Winning Edge Presentations Pty Ltd v Victoria Amateur
[2010] VCC 493
•28 May 2010
| IN THE COUNTY COURT OF VICTORIA | Revised |
(Not) Restricted
AT MELBOURNE
CIVIL DIVISION
COMMERCIAL LIST
| EXPEDITED CASES DIVISION | Case No. CI-09-02343 |
| WINNING EDGE PRESENTATIONS PTY LTD | Plaintiff |
| v | |
| VICTORIA AMATEUR TURF CLUB | Defendant |
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| JUDGE: | HIS HONOUR JUDGE ANDERSON |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 4-7 May 2010 |
| DATE OF JUDGMENT: | 28 May 2010 |
| CASE MAY BE CITED AS: | Winning Edge Presentations Pty Ltd v Victoria Amateur Turf Club |
| MEDIUM NEUTRAL CITATION: | [2010] VCC 0493 |
REASONS FOR JUDGMENT
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Catchwords: | Damages – Wrongful termination of supply and sponsorship agreement – Loss of profits – Likelihood of exercise of option to renew – Meaning to be given to the expression “when items are ordered in bulk” in the agreement - Annual value of lost marketing rights agreed – How lost marketing rights should be reflected in award of damages. |
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| APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M. Stirling | Baker Jones |
| For the Defendant | Mr M. Wise | Middletons |
| HIS HONOUR: |
1 On 26 February 2010, I determined that Melbourne Racing Club had, on 21 February 2009, wrongfully terminated its supply and sponsorship agreement with Winning Edge Presentations Pty Ltd. A further hearing was held in order to determine Winning Edge’s damages and the Club’s counterclaim.
2 The supply and sponsorship agreement was entered into on 21 November 2006 for three years – the 2007/08, 2008/09 and 2009/10 racing seasons – with an option for Winning Edge to renew the agreement for a further three seasons. Winning Edge
makes the following claims:
(a) unpaid invoices of $21,369 (this claim was admitted although there may be a dispute as to the precise figure); (b) loss of profit on sales of trophies for the balance of the contract period and for the option period; (c) loss of marketing rights (the annual value of the rights was agreed at $110,000); (d) wasted material costs of $19,925. This sum was agreed by the defendant. There remains a dispute in relation to “design, development and tooling costs” of $5,000. 3 The loss of profits claim involved consideration of the following issues:
(a)
the annual sales figure to use in the calculation of the loss of profits claim was agreed as the average of the sales for 2007, 2008 and 2009 seasons, or $197,739 per annum;
(b)
whether loss of profits were claimable for the option period depended upon whether Winning Edge was likely to have exercised the option;
(c)
the rights fee that would have been payable by Winning Edge pursuant to any renewed agreement;
(d)
whether any deduction should be made from the annual sales figure in paragraph (a) to reflect the “bulk order” provision in Clause 4.2 of the agreement which limited Winning Edge to charging “equivalent to the wholesale value plus a 50 per cent mark-up”. A similar issue required determination in respect of the Club’s counterclaim for alleged overcharging of $26,880.10 in 2007/08 and of $41,644.70 in 2008/09.
4 The marketing rights were agreed by the parties to have an annual value of $110,000. There was disagreement as to how this sum should, upon the present state of the evidence, be reflected in the damages allowed to Winning Edge.
5 There was a dispute as to whether a claim by the trophy supplier, Royal Selangor (Aust) Pty Ltd, for $5,000 for “design, development and tooling” in respect of a particular trophy should be allowed as part of Winning Edge’s damages.
6 It was agreed that there were invoices the Club had not paid following the determination. Winning Edge claim these invoices totalled $21,369, the Club said the figure was $21,355.20.
7 Both parties agreed that in calculating damages the rights fee for the balance of 2008/09 must be allowed by Winning Edge. This figure was agreed at $38,206.65.
Likelihood of Winning Edge exercising its option to renew
8 Clause 6 of the agreement was headed, “Option to renew”, and read as follows:
“6.1 WEP shall have the option to renew the agreement for another three (3)
racing seasons from 2010/2011 through to 2012/2013 on such terms and conditions as reasonably agreed between the parties, provided WEP shall notify MRC of its intention to do so in writing by no later than 31 October 2009.
6.2 If the parties are unable to negotiate a new agreement pursuant to Clause 6.1
by 30 November 2009, MRC reserves the right in its absolute discretion to
commence negotiations with third parties regarding the sponsorship and the
supply of trophies and mementos”.9 Ms Mary Morton is the Club’s General Manager, Marketing & Communications. She commenced employment with the Club in October 2005 and was responsible for the agreements entered into with Winning Edge in May 2006 and on 21 November 2006. It would have been Ms Morton’s responsibility to negotiate the terms for the renewal
issue prior to termination of the agreement in February 2009 and had discussed it
with the sponsorship manager, Mr Scott Jenson, and with the Club’s CEO, Mrof the agreement in October 2009. Ms Morton said that she had considered the had mentioned in those discussions was a rights fee of $140,000-$150,000 per annum.
