CATCHWORDS Trade Practices - Resale price maintenance - Measure of damages - Whether allowance should be made for income tax. Trade Practices Act 1974 ss. 48, 82. SIMPSON LIMLTED v. HUBBARDS PTY. LIMITED No. Gll of 1982 CORAM: Bowen C.J., Franki and McGregor JJ. Sydney. 20 October, 1982. IN THE FEDERAL COURT SOUTH AUSTRALIA DISTRICT REGISTRY No. Gll of 1982 wwe YS YS GENERAL DIVISION BETWEEN SIMPSON LIMITED Appellant AND BUBBARDS PTY. LIMITED Respondent ORDERS JUDGES MAKING ORDERS: Bowen C.J., Franki and McGregor JJ. WHERE MADE: Sydney. DATE OF ORDERS: 20 October, 1982. THE COURT ORDERS THAT: - 1. The appeal and cross-appeal be allowed. 2. The order of the Federal Court of Australia of 23 April 1982 be varied by substituting in paragraph 1 the sum of Sixty thousand five hundred and seventeen dollars ($60,517) in lieu of the sum of Fifty two thousand three hundred and seventy three dollars ($52,373). 3. The appellant pay to the respondent three quarters of its costs of the appeal and cross-appeal. IN THE FEDERAL COURT SOUTH AUSTRALIA DISTRICT REGISTRY No. Gll of 1982 wee ww GENERAL DIVISION BETWEEN SIMPSON LIMITED Appellant AND HUBBARDS PTY. LIMITED Respondent CORAM: Bowen C.J., Franki and McGregor JJ. 20 October 1982. REASONS FOR JUDGMENT The Court: This is an appeal by Simpson Limited (appellant) against an assessment of damages made by a judge of this Court in a judgment given on 23 April 1982 in favour of Hubbards Pty. Limited (respondent) for the sum of $52,373, (1982) A.T.P.R. 40-295. The respondent's claim for damages was based on the appellant's having engaged in the practice of resale price maintenance contrary to s.48 of the Trade Practices Act 1974 (the Act). Such damages are recoverable pursuant to s.82 of the Act. The findings of the trial Judge included findings that the appellant was a large supplier of electrical goods to distributors and retailers; that the respondent was a discounter conducting reta1l shops and it purchased certain of its goods known as "white goods" from various suppliers including the appellant which was then a market leader in South Australia in the sale of washing machines, clothes dryers and ranges; and that the respondent had traded continuously with the appellant on a large scale between 1952 and 1978 when the appellant closed the account. The circumstances in which the account was closed are to be found in the judgment of Franki J. in Trade Practices Commission v. Simpson Pope Limited (1980) A.T.P.R. 40-169. The present appellant was formerly known as Simpson Pope Limited. In the action before Franki J., the Trade Practices Commission had recovered from the appellant a pecuniary penalty under ss.76 and 77 of the Act by reason of contraventions of s.48. Before the trial Judge, it was common ground that Franki J. had made findings of fact which then were, as provided by s.83 of the Act, prima facie evidence in the proceedings before him. Franki J. held that on or about 1 December 1978 the appellant had withheld the supply of Simpson products to the respondent. It was upon that withholding that the respondent proceeded to seek damages from the appellant pursuant to s.82 of the Act for the amount of the loss or damage which it had suffered. The trial Judge accepted that there was causal connection between the conduct of the appellant constituting the contraventions earlier mentioned and the loss or damage. Further, he noted that it was common ground that the question as to whether damages claimed on behalf of the respondent should be uw determined according to principles applicable to tort or contract was not important since the damages claimed by the respondent would fall within the tests in respect of either; though he thought, as had their Honours in the cases mentioned below, that the task was more "akin to tort". His Honour stated also that he followed the approach of Fox J. in Brown v. Jam Factory Pty. Ltd. (1981) 35 A.L.R. 79 and Northrop J. in Mister Figgins Pty. Limited v. Centrepoint Freeholds Pty. Ltd. (1981) 36 A.L.R. 23 1.e. that there must be some causal connection between the contravention and the loss or damage. Further, he said - "In my opinion the correct way to consider the assessment of damages in this case is to compare the position in which Hubbards might have been expected to be 1£ the contravention of s.48 had not occurred with the position it was in as a result of the contravention." Before referring to criticism made by the appellant of the judgment, it is convenient to set out how the trial Judge arrived at the figure of $52,373. He noted that the respondent claimed that it suffered four heads of loss or damage by the appellant's conduct. The heads were:- (1) Loss of profits on sale of Simpson products. (2) Loss of profits on sale of products other than Simpson. (3) Loss of advertising subsidies. (4) Diminution in the value of its business. The trial Judge found the claims established under heads (1) and (2) but not under heads (3) and (4). He was of the opinion that the correct method to use in that calculation was to have regard to the "lost sales" of Simpson products between the period 1 December 1978 up to about 31 December 1979. He accepted the submission made on behalf of the respondent which was, in effect, to:- (i) estimate the sales of Simpson white goods which would have been made during calendar year 1979; (il) multiply these sales in each category by the estimated average gross selling price; (111) take 10% as the respondent's "profit" margin. His Honour then considered each category of "white goods" separately. There was evidence of sales of Simpson products by three other retailers, competitors of the respondent , in 1978 and 1979 compared with the respondent's sales. Using the names shortened by the judgment, these were Radio Rentals, John Martin and Saverys. He noted that throughout South Australia there was an increase in 1979 of sales of all washing machines from 26,160 to 28,349, 1.