Origin Energy LPG Ltd v BestCare Foods Ltd
[2013] NSWCA 90
•24 April 2013
Court of Appeal
New South Wales
Case Title: Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd) v BestCare Foods Ltd Medium Neutral Citation: [2013] NSWCA 90 Hearing Date(s): 4-6 March 2013 Decision Date: 24 April 2013 Before: Macfarlan JA at [1]
Hoeben JA at [9]
Ward JA at [10]Decision: 1 The appeal from the judgments of McDougall J of 31 May and 15 June 2012 is allowed.
2 Set aside orders 1 to 7 inclusive made by McDougall J on 15 June 2012.
3 Order that the referee's report of the Honourable JMN Rolfe QC published on 30 August 2011 be adopted save that:
(a) Paragraphs 916, 934, 935 and 936 are rejected.
(b) The referee's reasoning and conclusions are rejected insofar as they constitute, incorporate or reflect findings as to whether, and to what extent, the respondents would, or may, have supplied pet food to the entity known as IAMS (and indefinitely to one or more of Nestlé, Safcol or Doane) if the explosion had not occurred at the respondent's premises on 25 January 2003.4 Remit the proceedings to the Equity Division for the determination of the damages to which the respondent is entitled and the making of orders (including as to costs) that the judge considers appropriate for disposal of the proceedings, on the basis that (subject to the tender of additional evidence as to matters of calculation and the tender of any further evidence that the judge considers is warranted on special grounds), the issues should be determined on the evidence taken before the referee, in accordance with rule 20.24(1)(d) of the Uniform Civil Procedure Rules. (Note that, as part of this remitter, the question whether there should be a modification of the interest award in order to take into account the reliance placed by BestCare on the IAMS 2 scenario should be a matter for the judge hearing the matter.)
5 Order the respondents to pay the appellant's costs of the quantum appeal.
6 Grant the respondents a certificate under the Suitors' Fund Act 1951, if qualified.
[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: EVIDENCE - findings of fact - appellate review - whether a finding of fact by a referee was based on no evidence or no more than a mere scintilla of evidence
DAMAGES - negligence - method for valuing a loss of commercial opportunity(or loss of chance) - whether credit should be given for salvage value of business including any residual goodwill
PRACTICE AND PROCEDURE - whether primary judge erred in exercise of discretion in adopting the referee's reportLegislation Cited: Evidence Act 1995
Uniform Civil Procedure Rules 2005Cases Cited: Bak v Glenleigh [2006] NSWCA 10
Bruce v Cole (1998) 45 NSWLR 163
Ciccarelli v Cavasinni Developments [2004] NSWSC 788
Commissioner of Taxation of the Commonwealth of Australia v Murry [1998] HCA 42; 193 CLR 605
Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1992) 174 CLR 64
Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588
Dominion Mosaics v Trafalgar Trucking [1990] 2 All ER 246
Evans v Balog [1976] 1 NSWLR 36
Foxman Holdings Pty Ltd v NMBE Pty Ltd (1995) 38 NSWLR 615
G W Sinclair & Co v Cocks [2001] VSCA 41
Gagner Pty Ltd v Canturi Corporation Pty Ltd (2009) 236 FLR 401 (CA)
Hampton Court Ltd v Crooks Ltd (1957) 97 CLR 367
House v The King (1936) 55 CLR 499
lllawarra Hotel Company Pty Ltd v Walton Construction Pty Ltd [2013] NSWCA 6
Jones v Schiffmann (1971) 124 CLR 303
Malec v JC Hutton Ltd [1990] HCA 20; (1990) 169 CLR 638
Naxakis v Western General Hospital [1999] HCA 22; (1999) 197 CLR 269
Nine Network Pty Ltd v Kennedy Miller Television Pty Ltd [1994] NSWCA 235
Olympic Holdings v Lochel [2004] WASC 61
Ryder v Wombwell (1868-69) LR 4 Ex 32
Sellars v Adelaide Petroleum NL [1994] HCA 4; (1994) 179 CLR 332
State of New South Wales v Burton [2008] NSWCA 319
Super Pty Ltd v SJF Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549
Swain v Waverley Municipal Council [2005] HCA 4; (2005) 220 CLR 517
Tabet v Gett [2010] HCA 12; (2010) 240 CLR 537
Toomey v The London, Brighton, and South Coast Railway Company [1857] 3 C B (NS) 145
Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253
Wheelton J & ors v Edward BrydgesHardisty & ors (1857) 120 ER 86Texts Cited: McGregor QC, H. McGregor on Damages, 18th ed, Sweet & Maxwell, London. Category: Principal judgment Parties: Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd (First Appellant)
Origin Energy Retail Ltd (Second Appellant)
BestCare Foods Ltd (First Respondent)
BestCare Foods (Sales) Pty Ltd (Second Respondent)Representation - Counsel: Counsel:
B W Walker SC with E G Romaniuk, B Smith, R D Glover (Appellants)
M L Williams SC with D S Weinberger, S A Lawrance (Respondents)- Solicitors: Solicitors:
Hunt & Hunt (Appellants)
McCabe Terrill (Respondents)File Number(s): 12/223427 Decision Under Appeal - Before: McDougall J - Date of Decision: 15 June 2012 - Citation: BestCare Foods Ltd & Anor v Origin Energy LPG Ltd (formerly Boral Gas (NSW) Pty Ltd & Anor [2012] NSWSC 574, [2012] NSWSC 670 - Court File Number(s): 05/270917
JUDGMENT
MACFARLAN JA: I agree with the orders proposed by Ward JA and with her Honour's reasons. I add the following observations.
The loss of profits claim
The foundation upon which the principal limb of BestCare's lost profits claim was based was that, prior to the destruction of its factory, BestCare had a significant prospect of contracting with IAMS for the supply each year, for an indefinite number of years, of at least 80,000 tonnes of pet food. In my view, Origin is entitled to succeed on its challenge to the primary judge's adoption of the Referee's assessment of lost profits because there was no evidence, or at least none of significance, to support this proposition.
Sellars v Adelaide Petroleum NL [1994] HCA 4; 179 CLR 332 established that whilst the value of a lost commercial opportunity is to be "ascertained by reference to the degree of probabilities or possibilities" that it would be realised, a plaintiff must first prove "on the balance of probabilities that he or she has sustained some loss or damage" (at 355). In the present case BestCare did not in my view discharge that onus. The commercial opportunity that had to be considered here was in my opinion properly characterised as one to supply pet food to IAMS at the rate of 80,000 tonnes or more per year. For the reasons given by Ward JA at [112] to [193] below, none of the categories of evidence, that BestCare relied upon on appeal to support the proposition that this alleged commercial opportunity was one of some value constituted probative evidence of that fact. Those categories of evidence, whether taken individually or cumulatively, did not establish that there was more than a negligible or speculative prospect of supply at that level. In a context such as the present, the search must be for "probative evidence" (see, by way of analogy, Bruce v Cole (1998) 45 NSWLR 163 at 189 per Spigelman CJ), not, to use a phrase to which Ward JA has referred at [87] - [90], evidence that constitutes no more than a mere "scintilla of evidence".
The Dubbo business sale proceeds
On the other matter in issue on the appeal, I agree with Ward JA that Origin did not establish that the Referee should have deducted the amount of $13,681,333 from the damages to which he found BestCare was entitled. This amount was the sum obtained by the administrators of BestCare on the sale in 2005 of the premises acquired, and business established, by BestCare at Dubbo after the destruction of its Gunnedah factory. Those premises and that business were purchased or established using BestCare's own funds. It is not in my view of any significance that the funds were obtained by BestCare, wholly or in part, as a result of a claim on its insurers in respect of the destruction of the factory. Because they were its own funds, BestCare is not, at least prima facie, accountable to Origin for the proceeds of their utilisation. BestCare was entitled to, and was awarded, the costs that it incurred out of its own funds in taking the admittedly reasonable step of re-establishing its business at Dubbo, in place of that situated at Gunnedah which was destroyed by the fire.
Nevertheless, questions remain of whether Origin was entitled to any credit, not given by the Referee, against the damages award for salvage, or on any other basis, and whether any part of the Dubbo sale proceeds could fairly be taken as an indication of the proper amounts of those credits.
In my view, BestCare demonstrated that these questions are correctly answered in the negative. First, credit was given in the damages calculations adopted by the Referee for the relatively small residual value of the land at Gunnedah after destruction of the factory. Secondly, with limited exceptions, no separate award was made to BestCare in respect of plant, equipment and stock destroyed in the explosion. Rather, BestCare was compensated by the award of the costs of re-establishing its business in Dubbo. To the extent, if at all, that plant, equipment or stock at Gunnedah survived the explosion, BestCare's ability to utilise it at Dubbo reduced the expenditure necessary for it to re-establish the business there, and therefore reduced the damages awarded. As a result any credit properly available in respect of these items was duly given.
Nor was Origin entitled to a credit for the portion of the Dubbo business sale proceeds representing goodwill. The award to BestCare in respect of lost profits was not, at least in terms, an award for loss of goodwill. It was an award to compensate for trading losses in fact incurred in the period of about two years after the date of the explosion and for a loss of profits in respect of the period thereafter. To the extent that BestCare derived any revenue from the limited sales that it made to IAMS in that two year period, that revenue was taken into account in arriving at (and reducing) the amount of the losses for which compensation was given. BestCare did not earn any revenue from IAMS thereafter because, although BestCare's business continued for a period after the explosion (including at Dubbo), it collapsed within two years of, and as a result of, the explosion at the Gunnedah factory.
Looked at in terms of goodwill, the result is the same. Any goodwill that BestCare retained after its Gunnedah factory was destroyed must have been small because, notwithstanding that BestCare had insurance funds to enable it to acquire the physical assets necessary for the re-establishment of the business, the business failed. In any event, it could not be concluded, without evidence demonstrating it, that the amount obtained for goodwill on sale of the Dubbo business equated to any goodwill that BestCare retained immediately after the explosion at Gunnedah. The intervening years, expenditure on re-establishment of the business and the different location would prevent that connection being inferred without the need for evidence.
HOEBEN JA: I agree with Ward JA and the orders she proposes.
WARD JA: On 25 January 2003, a pet food factory at Gunnedah owned and operated by the respondents (together, BestCare) was destroyed in an explosion and fire that had resulted from the leakage of liquefied petroleum gas into the factory. Nicholas J found that the appellants (together, Origin) were liable for breaches of various duties of care that led to the explosion ([2011] NSWSC 908). An appeal from that decision was dismissed by this Court on 13 December 2012 ([2012] NSWCA 407).
