FEDERAL COURT OF AUSTRALIA Sykes v Reserve Bank of Australia [1999] FCA 746 TRADE PRACTICES – representation with respect to future matter – representation without reasonable grounds – damages recoverable for misleading conduct – Trade Practices Act 1974 (Cth) ss 51A and 82 CAUSATION AND RELIANCE – acts done in reliance upon misrepresentations amount to sufficient connection for causation – causation a question of fact to be determined by commonsense and experience in the facts of a particular case – whether applicants relied on representation of release date of notes in purchasing equipment and engaging in production of their product – whether commercial opportunity lost as a result of misrepresentation DAMAGES – loss of commercial opportunity – form of economic loss – quantum for future possibilities and past hypothetical situations determined by degree of probability WORDS AND PHRASES – "causation", "reliance" "loss of opportunity", "degree of probability" Trade Practices Act 1974 (Cth) ss 51A and 82 Sykes v Reserve Bank of Australia (1997) 151 ALR 579, cited Sykes v Reserve Bank of Australia (1998) 158 ALR 710, followed Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, applied March v E & M H Stramare Pty Ltd (1991) 171 CLR 506, applied Commonwealth v Amann Aviation Pty Limited (1991) 174 CLR 64, applied Malec v J C Hutton Pty Limited (1990) 169 CLR 638, followed PETER SYKES, BEVERLEY MAY SYKES AND POLYBANK PTY LIMITED v RESERVE BANK OF AUSTRALIA NG 941 OF 1994 TAMBERLIN J SYDNEY 4 JUNE 1999 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY NG 941 OF 1994 BETWEEN: PETER SYKES First Applicant BEVERLEY MAY SYKES Second Applicant POLYBANK PTY LIMITED (ACN 051 634 158) Third Applicant AND: RESERVE BANK OF AUSTRALIA Respondent JUDGE: TAMBERLIN J DATE: 4 JUNE 1999 PLACE: SYDNEY REASONS FOR JUDGMENT 1 This matter comes before me pursuant to an order of remittal made by the Full Court for determination of issues which I did not find it necessary to address in my earlier judgment. In the earlier judgment I found that there was no misleading conduct on the part of the Reserve Bank of Australia ("the Bank"). The earlier decision is reported: see Sykes v Reserve Bank of Australia (1997) 151 ALR 579. The factual background is spelt out in detail in that judgment. The Full Court decision is reported at (1998) 158 ALR 710. 2 The issues which fall for determination concern issues of reliance and causation, and quantum of loss, if any, suffered as a consequence of the misleading conduct and therefore recoverable under s 82 of the Trade Practices Act 1974 (Cth) ("the TPA"). Full Court decision 3 The conduct of the Reserve Bank considered by the Full Court to be misleading in substance was the press release and earlier statements in 1990 where the Bank had stated that a new series of $5 polymer bank notes would begin to issue after Easter 1991. It is common ground for the purposes of the present proceeding that the substance of representation was to the effect that in about May 1991 the new $5 polymer bank notes would begin to be issued. 4 The Full Court, by majority (Heerey and Sundberg JJ), held that this representation was as to a future matter and was made without reasonable grounds within the meaning of s 51A of the TPA. Emmett J dissented and held that the statements were not in relation to a future matter and that s 51A was not attracted. 5 I now turn directly to the specific matters calling for decision. Reliance – causation 6 As the High Court majority (Mason CJ, Dawson, Toohey and Gaudron JJ) pointed out in Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 348, the questions of reliance and causation are closely related. At that page their Honours said: "In the context of contraventions of s 52(1) [of the TPA] in the form of misleading conduct constituted by misrepresentations, acts done by the representee in reliance upon the misrepresentations amount to a sufficient connexion to satisfy the concept of causation. And, if those acts result in economic or financial loss, it will ordinarily be recoverable under s 82(1). So, in a case such as the present, the applicant is entitled to recover a sum representing the prejudice or disadvantage [the applicant] has suffered in consequence of his altering his position under the inducement." (Emphasis added) 7 In substance, the applicants' case is that Mr Sykes, acting on behalf of the third applicant ("Polybank"), relied and acted upon the misleading statements by the Bank as to the anticipated date of release because although he had begun to actively promote the polymer note handling device ("the product") since about August 1990, he did not go into production until April 1991. This was because he wanted to ensure the optimum timing for the release which, in his view, was a matter of several weeks before the date of release by the Bank of the $5 polymer notes. Mr Sykes contends that he had a special advantage in the market because he had the inside running in relation to the marketing and manufacture of the products to handle the polymer notes. This gave him a head start. The product was a very simple one in the nature of paper bands and small note dispensing containers in which the polymer notes could be stored. 