR 700;
Murphy v Mark (1977) VR 316;
Murphy v Overton Investments Pty Ltd [2004] HCA 3; (2004) 216 CLR 388;
Norbis v Norbis (1986) 161 CLR 513;
The Ophelia [1916] 2 AC 206;
Roper v Johnson (1873) LR 8 CP 167;
Rosebanner Pty Ltd v EnergyAustralia [2009] NSWSC 43; 223 FLR 406;
Shimokawa v Lewis [2009] NSWCA 266;
Singer v Berghouse (1994) 181 CLR 201;
Sherwood v Guneser (1992) 110 FLR 459;
State of New South Wales v Moss [2000] NSWCA 133; (2000) 54 NSWLR 536;
TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130;
Tyco Australia Pty Ltd v Optus Networks Pty Ltd [2004] NSWCA 333;
White v Lady Lincoln (1803) 8 Ves Jun 363; 32 ER 395;
Yarrabee Coal Company Pty Ltd v Lujans [2009] NSWCA 85; (2009) 53 MVR 187;Category: Principal judgment Parties: William Thomson Venables McCartney - First Appellant
Ingredients Plus Pty Ltd - Second Appellant
Graeme Bruce Love - Third Appellant
Orica Investments Pty Ltd - First Respondent
Bronson & Jacobs Pty Ltd - Second Respondent
Orica Australia Pty Ltd - Third RespondentRepresentation: A J Sullivan QC & J Zerelli - Appellants
I M Jackman SC, J Stoljar SC and J K Taylor - Respondents
Hassett Dixon - Appellants
Mallesons Stephen Jaques - Respondents
File Number(s): CA 260399/05 Decision under appeal
- Citation:
- Orica Investments Pty Ltd & Ors v William McCartney & Ors [2007] NSWSC 645;
Orica Investments v McCartney [2010] NSWSC 488- Before:
- White J - 25/6/07
Ball J - 28/5/10- File Number(s):
- SC 3895/05
Judgment
GILES JA:
1. Introduction
Bronson & Jacobs Pty Ltd ("B & J") was a supplier of chemical raw materials to the pharmaceutical, cosmetics, food and aromatic industries in Australia, New Zealand, Asia and the United Kingdom. Mr William McCartney was its managing director and a shareholder.
In April 2004 Mr McCartney and the other shareholders of B & J sold their shares to Orica Investments Pty Ltd ("Orica"), a member of the Orica Group's global business interests including in chemicals. The sale was completed on 31 May 2004. Mr McCartney entered into a consultancy agreement with Orica Australia Pty Ltd ("Orica Australia") for a period of 12 months with provision for extension.
Mr McCartney had been with B & J for many years, and had formed close relationships with suppliers to and customers of B & J and of other companies in the group of which it was part. Upon the acquisition of B & J by Orica, he accepted restrictions on engaging in competitive business activities. So far as presently relevant, under the share sale agreement (to which B & J was a party) he covenanted that for five years from 31 May 2004 he would not carry on any business "the same as or substantially similar to or in competition with" the Restricted Business (cl 15.1(a)), or "entice away from the Purchaser ... any supplier to the Restricted Business (cl 15.1(b)(ii)). The business of B & J was within the Restricted Business as defined. Despite the reference to the Purchaser, it was not in dispute that enticing away a supplier to B & J was an enticing away from Orica.
In proceedings brought by Orica, B & J and Orica Australia, in which there were many more issues, White J found that Mr McCartney was in breach of the share sale agreement, in that he carried on a competing business by inducing Mr Remy Bontoux of Clos D'Aguzon ("Clos"), a supplier to B & J of essential oils particularly lavender oil, to transfer to Ingredients Plus Pty Ltd ("Ingredients Plus") the distributorship pursuant to which Clos supplied B & J (cl 15.1(a)), and enticed Clos to transfer the distributorship to Ingredients Plus (cl 15.1(b)(ii)). His Honour found also that in these respects Ingredients Plus and its founder, Mr Graeme Love, knowingly interfered with the contractual relations between Mr McCartney and B & J. His Honour held that as a party to the share sale agreement, B & J could recover damages for the loss suffered by it from Mr McCartney's breaches, and that Ingredients Plus and Mr Love were also liable in damages for that loss. His Honour's reasons may be found as Orica Investments Pty Ltd v William McCartney [2007] NSWSC 645.
White J ordered -
" ... that the assessment of damages payable in respect of [B & J's] loss of Clos d'Aguzon as a supplier be referred to an Associate Justice of the Court for inquiry and certification."
The enquiry was undertaken by Ball J ("the primary judge"), not by an Associate Judge. In the hearing before his Honour the parties considered themselves bound by the findings of fact made by White J, although they accepted that a different finding was open if warranted by further evidence before the primary judge. The evidence which had been before White J was only evidence before the primary judge to the extent that it was specifically tendered.
It was common ground before the primary judge that the damages should be assessed by valuing the income stream lost by B & J through termination of the Clos distributorship on a discounted cash flow analysis, and discounting that value according to the likelihood that the distributorship would have been terminated in any event. The issues before his Honour were concerned with valuation of the income stream and determination of the discount. The issue over the discount was at two levels; first, as to acceptance of evidence of Mr Bontoux that Clos would have terminated the distributorship even if Mr McCartney's conduct had not contributed to its transfer to Ingredients Plus, and secondly on the basis that Mr Bontoux' evidence in that respect was not accepted.
The primary judge assessed B & J's damages at $1,219,829.70, to which was added interest of $599,520.89. B & J obtained judgment against Mr McCartney, Ingredients Plus and Mr Love for $1,819,350.50, and an order for costs including costs on an indemnity basis from a stated date. His Honour's reasons may be found as Orica Investments Pty Ltd v William McCarthy [2010] NSWSC 488.
Mr McCartney, Ingredients Plus and Mr Love (together, "the appellants") appealed against the assessment of damages. They contended that the primary judge should have found that no damages were payable or that the damages payable were in a much lesser amount, the result varying according to the ground(s) on which they succeeded on appeal. Presumably because they had an interest in the costs order, Orica and Orica Australia were made respondents as well as B & J (together, "the respondents").
For the reasons which follow, in my opinion error has not been shown in the primary judge's valuation of the income stream, but has been shown at each level in the determination of the discount. There should be a new trial limited to the determination of the discount. For the possible assistance of the parties, on the basis that Mr Bontoux' evidence was not accepted the damages would be reduced to $612,917 plus interest.
2. The issues on appeal
The respondents' expert accountant, Mr Michael Potter, identified two approaches for calculating B & J's expected future revenues from the Clos distributorship. The primary judge preferred his second approach, and its adoption by his Honour was not challenged on appeal although some of its components were challenged. The second approach was intended to allow for changes in B & J's business following its acquisition by Orica, by looking where possible to actual cash flow rather than projected cash flow.
For the period to 31 May 2009 (the date the restraints in the share sale agreement came to an end) Mr Potter first determined B & J's sales of Clos products and any substitute products from 10 March 2005 (the date on which Mr Bontoux told B & J that he had decided to appoint Ingredients Plus as Clos' distributor) and Ingredients Plus' sales of Clos products from September 2004 to 30 September 2007 and its projected sales from 30 September 2007. In the primary judge's words, "the actual sales of the two companies [were] used as a proxy for the expected sales of Bronson and Jacobs in the event that Mr McCartney had complied with his contractual obligations" (at [44]). Mr Potter then determined an expected gross margin on the sales, and subtracted B & J's actual gross margin to arrive at annual gross lost profits. After deduction of income tax, he calculated the net present value of the cash flow over the period at a stated discount rate and grossed up that amount for tax payable on the judgment. For the period after 31 May 2009 Mr Potter then calculated a net loss in perpetuity, applying an adjusted discount rate to the lost profit figure for the year following the date of valuation.
The appellants did not dispute this methodology. The issues on appeal were as follows.
First, before the primary judge the appellants relied on Mr Bontoux' evidence abovementioned and contended that B & J had suffered no loss or minimal loss by reason of Mr McCartney's breaches. The primary judge did not accept Mr Bontoux' evidence. The appellants submitted that his Honour was in error in declining to accept Mr Bontoux' evidence.
Secondly, before the primary judge the appellants contended that, even if Mr Bontoux' evidence was not accepted, there was a high likelihood that Clos would have terminated the distributorship in any event. The primary judge found as to the period to 31 May 2009 that there was "a significant risk that Clos would have left Bronson & Jacobs in any event", but that it was not "greater than 50% or anything like it" (at [53]). Together with an allowance for the risk of loss of a particular customer, his Honour reduced the damages for that period by 20 per cent. His Honour found that the likelihood of Mr McCartney enticing Clos away from B & J after 31 May 2009 would have been small, and reduced the damages for the period after 31 May 2001 by a further 10 per cent. The appellants submitted that the discounts of 20 per cent and 30 per cent for the respective periods should have been much greater.
Thirdly, in his calculations Mr Potter used a gross profit margin of 30 per cent derived from a spreadsheet listing Clos products sold by B & J and the costs of sale for each. Before the primary judge the appellants contended that the spreadsheet was an unreliable source for the gross profit margin. His Honour did not agree. The appellants submitted that his Honour was in error in accepting Mr Potter's derivation of the gross profit margin from the spreadsheet.
Fourthly, in his calculations Mr Potter did not adjust the gross profit margin by an allowance for overheads, on the basis that the business of B & J had been absorbed into Orica's business and the incremental cost of earning the lost profits would be negligible. Before the primary judge the appellants contended that an allowance should have been made. His Honour did not agree. The appellants submitted that his Honour was in error in accepting that an allowance was not necessary.
Fifthly, before the primary judge the appellants contended that B & J had failed to mitigate its loss by not taking reasonable steps to obtain products from other suppliers in place of Clos. His Honour found that reasonable steps had been taken. The appellants submitted that his Honour was in error in so finding.
3. Some background information
White J found -
"11 During the negotiation for the purchase of the shares in Bronson & Jacobs, Orica represented that there would be no change to the day-to-day operations of Bronson & Jacobs, except in the finance area. It gave a presentation to suppliers and customers of Bronson & Jacobs which stated ' for B & J, this acquisition will mean business as usual and access to increased resources and systems ' and ' Bronson & Jacobs will operate as a stand-alone division within the Orica Chemnet business ' and ' Orica recognises the quality of the existing Bronson & Jacobs business and its employees .' The same message was conveyed to Bronson & Jacobs' employees." (italics in original)
This was not borne out. White J found that the transition of the control of the B & J business to Orica "was fraught with tension" (at [12]). Orica appointed senior management within B & J, incurring the resentment of the existing senior management, and changed the roles of some of the existing senior managers. In August 2004 Mr Love, who was B & J's General Manager, Operations, was told that he would be made redundant, which became known to at least some of the senior management. The roles of Mr Michael Hadji-Petros (National Sales Manager, Pharmaceuticals) and Ms Nguyet Nguyen (National Sales Manager, Essential Oils and Aroma Chemicals) were changed so that they no longer dealt with their clients. Ms Nguyen's responsibilities included the distribution of Clos' essential oils. She was dissatisfied with the change in role and otherwise. When her role was changed Ms Sarah Dalziel was appointed Product Manager, Essential Oils and Aroma Chemicals and became the point of contact with suppliers and customers. Her background was in human resources, and she did not have the knowledge and experience of essential oils possessed by Ms Nguyen.