€. 2189; and in the same period the sale of the appellant's washing machines in South Australia increased by 2200. The sales of Simpson's clothes dryers in South Australia correspondingly increased from 10,589 to 11,328, i.e. 739. The sales of Simpson ranges in South Australia similarly was 9,360 and 5,914, a decrease of 3,446; yet the members of a buying group, N.A.R.T.A. which includes Radio Rentals, John Martin, Saverys and the respondent, were able to increase their sales on a diminishing market; and in 1978 the respondent was the biggest seller of the appellant's ranges of all the South Australian members Of N.A.R.T.A. Radio Rentals and Saverys were not large sellers of Simpson dishwashers. His Honour noted that, in 1978, 684 Simpson dishwashers were sold in South Australia of which the respondent sold 120. He also noted that, out of a total of 364 dishwashers of all brands sold by the respondent in 1978, 120 were of Simpson's product but in 1979 the respondent sold no Simpson dishwashers. His Honour said:- "Overall, I am satisfied that the number of sales which Hubbards claims it lost by reason of Simpson's contravention 18 a reasonable calculation. It is based essentially upon the 1978 sales, and I see no reason to challenge that as a proper base from which to measure lost sales." The respondent claimed the loss of the sale of 120 dishwashers in 1979 was reasonable. The trial Judge considered there was much to be said for the view that this approach was, upon the part of the respondent, conservative. Calculations were also made in relation to lost sales of Simpson electric ranges and dryers. His Honour then referred to the calculation relied on by the respondent as to the average selling price of the relevant units. This was, of course, a necessary step in choosing the figure to be used as a multiplier of the lost sales before calculating, by the use of the 10% figure, the "profit" loss. His Honour stated that the respondent had totalled the value of the sales of each of the four classes of Simpson products for each of the financial years ended 30 June 1978, 1979 and 1980 then divided each total by the number of units. Average prices thus obtained were averaged over the three years. By this method he found that the average selling price was for washing machines $331, for clothes dryers $132, for ranges $300 and for dishwashers $350. A similar calculation taking the numbers of the various units over the period 1 July 1977 to 30 June 1980 divided by numbers of units sold yielded the figures of $325, $131, $300 and $350 respectively. His Honour preferred this approach which gave a total figure when used as a multiplier of the "lost sales" of $496,553. He was satisfied that there would have been no increases in selling expenses for the year ended June 1979 notwithstanding the increase of actual sales by the lost sales. He did, however, make a deduction of $1788 from the fagure of $496,553, making $494,765 to allow for an expected ancrease in bank charges related to the Bankcard component in sales by the respondent. He rejected other arguments offered on behalf of the appellant as to what would have been the appropriate method of calculating the respondent's profit margin. Thus, under the main head of the claim, he allowed 10% of $494,765, namely, $49,477 as damages. His Honour held that a further sum was lost by the respondent by reason of his acceptance of evidence that it lost, quite apart from sales of Simpson products, sales of washing machines and ranges it would otherwise have made. This was because with the absence of Simpson products, there was not a wide enough assortment on the floor. Thus it was claimed, and he accepted, some customers would go elsewhere. Under this heading, after taking into account the lost sales, their average price, and applying 10%, he arrived at a sum of $13,330. The respondent also claimed to have lost advertising subsidies which it did not receive from the appellant. A sum of $9,333 was sought. He rejected this part of the respondent's claim. His Honour also rejected claims advanced for the respondent as to an alleged diminution in the value of its business and for interest on damages awarded. His Honour then held that the sum of $10,434 should be deducted from the amount so calculated totalling $62,807. This was because his Honour was of the view that any amount of loss or damage awarded would be income assessable to tax in the hands of the respondent, with the result that certain tax losses available to the