10 Ms Morton said that the terms that she would have required in October 2009, if Winning Edge were to renew the agreement, would involve:
(a) an increase in the rights fee to a minimum of $140,000 per annum in the first year and indexed by the Consumer Price Index for the following two years; (b) renegotiation of other terms to ensure greater transparency in pricing and the quality of trophies, deletion of the provision for “preferred supply rights of other merchandise and mementos” (Clause 4.6) and some variation to the terms relating to the pricing “when items are ordered in bulk” (Clause 4.2) 11 Ms Morton said that she was aware that Clause 6 of the agreement required the terms and conditions of renewal to be “as reasonably agreed between the parties”. She said that the factors that would have influenced her insistence upon the increased rights fee and other conditions were as follows:
(a)
In 2006, when the earlier agreements were negotiated, she was “new to the job” and the Club had “lots” of assets she was required to sell. In 2008/09, there were fewer assets particularly at the “prestige” end of the market and demand for those assets was very strong. The principal assets were the naming rights for Club races particularly those races which were televised;
(b)
Winning Edge’s representatives were demanding to deal with and the relationship with the company was, as she described it, “resource intensive”. Although Ms Morton said that she had good professional relationships with both Mr Ewart and Ms Ewart-Kennedy, considerable effort needed to be devoted to dealing with issues arising from the agreement as Winning Edge were always “pushing the boundaries” of the agreement;
(c)
she had concerns in relation to the pricing and quality of the trophies supplied by Winning Edge, particularly as Winning Edge was the Club’s exclusive supplier of trophies pursuant to the agreement. In 2006, Ms Morton was not aware of any other supplier of trophies who could have met the Club’s requirements.
(d)
Winning Edge should be required to pay a premium because they had an excusive supply arrangement with the Club.
12 Generally, I found Ms Morton’s evidence unconvincing. The figure of $140,000 was a global figure and no breakdown of how that figure was calculated was given. When Ms Morton was asked for specific detail to justify her assertions of the matters that she would have considered, there was little objective evidence given or, the objective evidence suggested a contrary conclusion. Both parties agreed that it was necessary to consider this matter in the context of what was “reasonable” and that this would involve consideration of the history of the relationship between the parties including the four previous written agreements between them.
13 Since about 1995, Winning Edge had been a sponsor and supplier of trophies to the Club. The first formal written agreement to cover the 2001/02 and 2002/03 racing seasons was entered into in September 2001 with a rights fee of $15,000 in the first year and $27,000 in the second year. The second agreement for the 2004/05 and 2005/06 seasons was entered into on 10 September 2004 with a rights fee of $35,000 per annum. The third agreement on 30 May 2006 for the 2006/07 racing season had a rights fee of $45,000. The fourth agreement entered into on 21 November 2006 for three racing seasons with an option to renew for a further three racing seasons had a rights fee of $50,000 to be adjusted annually according to movements in the Consumer Price Index.
14 On each occasion when a new written agreement was entered into, additional rights were given to Winning Edge. The prior contractual history is inconsistent with the suggestion that a rights fee of $140,000 (whether or not adjusted for the CPI or otherwise) was reasonable. The proposal by Ms Morton involved a substantial increase, particularly if the rights of Winning Edge under any renewed agreement were reduced rather than increased.
15 The principal sponsorship rights or benefits obtained by Winning Edge pursuant to the agreement were the “race naming rights” for two races, the group two race formerly known as the Herbert Power Quality Stakes (or a race of equivalent quality) on Caulfield Guineas Day to be known as the “Winning Edge Presentations Stakes” and a support race on Caulfield Cup Day to be known as the “Winning Edge Presentations Cup”. This latter race was to be “nominated by MRC in its absolute discretion”.
16 Ms Morton said that following the termination of the Winning Edge agreement, she had found alternative sponsors for both of these races, although she had delayed doing so in case a compromise had been reached in this proceeding. She said that
as a consequence of this delay she did not believe that she had been able to achieve
the full market price for the naming rights to each of the races.17 It is necessary for me to mask certain parts of my Reasons for Judgment as the Club contended that the sale price of sponsorship rights for races was commercially sensitive and should not be made public. In the circumstances, I will use code references in the body of the Judgment and provide the parties with a schedule from which they will be able to interpret the code in the Judgment.