During the course of the hearing before Nicholas J, and before findings of liability had been made, his Honour (over the objection of both parties) referred the issue as to the damages payable by Origin (in the event that Origin were to be held liable, as it later was, to BestCare) to a referee (the Hon JMN Rolfe QC) pursuant to r 20.14 of the Uniform Civil Procedure Rules 2005.
Nicholas J published his judgment on liability on 23 August 2011. The referee published his report (after a lengthy hearing) on 30 August 2011. That report was adopted, with a variation and some rejections, by McDougall J in May 2012 ([2012] NSWSC 574) and final orders were made by his Honour on 15 June 2012.
After the determination of Origin's (unsuccessful) appeal from the decision of Nicholas J, its appeal from the adoption of the referee's report and recommendations was heard.
Origin raised a number of grounds of appeal in relation to McDougall J's decision, as set out in the Further Amended Notice of Appeal, but ultimately rested its appeal on two main grounds (the "no evidence" ground and the "credit for salvage value" ground). (The grounds of appeal relating to the interest calculation were not pressed.) In summary, Origin's contentions are that McDougall J erred:
(i) in failing to find that there was no evidence before the referee that properly permitted damages for loss of future profits to be calculated using a particular calculation (the lAMS 2 scenario), including failing to find that the assumptions as to annual production volumes (and as to the relevant period over which such production would, but for the explosion, have occurred), on which the IAMS 2 scenario was based, had not been proved; and
(ii) in failing to adopt the referee's recommendation that the sum of $13,681,333 should be deducted from the award of damages (that sum representing the amount realised on the sale by BestCare's administrators in 2005 of the land, plant and equipment, stock and goodwill associated with the replacement premises from which BestCare had resumed its business after the explosion).
By way of Amended Notice of Contention filed by leave during the hearing of the appeal, BestCare seeks to affirm the decision of McDougall J on the credit for salvage value ground (i.e. his Honour's rejection of paragraph [916] of the referee's report in which the referee had recommended that the sum of around $13.6 million be deducted from the award of damages) on the grounds that this amount:
(i) represented or included sale proceeds received by BestCare for the sale of the Dubbo property that BestCare (acting reasonably) had purchased instead of repairing the Gunnedah property that had been damaged in the explosion; and
(ii) did not represent the value of BestCare's business immediately after the explosion.
Background
The factual background to the present dispute has been set out in the various judgments on liability and damages to which I have already referred. Suffice it for present purposes to note the following.
After the explosion on 25 January 2003, BestCare chose not to repair the Gunnedah factory. Instead, with the use of around $15 million in insurance funds, BestCare purchased a factory at Dubbo in July 2003. It was accepted by Origin that BestCare had acted reasonably to mitigate its loss in so doing. Trading from the Dubbo factory commenced in about November 2003.
Prior to the explosion, BestCare's so-called "core" business (described in evidence as its "biscuit business") had been the production of pet food products for sale by it. The business had been founded by Mr Franz Strobl and Mr Michael Goldring (each of whom gave evidence for BestCare before the referee and whose assumptions formed the basis on which BestCare's accounting experts prepared their assessment of BestCare's loss of profits). BestCare's first year of business was the 2001/2002 financial year. (There was some debate before the referee as to the business, at the time of the explosion, being "immature" or in start-up mode. However, nothing ultimately turns on this for the purposes of the present appeal.)
The referee accepted (at [61]) that BestCare's business could barely continue following the explosion (something the referee considered was to be expected having regard to the extent of the devastation brought about by the explosion) and said (at [64]) that, whatever the business was as at the date of the explosion, it was "destroyed at that point". Mr Goldring's evidence was that as at mid 2004 BestCare had lost about 75% of its original business and that this was business that was never recovered. Green's, a pet food company with which two of the witnesses called for Origin (Dr Johnson and Mr Morkunas) were associated, had been BestCare's largest customer prior to the explosion. However, as Green's had plans to commence its own production, there was some doubt as to whether its custom had been lost. The referee approached the assessment of damages referable to the loss of the Green's business on the basis that at some unspecified future date Green's would have terminated its contractual arrangements with BestCare but said that, in the absence of definite evidence as to when that would have occurred, he would take this into account by increasing the figure for vicissitudes [90]. The referee at [92] concluded that, leaving aside the custom of Green's, BestCare suffered a drop in business of almost 50%.
Apart from its original or core business, BestCare had, prior to the explosion, been in negotiation with other pet food suppliers (for the manufacture by BestCare of products for those suppliers (this being referred to as "contract manufacture"). One of those was Nestlé. After the explosion, BestCare entered into a manufacturing agreement with Nestlé (the contract was dated 30 January 2004 with a contract commencement date on 12 January 2004). The termination date of the Nestlé contract was 31 December 2006. In the period from March 2004 to November 2004, BestCare also engaged in contract manufacture for two other suppliers (Safcol and Doane).
In June 2004, BestCare entered into the IAMS contract on which the bulk of its loss of profits claim was ultimately predicated. While there had been some discussion prior to the explosion in relation to the proposed manufacture of IAMS products by BestCare, the negotiations that led to the 2004 contract were those that occurred after the explosion. The IAMS contract was with three entities associated with Procter & Gamble (The IAMS Company, Iams Japan and Procter & Gamble Far East, Inc, together referred to in the contract as the "Buyer"). (As two of those companies were based in Asia, I assume that the reference in some of the BestCare documents prepared in 2004 to additional business from Asia was a reference to production of other items and not those under the IAMS contract itself.)
The IAMS contract was for the manufacture by BestCare of "super-premium" pet food products for the IAMS entities. It was signed by the contracting entities on various dates in June 2004 but specified an effective date of 28 May 2004. It was for a four year term with provision for five successive options for annual extensions of the term at the sole discretion of the Buyer (thus, in its terms, the contract could potentially have led to a 9 year contractual relationship if all options were exercised) (clause 6.1). It follows that the initial term of the IAMS contract would, but for the intervening administration of BestCare, have expired in mid 2008 and the termination date (had all options been exercised) would have been in mid 2013. This is of significance when it is recognised that the award of damages for loss of profits was calculated on an assumption that at least the commercial relationship (if not also the contractual relationship) with IAMS continued at least until 2018.
The IAMS contract, headed "Supply Agreement (For Contract Manufacturing)", made no provision for any minimum or maximum quantities (and was not on what was referred to in submissions as a "take or pay" basis). Each purchase order was to be pursuant to, and in accordance with, separate documentation but deemed to constitute a part of the Supply Agreement (clause 6.2).
The only two indications in the IAMS contract as to the anticipated level of production thereunder were: first, that clause 4.1 (under the heading "4.0 Quantity" and sub-heading "Purchase & Sale Obligations") provided: "BUYER estimated quantity is 14,000 US tons annually"; and, second, the price structure set out in Exhibit III to the contract.
The price at which BestCare agreed to manufacture and sell the goods under the IAMS contract was based on a quote from BestCare for manufacture that had been revised in the course of negotiations prior to the contract. The price varied according to the volume purchased (up to 9,000 metric tonnes; over 9,000 metric tonnes; over 20,000 metric tonnes; and over 30,000 metric tonnes).
Relevantly, insofar as it was suggested to at least one of the witnesses (Mr Morkunas) that IAMS was "committed" annually to purchase thousands of tonnes of product under the IAMS contract, that proposition is not supported by reference to the terms of the contract. There was no contractual commitment on the part of IAMS to purchase any particular annual tonnage or any tonnage at all and the reference to an annual quantity of 14,000 US tons was clearly an estimate. Similarly, the specification of a varying price structure evidenced no commitment to purchase product at any particular level.
Under the IAMS contract, the Buyer agreed to provide BestCare up to AU$1 million as an advance to be utilised in the purchase of the initial raw material inventory build (clause 5.1.1). This support (regarded by Mr Morkunas as favourable to the producer) was relied upon by BestCare as an indication of the likelihood that the IAMS contract would have continued beyond 2005. While that may be the case, it is difficult to see that it could have provided support for such an inference beyond the maximum term of the IAMS contract, since there was no assurance (notwithstanding the fact that IAMS had provided that support) that there would be any extension of the contractual or commercial arrangements beyond that point.
Trial production of IAMS product successfully took place in August 2004 but no commercial production for IAMS ever took place. This was explained by Mr Goldring as due to difficulties BestCare was then having with its financiers. (Mr Goldring's belief (at [209]) was that, had those difficulties been resolved, commercial production under the IAMS contract would have commenced in early 2005.)
In November 2004, BestCare was placed in administration. After BestCare went into administration, and the IAMS contract came to an end, IAMS had discussions with other pet food manufacturers in Australia (including, in particular, VIP Petfoods (Aust) Pty Ltd, for whom in 2005 Mr Goldring was acting as a consultant) as to the potential for the contract manufacture of IAMS product. I refer later to the quotes sought from, and provided by, VIP (on which BestCare places weight when pointing to the evidence before the referee by reference to which it says the award of loss of profits on the IAMS 2 scenario could be justified). Nevertheless, those quotes were not accepted and IAMS did not in fact enter into any contract with VIP (or, for that matter, any other pet food manufacturer in Australia) for the manufacture of pet food in Australia after BestCare went into administration. Rather, from about 2005 IAMS had left the market for contract manufacture of pet food in Australia (though its products continued to be sold in Australia after that time).
There was some conjecture (to which I will refer later) as to the reason IAMS did not proceed with the VIP quote but no evidence from IAMS as to this or any other issue (including why it had left the Australian contract manufacture market altogether). Nor was there evidence as to the state of the market generally for the contract manufacture of premium pet food in Australia in the period following the administration.
As adverted to above, the BestCare business and the factory premises at Dubbo were sold by the administrators by agreement made on 10 March 2005. There was no dispute as to the apportionment of the sale price as between the land, plant and equipment, stock, and the goodwill of the business, in amounts to which I will refer later.
Accounting Evidence re Loss of Profits
BestCare relied upon the evidence of two accounting experts: Mr Dolman (who was instructed to prepare a report calculating the projected loss of profits for the period from 2003 to June 2008) and Mr Fayad (who then prepared the calculations of future profits beyond 2008 based upon Mr Dolman's calculations).
The referee (from [292]) referred to Mr Fayad's summary of the methodology used to determine the value as at the explosion date of the profits lost by BestCare as a result of the explosion and his assessment of the value of the lost profits.