respondent would have been absorbed. Thus for the respondent there would have been produced a taxable income for the year ended June 1980 of $14,857 and for the year ended June 1981 of $7,825. Applying an effective rate of tax of 46 cents he made a discount for the tax. His Honour rejected a claim on which the appellant bore the onus of proof that the respondent failed to mitigate its damages in a way outlined in argument to which later we refer. In the result, his Honour entered judgment for the respondent for $49,477 and $13,330 totalling $62,807 less a discount in respect of income tax of $10,434, that is a sum of $52,373. The parties are agreed that the learned trial Judge was entitled to approach the assessment as if the action were in tort, that it was appropriate to consider the "lost sales" subject to one aspect to be mentioned later, as a method of assessing damages. Counsel for the appellant submitted the overall award was excessive; but to get to that result it was necessary to look at the various components considered by the trial Judge. Counsel summarised his submissions, which are numbered for ease of reference, thus - 1. In two instances his Honour improperly allowed lost unit sales. For example, he did not deduct when he should have deducted 32 stove cook tops which had been in the possession of the respondent but which were returned to the appellant. 2. His Honour allowed for lost sales of products other than Simpson products. It was submitted that there was no evidence to show that sales of products other than Simpson products had suffered. 3. That the trial Judge erred in making that award (i.e. for $13,330 in respect of "lost sales" other than of Simpson products) because he took into account a document (Exhibit "K") tendered subject to a condition and that his Honour overlooked the condition and that that document was abandoned by the respondent. 4. That in allowing 10% of the total sale price of Simpson products, his Honour was in error in that he should have adopted a lower figure. Counsel suggested 4%-6%, though without any argument, specifically to demonstrate how that percentage was reached except one based on increase of profit in the financial year 1981 over the financial year 1980. 5. That his Honour erred insofar as he should have made allowance for the increased overhead which would have been incurred in achieving additional sales of the order of $500,000. The overheads referred to were for increased insurance, commission to salesmen, finance referable to payments for increased stock, additional staff, administration and stationery. The largest of these would have been for finance, a figure of $40,000, and a rate of interest of 10% wasoffered in argument as being the interest rate which might have been chargeable on extra finance which the respondent would have had to have available for the (notional) extra sales. 6. That the trial Judge erred in calculating the net profit on sales in that he made insufficient allowance for Bank card charges. That his Honour made an arithmetic miscalculation was conceded. The suggested figures were worked out in argument. 10. 7. That a reduction attributable to notional sales of other than Simpson products referable to the Bank card component was also not allowed. This was conceded to be a valid criticism. The sum to be deducted referable to Bank card charges 1n respect of those products was agreed to be $4680. g. That the trial Judge incorrectly found that the respondent had mitigated its loss; that it would have been possible to apply for an interlocutory judgment at an early stage, 1.e. to compel the appellant to resume supply; and yet the respondent did not do so. 9. That whilst his Honour correctly made some allowance for income tax in respect to the damages awarded he should have made full allowance of 46% rather than take into account tax losses. We note the evidence given by Mr. Hubbard, Managing Director of the respondent. He has held that position since 1961 and has been with the respondent since 1949. The trial Judge remarked that the witness' credibility was not challenged by the present appellant; and that Mr. Hubbard impressed him as a truthful and reliable witness whose evidence he accepted. We deal in turn with the submissions of Counsel for the appellant. ll. As to 1 above, Mr. Hubbard said, as to the 32 stove cook tops these were returned to the appellant in 1979 because there was an excess number of them. He pointed out that they complemented wall ovens which, however, the respondent was unable to get. There were outstanding orders for wall ovens. The effect of this evidence included the proposition that it would be difficult anyway to sell one item of a wholesaler's range without having the rest of the product range. lis Honour found that the ovens were not delivered to the respondent in 1978 or January 1979. He accepted Mr. Hubbard's decision to return the stoves as a commercial necessity. Other evidence by Mr. Hubbard was that he did not think there was any likelihood of the appellant reversing its decision short of a Court order. We see no reason to differ from his Honour's finding in this regard and we reject this part of the appellant's argument. Counsel referred to this part