18 Ms Morton said that she had sold the sponsorship rights to the group two race for the sum of [schedule item 1]. Ms Morton said that this was part of a larger sponsorship package of about [schedule item 2]. Ms Morton said that in relation to the unlisted race on Caulfield Cup Day she had sold the naming rights to this race for [schedule item 3]. However, she said that with more time she was confident that she could have received about [schedule item 4].
19 An analysis of the details of the sponsorship agreement with the specific sponsor who purchased the naming rights to the two races, previously the subject of the agreement with Winning Edge, does not bear out the assertions made by Ms Morton as to the specific values she assigned to the two races as part of the sponsorship package. In defendant’s counsel’s submissions dated 26 May 2010, these values are more accurately referred to as “estimates”.
20 The sponsor who purchased the naming rights in June 2009 was Sporting Bet Australia Pty Ltd. The agreement with Sporting Bet provided naming rights for four races with total prize money of $1,070,000, including the two races previously sponsored by Winning Edge. The additional races were the Orr Stakes and the Oakleigh Plate. Each of these races was a group one race with prize money of $400,000. The sponsorship fee to be paid by this sponsor for the 2009/10 season was [schedule item 5] and for the 2010/11 season was [schedule item 6].
21 It appears that both of the group one races, to which Sporting Bet had naming rights, were significant races in the racing calendar and, during 2010, both races were televised.
22 Ms Morton agreed that in determining the relevant sponsorship fee, the most relevant factor was the status of the race. The matters reflecting the prestige of the race included whether it was a group one, two or three or unlisted race, whether the particular race day would be televised and the value of the prize money. Ms Morton said that the exposure for the sponsor, and particularly television exposure, was the most significant factor and televised races commanded the highest sponsorship fee.
23 In the circumstances, it is difficult to see how the four races sponsored by Sporting Bet for a sponsorship fee for the 2009/10 racing season of [schedule item 5] supports Ms Morton’s assertion that the two races previously sponsored by Winning Edge had sponsorship values of [schedule item 1] and [schedule item 3] or that she would have insisted on a renewal fee of at least $140,000 for Winning Edge for the 2010/11 season.
24 The Club has discovered documents recording sponsorship agreements entered into with 12 sponsors after the date of termination of the Winning Edge agreement, together with two earlier sponsorship agreements. An analysis has been done by Plaintiff’s counsel of the relationship between the prize money for the races to which the particular sponsor had sponsorship rights (the prize money giving an objective indication of the status of the race and the marketability of the sponsorship rights to it) and the rights fee payable pursuant to each sponsorship agreement. It was then sought to compare the percentage the rights fee bears to the total prize money for the sponsored races. The highest percentage (44 per cent), was for a sponsorship agreement entered into in November 2008 with [schedule item 7].
25 Ms Morton said the this arrangement with [schedule item 7] was equivalent to the arrangement with Winning Edge because it related to a race on Caulfield Cup Day that would be televised. There was a further sponsor [schedule item 8] with naming
rights for another race on Caulfield Cup Day, although it is not clear from Ms Morton’s
evidence whether this was a race that would usually be televised. In relation to that
sponsor, the rights fee represented 35.7 per cent of the value of the race prize
money.26 A further sponsor, [schedule item 9], sponsored two races on Caulfield Guineas Day, a televised meeting, although only one of the races was a group three race and the other was unlisted. The rights fee represented 30 per cent of the race value prize money. The sponsor to whom the 2006 agreement related [schedule item 10] paid a rights fee in 2009/10 equivalent to 26.5 per cent of the total prize money for the sponsored race. Apart from these four sponsors, the other 10 sponsors had rights fees which, as a proportion of the prize money for the relevant races, ranged from 4.1 per cent to 20 per cent
27 If the renewal rights fee for Winning Edge were calculated at 25 per cent of the total prize money for the group two and the unlisted race on Caulfield Cup Day included in its agreement, the fee would be less than $70,000.
28 Applying the highest figure referred to by Ms Morton for the group two race, she would have been able to obtain for the Caulfield Cup Day unlisted race with more time, the total is only [schedule item 11]. Allowing about $20,000 for the ticketing and hospitality rights, there would still be a shortfall for Ms Morton’s nominated figure of $140,000 per annum. Ms Morton said that the increased rights fee would also compensate for the exclusivity of the supply agreement and the additional resources required for the Club to service the Winning Edge Agreement.
29 In defendant’s counsel’s further submissions dated 26 May 2010, it was asserted indication that $140,000 for the rights fee is perfectly reasonable”. Apart from the likelihood that the reasoning in the expert report of Mr Chris Nolan may have assisted the parties to reach agreement on the figure of $110,000, there is no evidence as to the make-up of that figure or how that figure, or any other figure, might be related to the rights fee of $50,000 agreed by the parties in November 2006.