As found by White J -
"14 Mr McCartney objected to the changes in management. He was concerned that jobs of staff who had worked loyally for him for decades were under threat."
Mr Love's redundancy took effect in December 2004: he then established Ingredients Plus, which was registered on 12 January 2005. In January-February 2005 Mr Petros, Ms Nguyen and Ms Tracey Lynam (a technical sales representative) left B & J and joined Ingredients Plus.
White J found that by early December 2004 Mr McCartney "had made it known to Graeme Love, Petros, Nguyen and Lynam that he would support the establishment by them of a rival business" (at [67]). He held that Mr McCartney breached the share agreement and the consultancy agreement by enticing Ms Nguyen and Ms Lynam away from their employment, but that Mr Love moved away because he was retrenched and Mr Petros moved away despite Mr McCartney urging him to stay.
White J found that Mr McCartney provided working capital of $600,000 to Ingredients Plus, and that he had an agreement that he would be beneficially entitled to 15 per cent of its share. His Honour held that Mr McCartney did not breach the share sale agreement in these respects, but breached the consultancy agreement by providing the working capital.
White J found -
"257 ...
(e) Nguyen was dissatisfied with changes made by Orica, and was encouraged by McCartney's promise of support to Ingredients Plus to leave her employment with Bronson & Jacobs;
(f) a material contributory reason for Lynam's decision to change her employment was McCartney's promise of support of Ingredients Plus;
(g) Petros was aware that McCartney would provide financial support to Ingredients Plus, but decided to leave Bronson & Jacobs because of his dissatisfaction with Orica's management. McCartney provided no further encouragement for him to leave and in about December 2004 and early February 2005, asked him to stay with Bronson & Jacobs to see if things got better;
(h) having decided to leave Bronson & Jacobs, Petros joined Ingredients Plus because of his association with Nguyen, Graeme Love and Lynam, and also because he was aware that McCartney would provide financial support to Ingredients Plus;"
The difficulties in the transition of the control of B & J went beyond changes in and loss of personnel and the disruptive consequences of those matters. White J found (at [12]) that Orica -
" ... introduced to Bronson & Jacobs an operating system known as SAP, which was used by other divisions of Orica. It was used at least for the ordering, control and delivery of stock. All of the data on Bronson & Jacobs' existing operating system had to be loaded on to the SAP operating system. There were over 8,000 different codes to describe products, pack sizes and manufacturing. Warehouses were re-organised and all customer orders were directed through the Melbourne office. This led to many complaints from customers of Bronson & Jacobs and from suppliers to Bronson & Jacobs. It affected the level of service that Bronson & Jacobs was able to provide to its customers. This in turn led to dissatisfaction amongst a number of the existing staff of Bronson & Jacobs who had close links with suppliers and customers."
Turning more specifically to loss of the Clos distributorship, Mr McCartney and Ms Nguyen had dealt with Mr Bontoux at Clos; Mr McCartney had dealt with him or his father for many years, and "had a close involvement with Clos d'Aguzon" (White J, at [168]). In late 2004 Mr McCartney had provided funding in the order of 1.3 million euros, at Mr Bontoux' request, to assist Clos when it encountered financial difficulties.
Before White J, Mr Bontoux denied any inducement or enticement by Mr McCartney to appoint Ingredients Plus as Clos' distributor.
In his affidavit read before White J Mr Bontoux said, the timing in para 24 being about October 2004 -
"24. I started to become aware from my discussions with B & J Group employees that the level of service being provided to Clos d'Aguzon customers by the B & J Group was not as good as prior to the acquisition of the Orica Group. Also at this time I received requests from English and French brokers to purchase specific products directly from Clos d'Aguzon. Those products had only previously been sold through the B & J Group. This indicated to me that there was a problem in the business of the B & J Group as for the first time customers were trying to purchase products not through the B & J Group.
25. In or around January 2005, I was informed that Ms Nguyen would no longer be the main contact for Clos d'Aguzon at B & J, but rather the main contact was to become Sarah Dalziel, who had been appointed Product Manager - Essential Oils and Aroma Chemicals. I was aware that Ms Dalziel had previously worked in the human resources area.
26 . From my subsequent discussions with Ms Dalziel, it was clear to me that she did not have proper knowledge of Clos d'Aguzon's products and I did not consider that she was the right person to ensure that Clos d'Aguzon's business would be conducted properly."
Mr Bontoux then referred to an e-mail received on 16 February 2005 from Mr Anthony Cavanagh of Orica, advising him that Ms Nguyen had left B & J and of his appointment as Business Manager for the Essential Oils and Aroma Chemicals area of B & J in Australia. He referred to an e-mail he sent on 21 February 2005 to Mr McCartney, reading -
"Dear Bill,
I hope you are well.
I am receiving the attached message [Mr Cavanagh's e-mail] and I am surprised you didn't let me know before. Last year when B&J was sold to Orica, it was clearly said things would continue like before. Now, I am getting very concerned about my interests in Australia, as you perfectly know to be successful selling essential oils you need a well trained team with a long experience.
I really doubt you are still in this position with people like Tracy & Nguyet leaving the company.
What about yourself are you still involved?
In confidence, I am receiving direct complains from customers which are not satisfied at all with service and have already switched some needs in other directions !!!!
Bill, to my great disappointment, after all those years of very good relationship, I think I'll have to protect my interests using a different support.
Yours truly
Remy"
Mr Bontoux said in his affidavit that -
" ... at the time of sending that e-mail I had decided that it was no longer in Clos d'Aguzon's interest to continue to use the B & J Group as its distributor in Australia, but I had not yet decided whether it would be necessary for Clos d'Aguzon to distribute its products in Australia directly or by using another distributor."
Mr Bontoux then referred to an e-mail he sent to Mr McCartney on 1 March 2005, reporting on a conversation with Mr Cavanagh and so far as presently relevant saying that he had told Mr Cavanagh, "I was very disappointed with the team change and very concern about competition taking over the essential oil business".
On 10 March 2005 Mr Bontoux sent an e-mail to Mr Timothy McCann, a Due Diligence and Integration Manager within Orica responsible for the integration of B & J's business with Orica's existing operations, stating that "[a]fter having considered all the aspect of our current situation, we have now decided to appoint [Ingredients Plus] representative agent".
In his affidavit Mr Bontoux said -
"32. I decided to appoint Ingredients Plus as Clos d'Aguzon's distributor instead of the B & J Group, as I wished to continue to deal with Ms Nguyen who had expertise in relation to Clos d'Aguzon's products. I did not appoint Ingredients Plus as Clos d'Aguzon's distributor because of any request or suggestion by Mr McCartney."
White J did not accept Mr Bontoux in this respect. His Honour's reasons for this are not now in issue, but they included that Mr Bontoux had not disclosed that on 17 February 2005 he sent an e-mail to Mr McCartney's private e-mail address, not his e-mail address at B & J -
"Dear Bill
I am writing you this message because I am very concern about what is going on in the Australian market for our products.
As you know we have developed a nice business together over the past years because of our very good personal relation.
Now, with all the changes at B&J I have strong doubts about the future for our sales in Australia.
Customers are starting to complain and I may have regretfully to decide to protect my company interest in a different way.
I realise how disappointing this message could be for you after all those years of good collaboration and can't tell you how sad it is for me.
I will keep you informed soon.
Best Regards
Remy"
Mr McCartney telephoned Mr Bontoux in France on 21 February 2005. The 21 February 2005 e-mail was sent an hour after their conversation. White J found that Mr McCartney "settled the terms of Bontoux' response to Cavanagh" (at [184]); that is, that Mr McCartney settled the terms of the e-mail of 21 February 2005, although it was not sent to Mr Cavanagh but rather was forwarded by Mr McCartney to Mr Larke of Orica. His Honour plainly considered that this told against Mr Bontoux' credit and indicated influence by Mr McCartney.
Although his Honour did not directly say so, I understand the parties to have accepted on appeal that Mr Bontoux' 17 February 2005 e-mail was his own work and a true reflection of his concerns, although the 21 February 2005 e-mail followed discussion with Mr McCartney thereafter as to how he should respond to Mr Cavanagh's e-mail. In any event, that view of it appears to be correct.
White J found -
"186 I accept that Bontoux was unhappy with the Bronson & Jacobs distributorship. I accept his evidence that he was concerned that he had started to receive inquiries from Europe for products which were only sold in Australia which indicated to him that the Australian customers were trying to source their products indirectly through Europe and not through Bronson & Jacobs. He was also concerned that Nguyen had left Bronson & Jacobs, and this was a substantial part of his reason for moving his distributorship. However, I also consider that there was a plan to which McCartney was a party, and which pre-dated Nguyen's departure, for Nguyen to leave Bronson & Jacobs once Graeme Love had established his business. McCartney's financing of the establishing of Ingredients Plus contributed to Nguyen's departure, and was an indirect contributing factor to Bontoux' decision to cease to use Bronson & Jacobs as a distributor.
...
200 I conclude that the material causes of Clos d'Aguzon changing its distribution arrangements were that Ingredients Plus had established its business; that Clos d'Aguzon was dissatisfied with service provided by Bronson & Jacobs after the Orica takeover; that Nguyen had left Bronson & Jacobs to work for Ingredients Plus; and that McCartney solicited Bontoux to do so."
4. First issue: Mr Bontoux' evidence
4.1 Mr Bontoux' evidence in summary
Mr Bontoux gave evidence again before the primary judge.
In his affidavit read before the primary judge Mr Bontoux said that, although White J had found that he was influenced by his relationships with Mr McCartney and Ms Nguyen to move his business away from B & J, "the fact remains that I was unhappy with them and I say I would have moved my business away from them even if Ingredients Plus Pty Ltd had never existed". He said that he did not like the persons with whom he dealt at B & J after the Orica takeover; that he did not think B & J "were doing a good job for me"; and that he "did not trust the Orica/B & J management and by late February 2005 ... resented them". Fairly detailed, indeed discursive, explanations were given of each of these matters, and in the case of B & J not doing a good job four particular reasons were given which will later be fully considered.
Mr Bontoux went on to refer to the 17 February 2005 e-mail, and said that if Mr McCartney had stayed at B & J he "would have left B & J just as I have said in my email", and that "[t]heir poor sales performance was bad for my business and I thought there had to be 'a different way' as I likewise said in my email". He said that "events took a different course with the sacking of Bill by Orica just a week later", that he resented Orica for what it had done to his close friend, and he did not trust Orica because it had been represented that nothing would change in the way B & J did business but "a lot of things did change". Mr Bontoux said -
"19. On account of all these matters, by early March 2005, I was finished with Orica and B & J. I did not like them, I did not trust them, and they were bad for my business. Had I not gone with Ingredients Plus, I would have gone another 'different' way."
Mr Bontoux was cross-examined at some length. It will be necessary to go in more detail to his affidavit, including comparison with what he had said in his affidavit read before White J (which was in evidence before the primary judge as an exhibit tendered by the appellants).
4.2 A preliminary matter
The primary judge began his explanation for declining to accept Mr Bontoux' evidence -
"28. White J found that Mr Bontoux was not a reliable witness and I do not think that Mr Bontoux fared any better in the hearing before me, for three main reasons."