8 Mr Sykes had been engaged as a consultant to the Bank for some weeks between the period 26 November and 21 December 1990, and because of his relationship and discussions with the Bank he anticipated being first in the market to provide products to service the need generated by the new notes fro handling and storage. As a consequence of the inability of the Bank to commence marketing in mid-May as represented, he submits that he lost the benefit of plans made to launch his products onto the market at the most opportune time. As it turned out, of course, the Bank was not able to meet the May deadline and accordingly Mr Sykes says that he had been mislead into prematurely releasing the products onto the market and thereby lost momentum and the valuable commercial opportunity to build up and profit from an ongoing prosperous business. Once that opportunity to catch the market was spent it was never possible to retrieve the commercial advantage which had then been available to him. 9 In support of the submission as to reliance the applicants point out that it was only in March 1991, a matter of weeks before the anticipated release, that they decided to purchase the equipment for manufacturing the products. They say that this circumstance, taken together with the testimony of Mr Sykes as to his reliance, and the fact that a large number of the products were manufactured, lead to the conclusion there was reliance on the misrepresentation. 10 The case put for the Bank is that there was no reliance on the 1990 representation because Mr Sykes was so convinced and irretrievably committed to the opportunities which he perceived to be presented by the product and his marketing advantages that he would have acted in exactly the same way, as he in fact did, whether or not there had been misleading conduct on the part of the Bank. Accordingly, it is submitted that even if he had been told by November 1990 of the contingencies and uncertainties as to the proposed release of the notes in April-May, he would have acted exactly in the same way. Regardless of the representation, his conduct would not have changed. The Bank further submits that Mr Sykes would have continued to manufacture the product in the expectation that there would shortly be a release of the bank notes and that he would soon be able to realise the profits arising from his advantageous position. The Bank says that the best evidence of this is that in fact Mr Sykes continued to produce the products in the expectation of a further future release after he became aware the initial deadline could not be met. It is said he did this because he wanted to preserve the relationship which he had carefully nurtured with the Bank and which he wished to bring to fruition. Counsel for the Bank contended that Mr Sykes was anxious to preserve what he perceived to be a "monopoly" position. The Bank admits that Mr Sykes was first on the scene and to some extent had an inside running position. However, it points out that there was no contractual relationship between Mr Sykes and the Bank with respect to the sale of the products when they came into production. In summary, the probabilities are, according to the Bank, that Mr Sykes, even if aware of potential delay, would not have acted in any way differently. 11 Mr Sykes planned a large scale manufacture of the products in the period March through April-May. On the evidence I am satisfied that in purchasing the equipment and planning the production in March-April and in actually engaging in that production, Mr Sykes on behalf of Polybank relied on the representations as to the May release date. Causation 12 In March v E & M H Stramare Pty Ltd (1991) 171 CLR 506, Mason CJ at 515 (with whom Toohey and Gaudron JJ agreed), and Deane J at 523, accepted that the common law tradition is that the question as to the cause of a particular occurrence is a question of fact which must be determined by applying common sense to the facts of each particular case. Whilst accepting that the "but for" test can provide some guidance on the question of causation, Mason CJ considered that this test was not of itself sufficient and that the application of the "but for" test alone could prove to be either inadequate or troublesome in situations where there were multiple acts or events leading to the injury of the plaintiff. 13 In the present case it is necessary to first identity what is said to be the nature of the loss suffered by the applicants. That loss is identified by the applicants as being the loss of a commercial opportunity to realise the potential profits to be made from the advantageous position Polybank had secured and of a timely marketing of the products within the period of weeks before the actual release of the new $5 bank notes. In elaboration of this proposition it is said, among other things, that because of the delay in the release of the bank notes purchasers and potential purchasers of the products lost enthusiasm for a product which had no immediate practical application. They became sceptical if not cynical about the notes ever being released. Accordingly, the marketing opportunities declined and the applicants were never able to regain the position which they would have secured if there had been a close proximity between the selling of the product and the release of the notes. It is said that money-handlers including banks, building societies, clubs, financial organisations and large corporations, became doubtful as to whether the new notes would ever be issued and as to the time span in which they might be released because of the confusion and uncertainty surrounding the issue. It is also said that the misleading conduct coupled with the ongoing uncertainty as to release dates after May 1991 and the reluctance of the Bank to make any commitment as to a specific time period after that date until about January-February 1992 contributed to the failure of the Polybank venture. 