30 In my view, the suggestion by Ms Morton that a rights fee of $140,000 would be a reasonable basis to renew the agreement cannot be supported. I take into account the following matters:
(a)
allowing for the Consumer Price Index adjustment, the rights fee for 2009/10 would, according to the experts, have been $52,100,
(b)
the length of the earlier trading relationship between Winning Edge and the Club,
(c)
the basis upon which previous written agreements had been entered into, including the rights fee and additional rights included in later agreements,
(d) the percentage increase in the rights fee charged in subsequent agreements, (e)
the value of the races (as can be ascertained from the total rights fees paid by the sponsor who took over the two Winning Edge races and sponsors of similar races),
(f)
the correlation between sponsorship fees and the value of the prize money of the races and whether those races would be televised or not, as matters reflecting the marketability of sponsorship rights to those races.
These factors lead me to the conclusion that a reasonable renewed rights fee would be about $75,000 for the first year of the option period (an increase of about 45%), and adjusted in line with the CPI for the following two years.
31 high maintenance Although Ms Morton said that Winning Edge was a “” client and that supplied the Club, there were no documents Ms Morton was able to refer to, which indicated that any concerns about these matters had been considered either within the Club or had been transmitted by the Club to Winning Edge during the life of the agreement. Mr Ewart and Ms Ewart-Kennedy said that no verbal complaints had been made to them during the life of the supply and sponsorship agreement by any Club representative.
32 As to the suggestion by Ms Morton that Winning Edge were continually pushing the boundaries and seeking further rights additional to those included in the agreement, there was evidence that in February 2009, Ms Morton agreed to Winning Edge
having the naming rights for the Winners Room. Ms Morton said that this was a
result of a negotiation over many months following a complaint by Winning Edge that
the Club had breached the agreement by failing to make the minimum value of
purchases during a particular year.33 There were certainly negotiations over many months. However, the grant of naming rights to the Winners Room was a matter of some significance. The fact that Ms Morton was prepared to assign the naming rights to Winning Edge was an indication that there were no fundamental difficulties in the relationship and it seemed likely that there would be no reason why the Club would not wish to continue their arrangement beyond the contract period.
34 Ms Morton said that following the termination of the Winning Edge agreement, the Club had principally used two companies to supply trophies, rather than having a single supplier. I am not convinced that the advantages to the Club of having to deal
with a single supplier would necessarily require Winning Edge to pay a premium for
the privilege of having an exclusive supply arrangement. The arrangement had
obviously worked to their mutual benefit for many years without Winning Edge
needing to pay for the privilege.
35 From the point of view of Winning Edge, Mr Ewart indicated that he would, if at all possible, have wished to renew the supply and sponsorship agreement. Winning Edge had similar arrangements with large numbers of racing clubs, both within
Australia and New Zealand. It seems likely therefore that Winning Edge would wish to continue the arrangement with the Club because the naming rights and other exposure at Caulfield and Sandown had obvious advantages which complemented the other parts of its business.
Bulk orders
36 Clause 4 of the supply and sponsorship agreement provided that Winning Edge’s “right to be the exclusive supplier of trophies and mementos to the MRC” was on the basis set out in that clause, which included in Clause 4.2 under the heading, “Pricing”, that “trophies and mementos shall be supplied in accordance with a pricing
structure as agreed between MRC and WEP equivalent to the wholesale value plus a
50 per cent mark-up when items are ordered in bulk. Quotes will be provided for all
items to be supplied by WEP to MRC pursuant to this agreement, and the provision
of any items shall be conditional upon WEP’s receipt of written acknowledgment and
acceptance of each such quote by MRC. Such items shall be paid for by MRC within
30 days of invoice date. Winning Edge will have the opportunity to pass on 1 (one)
price increase during the term of this agreement, for race day trophies based on CPI.
This is based on a minimum spend of $150,000 (excl. GST)”.37 Clause 4.3 under the heading, “Audit of trophies”, provided that “in good faith, WEP
shall work with MRC to determine the most appropriate standard of trophy and/or
memento for each race category which will then be bulk ordered in advance”. Clause
4.5 under the heading, “Sale of trophies and replicas”, provided that “Winning EdgePresentations shall sell trophies, replicas or mementos at race book valuation, with a
discount available for multiple orders”.