Relevantly, the referee noted that Mr Fayad considered that profits post 30 June 2008 could be calculated either by continuing the projections of estimated profit and discounting these to a present value as at 30 June 2008 or by capitalising BestCare's profits as at that date. The latter approach involved valuing BestCare's business by capitalising assessed future maintainable earnings as at 30 June 2008 (as recognised by the referee at [294]). However, as will be discussed in the context of the second appeal ground, the approach adopted by the referee in recommending an award of damages for loss of future profits was the former approach.
Referee's Findings
Before the referee, Origin contended that the explosion was not the cause of BestCare's entry into administration; rather, that as at the time of the explosion, BestCare was, or was nearly, insolvent. The referee's finding, however, was that the explosion at the Gunnedah factory (and the consequences of that explosion) was a (if not the) cause of the financial collapse of BestCare ([93]). That finding is not in issue on the appeal.
The referee's calculation of damages is set out at Part 17 of his report ([909]-[939]). He assessed BestCare's entitlement to damages in the amount of $64,913,902 plus pre-judgment interest ([942]). His assessment proceeded on the basis that, but for the explosion, BestCare would have continued to operate its pet food manufacturing business from the Gunnedah factory.
The referee divided the damages calculations into two areas: first, the damages suffered in consequence of the explosion by way of loss of the Gunnedah factory equipment and costs associated with seeking to mitigate the losses and the appointment of the administrators/receivers and coronial inquiry; and, second, the future loss of profits from the date of appointment of the administrators ([911]). Damages under the first area totalled $19,314,017.25. No issue is taken with the adoption of the referee's recommendations in this regard.
The referee then turned to the loss of profits claim. This was dealt with from [928]-[935] of the report. The referee concluded that BestCare was entitled to a sum of $26.4 million for this head of loss. In essence, the referee based this calculation on the projected profit figures in the IAMS 2 scenario, discounted to reflect the net present value of the future profits as at 24 November 2004 for the financial years ended 30 June 2005 through to 30 June 2018, with a 40% discount for vicissitudes.
The 2018 date was referred to as the "terminal value" point. The adoption of a terminal value was an accounting mechanism to reflect the period after which the net present value of any projected future profits was nominal. For Origin, it is submitted that the effect of this is that, for the period after 30 June 2008, the respective scenarios proceeded on the basis that the commercial relationship between BestCare and lAMS would last indefinitely (notwithstanding the evidence that IAMS had left the Australian contract manufacturing market in 2005) and that production would indefinitely be at the highest of the assumed annual production volumes.
I interpose to note that Origin's complaint in relation to the component of the award for loss of future profits referable to the existing arrangements with suppliers other than IAMS (to the extent that it is now pressed at all) was limited to the fact that it assumed indefinite continuation of those arrangements. Senior Counsel for Origin, Mr Walker SC, indicated at the outset of the hearing of the appeal that there was no contest as to the assessment of damages insofar as it was referable to the non-IAMS contracts (T 16/17). Mr Walker accepted that there was evidence of those arrangements and that those entities had not (as IAMS had done) left the Australian contract manufacture market.
Reference was made to the evidence of Mr Dolman to the effect that no particular attention was given to the identity or nature of the non-IAMS contracts on the basis that it was accepted there might be some turnover of customers in the ordinary course. (At Blue 674U, Mr Dolman agreed that there was no evidence to suggest that there was a continuing contract in place with Safcol and Doane.) Insofar as there was either an assumption or an implicit finding, in the adoption by the referee of the IAMS 2 scenario, that there would have been a continuation of the Nestlé or other non-IAMS contract manufacture business beyond 2008, no ground of appeal expressly challenged this. Senior Counsel for BestCare (Mr Williams SC) also noted that there was no challenge to the assessment of projected profits in respect of the "core" business of BestCare up to 2008 (that being assessed at $4,126,200 on both IAMS 1 and IAMS 2 scenarios).
As to the 40% discount for vicissitudes, what the referee in this context referred to were "the vicissitudes confronting any trading company, which ... is a company which is establishing itself and has the benefit and, consequently, the detriment, of a lengthy period" ([933]). The referee noted that he had worked on the "most optimistic figures" so far as BestCare was concerned (the IAMS 2 figures) and that those figures carried "the greatest degree of risk" ([933]) (by which I understand the referee to be referring to the risk referred to earlier in his reasons that the "longer the period of the contract, the more likely that something at a commercial level may have come amiss" - [907]). The referee also noted that he had taken into account in this regard what he described as the "conservative approach" adopted by one of the accounting experts called for BestCare (Mr Dolman).
For Origin, it is submitted that insofar as the 40% discount for vicissitudes was based on the company establishing itself and the benefit/detriment of a lengthy period (as the referee expressed it) this does not address the contingency referable to the necessity for BestCare to secure the assumed high volumes of annual production (and, conversely, that if the 40% discount had been intended to take into account business uncertainties as to the level of production and period over which the production would, but for the explosion, have occurred, then it provides a negligible, if any, discount for other vicissitudes).
The adoption of the IAMS 2 figures as a starting point or base for the assessment of loss of future profits was one that had been urged upon the referee by BestCare. At [929] of his report, the referee noted the submission made by Mr Williams that the correct way to assess loss of profits was to take the IAMS 2 figures and to make certain calculations based on initial discount rates (to show the present value of future profits for the financial years ended June 2005 to June 2018) before applying a discount for vicissitudes to the net present value of those projected sales. The submissions by BestCare to the referee included the statement that:
...The uncontroverted evidence is that IAMS, by November 2004, required 80,000 tonnes of product to be manufactured under contract. Therefore, in BestCare's submission, IAMS 2 was far more likely than IAMS 1. That should be the starting point in the quantification process. ([226], Blue 1/35).
(and, similarly, in the submissions to the primary judge reference was made to Mr Goldring's statement as going to the capacity and access to funding to do "the amount required by the IAMS contracts") (my emphasis).
In reaching the conclusion that the referee did as to the loss of profits claim, he explained that he had come to the view, on the accounting evidence, that the evidence of BestCare's experts (Mr Dolman and Mr Fayad) should be preferred to that of Origin's experts (Mr Gower and Mr Watt) ([901]). The referee made various credit findings favourable to the BestCare experts and was highly critical of the principal accounting expert for Origin.
At [269], the referee said that he was satisfied that Mr Dolman's methodology was one that could properly be used "and that in deciding what figures should be factored in, he [Mr Dolman] had undertaken a detailed and accurate analysis". Insofar as, by this, the referee had proceeded on the basis that Mr Dolman had independently satisfied himself about the matters he was instructed to assume, that was not the case. It was acknowledged by Mr Williams that Mr Dolman had not undertaken a detailed analysis of the figures that he was asked to assume. In particular, it was accepted that, while Mr Dolman said that he had taken into account various matters in relation to the forecasts and budgets and had formed the opinion that there was a reasonable basis for making them, Mr Dolman had not independently verified the assumptions on which those forecasts and budgets were based.
The referee (having observed that, speaking generally, the evidence of Mr Goldring and Mr Strobl was corroborated by other evidence that he had accepted) did not confine himself to credit findings but listed (at [903]) a number of "probabilities" that he considered made it a proper approach to accept the evidence of BestCare's former directors.
Those matters, in general, related to the business experience of, and high regard shown by others in the industry for, each of Mr Goldring and Mr Strobl and the fact that, after "rigorous due diligence examinations", two financiers had been satisfied that loans should be made to BestCare. Reference was made to the improvement in the financial position of BestCare from commencement of its business to December 2002; to the advanced state of negotiations with Nestlé as at December 2002; to the efforts made after the explosion to continue BestCare's business and to the completion of negotiations with Nestlé during 2003. Reference was also made to the interest IAMS had shown in entering into a contract with, and offering apparent commercial advantages to, BestCare (seen as indicative of IAMS's satisfaction as to the capacity of BestCare to carry out "the contract" and as to the "high order" of its management). The referee accepted that in mid 2004 BestCare was still in recovery mode and that the loss of the IAMS contract was due to the inability to raise sufficient capital to fit out the Dubbo factory.
Two matters listed by the referee in paragraph [930] of his report are matters on which BestCare places significant weight on the present appeal. First, the opinion of Mr Morkunas (formerly associated with Green's) as to the high quality of BestCare's product; the management ability of BestCare; and the capacity and general knowledge of BestCare's management to produce reasonable forecasts, with which he basically agreed (reference also being made to Mr Morkunas' opinion as to the likely growth of BestCare and the speed with which this would have occurred "if the IAMS' contract had come to fruition"). Second, an offer by IAMS "to advise BankWest, if it would assist BestCare, that it had the contract with IAMS" (a somewhat inaccurate summary of what Mr Rutemiller of IAMS is reported to have said). I refer to both these matters in more detail when considering the "no evidence" ground of appeal.
The referee referred to those matters as relevant to the "probabilities of the truthfulness" of Messrs Strobl and Goldring "by reference to the way in which they sought to grow the business, which was in an area with the potential for good profitability, and to manage it", concluding (at [905]) that Messrs Strobl and Goldring were witnesses of truth upon whose evidence reliance could be placed and that:
... Accordingly, I am satisfied that in so far as the experts worked on assumptions to be proved by the evidence of Messrs Strobl and Goldring, those assumptions have been established.
Insofar as the referee found that the assumptions on which Mr Dolman's report, and hence Mr Fayad's calculations, were made good by the evidence of Mr Goldring and Mr Strobl, Mr Walker submits (and I agree) that the favourable credit findings in respect of those witnesses were irrelevant.
To the extent that the assumptions on which the experts had worked included the projected levels of production, those projections were dependent on more than the management skills of BestCare's executives or the genuineness of their intentions as to the growth of the business or the capacity of the business to sustain that level of production. They were, critically for present purposes, dependent also on the intentions and future performance of IAMS (which was not obliged to take any particular amount of production under the existing IAMS contract and was not obliged to extend the contract or to continue the commercial relationship with BestCare after the term of the contract had expired). It is not disputed that the IAMS production component represented approximately two-thirds of the projected figures in both IAMS scenarios. Origin's complaint (which has much force) is that the projections as to the IAMS level of production never rose higher than assumptions.
It is accepted (and was accepted before the primary judge) that there was no contract between IAMS and BestCare that expressly provided for production of tonnages in the amount contemplated by either of the IAMS scenarios. However, BestCare's submissions proceeded on the basis that there was evidence to support the conclusion that IAMS's requirements (at least by 2005) were for production of the order contemplated by the IAMS 2 scenario (and hence that this was the level of production that could have been achieved under the existing contract).
