Case: Chappel v Hart [1998] HCA 55 ; (1998) 195 CLR 232
Outcome: discussed
am satisfied that Naturalcare, through Schadel, did rely upon the Quality Assurance representation and the Supply representation. Counsel for Pan relied upon some factors to negative reliance, for example, the intention to source product from Amrion; the pattern of purchase from other suppliers; the freedom reserved by Schadel to acquire goods from other suppliers if price were favourable; and the variety of manufacturers Naturalcare had listed with the TGA to manufacture its products. It is submitted for Pan that the express evidence of reliance given by Schadel should be given little or no weight, citing Chappel v Hart [1998] HCA 55 ; (1998) 195 CLR 232 at 246 n64. 96 Chappel v Hart does not compel that conclusion. Indeed, the absence of such evidence could be fatal to a claim of reliance and causation. In the present case, Schadel's evidence accords with commercial reality. Naturalcare continued to acquire most of its goods from Pan and was lulled into what was a false sense of security by the assurances over the years and entry into the Manufacturing Agreements. It is obvious that if Schadel had thought that there was any real danger of Pan losing its licence because of non-compliance with the Code, he would have taken steps to reorganise the business to minimise dependence upon Pan for supplies. In essence, Schadel was induced not to reorganise the Naturalcare business to reduce dependence upon Pan as a supplier. The misleading conduct does not have to be the sole cause of the action or inaction said to cause the damage ( I &amp; L Securities Pty Limited v HTW Valuers (Brisbane) Pty Limited [2002] HCA 41 ; (2002) 210 CLR 109 per Gleeson CJ at [33], per Gaudron, Gummow and Hayne JJ at [57], per McHugh J at [90] [93] per Callinan J at [216]). DAMAGES The assessment of damages pursuant to s 82 of the Trade Practices Act 1974 (Cth) presents some problems. Damages have been assessed by Naturalcare by estimating the loss of gross profits on product supplied to it by Pan as at April 2003 and then deducting from that amount any savings in costs and incidentals for a period until alternative suppliers were found. There are issues as to the particular methodology employed to arrive at that result which may be put aside for the moment. It is submitted for Pan that the basic approach is flawed. If Schadel's evidence is accepted then, on the hypothesis as to liability being explored, he would have commenced decreasing his reliance on Pan from March 2002, both by obtaining products from a range of other suppliers and by developing more generic products rather than complex slurry mix soft gels dependent upon Pan's particular expertise. Pan complains that there has been no attempt to estimate the difference between the position that would have been arrived at as a result of that conduct and the situation which existed at the time of the recall. In other words, Naturalcare has quantified damage on the basis of the continued supply of Pan products rather than upon the hypothesis that there would have been a substitution for Pan's products. Naturalcare's claim for damages was formulated in a global fashion for all causes of action seeking to demonstrate what was lost by the inability to acquire and resell Pan products. It is submitted for Pan that this leaves the Court in a position where there is no proper basis for the assessment of damages in circumstances where a proper basis could, and should, have been put forward ( Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd [2003] HCA 10 ; (2003) 196 ALR 257 at [38] per Hayne J; Optus Vision Pty Limited v Australian Rugby Football League Limited [2003] NSWSC 288 at [132] [137] (unaffected by the appeal at [2004] NSWCA 61). Naturalcare responds that the approach that it has taken is likely to underestimate the quantum of potential damages as it does not take into account the fact that if it had reorganised its business it would have been in a stronger position in the market following the Pan recall than it ultimately was as its competitors would have been adversely affected by the recall and it would not have been. It, therefore, would have been likely to have increased its market share. It is also submitted that the method chosen uses actual figures and so reduces the necessity for hypothetical estimates which would inevitably be speculative. In my opinion, the approach taken by Naturalcare is acceptable as a starting point ( Murphy v Overton Investments Pty Ltd [2004] HCA 3 ; (2004) 216 CLR 388 at [44] [52]). As it was induced to do nothing, it did not get out of the way and was a sitting duck when hit by the runaway train. Quantification of the effects of the train wreck is a good starting point for the assessment of loss. Of necessity, the assessment of damages in a case such as this is imprecise. There is a body of material in evidence as to the financial performance of the Naturalcare business prior to and after the suspension of licence and product recall which forms the raw material for the necessary assessment. The fact that the witnesses have approached the matter in one way or another is not decisive. If reorganisation of the business could have been completed so as to eliminate dependence upon Pan prior to the suspension of Pan's licence, then the proposed measure of damages would be a good proxy for the loss caused by the misleading and deceptive conduct. If reorganisation would not have been completed, there would need to be a discount to reflect the extent to which reorganisation would not have taken place. The evidence of what occurred in relation to reorganisation after the recall is of some value in assessing what may have occurred in the 12 months prior to it. However, the latter period was complicated by widespread effect of the failure of Pan, which meant that many other customers apart from Naturalcare were scrambling to obtain supply. I am not satisfied that the divorce from Pan would have been complete by the time of the suspension of the licence, even if commenced in March 2002. I agree with the submission by counsel for Naturalcare that the most striking aspect of the actual results post recall is the significant loss of total revenue by the business after the cessation of supply by Pan. The total revenue for