38 Terms relating to the pricing of trophies and mementos were not included in the first agreement in 2001. The second agreement in 2004 contained a clause providing that trophy prices reflect “a wholesale value plus 50 per cent mark-up when items are ordered in bulk”, but also contained a provision that “Winning Edge Presentations
must sell trophies, replicas or mementos to connections at wholesale cost plus 60 per
cent”, and that “Winning Edge Presentations must supply an annual report to the
Melbourne Racing Club that clearly indicates additional revenue the Club has directed to Winning Edge Presentations for both trophies and replicas from winning
connections including quantity and purchase price”. The provisions in the third
agreement dated May 2006 were repeated in similar terms in the fourth agreement
entered into in November 2006.39 In the proceeding, there was a dispute in relation to the following issues:
(a)
whether, during the course of the agreement, items had been “ordered in bulk”;
(b) what was meant by “wholesale value”; (c) whether “a pricing structure [had been] agreed between MRC and WEP”. 40 The issue of bulk orders has relevance in the determination of two matters:
(a) whether Winning Edge’s loss of profits claim should use the average of the sales figures “capped” at a 50 per cent mark-up on the cost of the trophies from Winning Edge’s suppliers, or whether the mark-ups used by Winning Edge over the course of the agreement should continue to be applied; (b) to determine the Club’s counterclaim in respect of items supplied during the course of the agreement, where the mark-up was more than 50 per cent of the cost of trophies and mementos from Winning Edge’s suppliers. 41 In its counterclaim, the Club alleged that in advance of the 2007/08 and 2008/09 racing seasons the Club, through its sponsorship account manager. Mr Nicholas Fletcher, had forwarded to Winning Edge a budget identifying the Club’s
requirements for trophies and mementos for the coming season. The Club alleged
that “the budget document was a bulk order for the trophies and mementosrequirements for Melbourne Racing Club for the entire season. The decision as to the type and design of trophies, save for feature trophies such as the Caulfield Cup
and Blue Diamond Stakes, was largely left to Winning Edge Presentations”.
42 The Club’s budgets were sent to Winning Edge before the start of each racing season. During the course of evidence, defendant’s counsel Mr Wise referred witnesses to documents passing between the parties which used the expression
“bulk” orders. Whilst these documents indicated that the parties’ representatives believed items were being transacted in “bulk”, it does not necessarily follow that these involved transactions “when items are ordered in bulk” as contemplated by Clause 4.2 of the agreement.
43 The principal documents referred to were as follows:
(a)
a letter to Winning Edge from the Club dated 21 December 2004. It was noted that “the clause in the contract referring to bulk discount was discussed for
several months during the negotiation stages in the context of multiple
purchases (more than one item). At this time Alistair advised that wholesaleprice (his buy price) was marked-up by 100 per cent, hence a 50 per cent
mark-up was in effect providing the Club with a 25 per cent discount”. Mr
Ewart agreed that there had been discussions to that effect;
(b) internal documents within the Club, including a memorandum dated March 2005, indicated a belief on the part of the marketing manager, Mr Wade Calderwood, that the Club had been charged by Winning Edge “at inflated mark-ups, with no recourse to control”; (c) a meeting in July 2007 attended by representatives of the Club and Winning Edge noted, under the heading “MRC bulk purchasing”, that the Club was to “set up meeting with racing department to determine how far in advance race names can be confirmed…race names for plaques to be sent through in bulk as per racing department’s advice”;
(d) in an email from Mr Ewart to Mr Bingley at the Club dated 2 October 2006, Mr Ewart noted that “we have done a bulk order for your 06/07 trophies”. Mr Bingley responded stating that “the bulk order was done under the assumption that there will be a degree of flexibility shown…we need to
maintain flexibility in relation to all trophies and would be reluctant to enterinto a bulk order scenario in future years if this cannot occur”;
(e) correspondence during the second half of 2007 referred to the “bulk order” and the fact that Mr Bingley had visited Winning Edge’s showroom to sight the trophies previous ordered in bulk by the Club; (f) in May 2008, the Club forwarded a spreadsheet headed “2008/09 trophies budget”. No agreement was reached as to pre-payment for this order. Mr Ewart later referred to it as a “non-bulk order”. 44 The 2007/08 trophies budget referred to the Club’s requirements and specified, in relation to each race day in the Caulfield and Sandown calendars, the value of the trophy or memento required for each race. In the spreadsheet, the “unit price” was exclusive of GST. If GST were added back in, the prices would reflect the standard trophies which had values of $500, $750, $1,000, $2,000, etc. In the 2008/09
trophies budget spreadsheet, similar information was provided although the value of
the trophies expressed as the “unit price” were $500, $750, $1,000, $2,000, etc
(exclusive of GST).45 In the 2006/07 and 2007/08 years, after the Club had forwarded the budget spreadsheet to Winning Edge, Winning Edge then forwarded an invoice to the Club which reflected the trophy requirements of the Club and the prices of the trophies. The invoice was submitted on the basis that, if payment was made “up front”, Winning Edge would allow a discount of 10 per cent. This was reflected in invoice number 152803 dated 11 July 2006. A similar arrangement was entered into for the following year. However, for the year 2008/09, the parties could not reach a similar agreement for the Club to pay “up front” for the trophies. This led to Mr Ewart describing the order as a “non-bulk” order.
