New South Wales Supreme Court CITATION : Orica Investments v McCartney [2010] NSWSC 488 HEARING DATE(S) : 10 May to 14 May 2010 JUDGMENT DATE : 28 May 2010 JUDGMENT OF : Ball J DECISION : 1. Upon inquiry, the damages to which the Plaintiffs are entitled from the Defendants are assessed in the amount of $1,561,245, together with interest on that sum of $743,452.04 (making a total of $2,304,697.04). 2. The Defendants pay the cost of the Plaintiffs of the inquiry as to damages. CATCHWORDS : DAMAGES - Contract - Breach of restraint of clause - calculation of damages for loss of the benefit of a distributorship agreement - loss of a chance - whether Plaintiff failed to mitigate its loss. CATEGORY : Principal judgment Armory v Delamirie (1722) 1 Stra 505; 93 ER 664 Banco de Portugal v Waterlow and Sons Ltd [1932] AC 452 Heskell v Continental Express Ltd {1950] 1 All ER 1033 Houghton v Immer (1997) 44 NSWLR 46 CASES CITED : McCrohon v Harith [2010] NSWCA 67 Malec v JC Hutton Pty Ltd (1990) 159 CLR 638 Poseidon Ltd & Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5 Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 Wylie v The ANI Corporation Limited [2002] 1 Qd R 320 Orica Investments Pty Ltd (First Plaintiff) Bronson & Jacobs Pty Ltd (Second Plaintiff) PARTIES : William McCartney (First Defendant) Ingredients Plus Pty Ltd (Second Defendant) Graeme Bruce Love (Third Defendant) Thomas Daniel John Love (Fourth Defendant) FILE NUMBER(S) : SC 2005/260399 Mr I Jackman SC (Plaintiff) Mr J Stoljar SC (Plaintiff) COUNSEL : Ms J K Taylor (Plaintiff) Mr A Sullivan QC (Defendant) Mr T Davie (Defendant) SOLICITORS : Mallesons Stephen Jaques (Plaintiff) Hassett Dixon (Defendant) - 1 - IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION BALL J 28 MAY 2010 2005/260399 ORICA INVESTMENTS PTY LIMITED v WILLIAM McCARTNEY JUDGMENT 1 HIS HONOUR: On 25 June 2007 White J gave judgment in this matter in favour of the Plaintiff: see [2007] NSWSC 645. One of the orders his Honour made was that the assessment of damages payable by the First, Second and Third Defendants in respect of the loss by the Second Plaintiff (Bronson & Jacobs) of Clos D'Aguzon (Clos) as a supplier to it of various essential oils (particularly lavender oil) be referred for enquiry and certification. This judgment concerns the assessment of those damages. 2 The Third Plaintiff together with its related companies (Orica) carries on the business of manufacturing, supplying and distributing numerous chemical products and providing associated services in Australia and various other countries throughout the world. The First Plaintiff (Orica Investments) is a member of the Orica group. By a Share Sale Agreement dated 27 April 2004 Orica Investments agreed to acquire from the First Defendant (Mr McCartney) and a number of others all of the shares in the Bronson & Jacobs for the sum of $110 million, subject to various adjustments. Bronson & Jacobs was and is a supplier of chemical raw materials to the pharmaceutical, cosmetics, food and aromatic industries in Australia, New Zealand, Asia and the UK. Mr McCartney was the Managing Director of Bronson & Jacobs and a significant shareholder at the time of its sale. He had worked for Bronson & Jacobs since 1968. He was appointed Joint Managing Director in 1982 and Chief Executive Officer and Managing Director in 1988. 3 By clause 15.1 of the Share Sale Agreement, Mr McCartney promised, in substance, that for a period of 5 years he would not (to use the words of White J at [7]): "a. carry on business similar to or in competition with Bronson & Jacobs, either directly or indirectly, as employee, manager, director, shareholder, member, partner, joint venture participant, consultant, or in any other capacity; b. entice away from Orica Investments any customer, supplier, or employee of Bronson & Jacobs' business; c. canvass or solicit orders for services similar to those provided by Bronson & Jacobs; or d. use or disclose any confidential information relating to the business or affairs of Bronson & Jacobs or its subsidiaries." 