the period 1 May 2001 to 30 April 2002 was $9 738 748 with an average monthly revenue of $811 562. In the period from 1 May 2002 to 30 April 2003, the total revenue was $11 240 026 with an average monthly revenue of $936 669. In the period from 1 May 2003 to 30 April 2004, the total revenue was $7 841 573 with an average monthly revenue of $653 464. In the period from 1 May 2004 to 30 April 2005, the total revenue was $10 667 344 with an average monthly revenue of $888 945. Thus, in what is roughly the year after the cessation of supply, the decrease in total revenue was $3 398 453 and in the ensuing 12 months the decrease was $572 682 in total which together can be rounded up to about $4 000 000. This pattern is broadly consistent with the evidence given as to the replacement of individual Pan products over the period. No other substantive reason has been advanced for the drop in revenue apart from the disturbance of supply of Pan products. I am satisfied that the interruption of supply was progressively alleviated over approximately two years. The total lost revenue in the two years would, as submitted by counsel for Naturalcare, understate the true loss as revenue had been on a rising plane up to the time of termination of supply by Pan. No doubt some of the effect of the unavailability of Pan products upon Naturalcare was due to Markethaven being unable to supply Pan products. It is reasonable to take account of that consequence because of the history of the relationship between Pan, Markethaven and Naturalcare. Pan endeavoured to establish that Naturalcare had not taken reasonable or timely steps to obtain substituted supplies more quickly. There was an attempt to use cross-examination and some evidence to show that Naturalcare had not acted reasonably as there were sources of supply not examined at all or not examined promptly. In my opinion, that endeavour was unsuccessful. Naturalcare had every commercial reason to take all steps open to it to minimise the loss. There is no reason to doubt the motivation to do so. In assessing the situation it is necessary to bear in mind what was said by Lord Macmillan in the well known passage from Banco de Portugal v Waterlow &amp; Sons Ltd [1932] UKHL 1 ; [1932] AC 452 (at 506): 'It is often easy after an emergency has passed to criticize the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken.' It is also necessary to bear in mind that Schadel's reliance on Selim had limited his knowledge of the market. Even if the result was not perfect, I am satisfied that Naturalcare took reasonable steps to restore supply. Loss of gross revenue is not the measure of loss to the business. It is quite obvious, however, that a sudden loss of revenue by a continuing business will inevitably lead to a net loss. Fixed costs and many of the variable costs will remain. There was a good deal of attention in the evidence and in the submissions to assessing the net revenue lost. In my opinion, the endeavour by Naturalcare to found upon a gross profit margin applicable only to the goods supplied by Pan is not appropriate to an exercise to determine damages for breach of s 52. I am satisfied that, in this respect, it is appropriate to adopt a margin of 45 per cent in accordance with the opinion of Mr McGuiness. However, having studied his report, and taking into account his evidence under cross-examination, his assessment of MSD costs and other operating expenses and the saving of wages costs are all too high. In my opinion, they should be approximately 15 per cent in total, rather than 20 per cent as he proposed. Therefore, in broad terms, the loss of net revenue is calculated as follows: loss of revenue $4 000 000 x gross profit margin 45 per cent = $1 800 000, less costs etc x 15 per cent = $270 000, leaving net revenue of $1 530 000. Allowance then needs to be made for the overlap between that amount and the loss of profit on goods returned and goods ordered but not supplied. Then there should be some discount for the uncertainty as to whether the business would have been completely reorganised by the time of the licence suspension and for other uncertainties. The principal difference between the parties in relation to the goods returned and goods not supplied claim relates to the gross profit margin. Naturalcare claims a gross margin of 58.5 per cent for goods sourced from Pan moderated to 55.2 per cent if freight is taken into account. In my opinion, the criticisms of the foundation for that claim made by McGuiness are valid. I prefer to adopt for those purposes the yardsticks I have adopted for the umbrella claim, ie gross margin of 45 per cent and MSD etc of 15 per cent. The amount which is to be allowed for loss of profits on those claims is to be deducted from the overall amount I found for net loss. I would then discount the net amount by 20 per cent to take account of the uncertainties to which I have referred. I do not see the necessity for any discount back to a present value at the date of breach. The time has now elapsed. The amounts in question reflect the dollar values at the time during the period of loss. On that basis, interest would not run from the date of breach but should be calculated to reflect the progressive occurrence of loss. The amount of judgment should also reflect amounts allowed for direct expenses incurred due to the disruption such as the packaging, costs of registration and so on. Unless there are special reasons to the contrary, costs should follow the event. The proceeding will stand over to enable counsel for Naturalcare to bring in draft orders to reflect these reasons, including calculation of the amounts for damages and interest. The parties should also draw my attention to any issue that has been overlooked. I certify that the preceding one hundred and six (106) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Gyles. Associate: Dated: 31 October 2006 Counsel for the Applicant: Mr J Stoljar and Ms KW Dawson Solicitor for the Applicant: Australegal Counsel for the Respondents: Mr A J Sullivan QC and Ms KC Morgan Solicitor for the Respondents: Blake Dawson Waldron Date of Hearing: 24 28 October 2005, 5 7 and 9 June 2006 Date of Judgment: 31 October 2006 AustLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback URL: http://www.austlii.edu.au/au/cases/cth/FCA/2006/1403.html