White J had found Mr Bontoux an unreliable witness, and had not accepted his denial of any inducement or enticement by Mr McCartney to appoint Ingredients Plus as Clos' distributor. A question arose whether the primary judge had wrongly taken into account White J's assessment of Mr Bontoux' reliability as a witness, when he should have acted only upon his own assessment.
The appellants did not take the question up. In my view they correctly understood the reference to White J's assessment of Mr Bontoux' reliability as a witness as a prefatory aside. The primary judge independently made his own assessment of how Mr Bontoux fared.
4.3 The appellants' challenges: general
The primary judge gave "three main reasons" (at [28], see [43] above) for declining to accept Mr Bontoux' evidence. The first was that the reasons Mr Bontoux gave for saying that he would have terminated the B & J distributorship were not credible, with identification of three reasons of the four particular reasons given by Mr Bontoux and explanation of their difficulties. The second was the absence of contemporaneous evidence suggesting that Mr Bontoux had approached other distributors. The third was that Mr Bontoux had contradicted in cross-examination evidence in his affidavit concerning substitutes for Clos' products. The appellants submitted that each of his Honour's three main reasons was not soundly based in the evidence. They further submitted that his Honour had not dealt with other matters to which Mr Bontoux had referred in his evidence or which otherwise supported that he would have terminated the distributorship in any event.
The parties' submissions were detailed, and a rather lengthy judgment can not be avoided. Two related matters should be foreshadowed; I will return to them. The first is the part to be played in the present case by the constraints on appellate review of a credibility-based finding, see Fox v Percy [2003] HCA 22; (2003) 214 CLR 118 and many other discussions. The second is whether, if it be held that the primary judge's reasons for declining to accept Mr Bontoux's evidence are unsound, there can be a finding in this Court that he would have terminated the Clos distributorship in any event, or whether there must be a new trial. Both those matters are best addressed, if they arise, after the appellants' challenges have been considered.
4.4 The first main reason
The primary judge said -
"29 First, I do not think that the reasons Mr Bontoux gave for saying that he would have terminated the Distributorship Agreement with Bronson & Jacobs were credible. One reason he gave was that he had experienced poor sales figures to Bronson & Jacobs shortly before he terminated the Distributorship Agreement. However, none of the contemporaneous records record that as a reason for termination given by him. Mr Bontoux did not mention it as a reason in the evidence he gave in connection with the liability hearing. He offered no sales figures to support the claim. On the other hand, Bronson & Jacobs' own sales figures to its customers suggested that sales had not dropped off. Mr Bontoux says that he was concerned by the fact that he was receiving enquiries from third parties which specified Bronson & Jacobs' codes for Clos's products. Mr Bontoux gave the impression that those enquiries suggested to him that customers were dissatisfied with the service that they were getting from Bronson & Jacobs and consequently were seeking to acquire product directly from Clos. In fact, Mr Bontoux knew that those enquiries were coming from a competitor of Bronson & Jacobs. Mr Bontoux said that Bronson & Jacobs had created a conflict of interest by acquiring Keith Harris Ltd which had ties to Charabot, a competitor of Clos's. Again, however, this reason was not raised by Mr Bontoux in any of the contemporaneous correspondence. In fact, Bronson & Jacobs only acquired the flavouring manufacturing and fragrance manufacturing businesses of Keith Harris. Mr Bontoux accepted when cross-examined that those acquisitions would not have created a conflict of interest. Although there is no evidence to suggest that Mr Bontoux was aware that the acquisition was limited to those divisions, it is hard to believe that someone as experienced and knowledgeable in the industry as Mr Bontoux would not have made enquiries concerning the acquisition if he had been genuinely concerned about it."
This identified three of the four particular reasons given by Mr Bontoux for thinking that B & J were not "doing a good job for me", and found each wanting: namely, poor B & J sales figures; customer dissatisfaction with B & J service perceived from direct third party inquiries; and creation of a conflict of interest.
What Mr Bontoux said was -
"9. There are four reasons I say I did not think B & J were doing a good job for me post the Orica acquisition.
(a) the fall in sales of my product to B & J in the latter part of 2004 and early part of 2005;
(b) the fact that I was receiving the kind of enquiries which Justice White referred to at 186 of his Judgment set out above. These enquiries contained specific B & J codes for our product. These codes are known only to B & J and B & J customers. So the fact that I was receiving enquiries from, for example, persons in Paris quoting me B & J code numbers and trying to acquire this product from me told me that customers in Australia who were buying my product through B & J were now trying to source the same product from persons other than B & J. The question I had was: why were these persons not going through B & J in the usual way? This had not happened before. The only answer was: these people were unhappy with B & J and were cutting them out of the loop. There was no other explanation as far as I was concerned, and this reflected poorly on B & J. It told me B & J were losing their customers. That of course impacted directly on me, and meant my sales to B & J would fall, which they were doing as set out in (a) above.
(c) They had managed to lose, for whatever reason, the people with the expertise required to sell my products. I refer principally to Nguyet Nguyen and Tracy Lynam, and the expertise required to sell my products which I set out more fully below. I appreciate from reading the Judgment that Justice White has found that there was a plan involving Bill McCartney, Graeme Love, Nguyet Nguyen and Tracy Lynam to leave B & J and start up a competitive company in the event Orica did not do what they said they would do (ie not change the B & J business). However, I was not a party to any such plan. All I knew in February 2005 was that both these women did not like working for Orica. When I heard from Cavanagh, by email on 16 February 2005, that Nguyet Nguyen was leaving B & J, this fact combined with the falling sales and complaints caused me to decide to leave B & J and move my products elsewhere; and
(d) they had created a conflict of interest by acquiring Keith Harris Ltd. I explain the difficulties caused by this below."
4.4.1 Poor B & J sales figures
This was Mr Bontoux' particular reason (a).
The primary judge's first observation was that none of the contemporaneous records recorded it as a reason given by Mr Bontoux for terminating the distributorship. It is not entirely clear what his Honour meant by the contemporaneous records, but it must have been the e-mails Mr Bontoux sent to Mr McCartney in February/March 2005. It was put to Mr Bontoux in cross-examination that it was "not a matter you stated in any correspondence in early 2005 with Mr McCartney", to which he replied, "I cannot be one hundred per cent sure"; it was put that it was "not a reason at all" and he said, "It was a factor".
The e-mail of 17 February 2005 expressed concern "about what is going on in the Australian market for our products", and included that "with all the changes at B & J I have strong doubts about the future for our sales in Australia". This was concern for future sales, and although not expressed to be because of a known fall in sales it was consistent with a belief that sales had fallen in late 2004 and early 2005. Mr Bontoux did not in this or the other e-mails purport to explain his concerns in detail, or to explain to Orica why he was changing distributors. His e-mail to Mr McCann was curt, no more than advising that Ingredients Plus was Clos' "representative agent". With respect, I do not think there is great significance in the absence of specific reference to a current fall in sales, and a current fall in sales can readily enough be seen as the occasion for the concern for future sales.
The primary judge's second observation was that Mr Bontoux had not mentioned the fall in sales as a reason for terminating the distributorship in his evidence before White J. That is correct, in that there was not specific reference in the affidavit read before White J to concern over a fall in sales, nor indeed reference to concern for future sales. However, although it was not referred to in his affidavit it was known that Mr Bontoux had sent the 17 February 2005 e-mail with its doubts about the future for sales in Australia. In determining whether a belief that sales had fallen in late 2004 and early 2005 was a factor, this would appropriately be added to what he said in his affidavit, and he did say in cross-examination that it was a factor. With respect, the primary judge's observation was not entirely accurate; that reference to concern over sales became part of the evidence before White J, available as a true reflection of Mr Bontoux' concerns.
The primary judge's third observation was that Mr Bontoux "offered no sales figures to support the claim". There were none in his affidavit. In cross-examination, Mr Bontoux said that he was referring to sales by Clos, that he was able to monitor sales of lavender essence (which was Clos' major commodity) to B & J, but that he did not recall figures and only that he "was not selling lavender any more at that time in big volumes like in the past" and "definitely the volumes of lavender was down a lot". He said, "It was big enough to make me thinking it was going bad and it means it was over 20 per cent".
No doubt Mr Bontoux' evidence could have been bolstered by sales figures from Clos' records or the records of B & J as purchaser; it could also have been impugned by the respondents through B & J's records of its purchases. Taken by itself, failure of Mr Bontoux (in reality, the appellants' lawyers) to proffer sales figures does not seem to me to be of great significance. The respondents did not impugn it through B & J's records of its purchases, and for what it is worth see at [58]-[59] below as to B & J's sales in late 2004 and early 2005.
The primary judge's fourth observation was that the figures for B & J's sales to its customers "suggested that sales had not dropped off"; in context, meaning that the B & J sales figures suggested that sales from Clos to B & J had not dropped off. There are two difficulties with this. One difficulty is that sales by B & J for a relatively confined period are a doubtful guide to sales to B & J for that period, since the timing of transactions and stocks held may distort a comparison. The more important difficulty is that B & J's sales figures did fall.
The primary judge does not appear to have been assisted in this regard. His Honour may have had in mind cross-examination in which Mr Bontoux was taken to sales for the two periods October 2003-February 2004 and October 2004-February 2005, which were similar. Mr Bontoux was speaking of sales over the latter period. Comparison with the former period said nothing as to a fall in sales over the latter period. Mr John O'Connor of B & J provided a spreadsheet of its sales of Clos products, and the respondent's expert accountant Mr Wayne Lonergan, produced a graph as to which he said, that "subsequent to the acquisition of the Bronson and Jacobs business by Orica and prior to the date of the complaint of conduct (March 2005), sales by Bronson & Jacobs of products supplied by Clos d'Aguzon were in decline". The graph was on a small scale, but showed a marked decline (from about $180,000 as at October 2004 to about $80,000 as at February 2005; precision in amount and date is not feasible).
The respondents submitted that material in one of Mr Potter's reports "called into question" that there was a decline in sales in the period October 2004-February 2005. I do not think it does. It also provides comparisons with earlier periods, rather than information as to a sales trend over the period abovementioned or an extended period which includes it. The respondent's reliance on a sales spike in May 2004, apparently because sales personnel were directed to book as many sales as possible before 31 May 2004 in order to bring a more favourable price in the acquisition by Orica, does not detract from the marked decline.
In my respectful opinion, the four observations conveying the primary judge's rejection of this reason did not warrant its rejection.
4.4.2 Customer dissatisfaction
This was Mr Bontoux' particular reason (b).
Requests for direct purchase from Clos, causing belief that B & J was not providing a good service to customers, had been part of Mr Bontoux' evidence before White J, see para [24] at [29] above. White J had accepted that Mr Bontoux was concerned because the direct inquiries indicated that Australian customers were not sourcing products through B & J, see [186] at [38] above, although in the manner the hearing was conducted that did not bind the primary judge if other evidence led to a different conclusion.
The primary judge did not find this reason credible because Mr Bontoux "knew that those inquiries were coming from a competitor of Bronson & Jacobs". His Honour's reasoning is not entirely clear and, with respect, the evidence to which he must have been referring did not properly lead to rejection of the reason.