4 Following completion of the Share Sale Agreement, Mr McCartney resigned as the Managing Director and as an employee of Bronson & Jacobs. He entered into a Consultancy Agreement with Orica. That agreement was for an initial period of 12 months but extended automatically for further periods of 6 months unless either party gave notice terminating it. It also contained express and implied restraints on the ability of Mr McCartney to be involved in a business which competed with Bronson & Jacobs. However, it was terminated on 25 February 2005 and those restrictions came to an end at that time. 5 The Second Defendant (Ingredients Plus) was registered as a company on 12 January 2005. Its initial shareholders and directors were the Third Defendant, Mr Graeme Love, and the Fourth Defendant, Mr Thomas Love. Mr Graeme Love had been employed by Bronson & Jacobs as General Manager, Operations, but was made redundant following its acquisition by Orica Investments. His redundancy took effect on 23 December 2004. Mr Thomas Love is Mr Graeme Love's father. 6 Ingredients Plus began operating a business in competition with Bronson & Jacobs. Several senior employees (Ms Lynam, Ms Nguyen and Mr Petros) left Bronson & Jacobs to join Ingredients Plus. Ingredients Plus secured distribution rights from suppliers of chemical products who had formerly supplied those products to Bronson & Jacobs. One of the suppliers secured by Ingredients Plus was Clos. 7 White J found that Mr McCartney breached clause 15.1 of the Share Sale Agreement and the provisions of his Consultancy Agreement in connection with the replacement of Bronson & Jacobs by Ingredients Plus as Clos's distributor. His Honour also found that Mr Graeme Love had, in connection with the move of Clos from Bronson & Jacobs to Ingredients Plus, knowingly interfered with the contractual relations established between Mr McCartney and Orica Investments by the Share Sale Agreement and that his conduct was to be attributed to Ingredients Plus. 8 White J summarised his conclusions on this aspect of the case in the following terms: "199. In summary, the inference that McCartney solicited Bontoux [the person behind Clos] to transfer the Clos d'Aguzon distributorship from Bronson & Jacobs to Ingredients Plus arises from: (a) McCartney's having said prior to May 2004 that that was his intention if Orica did not leave Bronson & Jacobs as a stand-alone division; (b) McCartney's having provided working capital to Ingredients Plus and having a beneficial shareholding in it; (c) McCartney's attempts to disguise his involvement with Ingredients Plus; (d) McCartney's being a secured lender for more than €1,300,000 to Clos d'Aguzon, so that such a decision was unlikely to be made without his involvement; (e) McCartney's secretly providing assistance to Bontoux to assist Clos d'Aguzon to retain the advantage of Bronson & Jacobs' mistaken overpayment; (f) McCartney's talking and corresponding secretly with Bontoux about the terms on which Bontoux should write to Bronson & Jacobs about Clos d'Aguzon's concerns as to Bronson & Jacobs' marketing of its products; (g) Bontoux' email correspondence requesting McCartney and Nguyen to settle the terms of his announcement of the change of distributor, and saying he looked forward to being their principal again; (h) the volume of telephone traffic by McCartney on his mobile phone to Graeme Love and Nguyen;; and (i) the defendants' failure to call Nguyen. 200. I conclude that the material causes of Clos d'Aguzon changing its distribution arrangements were that Ingredients Plus had established its business; that Clos d'Aguzon was dissatisfied with service provided by Bronson & Jacobs after the Orica Takeover; that Nguyen had left Bronson & Jacobs to work for Ingredients Plus; and that McCartney solicited Bontoux to do so." 9 It is also relevant to observe that White J found (at [257]) that: "(e) Nguyen was dissatisfied with changes made by Orica and was encouraged by McCartney's promise of support to Ingredients Plus to leave her employment with Bronson & Jacobs; (f) a material contributory reason for Lynam's decision to change her employment was McCartney's promise of support of Ingredients Plus …" 10 Orica Investments claims $1,876,119.50 plus interest in respect of the loss of the Clos Distributorship. It relies in support of that claim on a number of expert accounting reports prepared by Mr Potter. Essentially, Mr Potter used a discounted cash flow analysis to calculate Orica Investments' loss. There is no dispute that that is the appropriate method, in principle, of calculating that loss. 11 Mr Potter identifies two approaches for calculating Bronson & Jacobs' expected future revenues from the Clos Distributorship. First, he took Bronson & Jacobs' cash flows from the Clos Distributorship for the