46 Mr Ewart said that he considered “items are ordered in bulk” (as defined by Clause 4.2 of the agreement), where the Club provided all the information which would be needed by Winning Edge to complete the trophies and mementos, including the race
name, sponsor details, logos, etc. At no time during the life of the agreement was the view, there had never been a bulk order. The Club’s contention through its counsel was that a bulk order was simply the provision of multiple items at one time and this was what had been reflected in the orders for the 2006/07 and 2007/08 seasons.
47 In my view, the interpretation of Clause 4.2 must depend upon the language used by the parties in the clause together with any assistance gained from other provisions of the agreement. It seems clear from the introductory words in Clause 4 and the
provisions in Clause 4.1 that as the exclusive supplier of trophies and mementos to
the Club, Winning Edge was required to supply, “in accordance with the
predetermined price structure specified in Clause 4.2”. Clause 4.2 provides for “a
51 pricing structure as agreed between MRC and WEP equivalent to the wholesale
value plus a 50 per cent mark-up when items are ordered in bulk”.
48 The purpose of Clause 4.2 is to determine the appropriate “pricing structure”. In the circumstances, I am satisfied that, what appeared to be intended by the parties, was:
(a) that, generally, items would be ordered in bulk, that is, substantial quantities of items would be ordered at the same time to take account of the price calculated in accordance with the “predetermined price structure”; (b) it was not necessary for a bulk order that all the details required by Winning Edge to produce the finished trophy should necessarily be provided at the time of the order but simply that a significant quantity of trophies or mementos be ordered at the same time. 49 The most obvious interpretation of the phrase “wholesale value” would be the cost of purchasing the trophies by Winning Edge from a supplier. Winning Edge’s “mark-up” of 50 per cent would be the mark-up on the purchase price from the supplier. The
aspects of the production of trophies, which were within the control of Winning Edge,
were the finishing matters – determination of the artwork required, the engraving of
the trophy, polishing, packaging and delivery to the Club.50 It is clear, as Mr Ewart suggested in his evidence, that there were economies of scale, and if Winning Edge had been provided with the precise details required for the engraving artwork at the time of the orders, it could have set up its operations to produce the final trophies more efficiently. I do not consider, however, that this was the intent of the agreement. The bulk order would simply allow Winning Edge to obtain the supply of trophies, to which it would add its 50 per cent mark-up to cover the finishing aspects.
It might be said that, in these circumstances, there would be no advantage to for any bulk orders. The items within its control (the finishing items including the artwork, engraving and delivery of the trophies) would be included within the 50 per cent mark-up. The “wholesale price” would refer to the supply costs to Winning Edge rather than the cost of producing each individual trophy including the labour costs of what were essentially administrative tasks.
52 Winning Edge justified the on-costs by calculating the time it would ordinarily take to process a trophy. In my view, a calculation on this basis does not seem consistent with an assertion that a bulk order was required before Winning Edge could offer a price based on a 50 per cent mark-up. Winning Edge led evidence of the notional cost of its administrative expenses (which did not appear to vary from case to case or whether the order was a bulk order or not) in order to justify the cost of preparation and delivery of the trophies.
53 During the life of the agreement, the Club appeared to place its orders in accordance with a “predetermined price structure”. In its budget spreadsheets, the Club referred to trophy costs for particular races. Notwithstanding this fact, it is my view that
Winning Edge was required to comply with the terms of the agreement. Whether a trophy had a nominal value of $500 or $750 or $1,000, it was nevertheless the obligation of Winning Edge to ensure that the cost to the Club was no more than the cost of the trophy from the supplier together with a mark-up of 50 per cent.
54 In relation to the Club’s counterclaim, an examination of the supplier’s invoices by the parties’ expert has demonstrated that in certain instances Winning Edge did not comply with the agreed pricing structure. For 2007/08, this amounted to $26,880.10 and in 2008/09 to $41,844.70. In the overall transactions between the parties, these are relatively minor sums but nevertheless I consider that an allowance must be made by Winning Edge to the Club for these amounts and in the calculation of the loss of profits Winning Edge suffered as a result of the Club’s wrongful termination of the agreement, the calculation of those lost profits must reflect the pricing structure contained in the agreement.