At [906], the referee drew particular attention to "the IAMS' contract", saying:
...I do this because damages were worked out on the bases either that the IAMS contract only proceeded for the first term or that IAMS exercised its right to have it proceed for a second term. These, of course, are referred to as IAMS 1 and IAMS 2.
Earlier (at [549]), the referee had said:
... All of the evidence about IAMS' approach to the contract, in which I include that trial products had proved successful, satisfies me that, in all probability the IAMS 2 contract would have gone ahead, but for the explosion.
The statements extracted in the last two paragraphs reveal that the referee was there proceeding under the misapprehension that the IAMS 1 and IAMS 2 scenarios related to forecasts or projections of production that were dependent upon whether the existing (i.e. July 2004) IAMS contract either continued to the end of or extended beyond the "first term". The referee considered that, in the former event, the IAMS 1 scenario was applicable and, in the latter, the IAMS 2 scenario was applicable.
The first and second stages which the referee had in contemplation were not precisely identified (i.e. whether the first stage ended at the expiration of the initial term in 2008 and the second stage to an extension of the contract beyond that time; or whether the first stage ended in 2013 on the assumption that all extensions were exercised and the second stage to a new contract thereafter). However, from his description in [906], it seems that what the referee had in mind was the first of those possibilities: i.e. that the first stage (IAMS 1 scenario) assumed the contract going through to 2008 and the second stage (the "IAMS 2 contract") assumed the contract was extended on the exercise of one or more of the options i.e. until 2013 (since the referee referred to a "right" on the part of IAMS to have the contract proceed to that second stage).
On any view of the matter, the term of the existing IAMS contract, even if all options were exercised, would not have extended beyond 2013. Therefore, any assessment of the prospect of IAMS production continuing after 2013 must have assumed a continuing commercial relationship after the expiry of the actual contract. The Court was taken to no evidence to support such an assumption, other than the general observation of Mr Dolman (an accounting expert), as to the continuation of customer relationships generally.
As to the credit for salvage value issue, the referee referred (at [915]), in the context of his consideration of BestCare's claim for costs of reinstatement, to the submission by Origin that there should be a deduction (from BestCare's total losses) for the price received on the sale of its business prior to judgment. At [916], the referee accepted that submission (on the proviso that there was not shown to be any profit element in that receipt that would mean that there had been a recovery of compensation paid by Origin). However, when the overall calculation of damages was made by the referee there was no deduction for the $13.6 million (a matter contended by Origin before the primary judge to have been a slip on the part of the referee and capable of rectification by his Honour).
Primary judge's findings
When the matter came before McDougall J, a number of issues were raised in relation to the adoption (or otherwise) of the referee's report and recommendations, not all of which are now in issue.
As to the loss of profits claim, his Honour accepted that it had been shown that the breach of contract and negligence of Origin had caused BestCare to lose an opportunity of commercial value. That opportunity was variously described by his Honour as the opportunity represented by the IAMS contract to sell pet food to IAMS on a profitable basis ([70]), the opportunity to derive the benefits that were available but not assured under the IAMS contract ([74]) and the opportunity to receive and fulfil orders from IAMS under the IAMS contract and to profit therefrom ([76]).
His Honour accepted that there was no obligation on the part of IAMS to take any particular quantity of pet food in any given year ([81]), though observing that it could hardly be thought that IAMS would have engaged in "the very detailed process of negotiation, cooperation and ... "due diligence", simply to make a contract that had no commercial purpose".
His Honour expressly noted that the lost opportunity was not loss of an opportunity to sell either at 80,000 tonnes per annum or, more generally, at the IAMS 2 levels; and recognised that this conclusion was inconsistent with the analysis of the referee. His Honour expressly disagreed with the referee's analysis in this respect.
The primary judge accepted that there had been, from time to time, some degree of confusion in the way the referee had referred to the IAMS 1 and IAMS 2 scenarios but nevertheless considered that it was clear that, when the referee came to carry out his analysis of loss, he did so on the basis that it was a loss of the opportunities "under the IAMS contract", that loss being assessed by reference to the referee's estimate of the probabilities that production at the IAMS 2 level would have been achieved. Thus, his Honour considered that, whatever confusion of language there was in the report, this was not reflected in any underlying error of reasoning by the referee ([93]).
While the passage at [906] of the referee's report supports the primary judge's conclusion that the referee was assessing loss "under the IAMS contract", since he was assessing the likelihood as to whether the "contract" would proceed only to the end of the first term or would continue to the second term, the passages extracted earlier from the referee's report do not bespeak a conclusion as to the likelihood that production would reach the levels of the IAMS 2 scenario (as opposed to the likelihood that the contract would be extended and that, if it were, BestCare would have the managerial ability or capacity to carry out production at that level). Hence, it is difficult to accept that the referee's conclusion did not involve an underlying error of reasoning.
His Honour expressed the view at ([77]) that the fact that the loss of opportunity was not loss of an opportunity to sell at the IAMS 2 levels did not mean that the IAMS 2 scenario was irrelevant to the assessment of loss. The relevance that his Honour saw in the respective IAMS scenarios was that each provided a "guide to the measure of loss on the assumption that production at the levels postulated by it would have been achieved" (my emphasis) and posed the relevant question as being what was the prospect that quantities of that magnitude would be sold and delivered.
At [80], his Honour expressed the view that in substance the referee had done what his Honour had described in [78]-[79] as a legitimate method of analysis: first, to establish that BestCare lost the opportunity to benefit from the performance of the IAMS contract and, second, to assess the value of that lost opportunity by reference to assumptions as to whether the optional extensions would have been taken up and assumptions as to the tonnage that would have been achieved. His Honour said at [80]:
... As a matter of commonsense or pragmatic analysis, it could be said that the referee assessed the value of the lost opportunity on the basis that, over the expected life of the contract (and I shall return to this), production was likely to have been achieved at about 60% of the IAMS 2 levels. That is not an exact way of analysing what the referee did, because his allowance for vicissitudes necessarily encompasses not only levels of production but also the likely duration of the contract (specifically, how many of the extensions might have been taken up) and other possible supervening events that would have impacted on the rate and total, and hence value, of production over the life of the contract
Pausing there, if what was being assessed by the referee (as his Honour accepted) was the opportunity to make profits from the sale of products over the expected life of the contract that had been concluded with IAMS, then (as already noted) on no view would those profits have extended beyond the maximum potential term of the contract (i.e. 2013). The application of a discount for vicissitudes cannot address the fundamental difficulty that loss of profits was assessed by the referee (and accepted by the primary judge) on the basis of an assumption that production would continue indefinitely. Significantly, when his Honour (at [90]) referred to the alternative (to either of the two IAMS scenarios) as being sales at the estimated level referred to in the IAMS contract, his Honour clearly recognised the finite period of the contract in referring to such sales "for the minimum life of that contract (four years), or for some longer period, allowing for one or more extensions".
If what was being assessed was the prospect that, once the IAMS contract came to an end in 2013 (assuming all the possible extensions to that point had been taken up), the parties would have continued their commercial relationship on some footing, this runs squarely into the difficulty that there was nothing other than an assumption that the commercial relationship would continue to support such an assessment.
His Honour considered that the referee had compressed the two-stage process of determining causation and identification of the lost opportunity but that the basic methodology that the referee had adopted was justifiable according to applicable principles "on the facts proved before the referee". His Honour then posed the question whether it was open to the referee to conclude that the loss of opportunity should be valued in effect at 60% of the net present value of sales at the IAMS 2 level; a question that his Honour said was to be answered on a review of all the material. His Honour concluded that unless it could be shown that the referee could not have reached the conclusion that he did on all the material that he had, the Court should adopt his conclusion.
At [84], his Honour said that what the referee was not required to do was to be satisfied that the opportunity was one of the loss of the benefit of a contract under which it was more likely than not that BestCare would have sold to IAMS at the IAMS 2 tonnages; rather, that he was required to consider whether BestCare had a valuable opportunity available to it under the IAMS contract which it lost as a result of Origin's breach, causing BestCare to suffer loss, and then to assess the amount of that loss. As his Honour's reasons make clear, at that last stage of the process, he considered that it was open to the referee to assess (on the whole of the evidence) whether any of the alternative scenarios (IAMS 1 or 2, or the estimated level of production referred to in the IAMS contract i.e. the 14,000 tonnes per annum) provided an appropriate basis for the process of assessment ([89]-[91]).
Addressing the "no evidence" submission made by Origin, the primary judge referred to the following evidence relied upon by Mr Williams to support the referee's finding ([64]): the extent and detail of the negotiations between BestCare and IAMS; the extensive investigations as part of those negotiations that IAMS carried out of BestCare's production facilities and methods; the valuable concessions and promises "undoubtedly made" by IAMS to BestCare (in relation to the sale of plant and equipment at discounted value and that IAMS would bear costs of raw materials used in manufacture of its products); the "undoubted" expertise of the relevant executives of BestCare in particular Mr Goldring; the fact that IAMS held Mr Goldring in particular in very high regard; and the significant concessions said to have been made by Origin's witnesses that supported the case for BestCare.
Origin points out that none of those matters was specifically referable to production at any particular annual level of production, let alone one at the 80,000 tonnes level and hence this evidence would also have been consistent with a range of other hypothetical production projections.
As to the credit for salvage value issue, his Honour concluded that the referee's approach to quantification of losses was not on an "enterprise" basis but rather was on the basis of identification and quantification of separate heads of loss ([96]). His Honour did not accept that the analysis of loss of opportunity on a discounted cash flow basis (or on a basis including a discounted cash flow analysis) necessarily meant that the product of that analysis was the enterprise value of the business and did not accept that in this case, either in fact or as a matter of outcome, this is what the referee achieved. His Honour concluded that it was not appropriate for the referee to deduct the sale proceeds from the amount otherwise to be recommended as the damages suffered by BestCare and therefore declined to adopt paragraph [916] of the report (in which the referee had expressed the opinion that such a deduction should be made).
Judgment was entered for BestCare in the sum of $91,219,465 (together with orders requiring Origin to indemnify BestCare against any liability for tax on the damages).