of the claim as "not significant". As to 2, we do not agree that there was no evidence to show that sales of products other than Simpson products had suffered. Mr. Hubbard's evidence includes this question and answer :- "Was the loss of Simpson products' the principal factor causing the company's difficulty in maintaining its sales ----We not only lost sales of Simpson, but we also lost sales, in our opinion, of associated products because of not having the full product range on the floor." Elsewhere in his viva voce evidence he estimated the "lost sales" of other brands in 1979 as 85 washing machines and la. 311 electric ranges. Wis viva voce evidence refers to his own estimate even though later in his evidence he refers to Exhibit K. No claim was made concerning clothes dryers or dishwashers not manufactured by Simpson. His Honour was at least entitled to accept the evidence and estimate of the witness who in this regard was hardly challenged in cross examination and remained uncontradicted. We see no reason to differ from the trial Judge in this area of his judgment. As to 3, Counsel did contend that in calculating damages for the "lost sales" of other than Simpson products the trial judge relied on an inadmissible document. An examination of the reasons for judgment does not support this contention; and the evidence just quoted indicates that the witness was giving evidence based on his own knowledge and estimates made by him. As to 4, the appellant's contention was that the profit margin of 10% on lost sales should have been reduced. We note that the unchallenged evidence was that an 11.5% mark up was applied to sales of "white products". The profit and loss account of the respondent showed an average gross profit for the financial years 1978, 1979, 1980, 1981 of from 12.8% to 9.45%, averaging 11.2%. We have followed the way the matter has been argued and we have used the term "profit" or "profit margin" or "gross profit", which is the term used in the profit and loss statements for the financial years 1978, 1979, 1980 and 1981. However this figure in reality results directly from the mark up. We see no reason to disturb his Honour's finding. 13. As to 5, Mr. Hubbard's evidence was that no significant additional items of overhead would have been incurred. He agreed it was likely there would have been some small increase in insurance related to increased stock value. We do not regard this figure, about $200, as of itself of significance in an award where much depends upon estimation; but, nevertheless, we have allowed for it in this judgment. It was suggested to Mr. Hubbard that the respondent would have been required to provide finance for the withheld stock of the order of $40,000. However, his answer drew attention to terms of payment for stock (not C.O.D.); that the respondent would have had up to two months credit at some stages depending upon when payment was made; and thus some of the stock in all cases would have been financed by the manufacturer's (appellant's) credit. The appellant has not satisfied us that the evidence establishes there would have to have been provided extra finance up to $40,000 or at all. Mr. Hubbard's evidence further was that there would have been no need to increase staff if supply of white goods had not been withheld. A comparison of the figures in the profit and loss account of gross profit with expenses lends support to the witness. Nor was it established that any additional commissions to salesmen would have been payable. We do not agree that any error has been shown to have been made by the trial Judge in not allowing further notional expenses as a reduction of the 10% profit margin. In particular, having regard to terms of credit and possible turnover with resultant cash flow, we do not find any error in the trial Judge's failing to accept any overhead figure related to additional finance. We note that in the financial year 1980 sales were $8.3 million but in the financial year 1981 they were $10.5 Million an increase of $2.2 million or about 25%. In the financial year 1980 the expenses, which included staff costs, advertising, bank charges, general expenses, postage, rent and many other expenses, were $997 thousand but in the financial year 1981 the same category of expenses was $1,026 thousand an increase of $29 thousand or about 3%. This is an illustration of a substantial increase in sales producing only a relatively small increase 1n expenses. As to 6, it was conceded there was a miscalculation in the profit loss referable to Bankcard sales. The figures set out in argument show that it was agreed that for the sum of $49,477 there should be substituted $47,867. To this extent there must be an adjustment in the damages awarded. As to 7, it was conceded that the damages awarded, $13,330 for lost sales of other than Simpson products, should have been reduced by $4866 so that there should be substituted for this fagure $12,850. As to 8, the appellant's argument did not correctly state what the trial Judge found as to mitigation. His Honour had found that the appellant, on which the onus lay, had not satisfied him there had been a failure by the respondent to mitigate its loss. it was submitted respondent should have sought interlocutory relief at an early stage; and further, should have sought to buy Simpson products on the open market. 