In cross-examination Mr Bontoux said that the persons in Paris and the United Kingdom who made the direct inquiries of him were regularly in contact with Sydney Essential Oils, and that he deduced that the inquiries were being made on its behalf. There was evidence that Sydney Essential Oils was both a purchaser from B & J of Clos products, and a competitor of B & J. Its position was left rather unclear, but Mr Bontoux said that he believed that it was being prompted by one of its customers to try to obtain products directly. It is difficult to see why this would not credibly have led Mr Bontoux to the view that B & J was not giving satisfaction to some of its customers, and that the customers were seeking to obtain Clos products through Sydney Essential Oils. Even if Clos still sold its product to a customer of Sydney Essential Oils, B & J was not doing a good job and other of B & J's customers might buy essential oils products elsewhere.
4.4.3 Conflict of interest
This was Mr Bontoux' particular reason (d).
The explanation in Mr Bontoux' affidavit of "the difficulties caused by" the acquisition of Keith Harris Ltd was -
"35. In this area, in early 2005, B & J created yet another problem with their acquisition of Keith Harris. Keith Harris Ltd was a little bit like B & J in that [it] had a wide chemicals distribution business essential oils as a small part of that business. This company had ties to Charabot, and had traditionally pushed Charabot in the market, just as B & J pushed my products. But now Keith Harris became part of B & J. The question was, now whose products would B & J push - mine or Charabot's? I was certainly not going to tolerate a preference for Charabot and become the second string product to that company. I do not know who the essential oil marketers were at Keith Harris, but my impression was they were seasoned campaigners given the success of Keith Harris generally and of Charabot's penetration in the Australian market as I perceived it. In my view, it wouldn't have been hard for them to get the better of Sarah Dalzeil [sic], who as I say, was a newcomer in the business. Had they done so, my product would have become the second string product.
36. In any event, I did [not?] wait around to see what would happen. This question was never resolved because of the events that happened, described above.
37. In my view, it was just another reason to leave B & J."
The primary judge observed that this was "not raised by Mr Bontoux in any of the contemporaneous correspondence". It was not specifically raised, although Mr Bontoux' point was that as a second string product sales of Clos products would suffer and loss of sales was part of the e-mail of 17 February 2005. It can also be said with some force that, as "just another reason to leave B & J", in the skimpy correspondence there was no particular reason to refer to it, and in cross-examination Mr Bontoux said -
"Q. And if this had been a genuine concern of yours, that is the Keith Harris acquisition, it's a point that you would have raised with Bronson & Jacobs, correct?
A. By the time I knew that, the relation went wrong already, so the communication about those strategy things was kind of over already, you know.
Q. So you didn't bother raising it with Bronson & Jacobs, is that right?
A. Exactly. I didn't trust them enough to enter into strategies at that time."
The primary judge then appears to have thought that Mr Bontoux can not have been concerned about the acquisition of Keith Harris Ltd because he had not made enquiries about it, which inquiries would have told him that his concern was misplaced. This was not raised with Mr Bontoux in cross-examination - he said that he thought the entire business of Keith Harris Ltd had been taken over, and the relevant challenge to him having a genuine concern was in, and was responded to in, the passage last set out. Again, as "just another reason to leave B & J" arising in early 2005 it is readily understandable that Mr Bontoux may not have enquired further.
The primary judge's grounds for finding Mr Bontoux' reason not credible are, with respect, far from persuasive.
4.5 The second main reason
The primary judge said -
"30 Secondly, Mr Bontoux gave evidence that, because of his concerns about Bronson & Jacobs following Orica's takeover, he had decided that Clos should terminate the Distributorship Agreement and that the only question for him was whether to go to Ingredients Plus or some other distributor. However, there is no contemporaneous evidence suggesting that Mr Bontoux approached other distributors. He said in his affidavit that he could have looked up David Burke who had previously worked for Bronson & Jacobs, who had left by 2005 and who he regarded as another friend and knowledgeable in the area. However, he knew nothing about the business carried on by Mr Burke. In addition, Mr McCartney, when asked to list the competitors of Ingredients Plus and Bronson & Jacobs, did not include Mr Burke's business in his list. It is hard in the light of that evidence to believe that Mr Bontoux regarded Mr Burke's business as a genuine alternative."
The affidavit evidence concerning Mr Burke to which the primary judge referred is not accurately reflected in this passage. It was -
"20. From time to time I receive offers from various people offering to become distributors of the Clos D'Aguzon range of products in various parts of the world. Had there been no Bill McCartney, Graeme Love or Ingredients Plus, I believe I could easily have found another distributor to replace B & J. For example, I could have looked up David Burke, who used to work for B & J in essential oils for many years but had left by 2005. David was another friend, knowledgeable in this area, to whom I could have turned. He knows the Australian market well, and all the industry participants. It would not have been difficult for me to find another distributor who could give me what I wanted in terms of knowledge and skill in essential oil distribution."
Mr Bontoux did not say that Mr Burke was a potential distributor, or even that Mr Burke had a relevant business, although in cross-examination he said that he thought that Mr Burke was the owner of Scott Aromatics, a distributor of essential oils in Australia in 2005 and "has been pressing me over the years to restart the business with him, so that's the one which was easy for me to go, you know". Mr Bontoux' point was that Mr Burke was knowledgeable of the Australian market "and all the industry participants". He was saying that Mr Burke could provide information and guidance in finding another distributor. With respect, the judge's criticism of Mr Bontoux' evidence in this respect was not justified.
Nor was there any particular reason for Mr Bontoux to approach other distributors, or to enquire into other distributors, when he had been solicited to appoint Ingredients Plus. It was not necessary for Mr Bontoux to appoint someone else or inquire into appointing someone else, and his failure to inquire can not count against his evidence of what he would have done had he not "gone with Ingredients Plus". Again, with respect, the primary judge's basis for his second main reason is not persuasive.
4.6 The third main reason
The primary judge said -
"31 Thirdly, Mr Bontoux was cross-examined about substitutes for Clos's products. Mr Bontoux no doubt appreciated that this cross-examination was relevant to the question whether Bronson & Jacobs had taken reasonable steps to mitigate its loss. In cross-examination, Mr Bontoux denied that Clos promoted its products as being special and distinctive and denied that it did a certain amount of blending of its own to try to distinguish its product from those of others. However, those denials contradicted evidence given by Mr Bontoux in his affidavit. That evidence was given to explain why Ms Dalziel (a Bronson & Jacobs' employee engaged following the Orica takeover) did not have the necessary knowledge or experience to sell Clos's products."
In his affidavit Mr Bontoux went into some detail in explaining the desired marketing skills for Clos' essential oils, leading to adverse comparison of Ms Dalziel's skills with those of Ms Nguyen and others. He explained how marketing and service were the key to Clos' essential oils being preferred by end-users, and the explanation included -
"27. Firstly, one tries to promote the Clos d'Aguzon brand as something special, even though essential oils have set chemical specifications. We do a certain amount of blending of our own to try to distinguish ourselves, but in the main we are constrained by the specifications we have to meet. The 'brand' is more style than substance."
The cross-examination of Mr Bontoux included -
"Q. Your company promotes its products as having special and distinctive qualities, correct?
A. My company is promoting essential oil. Dot.
Q. And you promote those products as being special and distinctive, correct?
A. No.
Q. You promote your brand as something special, correct?
A. No.
Q. Turn to page 1471, paragraph 27. Just read paragraph 27 to yourself?
A. Yes.
Q. You agree you promote your brand as something special?
A. I mean, what is special with us is the reliability and the service. The long term things.
Q. It's important from your perspective that customers trust your product, correct?
A. Of course.
Q. It's important that they like your product and prefer it to your competitors, correct?
A. Yes, of course it's important I get the sale instead of my competitor.
Q. And you do a certain amount of blending of your own to try and distinguish your product from those of others?
A. No. What we are doing is to blend material we purchase from the farmers to meet the specification. Like, doing all our competitors.
Q. Do you do a certain amount of blending of your own to try and distinguish yourselves?
A. No.
Q. Go back to paragraph 27, please. Look at the second sentence, 'We do a certain amount of blending of our own to try to distinguish' - I think it says 'ourselves'. Do you agree?
A. Yes. But what I am answering you, when it comes to lavender, the kind of lavender we sell, you have out of 200 tonnes 100 tonnes will enter the same specification which is the requirement of the customer. So, is that really special?
Q. I'm asking you, do you do a certain amount of blending of your own to try and distinguish yourselves. True or false?
A. We make blendings to please the customer according to their specification.
Q. And to distinguish yourselves, correct?
A. I don't know to which extent that is true, so I am in difficulties to answer you." (italics added)
The primary judge must have been referring to the italicised passages. There is apparent contradiction, but correction and explanation, and the thrust of Mr Bontoux' evidence was at all times that promotion was constrained by the specifications, and marketing and service were the important things. The significance to his appreciation concerning mitigation of loss is not obvious. The degree of contradiction is a material matter in the assessment of Mr Bontoux' evidence, but of itself not a weighty one.
4.6 Mr Bontoux' other reasons
After giving the three main reasons, the primary judge without more said that "[t]he fact that I do not accept Mr Bontoux's evidence is not the end of the matter" (at [32]), and went on to consider what is now the second issue on appeal.
His Honour did not deal with Mr Bontoux' particular reason (c) for thinking that B & J was not doing a good job for Clos, namely, that B & J had lost the expertise, principally that of Ms Nguyen and Ms Lynam, thought necessary for sale of Clos' products. Nor did his Honour deal with the related matter that he did not like the persons with whom he dealt at B & J under its new management and did not trust Orica and the new management.
Failure to deal with particular reason (c) may have been because at a later point his Honour found that it was unlikely that Ms Nguyen and Ms Lynam would have left B & J and gone to Ingredients Plus if the appellants had not breached their duties to the respondents, see [37] at [138] below; and so he excluded that occurrence from consideration of what would have occurred in any event. (I conclude that his Honour was in error in this respect, but that is not to the present point.) Not liking replacements with whom Mr Bontoux dealt could be in the same position. However, the distrust of Orica and B & J's new management described by Mr Bontoux was a different matter, and one which could well have operated on Mr Bontoux' mind.
The primary judge did not deal with another matter to which Mr Bontoux referred. Mr Bontoux said that B & J after its acquisition by Orica ceased to be "customer focused and responsive to customer's [sic] needs ... fast in terms of processing orders ... generally a nimble smallish boutique chemical company"; that it was "compress[ed] within the Orica mould", with different departments in different states and a new computer system. It was "being turned into a big bureaucracy" which "did not suit my needs". This also could well have operated on Mr Bontoux' mind.
A further matter was of some significance in deciding whether Mr Bontoux' evidence should be accepted, but was not mentioned. The 17 February 2005 e-mail included, as well as strong doubt about the future for Clos' sales in Australia, that customers were starting to complain "and I may have regretfully to decide to protect my company interest in a different way". If this was a true reflection of Mr Bontoux' views, it deserved consideration.
In relation to all these matters, it should not be overlooked that White J had found that Mr Bontoux "was unhappy with the Bronson & Jacobs distributorship" (at [186]), see [38] above), and that knowledge that Mr McCartney had an involvement with Ingredients Plus (which on White J's findings was not a breach) would be likely to have disposed him to take Clos' business to where his old friend, experienced in the essential oils business, had gone. The primary judge recognised the relevance of the friendship in considering what on appeal is the second issue, see at [101] below, but not in relation to acceptance of Mr Bontoux' evidence. With respect, the scope of the primary judge's reasoning to rejection of Mr Bontoux' evidence was unduly confined.
