JUDGMENT No. 2677S LE. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION ) ) ) NG 611 of 1993 ) ) BETWEEN: FUTURIS INDUSTRIAL PRODUCTS PTY LTD Applicant AND: ARROW INDUSTRIES PTY LTD First Respondent TERRY CONROY Second Respondent Cross Claimant Cross Respondent Date : 13 December 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY Amendment to the Reasons for Judgment delivered on 13 December 1994: Order 1 in the Minutes of Order should read - "There be judgment for the first respondent against the applicant in the sum of $354,583.80." Associate to Justice Davies 16 January 1995 JUDGMENT No. svam2s227 14 CATCHWORDS DAMAGES - contract - breach of exclusive marketing agreement for supply of brake pads - no point of principle. FUTURIS INDUSTRIAL PRODUCTS PTY LTD v ARROW INDUSTRIES PTY LTD and TERRY CONROY NG 611 of 1993 Davies J Sydney 13 December 1994 13 DEC 1994 FEDERAL COURT OF AUSTRALIA PRINCIPAL REGISTRY IN THE FEDERAL COURT OF AUSTRALIA ) ) Ww W, G ) NG 611 of 1993 ) GENERAL DIVISION ) BETWEEN: FUTURIS INDUSTRIAL PRODUCTS PTY LTD Applicant AND: ARROW INDUSTRIES PTY LTD First Respondent TERRY CONROY Second Respondent ARROW INDUSTRIES PTY LTD Cross Claimant EUTURIS INDUSTRIAL PRODUCTS PTY LTD Cross Respondent Coram: Davies J Place: Sydney Date: 13 December 1994 MINUTES OF ORDER THE COURT ORDERS THAT: 1. There be judgment for the respondents against the applicant in the sum of $354,583.80. 2. Costs be reserved. NOTE: Settlement and entry of orders 1s dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) NG 611 of 1993 ) GENERAL DIVISION ) PRODUCTS PTY LTD Applicant AND: ARROW INDUSTRIES PTY LTD First Respondent TERRY CONROY Second Respondent ARROW INDUSTRIES PTY LTD Cross Claimant EFUTURIS. INDUSTRIAL PRODUCTS PTY LTD Cross Respondent Coram: Davies J Place: Sydney Date: 13 December 1994 REASONS FOR JUDGMENT This is the reheaiing of the issue of damages arising under the cross-claim of the first respondent, Arrow Industries Pty Limited ("Arrow"). The matter was ~2- remitted for rehearing on the question of damages by a Full Court constituted by Beaumont, Foster & Beazley JJ, on 18 April 1994. The applicant, Futuris Industrial Products Pty Ltd ("Futuris") is a manufacturer and distributor of brake linings, particularly of brake linings which are marketed under the trade name "Ferodo". Prior to April 1989, Mr Terrence Conroy, the second respondent, who was involved in motor sports, became interested in developing a top performance brake pad which was not manufactured from asbestos. Mr Conroy developed a formulation in association with Futuris and Ferodo, which Futuns agreed to manufacture for him. Mr Conroy then established Arrow as his company to handle the distribution of what came to be called the "Arrow" brake pad. The relevant facts summarised by the Full Court are as follows:- *(1) In 1987, Futuris, an Australian manufacturer of 'friction material' products, entered ito an agreement with Ferodo Limited, a U.K. company, under which Ferodo was to supply Futuris with 'formulations' that 1s, specifications, for brake pads. Futuris was licensed to manufacture Ferodo brake pads for the Australian market. (one formulation, known as 3410F, was central to the litigation as it was common ground that the pads sold to Arrow were all purportedly made from formulation 3410, although identified by varying batch numbers.) (2) In 1986, Mr Conroy (who later became the managing director of Arrow), a successful competitor in car rallies, became interested in the development of a high performance non-asbestos brake pad. He discussed the matter with Mr. Roger Carroll, Chief Chemust of 'Better Brakes', a division of James Hardie Industries. It was arranged that Mr. Conroy would test certain brake pads provided by 'Better Brakes'. The tests were carned out under rally conditions. (3) In 1987, James Hardie sold 'Better Brakes' to Futuris. Mr. Carroll became its Development Manager The arrangements made between Mr. Conroy and Mr Carroll continued. In March 1988, Mr. Carrol gave Mr Conroy pads for testing made from several formulations, including 3410F Mr Conroy's tests of 3410F pads impressed him (4) 6) (5) (sic) (6) -3- and others involved by Mr. Conroy, including the New South Wales Police. In 1988, Mr. Conroy formed Arrow with a view to entering the market for distributing sun roofs and, in the longer term, high performance brake pads. In early 1989, Mr. Conroy discussed with Mr Messer, (the General Manager, Services and Development of Futuris) Arrow's entry into the brake pad market. The discussion led to Mr. Messer's letter to Mr. Conroy dated 13 April 1989 in which Mr. Messer quoted prices on certain disc pads in material described as '2818'. (It is common ground that '2818' is a variance of the formulation 3410F.) After the quotations, the letter went On to say: '.. these prices are pretty sharp given that these pads contain some very sophisticated and expensive raw materials. You will appreciate that this particular pad compound will only be made for you and we really need decent sized production runs to justify the machine