Relevant Principles
Test to be applied on appeal from adoption of referee's report
There was no dispute between the parties as to the relevant principles to be applied on the present appeal. The question for this Court is not whether the referee was in error but, rather, whether the primary judge erred in the exercise of his discretion in adopting, as varied, the referee's report and recommendations (Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253 at [10]; Nine Network Pty Ltd v Kennedy Miller Television Pty Ltd [1994] NSWCA 235; lllawarra Hotel Company Pty Ltd v Walton Construction Pty Ltd [2013] NSWCA 6 at [17]). Review of the exercise of such a discretion must be in accordance with the approach set out in House v The King ((1936) 55 CLR 499 at 505), as noted in Illawarra at [18]-[19]).
By way of example given in the Nine Network case as to where there might be an appellable error in a case of this kind, the Court referred to the situation where a judge considering the adoption of such a report had "embarked upon a consideration of new evidence, or a fresh consideration of evidence that was before the referee, and could be shown to have reached a wrong conclusion". (Here, it is submitted by Origin that, to the extent that findings of fact were involved in the conclusion by the primary judge that the referee's reasoning was incorrect but that his conclusion was able to be reached by a different process of reasoning, this was impermissible.)
At [22] in Illawarra, Barrett JA noted that submissions to the effect that a finding of the referee is not supported by the evidence should be approached, by a judge considering whether to adopt the referee's report, by that judge considering whether the referee's decision was one which no reasonable tribunal of fact could have reached having regard to the evidence as a whole (there, referring to the principle articulated by McDougall J at item (13) at [7] in Chocolate Factory, where his Honour had also said that the question was whether the decision was one that any reasonable referee would have known was against the evidence and the weight of the evidence).
An example of where there was found to be no evidence before a referee supporting particular findings made by that referee (such that the primary judge was bound to have accepted submissions to that effect and erred in not so doing) can be seen in Illawarra (where the evidence sought to be relied upon in support of some of the referee's findings (even assuming it was from someone with specialist expertise for the purposes of s 79 of the Evidence Act) was evidence for which there was no basis to accept it as reliable, given the absence of explanation or exposition of the basis of the opinion.
In the present case, similar criticism can be made of Mr Morkunas' evidence as to the growth prospects of the BestCare business, to the extent that he accepted assumptions inherent in the forecast profit figures without a clear exposition of the basis on which he considered that they were reasonable or where the assumptions were demonstrably incorrect (such as there being a commitment by IAMS to take a particular level of production - Blue 536). At Blue 535L, Mr Morkunas explained the process that he understood Mr Fayad had gone through and said "[w]ell I mean, he'd taken forecasts of sales and just expanded the business and various selling prices that come up to be the top figures and therefore profits", indicating that Mr Morkunas accepted the Fayad figures as based on the earlier forecasts.
Similarly, Mr Dolman's acceptance of the reasonableness of the assumptions underlying BestCare's projection of profits without any independent analysis of those assumptions means that, if those assumptions were not otherwise made good, then his projections (and hence Mr Fayad's calculations) were unsupported by the evidence.
In Dasreef Pty Ltd v Hawchar [2011] HCA 21; (2011) 243 CLR 588, it was made clear that for an opinion to be admissible as expert evidence under s 79 of the Evidence Act, there must be proof of the factual assumptions on which it is based. Here, although the rules of evidence do not apply to the holding of an inquiry pursuant to a reference made under Part 20, if the factual assumptions underlying the expert's accounting projections have not been established then this must affect the weight able reasonably to be placed on those projections by the relevant decision-maker.
Principles on Assessment of Damages
As to the principles that apply on the assessment of damages for loss of a commercial opportunity (or loss of a chance), again there was no real dispute between the parties. Where there was a dispute was as to the application of those principles in the present case and, in particular, as to the level of satisfaction required to be established for the findings based on the prospect of BestCare making profits on the IAMS 2 scenario.
Where a claim is made for loss of a chance or opportunity caused by negligence (or breach of contract), the loss of that chance or opportunity must be proved on the balance of probabilities. Once the loss of a chance or opportunity has been so proved, then it is for the Court to value the possibility or prospect of that chance or opportunity (and this is not an exercise to be carried out on the balance of probabilities) (see Malec v JC Hutton Ltd (1990) 169 CLR 638; Commonwealth v Amann Aviation Pty Ltd (1992) 174 CLR 64; Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 and, more recently, Tabet v Gett (2010) 240 CLR 537).
The majority in Sellars said (at 355) that "acceptance of the principle enunciated in Malec requires that damages for deprivation of a commercial opportunity, whether the deprivation occurred by reason of breach of contract, tort or contravention of s 52(1), should be ascertained by reference to the court's assessment of the prospects of success of that opportunity had it been pursued". At 358, Brennan J, as his Honour then was, said:
Where a loss is alleged to be a lost opportunity to acquire a benefit, a plaintiff who bears the onus of proving that a loss was caused by the conduct of the defendant discharges that onus by establishing a chain of causation that continues up to the point when there is a substantial prospect of acquiring the benefit sought by the plaintiff. Up to that point, the plaintiff must establish both the historical facts and any necessary hypothesis on the balance of probabilities. A constant standard of proof applies to the finding that a loss has been suffered and to the finding that that loss was caused by the defendant's conduct, whether those findings depend on evidence of historical facts or on evidence giving rise to competing hypotheses. In any event, the standard is proof on the balance of probabilities.
While it is accepted that, as Toohey J in Amann noted (at 138) the assessment of damages does sometimes, of necessity, involve what is "guess work rather than estimation" (his Honour there quoting Menzies J in Jones v Schiffmann (1971) 124 CLR 303 at 308), the onus remains on the plaintiff to prove its loss. In a loss of opportunity case that requires evidence from which the value of that lost opportunity can be assessed. In Sellars, Brennan J (at 365) noted that "in order for a plaintiff to establish that a negligent defendant's conduct has caused a valuable loss of opportunity, he or she must establish by evidence that, but for the contravening conduct of the defendant, he or she could have and would have taken the opportunity and the benefit that it would have yielded" (my emphasis).
"No evidence"
During the hearing of the appeal, Mr Walker accepted that the "no evidence" ground could also be put (on the same factual material as the strict "no evidence" ground itself) on the basis that, even if there were a scintilla of evidence to support the referee's finding that damages for loss of the opportunity to make profits could be assessed by reference to the projected profits under the IAMS 2 scenario, it was manifestly unreasonable for the referee so to find in light of all of the evidence before him (and hence the adoption of that finding by the primary judge was manifestly unreasonable).
In Naxakis v Western General Hospital [1999] HCA 22, (1999) 197 CLR 269, Kirby J (at [55]) considered the genesis of the 'scintilla doctrine' (referring to the decisions in John Wheelton, Lys Seagar and Charles Lane v Edward Brydges Hardisty, Jacob Bell and Walter Barker (1857) 120 ER 86; Toomey v The London, Brighton, and South Coast Railway Company [1857] 3 CB (NS) 145; and Ryder v Wombwell (1868-69) LR 4 Ex 32). The doctrine, applied in Hampton Court Ltd v Crooks Ltd (1957) 97 CLR 367, focuses on whether the evidence made available to the fact finder opened the possibility of that fact finder reasonably coming to a conclusion that the fact sought to be proved was in fact established on that evidence. The test is not as to whether there was any evidence at all.
McHugh J, in the majority in Naxakis, said:
... At one stage in the development of the common law, an issue of fact would be left to the jury to determine where there was some evidence - even "a scintilla of evidence" - in support of the fact. That doctrine applied to issues of negligence as well as to other issues of fact. By the middle of the last century, however, it had become settled doctrine that a "scintilla of evidence, or a mere surmise that there may have been negligence on the part of the defendant, clearly would not justify the judge in leaving the case to the jury: there must be evidence upon which they might reasonably and properly conclude that there was negligence". So ... the question is, as Willes J said in a non-negligence context, [in Ryder v Wombwell] "not whether there is literally no evidence, but whether there is none that ought reasonably to satisfy the jury that the fact sought to be proved is established". (my emphasis)
Similarly, in Swain v Waverley Municipal Council [2005] HCA 4, (2005) 220 CLR 517, it was accepted that the question was not whether there was literally no evidence to support the finding of fact but whether there was more than a mere scintilla of evidence favouring such a finding. Kirby J (in dissent) emphasised (at [560]) that :
The "no evidence" ground, as it is currently named, bears little relationship to the concept which it is intended to signify. More properly, it should be called the "no reasonable evidence" ground. That is how I mean the expression to be understood. It remains to decide whether the evidence that has been proved is such that it could reasonably satisfy the jury that the contested fact is established.
Grounds of appeal
(i) No evidence ground of appeal
It is accepted that the so-called IAMS 1 and IAMS 2 scenarios were projections of profit based on schedules prepared by Mr Dolman. He was instructed to assume different levels of production at different periods up to 30 June 2008, each scenario contemplating production for a number of customers (the principal customer being IAMS). IAMS production represented approximately two-thirds of the projected production on the IAMS scenarios (and the whole of the 80,000 tonnage assumed as part of the IAMS 2 scenario for the purposes of the ultimate loss of profits award). Mr Fayad then projected those losses through to 2018.
It is not in dispute that neither of the lAMS scenarios reflected a level of production referred to in the June 2004 IAMS contract; nor that production to such levels had not been achieved at any time prior to BestCare's entry into administration. At least in the case of the IAMS 2 scenario, production to that extent had not been forecast at any time by BestCare under the existing contract. The maximum projected production volume per annum for IAMS from June 2008 under the IAMS 1 scenario was 25,000 tonnes; under the IAMS 2 scenario it was 80,000 tonnes.
For BestCare, it is submitted that its experts had (and were recognised by the referee at [421] and [423] of his report to have) adopted a conservative approach in seeking to quantify their damages (by proceeding on the assumption that BestCare would not achieve any further business from 2003 onwards beyond its core business and the four specific suppliers (IAMS, Safcol, Doane and Nestlé). With respect, whether certain of the assumptions were or were not conservative is not to the point. It is whether there was any or any sufficient evidence to support them (since in the absence of such evidence it would be manifestly unreasonable for the referee to have made the findings he did as to the award of damages based on those assumptions).
BestCare's position was that, although there was a wide divergence amongst the forecasts, the evidence from its witnesses (Mr Strobl and Mr Goldring) as well as from witnesses called by the appellants (Dr Johnson and Mr Morkunas) was that the BestCare business, but for the explosion and subsequent insolvency, would have become a profitable business. It was submitted that the business would have generated a million dollars in revenue in the first six months after the explosion, would have entered into contracts with Nestlé, Doane, Safcol and IAMS, would have had in excess of 90% of the Australian market for baked dog biscuits, would have launched further baked products, would have continued to grow its existing core business and, in six or seven years, would have become a business the same or similar size to that of Green's (which was valued at $95 million in 2007). It was submitted that the cash flows (or available further funding) would have been sufficient to fund the requisite capital expenditure to meet the projected production.