14 As a matter of commercial logic it seems to me that there is some substance in the submission of the applicants that they lost a commercial opportunity as a consequence of the premature production, marketing and sale of the products and the inability of the Bank to be in a position to release the notes until around July 1992. 15 I am satisfied that this commercial opportunity was a real one and that it was lost to the applicant as a result of the conduct of the Bank as to the May release date. I am therefore satisfied that the applicants have made out a case that there has been a loss as a result of and caused by the misleading conduct. 16 The more difficult question is as to the quantification of the loss. Commercial opportunity 17 The principles to be applied in consideration of a claim for damages under the TPA based on a loss of opportunity were examined by the High Court in Sellars (supra). In that case the applicants lost the benefit of an agreement they would have otherwise entered into if there had not been misleading conduct. The trial judge, whose decision was affirmed by the Full Court, awarded $1.212 million damages for the lost opportunity. The High Court dismissed the appeal. It concluded that the contract which the applicant entered into as a result of the misleading conduct was less favourable than that which would otherwise have been executed. 18 In the majority joint judgment in Sellars (supra), their Honours considered the principles relating to the quantum of damages in a case where there had been a loss of a commercial opportunity. At 348 their Honours said: "The prejudice or disadvantage which the respondents suffered in the present case was the loss of the opportunity or chance of securing commercial benefits which entry into the Pagini agreement and completion of it would have brought. The lost opportunity or chance, assuming it to have value, is a form of economic loss. The question, therefore, is: how is the value of that lost opportunity or chance to be measured?" 19 The judgment notes that it was established in Commonwealth v Amann Aviation Pty Limited (1991) 174 CLR 64 that a contract to provide a commercial opportunity breached enabled the innocent party to bring an action for damages for the loss of that advantage or opportunity. Amann is authority to support the conclusion that a lost commercial advantage or opportunity is a compensable loss even if there was a less than fifty percent likelihood that the commercial advantage would be realised. The majority in Sellars (at 349ff) observed that damages for breach of contract in such a case are to be assessed by reference to the possibilities of what would have otherwise happened. 20 See also Malec v J C Hutton Pty Limited (1990) 169 CLR 638, where the Court drew a distinction between proof of historical facts or what has occurred, and on the other hand proof of future possibilities and past hypothetical situations. The Court there noted that the civil standard of proof applies to the proof of historical facts but not to the predicted exercise where it is necessary to determine future possibilities and past hypothetical situations for the purpose of assessing damages (see 642-643 per Deane, Gaudron and McHugh JJ). The Court pointed out that it is the task of the Court to assess the degree of probability that an event would have occurred or might occur and then to adjust its award of damages to reflect the degree of probability of the hypothetical situation coming about. 21 In Sellars, the majority considered that the principles in Malec were applicable to damages occasioned by contravention of s 52 of the TPA. At 355 their Honours said: "On the other hand, the general stand of proof in civil actions will ordinarily govern the issue of causation and the issue whether the applicant has sustained loss or damage. Hence the applicant must prove on the balance of probabilities that he or she has sustained some loss or damage. However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had somevalue (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities. It is no answer to that way of viewing an applicant's case to say that the commercial opportunity was valueless on the balance of probabilities because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable." 22 In this case I am satisfied that the applicants have suffered a loss as a consequence of the misleading conduct of the Bank in the form of the lost commercial opportunity and that such loss was not of negligible value. However, I am not satisfied that the evidence is sufficient to establish the quantum of loss claimed by the applicants. Quantum 23 Any attempt to evaluate in monetary terms the continuing impact of a marketing advantage arising from the timely supply and availability of a product such as that in the present case must be made on a broad general basis. It cannot be the subject of any precise determination which approximates a particular figure. When an attempt is made to estimate the duration of any ongoing advantage to be derived as a consequence of such timing, the exercise is clearly prone to great imprecision. In circumstances where the projection undertaken is over a period in excess of seven years, in my opinion, any estimate travels into the role of speculation and a very substantial discount must be applied. 