set-up times. However in the initial stages we will 'knife and fork' to give you a chance to establish the business. This will be a bit frustrating for both of us initially but we will do our best.' (Emphasis added) Mr Conroy thought that the prices were satisfactory and placed orders accordingly. Arrow promoted and sold the product in the 'aftermarket' under the name 'Arrow' as a 'high performance' pad, although, initially, the volume of sales was small. In September 1989, Mr. Conroy and Mr. Messer discussed sales targets. By letter dated 12 September, Mr. Messer wrote to Arrow with respect to the pads in formulation 3410F as follows: 'At this stage of our venture with high performance disc pads in [the] Formulation .. I feel that it 18 appropriate to put into a more formal context our understanding of where we are and where we are going with this product range Firstly let me record our appreciation of your assistance during the development phase and the energy and enthusiasm which 1s now being directed towards its promotion - in particular the efforts of Terry Conroy. As we discussed, I think the time has come to start to get some focus into the exercise, I believe we should select a limited range of disc pads and aim to develop sales for that range As we go along, we may well decide to broaden that range. -4- From our point of view, constraints are'- (i) they must be products we are currently tooled up for (11) we must have minimum orders of fifty (50) sets at a time (except for new test pads) Of course any tooling that we already have in place for general aftermarket applications can be used to manufacture [the] formulation . New tooling will require volumes which are probably out of our reach. I agree that as discussed our next step should be to set up some targets and review these regularly. A target of 1,000 sets/month does Not seem unreasonable at this point. If you can give me the part nos with which you wish to proceed initially I will break 1t up for you on the basis of general aftermarket sales leveis. This will constitute a rough initial guide, we can a) on targets and them. l_am to Ww Lusi aftermarket in this county. (Emphasis added) In the case of exports and original equipment we would prefer to consult and proceed on a case-by-case basis. I would point out that because of the high relative cost of the constituents of [the formulation] ... I consider the O.E. prospects as being unlikely I have every confidence that the combination of Arrow Industries and this material will be a potent brew which will find uself a substantial miche in the higher performance end of the aftermarket. Because of the fact that I do not want any unnecessary and perhaps embarrassing conflicts between our standard products and your product I would like to be able to review any proposed advertising/promotion you might undertake. Going hand-in-hand with this 1s the fact that we may be able to draw on our knowledge to assist you in these endeavours ") (8) (9) (10) (11) -5- Please be assured that we will do all we can in the way of effective support. Once we have the project securely bedded down we may change the points of contact but at this early stage it 1s preferable if you continue to work through myself. .- I believe this better covers our situation as It now stands. If you feel there are points which require expansion or clarification please do not hesitate to contact me.' Towards the end of 1990, Mr. Conroy persuaded the publisher of 'Modern Motor' magazine to arrange a series of brake pad comparison tests. The results of the tests, in which the Arrow pad obtained top rating, were published in an article in 'Modern Motor' in March 1991. In the article, the Arrow product was highly commended. A surge in sales followed the publication. At about this time, Futuris determined that it would 'take advantage' of Arrow's success by itself marketing 3410F pads on the general, rather than high performance, market and at prices significantly less than those charged by Arrow. The pads were to be marketed under the brand name 'Ferodo'. On 28 February 1991, Mr. Messer handed Mr. Conroy a letter dated 26 February as follows: 'This letter is to advise that it 1s our intention to make the friction maternal formulation which we currently supply to your Company for sale under the 'Arrow' brand available to our distributors under a FERODO brand for sale into the general aftermarket. We are happy to continue to supply the current formulation to your company for sale under your brand provided that all normal commercial criteria are met. Artrow's sales conunued to increase until July 1991 However, in the second half of 1991, Arrow's sales dechned markedly, for two reasons. First, customers were able to buy the same product from Futuris. Secondly, there were complaints, on the grounds, inter alia, that the Arrow pads lacked durability. By September 1991, the volume of these complaints had become so great that Arrow was forced to suspend sales. On the expert opinion evidence, the pads supplied by Futuris after February 1991 were either 'individually