It was further submitted that the business would have lasted indefinitely (on the basis that the business had been trading profitably at the time of the explosion; bank payments were up to date; there had only been minor breaches of lending covenants; that the Nestlé contract then in the course of negotiation would have been signed; and that further contract manufacturing work would have been won).
As to IAMS, it was submitted by BestCare that the extent of the financial investment, time and effort put in by IAMS in the negotiations in relation to the IAMS contract was such that, if it had been profitable for both parties it was unlikely that IAMS would not have continued the relationship with BestCare for contract manufacture in Australia and that it was a matter for the referee to assess the skills and competence of Mr Goldring and Mr Strobl, and the reliability of their forecasts.
What was the relevant "lost" opportunity?
On the principles set out earlier, the loss of a commercial opportunity caused by Origin's negligence was to be established on the balance of probabilities; however, the value of an opportunity so established to have been lost would fall to be assessed having regard to the possibility that such an opportunity would have matured. Thus, as the primary judge, with respect, correctly emphasised, before an assessment could be made of the value of a lost commercial opportunity, it was necessary to identify what was the opportunity that, on the balance of probabilities, was lost as a result of Origin's breach.
In dispute between the parties on the appeal was whether BestCare's case, as put to the referee, was that it had lost the opportunity to make profits from the sale of production at the level contemplated by the IAMS 2 scenario (and hence whether that was required to be, and had been, proved on the balance of probabilities) or whether its case was more broadly based as being that it had lost the opportunity to make profits under the IAMS contract or by reason of its commercial relationship with IAMS.
For Origin, it was submitted that BestCare had eschewed reliance on the actual contract that had been entered into with IAMS and had based its loss of opportunity claim on the IAMS 2 scenario, therefore being required to prove on the balance of probabilities that what had been lost was an opportunity to sell 80,000 tonnes per annum to IAMS over the period through to 2018, or indefinitely.
BestCare's position was that its loss of opportunity claim was always more broadly based. Hence the proposition by Mr Williams that the IAMS contract was not a "straitjacket" around which the value of a lost opportunity to deal with IAMS was to be assessed.
In that regard, Mr Williams referred to the particularisation of loss and damage in the Fourth Further Amended Commercial List Statement (10(b) and (c)) as including loss of income and loss of goodwill; the statement by Mr Goldring (which referred to expected production for Nestlé as well as IAMS); Mr Dolman's first report, which included both the IAMS 1 and 2 schedules; the recognition in Mr Gower's report as to the basis on which BestCare's experts had assessed loss of profits; Mr Strobl's statement including the financial models and budgets to which he referred (not being referable to the IAMS 2 scenario); the joint report from the expert's conclave (which addressed losses under both IAMS 1 scenarios); and the submissions that had been made by BestCare.
Reference was also made by Mr Williams to the following passages in the referee's report:
● [3], where the referee noted that BestCare was claiming the loss of all future profits;
● [60], where the referee stated that what was lost was the ability to carry on that business, at least, which was an income producing one (and hence a business of some value) - the ability to undertake further work at Gunnedah. The referee said that he did not see that the chance was "so high as to be in the nature of a certainty, or so low as to be regarded as speculative" and considered that he was bound to take the chance into account in assessing damages having regard to the degree of possibilities or probabilities";
● [292]-[303], where the referee referred to the methodology and analysis of Mr Fayad, the referee (at [300]) noting that Mr Fayad's conclusion that the values of $42.8m to $47m on IAMS 1 and $72.9m to $80.3m represented "essentially the present value of all the future earnings of BestCare as at 30 June 2008 on the basis of assuming that all the 03-08 Probable Profits were earned;
● [903 (i)-(l)], where the referee referred to matters such as the inevitable loss of custom from the explosion and Mr Morkunas' evidence;
● [911(vi)], where the referee referred to the future loss of profits as a separate area of the damages calculations;
● [928], where the referee turned to loss of profits as a separate topic and considered that the proper approach was to consider Annexure C (being a schedule prepared by Mr Goldring that added the IAMS 1 and 2 scenario figures to the BestCare budget figures at an earlier time); and
● [933], where the referee referred to the result of his calculations as "giving an amount for damages for loss of future profits".
I accept that the loss of opportunity pleaded by BestCare was not one limited to an opportunity to make profits from the production of an annual 80,000 tonnes for sale to IAMS. It was accepted by the referee to be the loss of an opportunity to make profits from the sale of pet food. However, although the referee referred in various parts of the report to loss of future profits in a general sense, what he concluded at [907] was that "the probabilities were that had BestCare remained in business that contract would have continued to the IAMS 2 stage". The referee thus found that, on the balance of probabilities, BestCare had lost the opportunity to make profits that would have been made had the contract continued though to the "stage 2 contract" (leaving aside, for present purposes, loss of profits from its core business or other supply contracts) or, in other words, valued the loss of the opportunity to make profits under the IAMS contract as extended to "stage 2" as more than 50%. The difficulty is that he did so based on the erroneous assumption that under "stage 2" of the IAMS contract the expected or forecast level of production was that reflected in the IAMS 2 scenario. The relevant finding was that in all probability the IAMS contract would have continued to the end of its term. That, however, was not 2018 and there no evidence of any discussions between IAMS and BestCare that contemplated the contract extending beyond (at the latest) 2013.
While it is possible that the lost opportunity could have been characterised more generally as the loss of an opportunity to make profits not only under the existing contractual relationship with IAMS but, beyond that, from a continuation of the commercial relationship after the existing IAMS contract came to an end, it is not clear from the referee's report that he made any finding to that effect (as opposed to the finding that the IAMS contract may have gone "to that stage", i.e. to the stage that the contract was extended). What the referee was assessing was the value of the loss of the opportunity to make profits under the IAMS contract (extended or not as the case may be), not the opportunity to make profits from a continuation of the IAMS relationship beyond the ultimate term of the existing contract.
The referee did not separately address the question of what percentage should be put on the prospect of it achieving production levels of the kind projected for the balance of the term of the IAMS contract. He seems to have assumed that this followed from a conclusion that the contract would have been extended "to the second stage" having regard to the evidence of BestCare's directors at the time as to its production capacity and his acceptance of their management ability and competence (as going to the likelihood that they would have achieved the projected profits).
Treating the relevant loss of opportunity (for present purposes) as the more broadly expressed loss of the opportunity to make profits from the sale of pet food (which would include the loss of opportunity to make profits from the sale of pet food "under" the IAMS contract or other supplier contracts), it does not appear to be disputed that there was evidence on the balance of probabilities that such an opportunity was lost. The question is whether there was no evidence capable of satisfying a reasonable decision-maker that an award based on the possibility or prospect of production levels on the IAMS 2 scenario through to 2018 should be made (bearing in mind that the IAMS contract itself did not contain any such commitment).
On the basis that the relevant loss of opportunity was simply the opportunity to make profits under the 2004 IAMS contract (and other supply contracts) to the maximum term of those contracts, was there sufficient evidence available to the referee to satisfy a reasonable decision-maker that the prospects of production on the IAMS 2 level were in the order of 60%?
The submissions for BestCare proceeded on the basis that all that it was required to do was to show the possibility of profits at the IAMS 2 level and that it was then open to the referee to form a view as to the appropriate profit scenario (of the varying alternative scenarios put before him, including what Mr Williams submits is the "floor" to any damages award, namely the 14,000 tonne annual production expressly estimated under the IAMS contract) to adopt. It was accepted by Mr Williams that it was uncertain what tonnages BestCare would have sold to IAMS but for the explosion. It was noted that there were various tonnages referred to in various contexts: the "estimated quantity" under the IAMS contract of 14,000 tonnes per year; the quote appended as Exhibit III to the actual IAMS contract, which suggested a possibility of tonnage in the order of over 30,000 tonnes per year; and the references to tonnage in a conversation between Mr Rutemiller of IAMS and Mr Goldring in November 2004 as well as references in correspondence between IAMS and VIP in 2005 to production figures of around 80,000 tonnes per year.
However, it cannot be sufficient simply to establish loss of an opportunity to sell pet food to (among others) IAMS and then to put forward a range of projected prediction figures without establishing what prospect or likelihood there was of those prediction levels being achieved.
Mr Walker accepts that there was the basis for finding that there was a loss of a commercial opportunity to sell pet food to IAMS on a profitable basis but submits that the prospect of the IAMS commercial relationship maturing into something that enabled an assessment to be valued by reference to the IAMS 2 scenario was a matter for BestCare to prove (albeit that it would not, on that hypothesis, be required to do so on the balance of probabilities). Mr Walker submits that it must be a commercial opportunity with a sufficient identity to be the subject of evidence.
What was the evidence to support the loss of profits award based on the IAMS 2 scenario?
Once the loss of the opportunity to make profits (as a general proposition), or the opportunity to make profits under the IAMS contract, was proved on the balance of probabilities, the question is whether there was evidence that on a principled approach (with reference to the "no evidence" test as explained above) enabled the Court to adopt the conclusion reached by the referee. In this regard, Mr Williams emphasised that it was necessary (on the authorities referred to earlier, including Chocolate Factory and Illawarra) for Origin to show that it was not open to the primary judge to conclude that the referee was correct in the findings he made or that it was unjust or unreasonable for primary judge to do so.
Reference was made by Mr Williams to Ciccarelli v Cavasinni Developments [2004] NSWSC 788, where Mc Dougall J (at [31]) referred with apparent approval to the observation of Cole J in Foxman HoldingsPty Ltd v NMBE Pty Ltd (1995) 38 NSWLR 615 at 620 to the effect that the reference in Super Pty Ltd v SJF Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549 at 563-4 to the rejection of a report where there was some apparent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding related to a "lack of understanding of the evidence as distinct from according to particular aspects of the evidence different weights" and to the "exceptional case where it can be clearly demonstrated that no reasonable tribunal of fact could have reached the decision achieved". It was submitted by Mr Williams that this could not be found where (as he contends is the case here) there was material that could support the relevant impugned findings of fact.