Loss of sponsorship rights and benefits
value of the marketing rights” 55 Pursuant to the agreement, a consideration of $50,000 (exclusive of GST) in the first year and indexed by CPI in the subsequent years, was to be paid by Winning Edge for both “the right to be the exclusive supplier of trophies and mementos” to the Club (pursuant to Clause 4 of the agreement) and the sponsorship rights and benefits (pursuant to Clause 3 of the agreement). In addition to the loss of profits Winning Edge claims in respect of the loss of supply rights for the balance of the 2009/10 racing season and for the option period, Winning Edge claims compensation for the loss of sponsorship rights and benefits. Those rights include loss of marketing, advertising, brand, signage and television exposure pursuant to Clauses 4.1 and 4.2 and loss of hospitality and committee room and race ticketing rights pursuant to Clause 4.3.
56 Early in the first hearing, the parties agreed that the annual value of the sponsorship benefits was $110,000. This agreement was subject to the submissions of the parties as to “what to do with that agreed figure”. The defendant submitted that to allow the whole of that sum (for whatever period the plaintiff was entitled) would admit the possibility of double counting as the allowance for loss of profits sufficiently compensated Winning Edge for the loss of sponsorship rights and benefits. The defendant’s forensic accounting expert, Mr Owain Stone, submitted that if the loss of sponsorship rights and benefits had affected Winning Edge’s business otherwise than generated through the Melbourne Racing Club, then evidence of loss of profits from that business should be presented and analysed. Defendant’s counsel submitted that this information should be available, particularly as over 12 months had passed since the termination of the agreement.
57 Mr Stone said that, “to add the entire agreed value of the marketing rights to the
claim for loss and damage results in a double counting of some or all of the agreed
. Mr Stone referred to the fact that the rights fee paid by Winning Edge on marketing. In 2008, the rights fee paid pursuant to the agreement with the Club represented 17 per cent of the total marketing budget and 21 per cent in the 2009 year. Winning Edge has made no claim for loss of profits in respect of the non-Melbourne Racing Club business resulting from the Club’s failure to deliver the sponsorship rights and benefits pursuant to the agreement.
58 Winning Edge is a sales and marketing company dealing in trophies and presentation products. Apart from the arrangements it had with the Melbourne Racing Club, it has similar supply agreements with about 30 other racing clubs in Australia and New
Zealand. The sales through the Melbourne Racing Club represented about 10 per cent of Winning Edge’s overall sales. The sponsorship rights provided by the agreement included both “brand exposure” for the Winning Edge name and the provision of hospitality and ticketing rights at the Caulfield and Sandown racecourses.
59 The expert witnesses agreed that it was not possible to directly relate the expenditure by Winning Edge on the type of marketing rights included in the agreement with a financial return in the form of profits from increased sales.
60 Mr Stone suggested in his evidence that a significant part of the benefit from the marketing exposure at Caulfield and Sandown would be localised and only reflected in the loss of sales associated with the Club’s activities. In my view, there is insufficient evidence upon which that conclusion might be reached. The evidence established that the substantial part of the sponsorship rights and benefits, to which Winning Edge was entitled pursuant to the agreement, related to the two races for which Winning Edge had naming rights. Both those races were televised and as a consequence attracted considerable exposure for Winning Edge not simply at the Caulfield racecourse.
61 In addition, the following further factors were relevant:
(a)
the nature of Winning Edge’s business. Ms Morton said that in 2006 she was not aware of another trophy supplier who would have been able to meet the demands of the Club from its own resources. It is clear that Winning Edge had, and probably retains, a pre-eminent position amongst its direct competitors;
(b)
Winning Edge’s involvement with a considerable number of racing clubs in Australia and New Zealand suggests that the exposure gained from the sponsorship rights and benefits at Caulfield and Sandown would complement the overall focus of its business activities;
(c) name, particularly through television, it was possible to value the loss of those
as the principal sponsorship benefit to Winning Edge was the exposure of its of Mr Chris Nolan which the plaintiff relied upon and which, presumably, was a relevant factor in the parties reaching agreement on a figure representing the annual value of Winning Edge’s sponsorship rights and benefits;
(d) similarly with the hospitality and ticketing rights, these were matters apparently quite easily quantified by calculating the commercial cost of the benefits received. 62 On one side of the equation in calculating its damages, Winning Edge has allowed the cost to it of both the supply and sponsorship benefits it acquired from the agreement. Winning Edge’s loss of profit claim reflects the other side of the equation so far as it applied to its inability to continue supplying trophies and mementos pursuant to the agreement. Winning Edge also seeks compensation for the loss of sponsorship rights and the benefits.