unacceptable' or the 'degree of mconsistency of quality was so great, as to make it impossible for Arrow conscientiously and confidently to supply them as a high performance product to demanding customers' Anising from those facts, Arrow claims damages for the breach by Futuris of its agreement to grant to Arrow exclusivity in the 3410F formulation and for its failure to maintain the quality of the product. The letter of September 1989 referred to "exclusivity in formulation ... for the high performance after market in this country." Counsel for Futuris has submitted that the agreement was merely as to exclusivity for "the high performance after market". It is, in my opinion, clear that the agreement between the parties was that formulation 3410F would "only be made for you (Arrow)", as stated in the letter of 13 April 1989. The Full Court so held when it found that there had been created between the parties an enforceable relationship "of an exclusive marketing character". Although several witnesses were asked as to the meaning of "high performance", it seems to me that the term has little significance. The brake pads were manufactured to meet the specifications of different makes of cars. When Futuris supplied the brake pads to Arrow in accordance with the specifications of a car such as the Holden Commodore, Arrow was entitled to distribute those pads to the after market. It was of no concern to either Futuris or Arrow as to whether the purchaser of the brake pads was a person who expected to drive a Holden Commodore at high speed or was a person who was prepared to spend additional money simply to obtain the top quality brake pad. -7- Of course, it was never intended by either party that Arrow would become the major distributor to the after market of brake pads for Commodore cars. The pricing structure itself precluded that from happening. The brake pads were sold to Arrow at about the price at which other Ferodo brake pads were sold to the trade. Arrow had to add its own mark-up to this price, and its subdistributors had to receive recompense for the part they played in the distribution chain. As the letter of September 1989 stated, a target of 1,000 sets per month was what was in mind. Bendix was the largest Australian manufacturer, producing 70% of Australian made pads. Futuris, which manufactured under licence from and sold under the name of Ferodo, produced less than 10% of the pads. Several other manufacturers produced minor quantities. In addition, there were imported pads which competed with the Australian product. I have mentioned the high price of the Arrow pads. In an article in "Modern Motor" magazine of March 1991, it was stated that:- "Every-day standard pads can be about $45-50, the Bendix EV-1 pads are around 18% higher and Arrow can run to $130 for a set." Other evidence would suggest that the trade price of the Futuris pad was about $28 per set and that of Bendix about $30 - $35 per set. Arrow sold to its distributors at about $57 - $60 per set. The factor which had the largest influence on the market was an article which appeared in the March 1992 issue of "Modern Motor" which appears to have been -8- published in late February. It is fair to assume that the results of the tests which were described in that article were spoken about in the trade even before publication. The article described tests using a Holden Commadore, which, according to the evidence, was a vehicle in respect of which there was some dissatisfaction as to its braking. On the tests made, the Arrow pad was found to be the best performing pad, better than Bendix or Ferodo or other pads. An important effect of the article was that it expressed the view that non- asbestos pads performed better than the asbestos pads and, therefore, that it no longer appeared necessary to continue with the use of asbestos, a use which was undesirable for health reasons. The publication of this article not only stimulated the sales of Arrow pads, but also precipitated a general move to non-asbestos based pads. It was for this reason that Futuris decided to market the Formula 3410F pads as the standard Ferodo pads. The action of Futuris in selling 1ts 3410F pads under the Ferodo name at the standard price necessarily caused disruption to Arrow's sales. Futuris made it known, or it became known, that the standard Ferodo pads, which were being sold at a competitive price, were the same pads as Arrow was marketing at a very much higher price. Necessarily, the sales of the Arrow pads were inhibited by the extent of this knowledge. -9- Futuris commenced selling the 3410F pads as standard Ferodo pads early in 1991. Precise dates are not available. It appears that there may have been some sales of the 3410F pads while there were asbestos pads still in stock. Later in the year, Futuris encountered quality problems which also affected the Asrow pads. It appears that a problem arose from the silicon sand being used in the pads. In the event, Futuris and Ferodo developed a new formulation which became the pads manufactured and sold by Futuris as from the