BestCare's case, as already noted, was that it had a profitable future and one that involved the likelihood of significant volumes of sales to IAMS. Mr Williams, on appeal, pointed to the following as evidence supporting a damages calculation based on the IAMS 2 scenario as damages for the broadly expressed loss of the commercial opportunity to make profits from the sale of pet food:
(a) IAMS estimates as to purchases of 80,000 tonnes per annum;
(b) BestCare contemporaneous budgets forecasting profits equivalent to those under the IAMS 2 scenario;
(c) opinions as to the growth of the BestCare business to a level comparable to that of the Green's business (which had sold for around $95 million in 2007);
(d) BestCare contemporaneous budgets and forecasts (and quotes) projecting sales to IAMS at IAMS 1 scenario levels (said to support the reasonableness of an award based on 60% of the IAMS 2 scenario);
(e) the devotion by IAMS of substantial time and resources to securing the 2004 contract with BestCare (said to indicate the likelihood that IAMS would have continued the contractual relationship with BestCare);
(f) evidence said to go to the likelihood that the IAMS contract would have run beyond 2005; and
(g) actual or intended plant capacity at Dubbo (said to indicate an expectation of production and sales at levels in excess of IAMS 2 levels).
I consider each in turn.
(a) IAMS estimates as to purchases of 80,000 tonnes per annum
Reliance is placed on two matters in this regard: first, a conversation between Mr Goldring and Mr Brian Rutemiller of IAMS in November 2004 (on which BestCare relies as an indication that IAMS believed it would require BestCare to manufacture 80,000 tonnes of product per annum); and, second, communications between IAMS and VIP (after BestCare went into administration), in relation to a request by IAMS for a quote for the contract manufacture of up to 80,000 tonnes per annum (in the course of which, in May 2005, IAMS sent an email of "projected volume" to VIP, which included reference to tonnages up to 79,708 tonnes per year).
·Rutemiller conversation
The November 2004 Rutemiller conversation is set out at [208] of Mr Goldring's statement. It was in the context of a discussion as to problems that BestCare was then having raising funds from investors and bankers. (At [209] of his statement, Mr Goldring said that had BestCare not experienced difficulties in raising funds in the latter part of 2004, his estimate was that BestCare would have commenced commercial production under the IAMS contract in early 2005.)
Mr Goldring also referred to the increase in capacity that he considered would be achieved for IAMS 1 (Blue 3/794).
At ([145] and [146]) of Mr Goldring's third statement, Mr Goldring referred to his intention to upgrade the Wenger x-185 extruder and at [146] to his intention to take steps in relation to production for IAMS before the explosion, including his intention to install particular items ([153] referred to in submissions at Black 58P).
A report of 26 October 2003 had been prepared (Blue 3/778) planning for matters to be budgeted and completed prior to the commencement of production for IAMS. Reference was also made to the report referred to at Blue 3/791 at [214] as to the capacity of the existing plant to meet the "IAMS Alternative" (which was the subject of submissions to the primary judge at Black 58U). At [234] Mr Goldring referred to what was required to be done. At Blue 3/798 (at [235]) Mr Goldring referred to the capacity of the existing plant to meet the IAMS 2 alternative and the cost of meeting production up to 80,000 (see also [248] and [249]).
The difficulty with this material is that, while it provided a basis on which it might be concluded that there was or would have been capacity at the relevant time to produce up to 80,000 tonnes of IAMS product, it says nothing as to the likelihood that orders would have been placed at that level and therefore provides no (or no more than a mere scintilla of) evidence as to the likely business opportunity at that level.
Conclusion as to appeal ground (i)
At [81], the primary judge said (in a passage that Mr Walker submits conceals the resort by the referee to assumptions rather than evidence) that:
... it would have been open to the referee, based on the material before him, to reach a conclusion as to the likely duration of the contract (perhaps nine years in all); and to reach a conclusion as to the average annual rate of sales under that contract (X tonnes per annum). Having done so, and using the information provided by the experts, the referee could have reached a conclusion as to the likely value of those sales, discounted back to the agreed starting point. Once that was done, it would have been open to the referee, again based on all the relevant material, to reach a conclusion as to the appropriate allowance for other vicissitudes.
However, the referee did not proceed on that basis. Rather, he proceeded on the misapprehension that the figures produced on the IAMS 2 scenario represented the projected profits if the IAMS contract continued to the end of its maximum term (to 2013). That misapprehension of the evidence alone in my view makes the award of damages for loss of profits extending out to the terminal value point manifestly unreasonable.
The finding by his Honour that there was an alternative basis on the evidence by which the referee's conclusion could be justified suffers from the difficulty that the evidence, when tested (and his Honour did not purport to revisit the evidence for that purpose), does not provide support for a finding that there was a 60% or more chance that profits under the IAMS contract would have been achieved on the IAMS 2 scenario.
(ii) Credit for salvage value ground of appeal ($13.6 million)
The second ground of appeal relates to the question whether the sum of $13,681,333 received as the net proceeds of the sale of the Dubbo business (including land, plant and equipment, stock and goodwill) should have been deducted from the overall amount awarded to BestCare. The sale price had been apportioned as to $2,000,00 for the land; $7,358,479 for the plant and equipment; $1,389,176 for the stock and $2,933,678 for the goodwill. There was no dispute as to the manner in which the sale price had been so apportioned.
The issue as to whether such a deduction should be made was first raised in Mr Fayad's first report. There, he considered it appropriate to deduct that sum for reasons to which I will shortly return. The referee (having recommended its deduction) did not make such a deduction from the overall award and McDougall J considered that the referee was correct not to make such a deduction. Origin maintains that such a deduction should have been made.
There was no dispute between the parties as to the general principle, in cases of tortious damage to property, that the plaintiff is entitled to the cost of reinstatement (provided that reinstatement is reasonable) or else the diminution in value of the property (Evans v Balog [1976] 1 NSWLR 36 at 40; Gagner Pty Ltd v Canturi Corporation Pty Ltd (2009) 236 FLR 401 (CA) at 421-423 [88]-[103]). Similarly, there was no dispute that, where the plaintiff (acting reasonably) decides not to reinstate the damaged property but to acquire an alternative property, the plaintiff may recover the cost of the alternative property in lieu of recovering the cost of reinstatement of the damaged property (Dominion Mosaics v Trafalgar Trucking [1990] 2 All ER 246 at 253-254; 256; McGregor on Damages, 18th ed, 34-009) and that if, having acquired an alternative property in such circumstances, the plaintiff subsequently sells the alternative property for a profit, then the plaintiff does not have to account to the defendant for that profit (Dominion Mosaics).
In Dominion Mosaics, two issues arose: first, whether the claimant was restricted to the diminution in value of the premises that had been destroyed and, if not, the account if any to be taken of the betterment involved in acquiring the replacement premises, and, second, whether there should be a deduction on account of the profit that had been made when the replacement premises were resold. The claimant was not restricted to the diminution in value of the destroyed premises and was not required to account for the profit made on resale.
The referee concluded in the present case that there was no profit on the re-sale of the Dubbo premises in 2005. Mr Lawrance submitted that the referee had misapplied Dominion Mosaics insofar as the referee suggested that it meant that the only part for which the defendant would obtain no credit was the profit on resale (rather than Dominion Mosaics being authority for the proposition that the defendant does not obtain the profit on the resale). The judgment sum included an award of $10,523,572 (plus interest) to compensate BestCare for the cost of buying the Dubbo factory and re-establishing its operations there (as recommended by the referee at [924]).
Applying the above principles to the present case, it is submitted by Mr Lawrance that BestCare should not be required to account to Origin for that portion of the sale proceeds that simply represents recoupment of the purchase price (since to do so would be to deprive it of the compensation received in lieu of reinstatement of the damaged property).
Of the components of the $13.6 million sum, it is submitted for BestCare that the $9,358,479 received by the administrators on account of land, plant and equipment represents the proceeds of sale of the Dubbo property purchased in lieu of reinstating the damaged property at Gunnedah (and if those amounts were to be deducted BestCare would be left with no Gunnedah property, no replacement property and no compensation for the loss of the Gunnedah property). As to the amount received on account of goodwill and stock, it is submitted that this represents the value of the business in March 2005, after it had been re-established and "fed with" insurance proceeds and was not the value of the business immediately after the explosion in January 2003.
Origin's position is that, unless the $13.6 million sum is deducted, BestCare will be overcompensated because the discounted cash flow calculation used by Mr Fayad in the calculation of the IAMS 1 and 2 scenarios in effect compensated BestCare for the entire value of the business; and BestCare would therefore have received not only that compensation but also the amount received for the residual value of the business when it was sold in 2005. Further, it is contended that the experts agreed in conclave that the sum of $13.6 million should be accounted for, by reference to the acknowledgement at [7] of the joint report that one of the heads of losses considered was the value of the BestCare business.
The relevant paragraph of the joint report prepared following a conclave of the accounting experts was as follows:
7. The losses addressed under each of the scenarios include various combinations of the following losses (each calculated on a number of alternate bases and under
differing assumptions):
...
(f) Present value of sales proceeds by Administrator (net benefit).It is by no means apparent from this that the experts agreed that there should be a deduction of the $13.6 million or a valuation of the net benefit of the BestCare business.
BestCare disputed that this was what was meant by the reference in the conclave report at Blue 1/504M as to the heads of loss that had been considered. It was submitted that the effect of [7] was simply a description of what had been taken into account in some of the calculations, not necessarily all of them.
It is necessary in this regard to consider the context in which Mr Fayad expressed the opinion in his first report that the sum should be deducted.
In that report in 2008 (at [280]-[281]), Mr Fayad said that he had assessed the value of BestCare as at 30 June 2008 based on the CFME (capitalised future maintainable earnings) method, on the assumptions that the IAMS 1 or IAMS 2 earnings were applicable and that the "03-08 Probable Profits" had been earned. He assessed the value of BestCare on the IAMS 1 scenario as in the range from $42.8-47 million and on the IAMS 2 scenario in the range from $72.9-80.3 million). At [282], Mr Fayad noted that the values set out in the preceding paragraphs represented the present value of all the future earnings of BestCare as at 30 June 2008 on the basis that "all the 03-08 Probable Profits" were earned.
At [283], Mr Fayad noted that the "Enterprise values" calculated in Tables 22 and 23 (which were contained in [280] and [281] and responded to the two IAMS scenarios) represented the values of the business of BestCare as at 30 June 2008, including all its business assets (one of which, (f), was goodwill).
However, by the time of the hearing before the referee, Mr Fayad had produced a supplementary report of 28 February 2001, containing the discounted cash flow analysis to which the referee referred, and it was this report which formed the primary calculations on which BestCare relied.
