Schmidt & Anor v AHRKalimpa Pty Ltd (Receivers and Managers Appointed) & Anor

[2021] HCATrans 24

[2021] HCATrans 024

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Melbourne  No M78 of 2020

B e t w e e n -

ALAN HESSEL SCHMIDT

First Applicant

OTWAY LIVESTOCK EXPORTS PTY LTD (ACN 070 299 302)

Second Applicant

and

AHRKALIMPA PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 164 529 533)

First Respondent

KALIMPA PTY LTD (ACN 152 484 056)

Second Respondent

Application for special leave to appeal

BELL J
STEWARD J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 12 FEBRUARY 2021, AT 10.15 AM

Copyright in the High Court of Australia

MR J.P. MOORE, QC appears with MR J.A.G. McCOMISH and MR C.R. NORTHROP for the applicants.  (instructed by Harwood Andrews)

MR J.W.S. PETERS, QC appears with MS K.A. BRAZENOR for the respondents.  (instructed by Mills Oakley Lawyers)

BELL J:   Yes, Mr Moore.

MR MOORE:   If the Court please.  Your Honours, in our submission, this application raises for consideration an important question of principle involving what rules apply when quantifying equitable compensation.  The principles in this area are unsettled and uncertain.  This Court has never directly addressed equitable compensation as a remedy, and the Court has never directly addressed the remedial consequences of a proposed joint venture fiduciary relationship in which no concluded bargain was ever reached. 

The question of principle can be shortly stated.  What approach does equity take when valuing lost opportunities?  The facts can also be shortly stated.  The applicants and the respondents sought to agree on the terms of the joint venture to conduct a business involving the export of cattle to Israel.  The export of cattle requires a licence.  It was proposed that the second applicant, who holds such a licence, and is a very experienced exporter, would enter into a management agreement with the proposed joint venture company.  It was also proposed that the parties enter into a shareholders’ agreement.  The agreements were proposed to last for five years, with a two‑year restraint upon termination. 

Now, while the parties were negotiating the terms of those two agreements, they started exporting cattle to Israel through the second applicant.  The trial judge found that those early exports were conducted on a piecemeal or interim basis.  Negotiations then broke down.  The parties could not agree on the terms of their joint venture, including, critically, the terms of the management and shareholders’ agreement.  The applicants thereafter undertook further exports of cattle to Israel for themselves.  Those are the facts.

BELL J:   Mr Moore, may I just interrupt you to take this up with you?  True it is that no formal joint venture was entered into but, nonetheless, you have concurrent findings at 234 of the application book in paragraph 216, that:

although the parties did not enter into a written joint venture agreement . . . they had established a business –

which, as at 25 November 2013, was misappropriated by your clients.  It was not a prospective business that they were prevented from establishing:

but an existing business with key customers in a new market –

to which the respondents had been introduced.  Now, the point of principle that you suggest this Court might be concerned with is one, as I understand your submission thus far, that would require recharacterising the nature of the loss contrary to the approach not only of the primary judge but of the unanimous Court of Appeal. 

MR MOORE:   With respect, your Honour, we do not seek to do that.  We do say, though, that in assessing equitable compensation, just as this Court said in assessing an account of profits in Warman v Dwyer, quote, “a distinction should be drawn between cases in which a specific asset is required and cases in which a business is acquired and operated”. Now, that is distinction that this Court drew in Warman v Dwyer in a related but distinct field, the assessment of an account of profits. 

STEWARD J:   Mr Moore, the Court of Appeal summarised the relevant legal principles in paragraph 180 to paragraph 189.  In which of those paragraphs may one find the error of principle you seek special leave on?

MR MOORE:   None of those principles, your Honour. 

STEWARD J:   So they all get a tick, do they? 

MR MOORE:   Yes, except to the extent that one might infer from 185 that there is a freestanding discretion in all cases to mould the remedy to meet the particular facts and in all cases to quantify equitable compensation for loss by reference to a gain made.  In our respectful submission, that is an error. 

The assessment of equitable compensation is governed by one general principle that the Court of Appeal accepted, and all parties accept, and that is in paragraph 182 at 223 of the application book.  The Court of Appeal there said that:

Equitable compensation is aimed at restoring the innocent party, as nearly as possible, to the position which he or she would have been had the breach of fiduciary duty not occurred. 

BELL J:   Yes.

STEWARD J:   If you look then at the factual findings made by – reinforced by the Court of Appeal from paragraphs 216 to 218, if you take those facts as they are described there, is that not inexorably what the Court of Appeal has done in order to comply with the legal principle at paragraph 182?  In other words, in order to get up do you not really need to complain about the characterisation of facts at 217 and 218, in particular the finding that they were deprived of an existing business rather than just the mere opportunity?

MR MOORE:   But we do not seek to overturn that characterisation.  It is simply not necessary, in our respectful submission.

STEWARD J:   All right.

MR MOORE:   But just as in Warman v Dwyer, when one talks about the acquisition of a business rather than a specific asset, one always has to assess the critical aspects of that business, its prospects and its inherent ability to continue as it was conducting before the wrong.  One can see the error of the Court of Appeal’s approach, in our respectful submission, at paragraphs 218 and 219 at page 235 of the application book. 

Putting aside the characterisation questions, whether one speaks about a business or an opportunity, one can see there that the proposition that was advanced on behalf of my clients, the opportunities that the business had had to be valued according to standard principles and that was rejected by the Court of Appeal in these terms:

If equitable compensation were assessed on the basis of loss of opportunity, AHRKalimpa would not be placed in the position in which it would have been if the breaches of fiduciary duty had not taken place.