beginning of 1992. From July to December 1990, Ferodo's sales were approximately 8,500 sets per month. From January to June 1991, the average was closer to 11,500 sets per month. In addition, there was a large promotional sale to Repco in May 1991 which gave that month a total of 26,095 sets. In July, August and September 1991, the average was closer to 11,500 sets per month. There were large sales m October, November and December 1991, which apparently reflected sales to which Repco had committed itself by an arrangement reached in May 1991. Repco was the largest distributor, having 40% of the total market. Arrow's sales of the Formula 3410F pads from July 1990 onwards were as follows:- 1990 Units July 388 August 196 September 460 October 178 November 156 December 180 199] Units January 218 February 372 March 513 April 710 May 667 June 472 July 957 August 249 By August 1991, the problem that the same pad was being sold as the standard Ferodo pad at a much lower price and dissatisfaction with the quality of Arrow's pads rendered further sales impracticable. Arrow commenced selling another pad manufactured by a different manufacturer as from January 1992. It did so under the Arrow name. It appears that sales of that pad have not been fruitful. This case is to be approached on the footing that, on 28 February 1991, Futuris could have given to Arrow 12 months notice of the termination of the exclusive licence agreement. On this footing, Arrow has claimed loss of sales of between 40,000 to 100,000 sets for the period 1 March 1991 to 29 February 1992. This claim is based on the submission that Arrow had the best quality pad on the market, that sales were not responsive to price and that Arrow had the potential to make its pad one of the major selling brake pads. I should say at once that I think there are substantial reasons why sales of that magnitude would never have been achieved by Arrow. The first is that Arrow's pricing structure was not geared so as to enable it to compete with the standard pads. An even more significant factor 1s that the largest manufacturers would not have -ll- permitted Arrow to take a significant part of their market. Bendix and Ferodo were quite capable of developing new products for the standard market. Bendix, which had 70% of the market, already produced a non-asbestos pad. Futuris and Ferodo had the capacity to produce a different formulation, which they did in late 1991 when it was found that there were quality problems with formulation 3410F. Both Bendix and Ferodo had significant reputations in the market and their businesses as manufacturers of standard pads were well established. Early in 1991, Futuris itself embarked upon a promotional campaign and allocated $1m or so to that campaign. My assessment of the position 1s that Bendix would not have stood back and allowed Arrow to take any significant part of its market. As to Futuris, I think that, if it had recognised that Arrow had the exclusive nghts which the Full Court has held that it did have, Futuris would have sought to buy out Arrow's interest under the contract. Absent any agreement as to price, and I suspect that Futuris would not have been prepared to pay more than $200,000 - $300,000 for Arrow's rights, I think that Futuris would have asked Ferodo to supply it with a non-asbestos based pad which competed with the 3410F pad. In these circumstances, I think that, but for the breaches by Futuris, Arrow's sales for the relevant period would be likely to have grown as follows:- March 513 April 710 May 667 June 472 July 957 August 1250 September 1500 -12- October 1750 November 2000 December 2250 January 2500 February _2000 16569 sets I have reduced the sales in February, as by then, Arrow would have been seeking to market its new product. I should now comment briefly upon the witnesses called for Arrow, whose evidence put forward a picture more favourable to Arrow. In considering this evidence, it should be kept in mind that, in late 1990 and early 1991, there was a perception of dissatisfaction with the braking performance of Holden Commodores. Accordingly, there was a perception that there would be a demand for a brake pad which performed better than the pads which were then fitted to the Commodores. Mr Terry Conroy, the managing director of Arrow, gave evidence as to the general facts surrounding the claim and of the expenses incurred by Arrow in establishing Arrow disc brake pads. However, this latter evidence does not assist, as Futuris had the opportunity of terminating the licence agreement by giving 12 months notice. Mr Conroy also gave evidence as to the costs incurred by Arrow in developing its 3410F brake pad and as to the costs later incurred in developing a replacement. This evidence also does not assist as the licence agreement was terminable on notice. -13- In hus affidavit of 16 March 1993, prepared for the purposes of the first hearing, Mr Conroy gave evidence that, m October 1989, he had discussions with Messrs Messer and Watson of Futuris with respect to the market potential of the Arrow brake pad. In this