24 The applicants' case on quantum is put on two alternative bases. The first and preferred basis is that the applicants suffered and will suffer an ongoing loss of potential profits over a period of about nine years, together with the loss of goodwill which could have been obtained on sale of a profitable ongoing business as at the year 2000. The alternative submission was that the loss suffered could be measured by liabilities incurred by the applicants by way of loan commitments and interest payments together with loss of earnings over a two year period. The two alternatives are set out in the following tables furnished by the applicants. REVISED SUMMARY OF APPLICANTS' CLAIM FOR DAMAGES 1. Loss of opportunity to release devices with notes Loss of profits $432,407 Loss of future value of business$118,582 $550,989 2. Alternative consequential loss if device not produced Lost salary $ 62,358 Overdraft Liability $ 48,799 Amount owing to trade creditors $ 90,600 Inability to service mortgage debt $ 11,743 $213,500 25 It is necessary to resolve a threshold question as to which of the two above approaches is applicable. In my view, as the subsequent history shows, it is unrealistic to suppose that the applicants would have disassociated themselves from the manufacture, marketing and promotion of the products after they became aware of the inability of the Bank to release the notes as forecast in May 1991. This is supported by the fact that Mr Sykes was extremely confident the product was a commercially attractive one and that Polybank had a decided advantage in manufacturing the product and timing its sales shortly before the release of the notes. To his perception the product was one in respect of which there would be a real need upon release of the $5 bank notes; and although the first deadline had not been achieved, he was prepared to continue to operate on the basis that the notes would be released within a reasonable time after May and that he would be able to maintain his advantageous position up to the time of that release. For this reason he continued to promote the product after May 1991. 26 The applicants' evidence and Mr Sykes's conduct between March 1991 and July 1992 clearly indicates that it would be unrealistic to suppose that Mr Sykes would have quit the scene and taken up alternative employment and claimed for consequential indebtedness arising from loans and loss of alternative earnings. In evaluating the likelihood of future conduct facts are to be preferred to prophecy as the authorities indicate and in the present case the fact is that Mr Sykes remained in the market awaiting the coming release of the bank notes. The picture which emerges from his conduct is that he continued, notwithstanding the delays and uncertainties, to act on the basis that the product would make a profit upon release of the notes. This is supported by the way in which his case was presented. It was cast in the form of a lost opportunity to position himself in the market. That is to say, his complaint is the loss of that initial marketing advantage, which would have given him the necessary impetus and potential to operate a continuous and increasingly profitable business by manufacturing and selling the products. He considered this prospect so likely that he persisted notwithstanding the uncertainty. 27 Having regard to the above considerations I am satisfied that the second alternative measure of damages is not the appropriate one because it does not accord with either the intentions or conduct of Mr Sykes in relation to continuance of the business of manufacturing, promoting and selling the product. Not only was it unlikely that he would have abandoned the project and sought employment, but in fact he did not. 28 The way in which his damages are calculated is said by the claimants to be "conservative" because the only figures available were those from sales during the six month period including July 1991 through December 1991. These were at a time when the release of the notes was no longer imminent. He says it was not the peak profit making period. In calculating the value of his loss, the figures for his anticipated earnings were taken to be those applicable, in the absence of other evidence, for the period January 1992 through June 1992 based on the last six months income in 1991. This is on the basis that there was a statement by the Bank in January 1992 to the effect that the notes would be released in July 1992 and that this proved to be true. 29 The applicants called Professor Halliday, who is an Associate Professor in the Graduate School of Management at Macquarie University, to give evidence on issues of marketing and damages. The evidence of Professor Halliday was basically conceptual and the figures which he used were derived by an accountant, Mr Rossetto, also called by the applicants. 30 I accept the evidence of Professor Halliday that the timing of the product was an important matter in relation to its success and that to prematurely enter into production or mistime the release of the products could have an impact on its acceptability in the market and result in a loss of some initial impetus in launching the business. 