Why, we ask, and the answer given is:

That is because, as found by the judge, the applicants’ breaches deprived AHRKalimpa of any real prospect of engaging in the business of exporting live cattle to Israel.

Thus, as the applicants’ breaches nullified AHRKalimpa’s opportunity to conduct the business and deprived it of any real value, it would be inappropriate to assess equitable compensation by reference to the value of the lost opportunity.

In our respectful submission, that reasoning is, with respect, circular.  It seeks to reject the need to value the business by looking at its opportunities by referring only to the lost opportunity itself.  That supports, in our respectful submission, rather than detracts from the proposition that what the respondents lost was a business with opportunities that needed to be valued.

The business did not have what it needed to continue into the future.  It needed an export licence.  It did not have one.  It was using someone else’s on an interim basis.  That critical fact, in our respectful submission, needs to be taken into account in the assessment of the quantum and one does, as one does in many cases involving the lost opportunity of a business to make a profit, to make an assessment of the chances of success and reflect those chances in the award and remedy ordered.

STEWARD J:   Mr Moore, this does sound rather very factual.

MR MOORE:   No, your Honour, because it is a very important question of principle that can be applied in many cases.  Do you, when you are valuing a lost business, simply assume that it would be successful or do you analyse the chances of the business being successful? 

What our learned friends want to do is to rely upon Brickenden, a controversial case in equity about not speculating against a plaintiff who seeks rescission.  They want to take that principle and do what the Court of Appeal has done, without expressly relying on Brickenden, and say you cannot speculate.  Even though this business did not have everything it needed, and so one needs to assess chances, you do not speculate.  You simply assume that all chances would be determined at 100 per cent in favour of the wrong party.  That is an erroneous, in our respectful submission, approach as a matter of principle.

STEWARD J:   Where do we find that?  I am looking at paragraph 199 where they summarise the learned primary judge’s valuation methodology and (a) is:

expected earnings before interest, tax, superannuation and amortisation –

In other words, a standard EBITDA calculation. 

MR MOORE:   That is of the business that the applicants conducted some six years after the events.  So it is not the business that was lost – a business which needed to obtain an export licence and was using someone else’s financial ‑ - -

STEWARD J:   But do you say it is wrong for the valuation to have been done with the benefit of hindsight?

MR MOORE:   No, but one needs to assess what was lost.  To say that the business that was conducted by different parties six years later is identical to the business that was lost six years earlier by the respondents is, in our respectful submission, erroneous as a matter of principle because the business that was conducted earlier was one where negotiations were in frame for a five‑year term to use the applicants’ export licence.

It did not have an export licence of itself.  It did not have an agreed arrangement to use anyone else’s export licence, apart from on an interim basis.  So the business that was being conducted depended upon either those negotiations being fruitful, to lead to a concluded bargain – that did not happen.

BELL J:   Again, Mr Moore, you are, so it seems to me, in that submission, canvassing the finding at paragraph 216 on application book 234.

MR MOORE:   Your Honour, the reason why we do not seek to say that the critical element is the label one gives to what was lost, was it a business or loss of opportunity, because a business in and of itself has opportunities.  This business had opportunities, we agree, that were lost, but it did not have fixed arrangements in place, as it would have had if it had reached an agreement with the applicants to use their export licence for five years, or whatever.  Those negotiations were ongoing.  It did have opportunities.  Those opportunities were lost by reason of the wrongdoing, but the ‑ ‑ ‑ 

BELL J:   It was not an opportunity to start a business, it was an ongoing business which was appropriated from the respondents, on the findings of the primary judge and the unanimous Court of Appeal.

MR MOORE:   Yes, but ‑ ‑ ‑ 

BELL J:   I am sorry, Mr Moore, but there is some difficulty in seeing how the suggested point of principle does not come down to a very close examination of the factual basis for the calculation of the amount of the compensation in circumstances where you do not challenge any statement of principle upon which the Court of Appeal proceeded.

MR MOORE:   The Court of Appeal proceeded on the basis that the proper valuation of what was lost years earlier can equate to, and should equate to, the value…..later.  The appeal will not delve into issues of fact that are contested in any way.  The critical fact, in our respectful submission, appears at page 129 of the application book, the learned primary judge, 162(2).  There his Honour addressed the correct question, what would have happened if the wrong had not been permitted, and his Honour says in subparagraph (2):

If the defendants had acted in accordance with their respective duties, not only would they not have misappropriated and not continued to operate the Business, but it is probable the plaintiffs would have continued to operate a business of exporting livestock to Israel successfully.  In short, I find it highly likely that the plaintiffs would have taken advantage of the opportunity of which they were deprived by the misappropriation of the Business and attracted another investor of substance, with an export licence, who would have agreed with the plaintiffs . . . to sell cattle to Israel.

We accept all of that, but that throws up the question of principle.  If that is what the trial judge says would have happened, but it depends upon issues of – it depends upon probabilities, the probabilities must, in our respectful submission, be taken into account in the assessment of damages for equitable compensation.  Instead of assessing what the probability was, the trial judge artificially assumed that it was a certainty, a 100 per cent probability that that is what would have happened.  That is the error of principle that we say this case gives rise to.

BELL J:   Yes, thank you.  We do not need to hear from you, Mr Peters.

In our view, the application turns on its facts, and does not raise any question of principle suitable for the grant of special leave.  Special leave is refused, with costs.

The Court will now adjourn briefly in order to set up the video connection for the next application.

AT 10.35 AM THE MATTER WAS CONCLUDED