discussion, Messrs Messer and Watson agreed that Arrow might achieve 30,000 units per annum, although Mr Messer said, "because you are developing a new market it might take considerable time to achieve this target." The 30,000 target required sales of 2,500 brake pad units per month. The following is an estimate which Mr Conroy prepared, for the purposes of his affidavit of 16 March 1993, of sales over a 15 month period based on 30,000 units per annum:- Total Unit Sales = 37,500 Total Dollar Sales = 2,250,000 Total Cost of Stock = 900,000 Total Margins = 1,350,000 Less Overheads (20,000 p/m x 15 = 1,050,000 It will be seen from these figures that Mr Conroy contemplated a price structure quite different from that applying to standard pads. The figures show that Mr Conroy had in mind to purchase the pads at $24 per unit and to resell them at $60 per unit. On top of the $60, there would necessarily have had to be profit imposed for sub- distributors and retailers. In his affidavit of 16 March 1993, Mr Conroy projected that sales for October, November and December 1991 would have been 1,750, 2,250 and 1,750 respectively, Le, an average of 1,916 sets per month. The projection was said to be based upon the -14- sales increases which occurred during the period in which the Arrow pad was sold and having regard to the sharp increase in sales which was evident after the publication of the Modern Motor article. Mr Conroy also projected that the sales for January to June 1992 would average 1,375 per month; but the basis for this is so unclear that I think I should not give weight to it. ' In his affidavit of 6 October 1994, Mr Conroy deposed that, in October 1990, Mr Messer agreed in a conversation to direct-ship goods to Repco, as there appeared to be good potential for sales to that company. This is an indication that Futuris was willing to assist Arrow to improve its sales. Mr Graham Loughnan gave evidence on behalf of Arrow. He had commenced employment with Futuris in November 1990 as the National Marketing Manager for Futuris. Mr Loughnan deposed that, during February and March 1991, Futuris employed extra sales representatives and commenced a promotional campaign known as "Ask for Ferodo". Mr Loughnan gave evidence that, late in 1991, Ferodo in the United Kingdom discovered that the Zircon silicon sand was out of specification and that this was considered to be the main reason for the problems with the formulation. He gave evidence that the production of formulation 3410 was discontinued in about December 1991 and that, although Futuris continued to sell the stock until it was depleted, Futuris commenced producing another formulation as the standard brand from January 1992. -15- Mr Loughnan gave evidence as to what he described was the high performance market. As I have said, however, I think that the arrangement between the parties was not limited by this description. Mr Loughnan deposed that, in January 1991, he presented to the Board of Directors of Futuris a marketing plan in which the stated objective was to lift Ferodo disc pad sales from less than 200,000 per annum to a rate of 400,000 sets per annum by 30 June 1992. The plan was accepted by the Board of Directors. Mr Loughnan said that the tests undertaken by the Modern Motor magazine were conducted on or about 12 December 1990 and that the Futuris standard brake pad known as AF2871 was discontinued sometime shortly thereafter. Mr Loughnan said in evidence that the promotional campaign cost approx $1m in the first 12 months. Sales increased as I have mentioned. Mr Loughnan was of the opinion that, but for the problems with quality, sales would have increased by another 20% or more. This evidence shows how impossible it would have been for Arrow to have achieved the sales volumes which are now claimed. As Mr Loughnan said, the motor industry suffered a recession in 1991 and the parts market contracted by 10%. The market was fiercely competitive. Mr David Seldon gave evidence that, mm the middle of 1990, his company, Sonar Reversing Aids Pty Limited, established a business known as "Stoppers" and began ordering Arrow brake pads. He said that the business sold approximately 700 sets between late July 1990 and August 1991. Mr Seldon said that, by early July 1991, - 16 - his sales had dropped considerably and that, between June 1991 and March 1992, his sales declined from an average of 72 sets per month down to 4 sets per month. Mr Seldon, who had not previously been in the business of distributing brake pads, established the business of Stoppers specifically to distribute the Arrow brake pad and sold only that pad. Mr Seldon said that, following the publication of the article in the Modern Motor, his sales had risen to 155 sets a month. Mr Seldon gave this evidence:- "Did you receive any responses by telephone to the direct mail?