three years to September 2004 and projected those cash flows going forward from 10 March 2005 (the date that Bronson & Jacobs lost the Clos Distributorship) until 31 May 2009 (the date the restraints in the Share Sale Agreement came to an end). He did so using three different scenarios. Scenario 1 assumed a zero growth rate and a gross margin on sales of 35%. Scenario 2 assumed a growth in sales of 2% per annum and the same gross margin on sales as Scenario 1. Scenario 3 assumed the same growth rate as scenario 2 but a gross margin of 30%. Mr Potter took an average of the results of these three scenarios to arrive at an estimate of Bronson & Jacob's future cash flows but for the Defendants' conduct. He refers to this approach as Approach 1. 12 The second approach taken by Mr Potter was to determine the actual cash flows earned by Bronson & Jacobs from the sale of Clos products and any substitute products during the period from 10 March 2005 to 31 May 2009 and to add that to the actual cash flows earned by Ingredients Plus from the sale of Clos products during the period from September 2004 to 30 September 2007 and projected cash flows from 30 September 2007 until 31 May 2009 assuming no growth during that period (he used projected figures because actual figures were not available to him for the relevant period). He referred to this approach as Approach 2. As Mr Potter explained, this approach is based on the premise that sales of Clos product "lost" by Bronson & Jacobs was gained by Ingredients Plus. 13 In the case of each of the two approaches adopted by Mr Potter: (a) he takes the date for the assessment of damages to be 10 March 2005; (b) he determines the value of sales in the "but for" world by reference to the relevant benchmark (the three years prior to March 2005 in the case of Approach 1 and actual sales of Bronson & Jacobs and Ingredients Plus together with projections where the relevant data was not available to him in the case of Approach 2); (c) for each year, he determines the gross margin expected to be earned on those sales; (d) he determines the amount of actual sales made by Bronson & Jacobs and for each year determines the gross margin earned on those sales; (e) he deducts the amount referred to in (d) from the amount referred to in (c) to arrive at an amount for gross lost profits for each year; (f) he concludes that it is unnecessary to deduct any amount for overheads from the amount determined in accordance with step (e) on the basis that, given that the business of Bronson & Jacobs had been absorbed into Orica's business, the incremental costs of earning those lost profits would be negligible; (g) he concludes that he should not include any amount for the costs incurred by Bronson & Jacobs in looking for alternative products on the basis that those costs also would be absorbed within Orica's costs structure; (g) he deducts income tax (at the rate of 30%) on the projected additional profit for each year to arrive at an expected cash flow for each year; (h) he calculates the net present value of that cash flow using a discount rate of 13.40%; (i) he "grosses up" that amount for tax payable on the judgment; (j) he adds interest at court rates from 10 March 2005; (k) in respect of the period after 31 May 2009, he values the net loss in perpetuity (or terminal value) by dividing the expected net lost revenue in the year following the date of valuation by the discount rate which has been adjusted by subtracting any assumed rate of growth; (l) he "grosses up" that amount for tax payable on the judgment; (m) he adds to that amount interest at court rates from 10 March 2005; (n) he adds the figures for the period before 31 May 2009 and the period after that date to arrive at an estimate of Bronson & Jacobs' total loss. 14 Applying this methodology, Mr Potter concluded that on Approach 1 Bronson & Jacobs loss (before interest) was $860,678 for the period to 31 May 2009 and $1,246,718 for the period after that date – making a total of $2,107,397. He concluded that on Approach 2 the loss (before interest) was $648,403 for the first period and $960,439 for the second – making a total of $1,644,842. 