63 Generally, I consider that Winning Edge should be entitled to an award of damages equivalent to the loss of those benefits. Those benefits are essentially an expense incurred in order to generate profits from its core business of providing trophies and similar products. It must also be recognised, however, that the expenditure on the
sponsorship rights and benefits was also in the nature of a capital investment to
strengthen the name or image of the company, its reputation in the marketplace and
its ability to attract other business particularly from other racing clubs. These
matters, as with the difficulty of directly attributing expenditure on marketing to any
particular reflection in the sales performance of the company, cannot be easily
related to the financial worth of the company in terms of its goodwill or the value of its
assets.
64 There is, of course, a possibility that the marketing expenditure with the Melbourne Racing Club would only have a direct consequence in terms of increased sales of trophies (including replicas) for either the Club or other customers associated with the events at Caulfield and Sandown. The Melbourne Racing Club business represented approximately 10 per cent of Winning Edge’s annual sales.
65 The proportion of the company’s annual marketing budget spent on the sponsorship fee pursuant to the agreement with the Club, was approximately 20 per cent. In my view, the possibility of double counting in the calculation of the Winning Edge
damages would be avoided by discounting the agreed value of the sponsorship rights
and benefits of $110,000 per annum by 20 per cent.66 Winning Edge has claimed that this sum should be allowed for the option period and for the balance of the contract period. Defendant’s counsel submitted that Winning Edge “has enjoyed the majority of the benefits during [the 2008/09] year”. This submission has some merit, as the parties agreed that Winning Edge’s main sponsorship rights were associated with its naming rights to the two races and that these races had already been run that year.
67 There would, however, have been other forms of “name” exposure and hospitality benefits enjoyed by Winning Edge after February 2009. I consider that an allowance of 20 per cent of the discounted value of the sponsorship rights and benefits would be appropriate compensation for the balance of the contract period.
Wasted materials costs
68 The Club has agreed that the sum of $19,425 was the cost of trophies by Winning Edge in anticipation of the agreement remaining on foot and that this sum should be paid by the Club. A dispute remains in relation to the sum of $5,000 for design development and tooling costs in respect of a particular trophy. Ordinarily, those costs would be amortised over a period of three years. The particular trophy had been supplied by Winning Edge to the Club for two years but not for the third, because the agreement was terminated.
69 On 18 September 2009, Royal Selangor invoiced the plaintiff for the sum of $5,000 for the design, development and tooling costs. Since that date it has not insisted on payment from Winning Edge. Ms Ewart-Kennedy gave evidence that, if the sum of $5,000 were recovered from the Club by Winning Edge, the monies would be paid to Royal Selangor. In a letter dated 1 August 2007 from Royal Selangor to Winning Edge, the set-up costs had been quoted at “$4,500 amortised over 3 years”. I will use this figure (subject to any required adjustment for GST) in my consideration of the issue.
70 The Melbourne Racing Club was aware that new trophies necessarily entailed a significant cost to set-up the production process for the trophy and a continuity of production was required over at least 3 years in order for the set-up costs to be
recovered. I consider that Winning Edge should be entitled to the sum of $1,500,
representing the third year for which it was unable to receive a contribution to those
set-up costs, as it had for two years it supplied the trophy.
Conclusion
71 Winning Edge is entitled to be paid for the following matters:
(a) unpaid invoices of $21,369 (or a slightly varied amount); (b)
loss of profit on sales of trophies for the balance of the contract period and for the option period based on sales of $197,000 for each year, less an appropriate allowance based upon Winning Edge only claiming a 50 per cent mark-up on the cost of purchasing the trophies from the suppliers. Winning Edge must also allow the sponsorship fee it would have paid for the balance of the 2009/10 racing season ($38,206.65)and a supply and rights fee of $75,000 per annum for the first year of the option term, increasing by the CPI in the following two years;
(c) the loss of marketing rights valued at $110,000 per annum less 20 per cent per cent of the discounted figure for the option period should be allowed;
(d) wasted material costs of $19,925 together with the further sum of $1,500 representing one-third of the quoted cost of $4,500. 72 The Melbourne Racing Club will be entitled to succeed on its counterclaim in respect of the sums of $26,880.10 for the 2007/08 year and $41,644.70 for the 2008/09 year.
73 I will hear further submissions from the parties before making formal orders and determining the question of costs.
Certificate
I certify that these 22 pages (and the schedule) are a true copy of the reasons for decision of
His Honour Judge Anderson delivered on 28 May 2010.
Dated: 28 May 2010.
Caroline Dawes
Associate to His Honour Judge Anderson
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