---The initial responses were, I guess, steady but mediocre and with the advent of the Modern Motor companison test those responses leapt dramatically." However, by about July 1991, Mr Seldon ascertained that the Ferodo brake pads were identical with the Arrow pad. Mr John Allan, who had been involved in the automotive industry since 1985, conducted a business repairing and maintaining vehicles and he also distributed a limited range of automotive parts. The business was based in Canberra in the Australian Capital Territory. In February or March 1991, Mr Allan read the article in the Modern Motor magazine. He contacted Mr Conroy and arranged to distribute the Arrow brake pad. However, when after March 1991 he attempted to sell the Arrow pad to potential customers, he was unable to do so as he was informed that the Arrow pad was only a Ferodo pad and was sold at a higher price. He said that he promoted the Arrow pad for approximately 6 weeks but decided to discontinue sales. His busimess purchased approximately 400 sets of brake pads from Arrow but was unable to sell more than 30 sets and returned the majority of the stock. -17- Mr Allan had had great enthusiasm for the Arrow pads. He employed a Mr McFarlane and provided him with a delivery van. He and Mr McFarlane, who knew that the Commodore of that time was "a very difficult vehicle to stop", thought that the sales potential in the area from the ACT to Goulburn and down to the coast was very large. In fact, however, their sales were minimal. Perhaps Mr Allan's evidence as to dates was incorrect. He spoke of February and March 1991. In fact, Futuris did not actively commence its advertising campaign until about April 1991. Mr Allan's evidence is interesting and demonstrates the enthusiasm which the article in the Modern Motor magazine generated. However, it is to be kept in mind that Mr Allan had not previously been a distributor of brake pads, although his business, "Allmake Automotive", did fit 20 to 30 sets of brake pads per month as an ordinary part of its business. His evidence tends to show that his enthusiasm for the Arrow brake pad was misconceived and that he could not sell the pad in competition with the standard Ferodo and Bendix pads. Mr Derry Robertson, who was the manager of BGT (Australia) Pty Limited, gave evidence that his company was a distributor of brake pads and commenced distributing Arrow pads in or about January 1991. Mr Robertson's evidence as to the numbers of pads sold, however, was so confusing that I think that his evidence on the aspect under dis' sion does not assist. - 18 - Mr W J Nolan, who was a director of Arrow from September 1988 to 16 May 1992, gave evidence that it was he who determined that $60 would be the wholesale price for Arrow brake pads. He determined this price on the basis that the product would sell at a retail price of $130 inclusive of tax. Mr Nolan said that the average purchase price was $24 per set. Mr Nolan, who had had experience in the mdustry, gave evidence that a premium price was achievable for an especially good product such as a brake pad if it was marketed on a philosophy of safety. Mr Nolan also said that the price of $130 per set was greater but not substantially greater than the price of other heavy duty pads. I accept this evidence, but it does not lead me to the view that, but for the breaches by Futuris, Arrow would have been likely to have sold more pads than the number I have set out above. The vast majority of pads sold were standard pads. The market for heavy duty or high performance pads was quite limited. Mr Nolan gave evidence which I accept that, notwithstanding Arrow's overdraft of approx $150,000 and the high interest rates prevailing in 1991, Arrow could have mereased its sales, funding tts increased expenditure from its creased sales. Mr Nolan agreed that this increased sales could not be achieved without increased expenditure, including increased expenditure on advertising, but said that only one additional sales person would have been required to increase sales to 1500 or 2500 sets per month. -19- Mr Nolan did not comment on additional staff required for the distribution of stock but perhaps he had it in mind that Futuris had previously agreed to direct-ship goods to firms such as Repco. Mr Nolan said that it had been intended to set up a dealer network around Australia including Repco and the other major distributors (although this was not achieved). Mr Nolan said that he anticipated that, because of the arrangement with Futuris, there would not have been a supply problem and that he was not aware of any such problem. This latter aspect of Mr Nolan's evidence should probably be read down. Arrow never achieved either a throughput or a distribution network such as that of Bendix and Futuris. No witness called on behalf of Arrow was a totally independent witness with expertise in the field. For example, no member of Repco, the largest distributor of brake pads, was called to give evidence as to the potential which Arrow had to sell its pads at the price which it charged as against the competition of Ferodo and Bendix. I need not discuss in detail the evidence called on behalf of Futuris. Mr L J Stratton, who described the general structure and nature of the industry, dealt with matters of background which I need not set out. The