4.7 Conclusion as to the first issue
It was not submitted that White J's finding that Mr McCartney's solicitation of Mr Bontoux was a material cause of Clos changing its distribution arrangements precluded a finding, from Mr Bontoux' evidence, that Clos would have terminated the distributorship in any event.
This Court's "real review" of the hearing before the primary judge and his Honour's reasons ( Fox v Percy at [25]; see also Lujans v Yarrabee Coal Company Pty Ltd [2008] HCA 51; (2008) 249 ALR 663 at [2], [31]-[32]) is subject to the Fox v Percy constraints, which need not be yet again described. The respondents submitted in particular that they include "the subtle influence of [a witness'] demeanour on [the judge's] determination" and that absence of express reference to demeanour does not mean that it played no part ( Abalos v Australian Postal Commission (1990) 171 CLR 167 at 179), and that it was necessary to be satisfied that the primary judge's advantage in seeing and hearing Mr Bontoux "could not be sufficient to explain or justify [the primary judge's] conclusion" (ibid at 178).
However, the real review must address the primary judge's reasons. While a subtle influence can not be excluded, they did not refer to any impression received from seeing and hearing Mr Bontoux give evidence. Rather, his Honour gave "main reasons" involving a collection of objective factors leading to the view that Mr Bontoux's reasons for saying he would have terminated the Clos distributorship in any event were not credible and his evidence was not reliable. They were "main reasons", which suggests subsidiary reasons, but the subsidiary reasons were not indicated and must be taken to have been subservient to the validity of the main reasons.
This Court has an appellate court's advantage, which can be a counter to a trial judge's advantage of the unfolding of the evidence over time, of careful assistance in examination of the evidence free of distraction by other trial issues: see Yarrabee Coal Company Pty Ltd v Lujans [2009] NSWCA 85; (2009) 53 MVR 187 at [3] per Allsop P referring to the court's "capacity for appellate synthesis and perspective". If on examination the objective reasons given by a trial judge for a conclusion as to credibility and a credibility based finding are unsound, the finding is unsound. Thus it was said in Shimokawa v Lewis [2009] NSWCA 266 -
" [181] The constraints brought by the trial judge's advantages to the appellate court's review of fact-finding do not exclude recognition of error in the process of fact-finding in other respects. In Abalos v Australian Postal Commission (1990) 171 CLR 167, one of the trilogy of cases said in Fox v Percy at [26] to remind of the limits under which appellate judges typically operate when compared with trial judges, McHugh J (with whom Mason CJ and Deane, Dawson and Gaudron JJ agreed) took from the speech of Lord Sumner in SS Hontestroom v SS Sagaporack (1927) AC 37 at 47 that appellate judges are in a position of disadvantage against the trial judge "unless it can be shown that [the trial judge] has failed to use or has palpably misused his advantage". These words, which have achieved mantra-like status, encompass where the trial judge has made credibility based findings (even expressly by regard to demeanour) for reasons which in whole or in part do not truly go to the reliability or veracity of the relevant evidence, or without taking account of an important consideration or considerations material to evaluation of the credibility or veracity.
[182] In those circumstances there comes to the fore the appellate court's advantage of the more mature assessment of the evidence than the pressures of decision-making at trial permitted, or which sometimes comes simply because second thoughts are better thoughts. Credibility determined from or with regard to demeanour is seldom the only basis for fact-finding, and commonly (and in the present case) there must be an evaluation of credibility together with other matters which weigh for or against the ultimate factual findings."
See also Davis v Veigel [2011] NSWCA 170 at [42], pointing out that "for the finding to be vitiated the error that the primary judge made must be an important one which was material to evaluation of the reliability or veracity of the relevant evidence".
As to the primary judge's first main reason, for the reasons I have given his Honour's four observations conveying rejection of Mr Bontoux' particular reason (a) did not warrant its rejection; nor was his Honour's rejection of Mr Bontoux's particular reason (b) well founded; nor are his grounds for finding Mr Bontoux' particular reason (d) incredible persuasive. The basis for his Honour's second main reason is also not persuasive and, while there is a basis for the third main reason, it does not in my view make up for the unsoundness of the other main reasons. His Honour did not fully deal with Mr Bontoux' explanation of why he would have terminated the Clos distributorship in any event, or with the e-mail of 17 February 2005, for the light they might shed on whether Mr Bontoux' evidence should be accepted.
As well, his Honour did not (at least expressly) take into consideration the probabilities. Of course, it may be that Mr Bontoux gave evidence that he would have terminated the Clos distributorship in any event in order to help his old friend Mr McCartney avoid payment of substantial damages. But it could also be said with some force that, as a matter of probability, he might have been caused to terminate the distributorship because he was unhappy with the B & J distributorship and concerned about the direct inquiries (as found by White J at [186], see [38] above), because of his distrust of Orica and B & J's new management and distaste for the new B & J as a cog in the Orica wheel, and because he thought Mr McCartney had been treated badly. There is nothing improbable in what Mr Bontoux said in these respects. These matters deserved consideration in deciding whether Mr Bontoux' evidence should be accepted, and with them would be considered whether Ms Nguyen would have stayed with B & J and the effect of a move to Ingredients Plus on the probabilities. And on the evidence, there were a number of distributors apart from Ingredients Plus, in a competitive market, to which Mr Bontoux could have changed Clos' distributorship.
In my opinion, it is open to this Court to uphold the appellants' challenge to the primary judge's refusal to accept Mr Bontoux' evidence, and I would do so. That does not mean that Mr Bontoux' evidence should be accepted and a finding made that Clos would have terminated the distributorship in any event. The challenge as upheld is destructive of the primary judge's reasoning to his conclusion, but leaves open whether or not the opposite conclusion should be come to and if not what conclusion should be come to.
4.8 What to do
We have not seen and heard Mr Bontoux give evidence. Although we can consider the persuasiveness of the reasons he gave in saying that he would have terminated the Clos distributorship in any event, and any matters which detract from their acceptance and their persuasiveness, and while we can have regard to other relevant matters and the probabilities, we lack that important part of fact-finding. It is very material in the present case, when Mr Bontoux' reliability and credibility are put in issue by the respondents. In my opinion, there must be a new trial on the question of whether, through acceptance of his evidence, the Clos distributorship would have been terminated in any event.
The appellants submitted that this Court could decide the question for itself, while accepting that a new trial would be necessary if that were not accepted. They referred to Beech v Advanced Management Consulting Pty Lt d [2002] NSWCA 311, Murphy v Mark (1977) VR 316 and Backwell v AAA (1997) 1 VR 182. The respondents also did not wish a new trial, and asked that this Court decide for itself if we felt able to do so.
In Beech v Advanced Management Consulting Pty Lt d it was said at [31] that a new trial was necessary because "[t]he reasons why [the trial judge's finding cannot stand do not lead inevitably to a preference for the evidence of Mr Beech". The appellants submitted that, whereas in that case there was a conflict of evidence between two witnesses, there was no such conflict in the present case and it is "a question of measuring what [Mr Bontoux] said against the background circumstances and inherent probability". However, in the present case the reasons why the primary judge's refusal to accept Mr Bontoux' evidence can not stand do not lead inevitably to acceptance of his evidence, and the cold print of the transcript is inadequate for an assessment of his reliability and credibility. That is so even if there is no conflicting testimony.
In Murphy v Mark the court reassessed damages, but expressly when "no question of the credit of the medical witnesses was raised" (at 321). That is not this case. In Backwell v AAA both parties asked that the court reassess damages after a jury trial, and a majority in the court was prepared to do so because of that joint request and on the basis of inferred facts which the jury must have accepted. That is also not this case.
No one would wish a new trial on the parties. However, I remain of the view that there must be a new trial as to the question abovementioned.
The appellants submitted that, in that event, it should be ordered that the judgment sum and costs paid by them to B & J be returned pending the outcome of the new trial. This appears to have been overlooked in the respondent's submissions. The parties should have the opportunity to make further submissions on the point.
5. Second issue: the likelihood of termination
A new trial on whether the Clos distributorship would have been terminated in any event would appropriately, and in my view necessarily, extend to the likelihood of termination. The evidence given by Mr Bontoux expresses relevant considerations, and if repeated its acceptance, even if in part, would be material to the likelihood of termination. In truth, his evidence went and would go to whether the likelihood of termination of the Clos distributorship in any event was a 100 per cent likelihood or something very close to it, and the two questions of acceptance of his evidence, and some lesser likelihood of termination can not sensibly be separated.
On one view, that makes consideration of the second issue of no utility. However, I propose to deal with the second issue as the evidence now stands, that is, on the assumption that Mr Bontoux' evidence that he would have terminated the Clos distributorship in any event is not accepted (although that leaves rather uncertain what may be acted upon within his evidence such as general dissatisfaction, dislike and distrust). The parties may be assisted in the future course of the proceedings, perhaps even assisted to come to an accommodation.
5.1 The primary judge's reasons
The primary judge described at [33]-[37] the "context" for determining the likelihood that Clos would have terminated the distributorship at some time following the acquisition of B & J by Orica. The intention was to describe relevant circumstances absent Mr McCartney's breaches contributing to termination of the distributorship as found by White J.
In summary, the context was -
(a) Clos was at liberty to terminate the distributorship at will;
(b) Mr Bontoux remained good friends with Mr McCartney, but Mr McCartney did nothing to encourage Mr Bontoux to change distributors;
(c) Ingredients Plus would still have been established by Mr Love but, in order to exclude that Mr McCartney had provided working capital in breach of the consultancy agreement, that would not have happened until after the termination of Mr McCartney's consultancy agreement on 26 February 2005;
(d) There was some disruption of B & J's business from restructuring and administrative changes, including that some employees were made redundant and the role of others was changed, which "would have caused annoyance to suppliers (including Clos), customers and staff" (at [37]);
(e) Ms Nguyen and Ms Lynam were likely, in the sense of more probable than not, to remain with B & J rather than move to Ingredients Plus: his Honour's conclusion in this respect was explained in some detail.
Matters (a) and (b) were not contentious, but the remaining matters received attention on appeal.
The primary judge declined to give any weight to the fact that a number of other suppliers terminated their distributorships with B & J following the acquisition by Orica; this was not challenged on appeal. His Honour said also that "the principle derived from Armory v Delamirie (1722) 1 Stra 505; 93 ER 664 is relevant in this context", whereby any uncertainty in deciding whether the distributorship would have been terminated in the absence of the appellants' conduct "should not be allowed to operate in [the appellants'] favour" (at [39]). This also received attention on appeal.
The primary judge's reasons after describing the context were quite brief. His Honour said -
"40 Taking these matters into account, in my opinion, the acquisition of Bronson & Jacobs by Orica increased the risk that Clos would terminate its Distributorship Agreement. Ingredients Plus would have been set up some time after 26 February 2005. Mr Bontoux had a close relationship with Mr McCartney and Mr Bontoux would have known that Mr McCartney had some connection with Ingredients Plus, although Mr McCartney would have said nothing to Mr Bontoux to encourage him to change distributors. The likelihood, however, is that key employees - Ms Nguyen, in particular - would have remained at Bronson & Jacobs. That would have been an important consideration to Mr Bontoux. I deal later in this judgment with the question of precisely what reduction should be made to Orica Investments' damages to take account of these facts."