31 However, I do not accept his evidence to the effect that the mis-timing of the release would continue, over a period of eight or nine years, to have an ongoing adverse impact on profitability of the product and therefore upon the ultimate goodwill value on disposal in the way suggested by Professor Halliday. In my view, this continuance was impossible as a potential commercial consequence. 32 In particular, I consider that the projections of increasing ongoing profits to the year 2000 did not take into account many significant contingencies and uncertainties which the product might face over that time. These contingencies are said to arise from the substitutability of simple products such as rubber bands to perform substantially the same function. In addition, the cost of the product, its non-re-useability, changes in economic circumstances, and the subsequent decline which the product suffered over the nine year period namely, that it did not prove to be as acceptable to the market as originally anticipated, were all operative considerations not taken into account or given sufficient weight or attention in the applicant's evidence. If the product had been as attractive or useful as indicated by the applicants, then it should have been able to compete and prevail over other products. 33 Professor Halliday, in cross-examination, considered that the rate of sale was likely to stabilise until such time as a competitor came in. He agreed that market experience showed that sale of the product settled down to a much lower level with the passage of time. He also agreed that the market had in effect passed a verdict on the product, but he indicated that this may have been because the polymer note was not released at the appropriate time. 34 Mr Rosetto, the second witness, was called by the applicants on quantum. The exercise which he performed was to take profit figures for the period when the product was being marketed from 1 July 1991 to 31 December 1991 and to apply those figures to the period 1 January 1992 to 30 June 1992 in respect of which there was no data. He then took the growth in profits from the quarter ended 30 September 1991 and the quarter ended 31 December 1991, and calculated a growth rate of 2.13% in profits on an ongoing basis. He used that growth rate to project forward from 30 June 1992 to the year 2000. This in turn, as can be seen from the table set out above, resulted in a loss of profit figure of $432,000. Using this profit estimation, he calculated there would have been a loss in value of the business on sale of the goodwill in the year 2000 amounting to $118,000. Mr Rossetto conceded that he had limited information and he had tried to make an estimate of what could have been the possible sales if the product had been launched in a timely way, namely in the order of six weeks before the notes. 35 In my view, the figures of Mr Rossetto as to income, profitability and value of the business in the year 2000 are speculative in the extreme. For example, he contemplates that there would have been a compounding growth in profits at the rate of 2.13% per quarter over a period of four years up to 1996, and thereafter the actual income would be static for the remainder of the decade. In my view, the predictions of Mr Rossetto are unreliable because they fail to take into account the wide range of contingencies which could impact on the profitability of the product between 1992 and 2000. 36 Although I accept that there was a loss of a commercial opportunity, I consider that given the time span of the prediction and the range of possible adverse factors to the profitability of the undertaking, the prospects of achieving the suggested profits and build-up in goodwill are grossly overstated in the applicants evidence. Doing the best that I can, I think that it would be appropriate in the circumstances to allow the figure of 15% of the estimate of $550,989 as representing compensation for the loss arising from the loss of the commercial opportunity referred to above. Conclusion 37 My conclusions are these. On the finding of the Full Court that the representation as to the Easter-May release was not based on reasonable grounds, I find that the applicants, in particular Polybank, through its agent Mr Sykes, relied on that representation in entering into the manufacture and marketing of the product. I also find that there was a loss of a commercial opportunity and that it was caused by the misleading conduct of the Bank. I am not persuaded that the amount claimed is anything like a reliable figure. It is at best a rough guide beset by great uncertainty. I find that a figure of 15% of the total claim of namely, an amount of $82,648, appropriately compensates the applicant Polybank for the loss in fact suffered as a consequence of the Bank's misleading conduct. I direct the parties to bring in Short Minutes of Orders on 9 July 1999 to give effect to these reasons. I will hear the parties on costs if necessary. I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Tamberlin. Associate: Dated: 4 June 1999 Counsel for the Applicant: M Ashhurst Solicitor for the Applicant: Packer & Austin Counsel for the Respondent: V R Gray Solicitor for the Respondent: Reserve Bank of Australia Date of Hearing: 24 May 1999 Date of Judgment: 4 June 1999