evidence as a whole confirms the impression I had at an early stage of the hearing that, notwithstanding the qualities of the early Arrow pads and notwithstanding the boost given to the sale of Arrow pads by the Modern Motor magazine article, the potential sales were relatively hmited. Indeed, the figures which -20- I have set out above seem generous when compared with Mr Conroy's "conservative sales target". The figures put forward by counsel for Arrow appear to me to be unrealistic. Counsel for Arrow propounded various figures for the loss of sales ranging from 46,000 to 200,000 units. These calculations were made by adopting a percentage of total sales of brake pads or a percentage of Futuris' sales. The percentages adopted have no validity. Arrow was selling to the heavy duty or high quality market and its goods were priced accordingly. Counsel for Arrow also sought loss of profits for the period 1 March 1992 to 31 December 1992. This is inconsistent with the findings of the Full Court which remitted the matter for retrial on the footing that Futuris had the right to terminate the agreement by giving 12 months notice. The Full Court expressed the view that the claim for damages for breach of quality should be treated "as a distinct claim for breach of a series of contracts separate from the marketing management." However, no distinct claim has been formulated or proved. In theory, Arrow should have been able to establish that it suffered a compensable loss of reputation and goodwill by reason of the defects of quality which appeared in its product. However, no such claim was formulated 1. monetary terms. Counsel made the following submission:- -21- "By reason of the quality defects of the Product Arrow's reputation as a supplier of high quality pads to the aftermarket was badly tarmshed and also its credibility in claiming to be the supplier of such a high quality Product." However, the company continued to trade under the Arrow name and the evidence of Mr Nolan was that "75 per cent of the customers we had disappeared when we lost the Futuris product". It would therefore appear that it was in general the inability to trade in the product rather than the defects in the product which caused financial loss. I think that the general calculation I shall make will cover this aspect of the matter save that Mr Conroy deposed that Arrow has in its possession 581 of the brake pads which it has been unable to sell and a further 108 pads which have been returned. The invoice value of these is $14,000 and $6,122 respectively. Although no specific claim was made for these sums, I shall include them in the damages. For the purposes of the calculation of loss of profits, counsel are agreed that sale price should be taken as $57 and the cost as $24, a margin of $33. There were overheads and costs amounting to $20,000 per month. Mr Conroy gave evidence that no additional expenses would have been incurred, even if the sales increased to 60,000 units per annum. However, Mr Nolan accepted that the achievement of greater sales would have required the expenditure of more money. I agree with that view and consider that I should adopt the sums put forward by Mr T Vella, a chartered accountant who was called to give evidence on -22- behalf of Futuris, save that J would substitute 1 extra employee for the 2 taken into account by Mr Vella. The additional expenses allowed per annum will be:- Wages $30,000 Interest $ 5,000 Advertising $24,000 Other $18,000 $77,000 Seven-twelfths of $77,000 is roughly $45,000. Counsel for Futuris submitted that Arrow failed to mitigate its loss. But I do not see that there was anything which Arrow should have done which it did not do. Once Futuris commenced to sell the 3410F pad as its standard line, Arrow had no access tO a suitable brake pad which could compete or take its place. I therefore assess the damages as follows:- Sales Lost: August 1,000 September 1,500 October 1,750 November 2,000 December 2,250 January 2,500 February 2,000 Total 13,000 Gross Margin on Sales Lost: 13,000 x $33 = $429,000 Less $20,000 Monthly overheads x 7 months $140,000 $289,000 Less additional expenses 45,000 $244,000 -23- To this sum should be added the sums of $14,000 and $6,122 I have mentioned. Interest up to judgment in the sum of $90,461.80 should be added, calculated in accordance with usual practice by reference to the interest rates specified in the Rules of the Supreme Court of New South Wales. For ease of calculation, the date from which the interest will run has been assumed to be 13 December 1991, which is three years from the date of the judgment. Costs will be reserved. I certify that this and the 22 preceding pages are a true copy of the reasons for judgment herein of the Honourable Justice Davies. Associate: v Date: 13 December 1994 Counsel for the applicant: C.C. Branson QC with A.J. Philpot Solicitors for the applicant: Bowen & Gerathy Counsel for the respondent: T. Tobin QC with R. Webb Solicitors for the respondent: Price Brent Date of hearing: 11-14 October, & 3 November 1994 Date of judgment: 13 December 1994