When his Honour came to the reduction, he first dealt with the period to 31 May 2009. He said -
"52 ... The business that is to be valued for the purpose of calculating damages is the business that Bronson & Jacobs was likely to have had as a result of the Clos Distributorship. That business has two important features. First, it was dependent on retaining the Clos Distributorship. For the reasons I have already given, I think that there was a significant risk that it would not have done so. Secondly, the business was heavily dependent on retaining TP Health as a customer since approximately 60% of the sale of Clos's products was to that customer. In fact, Ingredients Plus did lose TP Health as a customer for lavender oil recently.
53 There is no science to the determination of an appropriate discount. For the reasons I have already given, I think that there was a significant risk that Clos would have left Bronson & Jacobs in any event. But I do not think that it was greater than 50% or anything like it. I also think that some allowance should be made for the risks associated with the loss of TP Health as a customer. Taking these matters into account, I think that Bronson & Jacobs' claim for damages in respect of the initial period should be reduced by a further 20%."
The loss of T P Health as a customer was not more specifically dealt with in the primary judge's reasons; I come to it below at [145]. Because of the allowance for the loss of T P Health, his Honour's assessment of the likelihood that the Clos distributorship would have been terminated in any event must have been materially less than a 20 per cent likelihood.
The primary judge then separately addressed the discount for the period after 31 May 2009. His Honour said -
"54 Mr Lonergan [the expert accountant for the respondents] argued in his report that Bronson & Jacobs should recover nothing after 31 May 2009 on the basis that at that time Mr McCartney was no longer bound by the restraints in the Share Sale Agreement. I do not accept this argument. By then Clos would have been with Bronson & Jacobs without Mr McCartney for a period of 5 years. The likelihood that Mr McCartney would still be keen to entice Clos away from Bronson & Jacobs and the likelihood of him successfully doing so by that stage would have been small. In those circumstances, I think that I should discount the damages claimed by Bronson & Jacobs in this period by a further 10% (that is, by a total of 30%) to allow for that fact that the application of the discount rate calculated by Mr Potter in this period does not involve the possibility of double counting of the type I referred to earlier and to allow for the fact that there was some small chance that Mr McCartney would, at some time after 31 May 2009, seek to persuade Mr Bontoux to leave Bronson & Jacobs and would succeed in doing so."
The possibility of double counting to which his Honour referred was part of the discount rate used by Mr Potter for the period to 31 May 2009. Double counting was perceived because it was "intended in part to reflect a risk that [the actual cash flows] would not be earned" (at [51]). The additional 10 per cent partly allowed for the fact that that risk had not been taken into account for the period after 31 May 2009. The assessment of the increased likelihood that the Clos distributorship would have been terminated in any event must have been materially less than a 10 per cent increased likelihood - the primary judge described it as "some small chance".
The discounts were additional to the discount built in through Mr Potter's use of a 13.4 per cent discount rate to take account of general commercial risk (but not risk peculiar to the B & J essential oils business). Mr Potter thought it a conservative discount rate.
5.2 Appellate review of the discounts
The appellants accepted that this Court should regard the primary judge's assessment of the discounts as analogous to a discretionary decision, and that it was necessary that they persuade the Court that his Honour had acted on a wrong principle of law, misapprehended the facts or made a wholly erroneous estimation. Unsurprisingly, that was also the respondent's position. Both parties provided helpful submissions, and it is appropriate to explain why I consider that they were correct.
The likelihood that Clos would have terminated the distributorship quite apart from Mr McCartney's wrongful conduct is a past hypothetical. Speaking of assessment of damages, the court "must form an estimate of the likelihood that the hypothetical situation would have occurred"; it "assesses the degree of probability that [the] event would have occurred": Malec v J C Hutton Pty Ltd (1990) 169 CLR 638 at 639 per Brennan and Dawson JJ; at 643 per Deane, Gaudron and McHugh JJ. This is a necessarily evaluative determination. So also is determining the likelihood of termination of the distributorship necessarily evaluative, and it is the same so far as there is a future element in the period after 31 May 2009.
There are many such evaluative tasks in the law, in assessing damages and otherwise. Even if they are not properly described as the exercise of a discretion, itself a term with varied use ( Dwyer v Calco Timbers Pty Ltd [2008] HCA 13; (2008) 234 CLR 124 at [37]-[39]), they may attract the principles governing appellate review of discretionary decisions.
An illustration outside the area of assessment of damages is Singer v Berghouse (1994) 181 CLR 201, where the determination of whether an applicant for provision under the Family Provison Act 1982 had been left without adequate provision for his or her proper maintenance, education and advancement in life was described as strictly a question of fact, albeit with the making of value judgments, but one to which the principles governing appellate review of discretionary decisions should apply (at 210-12 per Mason CJ and Deane and McHugh JJ). Their Honours expressed agreement with the comments of Kirby P in Golosky v Golosky (CA, 5 October 1983, unreported), whose holding to that effect was endorsed -
"Unless appellate courts show restraint in disturbing the evaluative determinations of primary decision-makers they will inevitably invite appeals to a different evaluation which, objectively speaking, may be no better than the first. Second opinions in such cases would be bought at the cost of diminishing the finality of litigation in a troublesome area and, sometimes at least, with a burden of costs upon the estate which should not be encouraged."
Looked at in another way, in Norbis v Norbis (1986) 161 CLR 513 at 518 Mason and Deane JJ described an order as discretionary -
" ... because it depends on the application of a very general standard - what is "just and equitable" - which calls for an overall assessment in the light of the factors mentioned in s 79(4) [of the Family Law Act 1975 (C'th)], each of which in turn calls for an assessment of circumstances. Because these assessments call for value judgments in respect of which there is room for reasonable differences of opinion, no particular opinion being uniquely right, the making of the order involves the exercise of a judicial discretion. The contrast is with an order the making of which is dictated by the application of a fixed rule to the facts on which its operation depends.
The principles enunciated in House v R were fashioned with a close eye on the characteristics of a discretionary order in the sense which we have outlined. If the questions involved lend themselves to differences of opinion which, within a given range, are legitimate and reasonable answers to the questions, it would be wrong to allow a court of appeal to set aside a judgment at first instance merely because there exists just such a difference of opinion between the judges on appeal and the judge at first instance."
Returning to the assessment of damages, regard has been had to the nature of the particular task. In Moran v McMahon (1985) 3 NSWLR 700 at 723 Priestley JA regarded the assessment of damages for non-economic loss as akin to the exercise of a discretion, but questioned whether assessment of damages for lost earning capacity was of the same kind -
"There does not seem to me to be anything discretionary or quasi-
discretionary in the calculation of the amount of money lost by a plaintiff between the date of his injury and the date of the hearing of his claim for damages. Difficult questions of fact may be involved particularly when consideration is being given to the extent to which the plaintiff's injuries restricted his capacity to work but these questions are answered by the trial judge's evaluation of the facts. I do not know that it has ever been suggested that once he comes to a conclusion on the factual material before him he has any discretion to act on any other but that conclusion. Similarly, in regard to the plaintiff's loss of earning capacity from the date of judgment in his case into the future the trial judge is often faced with a difficult question of evaluation. Obviously different minds may evaluate differently the conclusion to be drawn from the factual material. Once again, this type of evaluation seems to me to be of a different kind from the evaluation made of the amount of money appropriate in the circumstances of the plaintiff's case to be included in his damages for the completely non-pecuniary element in his damages of pain, suffering and loss of the amenities of life. Here, the uniqueness of each plaintiff's position, the incommensurability of what it is that has to be valued with ordinary money figures, the lack of any kind of
Mr Potter did not regard the discrepancies as significant to the overall reliability of the derived gross profit margin. He said that it was not unusual to see "anomalies" in a "large data set of sales", and that they were small amounts relative to the sales of the business; he said that he "did not think they were anomalies of note". He gave instances from his experience, and said that "I have seen that in a lot of data sets and it didn't raise concerns for me". It did not affect his opinion as to gross margins or otherwise.
Primary record-keeping, and compilations such as the spreadsheet, are not always free of discrepancies, nor are the discrepancies always fully explained. The ideal in record keeping and in the presentation of evidence is seldom achieved, and the tribunal of fact is not obliged to reject a claim or one of its components when it is not attained. It was well open to the primary judge to conclude that the total figures for sales and costs of sales were sufficiently reliable, in the light of the evidence of Mr O'Connor and Mr Potter, to support Mr Potter's gross profit margin. I do not think error has been shown in his Honour doing so.
The primary judge's reference to the gross profit margin achieved by Ingredients Plus was no more than confirmatory. Further, it was not in terms of consistency, but was that the B & J gross profit margin "does not seem unreasonable when compared with" the Ingredients Plus gross profit margin.
We were not referred to any evidence which would have assisted the primary judge to compare the gross profit margins of 30 per cent and 24.7 per cent. In particular, we were not referred to evidence of Mr Lonergan or cross-examination of Mr Potter to the effect that the difference was so great as to cast doubt on the B & J gross profit margin, and Mr Potter considered that the two figures were consistent. The primary judge tested the 30 per cent gross profit margin by considering unreasonableness through comparison. I do not think it has been shown that he was in error in failing to see unreasonableness.
The appellants' challenge to the 30 per cent gross profit margin should not succeed.
7. Fourth issue: deduction for overheads
The primary judge said that B & J had very substantial overheads whether or not it retained the Clos distributorship, and that following its acquisition by Orica a number of the overheads were absorbed by Orica. His Honour asked himself what incremental costs B & J would have incurred if it had retained the Clos distributorship. He referred to a general statement by Mr Lonergan that "if you lose a couple of million dollars of sales you cut overheads no matter who you are", and observed that Mr Lonergan "did not attempt to identify what those costs might be in this case" (at [49]).
The primary judge continued -
"50 Despite [counsel's criticism of Mr Potter's decision to make no allowance for overheads], I think the approach taken by Mr Potter was reasonable. Mr Potter accepted that there would be some overheads associated with the Clos Distributorship. However, he thought that those overheads were likely to be negligible. In his view, given the size of Bronson & Jacobs and of Orica, in particular, it was reasonable to assume that most overheads associated with the Clos Distributorship would be absorbed by the existing business. In addition, he took the same approach to the additional costs incurred by Bronson & Jacobs in seeking to find a substitute supplier to Clos. He assumed that those costs would be absorbed as part of the business and he did not include those costs in calculating Bronson and Jacob's loss, although, subject to any failure to mitigate on the part of Bronson & Jacobs, they were clearly recoverable. Consequently, to some extent at least, any incremental costs that Bronson & Jacobs might have incurred in keeping the Clos Distributorship were offset by the costs incurred by Bronson & Jacobs in searching for an alternative for which Mr Potter made no allowance at all. In my opinion that was a reasonable approach and I do not think any adjustment needs to be made to Mr Potter's calculations to take account of these matters."
A precise mathematical analysis was not possible. The appellants pointed to net profit figures for Ingredients Plus in Ms Pearce's affidavit, in the range of 4 to 11 per cent, and to estimates by Mr McCartney and Ms Pearce of B & J net profit figures of around 5-8 per cent on Clos products prior to the acquisition by Orica. They said that direct costs such as packaging and consumables relating to Clos products would not be absorbed into B & J's business, and referred to evidence of Mr Mario Licciardi that under Orica's system the costs of warehousing and administration were attributed to products according to standard formulae. They submitted that there were substantial costs, including the costs of the significant time spent by Ms Nguyen and Ms Lynam selling Clos products, which could not be ignored as overheads.