15. Initially, even leaving aside any question of onus of proof, we are satisfied that the respondent acted reasonably and, having regard to the evidence in this case including the litigation instigated by the Trade Practices Commission, ought not to have been expected to seek an interlocutory injunction; or to have bought Simpson products on the open market. The appellant was in breach of the law and an interlocutory injunction probably would have necessitated the respondent giving the usual undertaking as to damages. We turn now to No. 9 and the respondent's cross appeal. It will be convenient to consider together both parties' contentions as to the treatment of tax losses and deductions for income tax. The appellant's argument was that tax losses should be disregarded and that tax at 46 cents in the dollar should be deducted from any amount awarded to the respondent by way of damages, which were to replace income which otherwise might have been earned. The respondent submitted that the incidence of tax should be ignored in the award of damages. It contended that, if the amount was assessable, this could be determined elsewhere and having regard to the state of profit or loss or tax losses which existed at the relevant time of receipt. On the evidence before the trial Judge, he was justified, in our view, in treating the damages to be awarded for loss of profit in the calendar year 1979 as probably assessable income within the meaning of s.25 of the Income Tax Assessment Act 1936. Counsel for the appellant conceded this. The Commissioner of Taxation is not a party and, in view of the 16. concession mage by the appellént we are not required to finally determine the guestion of liability of tax. In Stroke~on-Trent Caty Council v. Weod Mitchell and Co. Ltd (1979) 2 A11.E.R. 65 the Court of Appeal at p.@9 expressed the view in relation to a claim where the plaintiff might become liable to taxation on a sur awarded in respect of loss of profits that no deducticn should be made in respect of taxation. The basic principle which is applicable 1s that damages are compensatory. If the damages are texable in this case it follows that, 1f 46% be deducted from the calculation and the balance only awarded as damages, this belance will be taxable in the hands of the respondent at 46%. In other words, the respondent will, in effect, if the damages are taxable, be taxed twice et the rate of 46% and the Commissioner of Taxation will be deprived of part of the tax he maght have received, the benefit of this being passed to the appellant. In addition, it would meen that the respondent would not have been prcperly compensated fer its loss. Those cases where the damages will not be taxable an the hands of the recipient though he vould have been liable to be taxed if a loss had not occurred raise a G@iffcrent question. (See "McGregor on Damages" 14th ed. p.29S et seq and, in particular, pp.303-204; British Transpert Commission v. Gourley [1956] A.C. 185; Berrell Insurances Pty. Ltd. v. Pennant Hills Restaurants Pty. Ltd (1980) 34 A.L.R. 162). Since damages are compensatory the question of deducting probable taxation does not really arise. It 1s quite clear in our Opinion that the respondent would not be properly compensated 1£ a deduction was made from the damages awarded to it arrived at by requiring it to set off past tax losses against an award for damages. These losses may be regarded 1n one sense as an asset of the respondent and we see no reason why the respondent should be required to dissipate this asset to benefit the appellant. In summary, our opinion is that the damages related to lost sales might be assessable to tax. If this is so the amount when received will be, subject to the financlal state of the respondent at the date of receipt, assessable to tax. We consider the trial Judge was in error in reducing the proposed award by reference to tax. In the result, the appellant has succeeded in 1ts appeal in respect of its calculation of the Bankcard deduction from the "lost sales" component of both Simpson and other than Simpson products. Since we are necessarily obliged to reassess, we consider that the appellant should have the benefit of a deduction for increased insurance which, in round figures, 1s $200. In fixing costs, we observe that the respondent has substantially succeeded and the appellant has succeeded on matters which, anyway, were the subject of concession. The damages will therefore be for "Lost Sales" of Simpson Products $47,867.00 "Lost Sales" of other than Simpson Products 12,850.00 $60,717.00 Less cost of increased insurance 200.00 $60,517.00 18. we consider that the appeal and cross-appeal each should be allowed; that the order of the Federal Court of Australia of 23 April 1982 should be varied by substituting in paragraph 1 the sum of $60,517 in lieu of the sum of $52,373; and, that the appellant should pay to the respondent three quarters of its costs of the appeal and cross-appeal. Jcertify thas ts. Gite FT preceding pages are a true coy GF the reasons for judgment here'n of the Court iA Abid A ssociate Dated 20 Ceseter PL.