Mr Fayad explained that the probable profits after June 2008 could be calculated either by continuing the projections of estimated profits of BestCare (which is ultimately what the referee seems to have accepted in recommending the award for loss of profits) or by capitalising BestCare's profits as at that date (the latter involving valuing BestCare's business by capitalising the assessed future maintainable earnings as at June 2008).
Although the referee (at [911(vi)] of his report), when addressing the various calculations of damages, referred to the "enterprise loss" (emphasising that the loss sought to be assessed was "that which BestCare lost by losing its business, the enterprise loss") this term was used in distinguishing that loss from the equity loss that would be suffered by the shareholders (in the context of whether there should be a deduction for the debts of the business). As the primary judge found ([100]), what the referee proceeded to do was to assess the loss of future profits as one of the heads of damages, using the discounted cash flow methodology (not the enterprise value of the business). There was no separate assessment by the referee of the value of the goodwill of the business (though reference was made to goodwill at an early stage in his report, to which I will refer shortly).
When the matter came before his Honour, it was submitted for Origin (as noted at [95] of his Honour's reasons) that the sale proceeds should have been deducted, on the basis that the assessment of damages had been done on an "enterprise" basis. The argument for Origin was that, the analysis of the loss of opportunity having been done on a basis that included a discounted cash flow, the outcome of that analysis was one that produced an enterprise value for the business. His Honour rejected that submission, noting that what had been done by the referee was to identify and quantify separate heads of loss.
Mr Williams maintains that Origin's appeal on this issue is again based on the incorrect assumption that the referee assessed damages on an enterprise basis. Mr Walker maintains that the submission that this amount should have been deducted is not one that depends on whether the business was valued "on an enterprise basis" but, rather, turns on whether, by reason of the use of discounted cash flow calculations, what was derived was an amount representing the value of the business as a means of deriving future profit (i.e. a valuation of the profitability of the enterprise continuing), in which case it is submitted that account should be made of the component that represented the salvage value of that business following the explosion.
Reliance was placed on the fact that in cross-examination Mr Fayad confirmed his view that, from a commercial point of view, re-establishment costs and sale proceeds received by the administrator should be taken into account when considering "net benefit". In re-examination (Blue 2/678), Mr Fayad confirmed that the February 2011 report was an assessment of damages using valuation principles (those being described by him as the discounted cash flow methodology) and that this would be the value placed on the business as at November 2004 "based on the assumptions of certain contracts being in place".
Insofar as Origin, in responding to an hypothetical example posed by Macfarlan JA during the appeal, referred to calculations attached to Mr Fayad's report, those were attached to the first report dated 31 October 2008 not the supplementary report of 28 February 2011. (Mr Lawrance points out the October report contained no entries for assets and liabilities; being simply an analysis of projected cash flows). Therefore, the fact that the residual value of the business might be deducted from a calculation of damages based on the enterprise value of the business is not to the point, since it was the discounted cash flow analysis that was adopted by the referee.
Ultimately, the area of real debate on the $13.6 million issue focused on the treatment of that component of the sale proceeds that represented the goodwill of the business. That is because any residual value of the other components has already been taken into account in the overall damages award.
As to the land, it is clear that the sum of $10,523,572 million awarded by the referee as the costs of re-establishment (i.e. the replacement for the plant, land and building) took the residual value of the land as at 31 December 2002 ($220,000) into account (by reference to an entry in schedule 11 to Mr Dolman's report, which was the source of the sum awarded by the referee (at [912]) as the cost of re-establishment).
As to the stock, the figure awarded of $1.3 million could not have represented salvage value (or residual stock after the explosion) since the referee recommended an award of some $750,000 for stock destroyed in the explosion (and had there been any residual stock it may be assumed that it would have been the subject of a set-off claim).
As to the value of plant and equipment, Mr Lawrance submitted that this represented what was at the Dubbo factory in 2005, not the salvage value of plant and equipment that existed at Gunnedah (and there was no suggestion to the contrary). The referee awarded an amount on account of stock destroyed and there was no set-off against that.
As to goodwill, Mr Lawrance conceded that this was the most difficult component to be considered in this context. It was accepted that the experts' reports and the referee's findings proceeded upon the basis that the goodwill was totally destroyed by the explosion. It was also accepted that there must have been some residual value since BestCare had been trading at the date of the explosion and, on its own case, had good future prospects. It was BestCare's submission that the question of any deduction for residual goodwill is answered by reference to the manner in which the referee had assessed the particular heads of loss in this case.
In other words, since what the referee (and the experts) had assessed was the loss of profits (not the value of the business including an assessment of the goodwill of the business), there was no error in not making a deduction for any residual goodwill value. The distinction between loss of profits and loss of goodwill can be seen by reference to the methodologies described for the assessment of the latter in The Commissioner of Taxation of the Commonwealth of Australia v Murry [1998] HCA 42; 193 CLR 605 (at [49]-[52]).
(As noted earlier, there was some reference by the referee at [11]-[13] to evidence relating to whether the value of brand names and goodwill had been impacted by the explosion and BestCare's consequent absence from the market for some time. The referee said at [13] that "There was no evidence of an adverse affectation to either once those consequences of the explosion were overcome" and noted that the submissions seemed to have treated them as continuing. On that basis it seems that no assessment was made as to diminution in the value of the goodwill nor was its value calculated.)
The recommended award for loss of profits was not an award for the diminution in the value (including goodwill) of the enterprise conducted by BestCare. Given the basis on which the referee approached the damages calculation it cannot be said that it was manifestly unreasonable for the primary judge to reject the recommendation at [916] that Origin was entitled to a credit for the sale of the business prior to judgment. Accordingly, Origin's appeal on this ground fails.
Form of relief
It follows from the above that in my opinion Origin succeeds on its first appeal ground but not on the second.
As to the first ground, I consider that there was no (or no more than a mere scintilla of) evidence made available to the referee that was able reasonably to satisfy a decision-maker as to, or to support, an award of damages for loss of future profits referable to the IAMS 2 scenario; and therefore that the adoption or acceptance of the referee's finding to that effect was manifestly unreasonable in the sense considered in Chocolate Factory.
BestCare submitted that the award of damages insofar as it related to the calculation of lost profits in respect of sales to other (non-IAMS) customers should, in effect, not be disturbed (i.e. that these should be calculated in accordance with the method of calculation underlying the IAMS 2 scenario by: accepting the forecast profits appearing at Blue 1/357 (save for the last two rows relating to IAMS production), calculating the net present value of those projected profits (extrapolated in the manner performed by Mr Fayad before the referee), taking the midpoint of net present values calculated using the discount rates appearing in the two right-hand columns of that page, and applying a discount for vicissitudes of 40% to those net present values).
As to the non-IAMS component, this was calculated on an indefinite basis (insofar as the IAMS 2 scenario was carried through to terminal value). I am concerned that the question whether there was evidence to support the aspect of the IAMS 2 scenario that assumed the non-IAMS component would continue indefinitely into the future was not fully argued. Indeed, there is some doubt as to whether this point was even in issue (see transcript for 6 March 2013 p 2 line 18 - p 3 line 35). As the appellant's arguments concerning the prospects of supply to IAMS itself justify the orders that I propose, those orders should be made on the basis that this Court has not expressed any concluded view on the question concerning the non-IAMS component that I have identified.
There was a question raised as to whether (if the matter were to be remitted) it should be remitted to the referee or to a judge in the Equity Division). For Origin, it was contended that if the appeal were to be successful in respect of the application, and adoption, of the IAMS 2 scenario, then that aspect of quantum should be remitted to the Equity Division, Commercial List, for orders as to the further hearing of that aspect of the quantum claim. For BestCare it was submitted that in that event the matter should be remitted to the referee for further determination.
As to this question, in my opinion sufficient time has elapsed from the referee's inquiry that there is no advantage to be gained from remittal to the referee as opposed to remittal to the Equity Division. I consider that the latter course would be the more consistent with the objective of the just, quick and cheap disposal of the proceedings (since the adoption of any further report by the referee would then need to be considered by the Court, requiring a further hearing in the Equity division in any event).
Origin accepted that in the event of such a remittal a loss of opportunity claim might be able to be made on the basis of the actual IAMS contract (subject to the effect of the evidence that IAMS left the Australian market in 2005) but submitted that BestCare should not be permitted to supplement its evidence or to change the claim to a "market based" claim. BestCare, as noted, denies that its claim was restricted to a claim based on loss of opportunity to make profits from the manufacture and sale of pet food to IAMS.
Finally, Origin sought that the question of interest also be remitted to the Equity Division. It made clear that it was not seeking to raise the matters the subject of the appeal grounds that were not pressed before this Court (grounds 24-26) but, rather, was foreshadowing a submission that in the exercise of the Court's discretion those orders might be modified in some fashion having regard to the submission that it was the reliance by BestCare on the IAMS 2 scenario that was the cause of it being out of its money for the time in which the IAMS 2 scenario was challenged. That is a submission that should be left to the judge hearing the remittal.
Orders
For the reasons set out above, I would make the following orders:
1 The appeal from the judgments of McDougall J of 31 May and 15 June 2012 is allowed.
2 Set aside orders 1 to 7 inclusive made by McDougall J on 15 June 2012.
3 Order that the referee's report of the Honourable JMN Rolfe QC published on 30 August 2011 be adopted save that:
(a) Paragraphs 916, 934, 935 and 936 are rejected.
(b) The referee's reasoning and conclusions are rejected insofar as they constitute, incorporate or reflect findings as to whether, and to what extent, the respondents would, or may, have supplied pet food to the entity known as IAMS (and indefinitely to one or more of Nestlé, Safcol or Doane) if the explosion had not occurred at the respondent's premises on 25 January 2003.4 Remit the proceedings to the Equity Division for the determination of the damages to which the respondent is entitled and the making of orders (including as to costs) that the judge considers appropriate for disposal of the proceedings, on the basis that (subject to the tender of additional evidence as to matters of calculation and the tender of any further evidence that the judge considers is warranted on special grounds), the issues should be determined on the evidence taken before the referee, in accordance with r 20.24(1)(d) of the Uniform Civil Procedure Rules. (Note that, as part of this remitter, the question whether there should be a modification of the interest award in order to take into account the reliance placed by BestCare on the IAMS 2 scenario should be a matter for the judge hearing the matter.)
5 Order the respondents to pay the appellants' costs of the quantum appeal.
6 Grant the respondents a certificate under the Suitors' Fund Act 1951, if qualified.
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