The appellants accepted that Clos products would have been "a very tiny fraction" of Orica's turnover. The Ingredients Plus figures were not a clear or particularly useful guide to B & J's operations as part of Orica. The earlier B & J net profit figures were not of great significance after its acquisition by Orica, nor was the internal attribution of overheads to products according to formulae.
No doubt there were some overheads incurred solely in relation to Clos products, as the primary judge accepted, but Mr Potter fully explained why he considered that most of B & J's operating expenses would be shared with other product lines and other divisions within Orica and would be "materially fixed rather than variable in respect of the sale of Clos and substitute product" (First Report, paras 4.18-4.32; see also Reply Report paras 8.1-8.9). The cross-examination of Mr Potter made no headway. Mr Lonergan said in his report that it was "not reasonable to expect that no overhead or other costs of any description and of any amount were incurred" in relation to the sale of Clos products, in context, meaning costs additional to Orica's operating costs. In the cross-examination of Mr Lonergan he gave the general evidence abovementioned and agreed that he had not quantified the incremental difference in overheads.
Mr Potter did not say that there would be no incremental overhead costs at all, but that they were likely to be small. He gave them recognition by offsetting the B & J costs of seeking to find a substitute supplier; those costs were quantified by Mr Potter at approximately $180,000. The primary judge had divergent opinions of two experienced accountants; Mr Potter's opinion was reasoned and not unreasonable, and Mr Lonergan's opinion did not command acceptance. It was open to the primary judge to prefer Mr Potter's opinion, and no error has been shown in his Honour's acceptance of Mr Potter's approach.
8. Fifth issue: mitigation of loss
With the termination of the Clos distributorship, B & J set about finding alternative suppliers of the essential oils which Clos had supplied and marketing those essential oils to its customers in place of the Clos products. This involved persuading the customers that they were appropriate substitutes. The task was given to Ms Dalziel, who had available the assistance of (amongst others) Mr Barry Clark. Although Ms Dalziel was inexperienced in the essential oils business, Mr Clark had extensive experience and had been a consultant to B & J since 2000.
The appellants submitted to the primary judge that B & J had failed to mitigate its loss because alternative suppliers were readily available and at least one alternative supplier of every product was noted on stock cards part of its records, and because of criticisms of what Ms Dalziel had done.
The primary judge did not accept the submissions, for reasons appearing in the following paragraphs -
"56 In my opinion, Bronson & Jacobs did not fail to mitigate its loss. The question is not so much what Bronson & Jacobs might have done to mitigate its loss as what it did do and whether, in all the circumstances, that was reasonable. As Lord MacMillan said in Banco de Portugal v Waterlow and Sons Ltd [1932] AC 452 at 506:
'[The] law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken.'
That passage was quoted with approval by Yeldham J in Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5 at 9. One way of testing whether what the plaintiff did was reasonable is to look at the alternative courses available to it. But ultimately the question is not whether there was a better way of doing things but whether what the plaintiff did was reasonable.
57 Bronson & Jacobs was placed in a difficult position as a consequence of the Defendants' conduct. It lost key personnel who had established relations with customers. The Distributorship Agreement with Clos was terminated with little warning. In response to these events Bronson & Jacobs gave to Ms Dalziel the task of finding alternative suppliers. Ms Dalziel had been engaged by Bronson & Jacobs in December 2004 as the Product Manager - Essential Oils and Aromatic Chemicals. She did not have experience of the essential oils business at that time. However, Mr Clark had worked as a consultant for Bronson & Jacobs since 2000 following the acquisition by Bronson & Jacobs of the fragrance manufacturing part of Quest International's business (where Mr Clark had worked for approximately 37 years). He had extensive experience in the industry and was available to assist Ms Dalziel. Ms Dalziel gave evidence and she struck me as a competent and intelligent person.
58 Ms Dalziel gave evidence of the extensive steps she took to find alternative suppliers. She put in place a committee to assist her. She searched for suppliers of alternative products, prepared samples of Clos's products to send to those suppliers and asked them to prepare samples of substitute products to those supplied by Clos. She then evaluated those samples and sought to convince customers that they were appropriate substitutes. Mr McCartney, Mr Love and Mr Clark were critical of this process. Mr McCartney said that it was a "rather enormous exercise" that it was unnecessary to carry out. Mr Clark says that it is not what he would have done, although he did not say that to Ms Dalziel at the time. In addition, he conceded in cross-examination that he thought that her actions were reasonable.
59 It may be that someone with the experience of Mr McCartney's [sic] would have approached the task confronting Ms Dalziel differently. Whether that would have made any difference is far from clear. Clos undoubtedly had a good reputation and produced products of a high quality. Many of Bronson & Jacobs' customers were used to those products. It is one thing to say that they would have accepted a substitute if Clos's products had become unavailable. It is another thing to say that they could have been persuaded to accept an alternative when they could acquire the product that they were used to from people with whom they were used to dealing simply be swapping suppliers. In any event, the question is not whether Bronson & Jacobs could have done a better job than it did to keep the customers it had in the difficult circumstances it found itself in. Rather, the question is whether it took reasonable steps to keep those customers. In my opinion it did."
The appellants did not dispute his Honour's formulation of the question for his determination. They challenged the answer to the question.
The appellants submitted that alternative suppliers could readily have been sourced from the stock cards and could and should immediately have been approached, and that the evidence showed that customers had already approved the alternative suppliers. Thus, they submitted, it was easy for B & J to obtain and provide to its customers acceptable substitute products shortly after March 2005, whereby it would not have suffered any loss. Their submissions on appeal did not take up the criticisms of Ms Dalziel, save so far as she did not resort to the stock cards.
Even if this be correct, it is not clear that B & J would not have suffered any loss at all in coping with the sudden loss of the distributorship. However, I do not think that the appellants, on whom the burden of proof rested (eg Roper v Johnson (1873) LR 8 CP 167; TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130), established that B & J acted unreasonably.
The evidence was rather confused and incomplete and, with respect, could have been more fully explained by the judge. Mr McCartney gave evidence of stock cards on which approved alternative suppliers were recorded. Mr Clark confirmed their existence, and said that the alternative supplier for each customer was also entered on the Berger computer system. It appears that the stock cards were lost when B & J moved premises in late 2006. The Berger computer record was not further explained (although it seems that it was replaced by the SAP system at some point; perhaps the record was lost, but there was no evidence). Ms Dalziel was aware of the stock cards, but was not aware that they recorded alternative suppliers for each customer. She could have enquired of others, Ms Francis Leung and Ms Sue Rennie, purchasing officers for essential oils, being identified, although she was unable to say whether or not she had done so; whoever she asked, she said she was directed to the Berger computer system. Ms Leung and Ms Rennie did not give evidence, and what would have been learnt from the computer system was not further explained. Ms Dalziel was not told, by Mr Clark or anyone else, that substitute products were already identified or were stated on the stock cards.
The primary judge made no findings as to this evidence, although he referred at [55] to Mr McCartney's evidence of a "policy" to keep the stock cards and may have found that they were kept. There is no reason not to calculate that they were.
The absence of findings may have been because his Honour's conclusion appears to have rested on evidence of Mr Clark in cross-examination. Part of Mr Clarke's job at the time was sourcing and evaluating alternative supply, and he said -
"Q. And you knew that Ms Dalziel and others were relying on you to fulfil your obligations under your consultancy agreement, correct?
A. Yes.
Q. And I take it, conformably with the answers that you've just given, if Ms Dalziel had been doing anything unreasonable or inappropriate you would have felt yourself duty bound to point that out, correct?
A. Correct.
Q. So it's fair to say this, isn't it, there's no definitive right or wrong way of locating alternative suppliers?
A. There's no difference.
Q. I'm sorry. There may be no single right way of finding an alternative supplier? You might have to adopt various strategies?
A. Correct.
Q. And consistently with that, there was a range of strategies which Ms Dalziel could have deployed to find an alternative supply, correct?
A. Yes.
Q. And what she was doing was within that range of reasonable strategies, correct?
A. Yes.
Q. Now, in paragraph 20 of your affidavit you say that the 'the course Sarah embarked upon is not what I would have done'. Do you see that?
A. Yes.
Q. And you say you didn't question the wisdom of her actions at the time?
A. She was the boss so --
Q. That's because you regarded her actions as reasonable, even if not precisely what you might have done in the circumstances?
A. I thought her actions were reasonable, yes."
It may be that the stock cards or the computer system provided a convenient means of identifying alternative suppliers, and that Ms Dalziel failed to resort to them. But Mr Clark, who knew of the stock cards with their record of alternative suppliers, did not cause resort to them. His criticism of Ms Dalziel ("not what I would have done"), not communicated at the time, was in relation to sending samples of Clos products to international suppliers for evaluation of replacement essential oils, not in relation to failing to resort to the stock cards or the computer system. He as an experienced person and consultant to B & J thought Ms Dalziel acted reasonably.
This evidence was all but fatal to the discharge by B & J of its burden of proof. No error has been shown in the primary judge's conclusion that B & J acted reasonably.
9. The result
The primary judge's assessment of damages can not stand, and the judgment must be set aside. It may be that the parties, more particularly the appellants, are content to proceed on the basis that Mr Bontoux' evidence is not accepted and the damages are $612,917 plus interest. If not, there must be the limited new trial.
The parties should have the opportunity to verify my calculation, and also to consider the future course of the proceedings including whether they can now come to an accommodation. Because the disposition of costs could depend on the detail of our decision, and having in mind the offer(s) presently not known to us which brought the element of indemnity costs in the primary judge's orders, we were asked to defer consideration of costs. I propose that the only orders at the present time be -
1. Direct that no later than 18 November 2011 the parties inform the Associate to Giles JA by joint memorandum of any correction to the calculation of damages and whether the Court's orders are to include an order for the limited new trial.
2. Direct that the parties file and serve their respective submissions accompanied by draft orders -
(a) if necessary, as to repayment of the judgment sum and costs; and
(b) as to costs of the hearing before the primary judge and on appeal; the appellants no later than 23 November 2011 and the respondents no later than 28 November 2011.
Unless the parties request an oral hearing, in which case the Court will consider but not necessarily agree to the request, or the Court considers that an oral hearing is necessary, the Court will determine these remaining matters on the written submissions.
MACFARLAN JA : I agree with Giles JA.
YOUNG JA: I agree with Giles JA subject to what follows.
I agree that for the reasons given by Giles JA there should be a limited new trial. However, I am also prepared to deal with the appeal on the compromise basis referred to by Giles JA in [190].
I wish to comment on two matters:
(a) the procedure adopted in the present case of having liability decided by Judge X and damages by Judge Y; and
(b) the discussion as to the ambit of the principle allegedly stemming from Armory v Delamirie (1722) 1 Stra 505; 93 ER 664; [1558]-[1774] All ER Rep 121.
(a) White J's original order was that the damages be assessed by an associate judge. This is the standard order. The reason for it is that, under the classic procedure in equity, the judge makes a determination and then the person who used to be referred to as the "Master", being a person for all intents and purposes within the chambers of the judge, is bound by the findings that the judge made and has liberty to refer back to the judge for additional findings if need be and outside this area may make his or her own findings.
Where the damages trial is to be done by a different judge, there are quite considerable theoretical problems as to how far the second judge is bound by the first judge's findings where there is no issue estoppel. Those difficulties were overcome in the instant case by common sense, but in my view it is preferable that the damages either be fixed by the trial judge on a subsequent occasion or else by an associate judge, rather than adopting the procedure that was adopted in the instant case.
(b) As to Armory v Delamirie , it is to be noted that Ball J did not actually say that he applied Armory v Delamirie , he said he applied "the principle derived from Armory v Delamirie " (see [39]). He quoted what Handley JA had said, with the approval of two other judges, in Houghton v Immer (No 155) Pty Ltd (1997) 44 NSWLR 46, 59. Again Handley JA merely cited a principle and then said "compare Armory v Delamirie ".
Armory v Delamirie itself contained two basic principles:
(a) that the possession of a finder is good against all the world except the true owner and that that person has the right to sue in conversion; and
(b) that in the circumstances of that case, the jury could presume the strongest against the defendant and make the value of the best jewels the measure of their damages.
In early years it would appear that principle (a) was considered to be the important one; see eg Bourne v Fosbrooke (1865) 18 CB (NS) 515; 144 ER 545. In that case the plaintiff was a schoolgirl who was the niece of the housekeeper of the testator. She had been given various articles by either the testator or the housekeeper. When the testator died the executor took those articles and sold them. The plaintiff sued in trover and succeeded before the Full Bench of the Court of Common Pleas. Erle CJ said at 525 (549):
"I am clearly of opinion that she may maintain this action against the present defendant, because the rule of law is that a person who is in lawful and quiet possession of an article has a right to recover its value if a wrong-doer comes and takes it away. A person who takes away and disposes of an article with the authority of the owner cannot be a wrong-doer: but one who does so without any colour of title or authority is a wrong-doer, and is liable to an action at the suit of the party whose possession is so invaded. So is the law laid down in the well-known case of Armory v Delamirie ."
Those words, however, are also significant because the Chief Justice defined a deliberate converter as a "wrong-doer".
It was necessary to refer to the concept of a wrong-doer because there were at least two cases decided in the 19 th century where the direction to the jury which was upheld was that the article concerned was presumed to be of the least possible value rather than the greatest value.
In Clunnes v Pezzey (1807) 1 Camp 8; 170 ER 857, a liquor merchant sent a quantity of liquor to the defendant. The defendant did not pay. The plaintiff sued in assumpsit for goods sold and delivered. All he could prove was that he delivered several hampers of full bottles of liquor, but had no idea of what they contained. Lord Ellenborough directed the jury to presume that the bottles were filled up with the cheapest liquor in which the plaintiff dealt. Reporter Campbell's note was that "where there has been no fraud on the part of the defendant, the presumption of law is against the demand of the plaintiff" and that where the defendant has been guilty of fraud and suppresses the means of ascertaining the truth, the presumption is in favour of the plaintiff's demand. The word "fraud" in this context is one that needs examination. As noted later, it does not mean any more than unconscionable conduct or perhaps gross negligence.
The same result was obtained in Lawton v Sweeney (1844) 8 Jurist 964 before the Full Court of Exchequer. That was an action for debt for money lent. The plaintiff and the defendant were at the racecourse, the defendant asked the plaintiff for a loan, the plaintiff handed him a banknote. However, this was the whole of the evidence and no-one could remember on the plaintiff's side what denomination banknote was involved. The primary judge instructed the jury that the lowest denomination banknote was 5.0.0. and they should assume the lowest denomination note was handed over, which the jury did. The Full Cou rt upheld that decision saying the case came precisely within the principle laid down in Clunnes' case.
However, one really has to go back to 1683 to see the genesis of the principle that is now being applied. In Childrens v Saxby (1683) 1 Vern 207; 23 ER 417 before North LK, the Equity Court had granted an injunction to prevent the defendants taking out execution at common law. The defendants disobeyed that injunction, levied execution. They found that the plaintiff had stored some money in a brick va ult in his house, they broke into that vault, took 150.0.0. and did damage. Lord Nottingham LC ordered the defendants to make good the money and satisfy all other damage. The defendants then asked his successor to set aside the order which the Lord Keep er refused to do. The report says that the Lord Keeper:
"thought it an idle practice in the court to put a thief to his oath to accuse himself; for he that has stolen will not stick to forswear it; and therefore in odium spoliatoris the oath of the party injured should be a good charge upon him that has done the wrong."
The reporter notes similar cases, first East India Company v Evans (1684) 1 Vern 308; 23 ER 486, where North LK refuted the proposition that the court as an Equity Court did not give discovery in matters that sound in tort and cited a case where a man ran away with a casket of jewels and was ordered to answer and the injured party's oath allowed as evidence in odium spoliatoris . Again, the reporter cited Dyer v Tymewell (1690) 2 Vern 123; 23 ER 688, where the Lords Commissioners held that where the defendant extorted 50.0.0. from the plaintiff and the decree was that the 50.0.0. be repaid with interest and costs, the costs were to be ascertained by the plaintiff's own oath.
The 4 th edition of Halsbury's Laws of England, Volume 12(1) [1108] says:
"The rule is not li mited to bailees but applies generally in actions for wrongs inflicted on chattels and in other actions where material evidence as to the value of a claim has been destroyed or impaired."
Various authorities are given for the latter proposition including White v Lady Lincoln (1803) 8 Ves Jun 363; 32 ER 395, where an agent's accounts had been kept so badly that he was not permitted to sue on them and Gray v Haig (1855) 20 Beav 219; 52 ER 587 where Sir John Romilly MR held that, where an accounting party destroys the accounts before the matters have been finally adjusted, the Court will presume everything most unfavourably to him, consistent with the established facts.
The 5 th edition of Halsbury's Laws of England, Volume 11 (Court Practice), [1105] cites the rule: "As between an innocent and a guilty party, unexplained circumstances are presumed unfavourably to the wrongdoer." The author cites the Childrens' case but continues: "But where the means of ascertaining the truth have not been suppressed" one assumes the reverse: Clunnes' case.
However, the equity cases I have cited, plus some other cases I am about to cite, show that there are other principles which point in the same direction as Armory v Delamirie , but which really do not derive from it.
In Hammersmith & City Railway Company v Brand (1869) LR 4 HL 171, the question was whether a person could obtain compensation for the damage or annoyance arising from vibration occasioned without negligence by the passing of trains. The Court held "no", but Lord Cairns said at 224:
"It is said that you ought to know how many trains a day there will be running, and the weight of them, and the speed at which they will pass. There is a well-known principle which applies to such cases, which is, that if the persons against whom the claim is made are not willing to bind themselves as to the maximum number of trains, or the weight, or the speed, then the sum must be taken most strongly against their company: upon the principles enunciated in the well-known old case of Armory v Delamirie. "
Then we get the situation which was the subject of the High Court's decision in Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64. As the headnote records, Mason CJ and Dawson J in a joint judgment and Brennan J in a concurring judgment, held that, when a contract is rescinded for breach and that breach, by preventing the performance of the contract, has made it impossible for the plaintiff to prove that the net value of his contractual benefits exceeds the wasted expenditure incurred in reliance on the defendant's promise before rescission, it is just to shift to the defendant the ultimate onus of proving that, if the contract had been performed, the net value of the plaintiff's benefits would not have covered the expenditure incurred before rescission.
Then we have the statement in LJP Investments Pty Ltd v Howard Chia Investments Pty Ltd (1990) 24 NSWLR 499 at 508 made by Hodgson J, as his Honour then was:
"It is impossible to be certain which course Chia would have taken, if it had refrained from trespassing: Chia's own unlawful act in trespassing, plus the absence of any of Chia's decision-makers from the witness box, have made such a decision highly problematic."
His Honour then considered he was justified in following Armory v Delamirie by analogy.
Another analogous situation is provided by Indian Oil Corporation Ltd v Greenstone Shipping SA (Panama) [1988] QB 345. In that case, a ship had on board some oil of the shipowners and it was mixed with oil, the property of the receivers, and transported to India. The mixture could not be separated for practical purposes and the question was how much of the oil were the receivers entitled. Staughton J reviewed a large number of cases, ancient and modern. He referred particularly to the decision of Lord Eldon LC in Lupton v White (1808) 15 Ves Jun 432; 33 ER 817. In that case the defendants had mixed ore obtained from their mine with ore from the plaintiff's mine. The Lord Chancellor said that one of the defendants, Mr White, was not guilty of any misconduct or fraud but was culpable, not morally, for having applied too little attention to his own interest (437/819). However, at 439-440 (820) he said that the defendants' acts had made it impossible for the Master to discover a fair and just account. His Lordship referred to Armory v Delamirie and said:
"Therefore, as it was proved, that the Plaintiff's evidence had been destroyed by the act of that person, who ought to have refrained from placing the transaction in that state, the Lord Chief Justice directed the jury to find, that the stone was of the utmost value they could find; upon this principle, that it was the Defendant's own fault, by his own dishonest act, that the jury could not find the real value."
His Lordship then noted that a principle not dissimilar though not precisely the same had been applied in equity. Staughton J said, after reviewing this case at p 363, "the analogy with Armory v Delamirie is striking. If the wrongdoer prevents the innocent party proving how much of his property has been taken, then the wrongdoer is liable to the greatest extent that is possible in the circumstances."
There is a problem, of course, as to what is meant by "wrongdoer". It would seem to me that the word is not equivalent to "tortfeasor" and in Lupton v White the Lord Chancellor suggested that a person who had no legal or moral blame, yet was careless in and about accounts, was a wrongdoer for the purpose of the principle. Further analyses of the cases by Staughton J show that there was a difference between deliberate mixing of goods together and accidental and that the principle akin to Amory v Delamirie applied only in the former case. Presumably this is because only in the former case could the admixer be said to be a wrongdoer.
In Rosebanner Pty Ltd v EnergyAustralia [2009] NSWSC 43; 223 FLR 406, 473, Ward J in the Equity Division of this Court said that "wrongdoer" was not a good translation of "spoliator" in the maxim quoted above. Her Honour noted at [457] that there was a spread of judicial views as to whether the blameworthiness involved required mala fides. She seemed to be in favour of the view that mala fides was not necessary based on the adoption of the exegesis in The Ophelia [1916] 2 AC 206, 229-230 by the High Court in Allen v Tobias [1958] HCA 13; 98 CLR 367, 375.
Putting all these thoughts together, it would seem that the tag " Armory v Delamirie " has been attached to a number of similar though possibly distinct principles. First, in cases where there is an action in tort relating to chattels, if the defendant who was last seen in possession of the chattel does not produce it, the court can assume it is the most valuable chattel of the type. Secondly, in actions in debt where no wrongdoing is attributable to the defendant, the plaintiff must prove its case and, if it shows that there is some damage, but cannot prove quantum, the smallest amount is allowed. Thirdly, where the plaintiff is entitled to damages and compensation and their computation is made more difficult by the defendant's action, then the Court may assume the worst against the defendant consistent with the evidence. Fourthly, in cases such as those dealt with in Commonwealth v Amann Aviation, the defendant has the ultimate onus of proving that, had the contract been performed, the net value of the plaintiff's benefits would not have covered the expenditure incurred before rescission.
In my view, the reference by Ball J to the Armory v Delamirie principle was a reference to that principle in its widest sense, and I see no error.
As to discount rate, I agree with Giles JA that the primary judge fixed the rate far too low. I agree that 65% is the proper rate.
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Amendments
01 December 2011 - Internal cross reference added.
Amended paragraphs: Para [106]
Decision last updated: 08 November 2011
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