15 Originally, Mr Potter arrived at a final figure for damages by taking an average of the two approaches. He did so because he considered that there were advantages and disadvantages with both approaches and that, consequently, an average best reflected Bronson & Jacobs' loss. Mr Potter pointed out that Approach 1 is not affected by the conduct complained of. On the other hand, as Mr Potter explained, actual trading results may be worse or better than historical trading due to events that would have occurred in any event. Approach 1 does not take account of that possibility. Approach 2 does, but in doing so it takes account of events which may be affected by the conduct complained of. 16 However, in a supplementary report and when giving evidence, Mr Potter did not suggest that it was appropriate to take an average of the two approaches. Rather, he said that which approach was preferable depended on factual matters (such as general market conditions and profitability) and risks which were specific to Bronson & Jacobs about which he had insufficient information to express an opinion. Having said that, he did express a slight preference for Approach 2. Nonetheless, the final amount claimed by the Plaintiff is an average of the two approaches. 17 The Defendants raise a number of objections to Mr Potter's methodology. 18 First, they raise what might be regarded as a threshold issue. According to them, the evidence establishes that Clos would have terminated the distributorship in any event or that it was very likely that it would have done so, and consequently they say that Bronson & Jacobs have suffered no loss at all. 19 Secondly, they say that Approach 1 is flawed because the trend of profits from its essential oils business was downward whereas Mr Potter assumes that it would increase or, at least, remain the same and that, in any event, that approach fails to take account of the changes brought about as a consequence of Orica's acquisition of Bronson & Jacobs. 20 Thirdly, they object to Approach 2 because they say it wrongly assumes that all sales made by Ingredients Plus would have been made by Bronson & Jacobs, but for the relevant conduct. 21 Fourthly, they say that the data (obtained from Mr O'Connor) on which Mr Potter relied for the conclusions he reached in relation to Bronson & Jacobs' gross margins on sales were unreliable and consequently should be rejected. 22 Fifthly, the Defendants take objection to Mr Potter's conclusion that Bronson & Jacobs would have no incremental overheads in the but for world. 23 Sixthly, they say that the discount rate used by Mr Potter is inappropriate because: (a) it makes inadequate allowance for the risks inherent in the business that was lost as a consequence of the Defendants' conduct; and (b) it fails to take into account what the Defendants say was the high risk that Clos would terminate the distributorship at some time in the future in any event. 24 Seventhly, they say that Mr Potter was not entitled to add a terminal value to his calculations because the period in respect of which it is calculated is one where Mr McCartney was no longer bound by the restraints in the Share Sale Agreement. 25 In addition, the Defendants say that Bronson & Jacobs failed to mitigate its loss by sourcing similar products to those supplied by Clos from elsewhere. The Threshold Issue 26 The parties agree that this issue is to be determined in accordance with the principles set out in cases such as Malec v JC Hutton Pty Ltd (1990) 159 CLR 638 and Poseidon Ltd & Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 –that is, the parties accept that the Plaintiff's damages are to be reduced to the extent that there was a chance that the Clos Distributorship would have been terminated irrespective of the Defendants' breaches. It is relevant to observe that in applying this principle the question is not whether there were causes other than the Defendants' breaches of Clos's decision to terminate the Distributorship Agreement. The fact that there were other causes of Clos's decision to terminate that agreement is not a reason for reducing the damages payable by the Defendants flowing from that event: Heskell v Continental Express Ltd [1950 1 All ER 1033 at 1048 per Devlin J; Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 at 346 per Samuels JA with whom Moffitt P and Reynolds JA agreed on the point; Wylie v The ANI Corporation Limited [2002] 1 Qd R 320 at [27] per McMurdo P and at [48] per Thomas JA. Rather, the question is, assuming that the Defendants were not in breach of their obligations, what was the risk that Clos would terminate the Distributorship Agreement following the acquisition of Bronson & Jacobs by Orica Investments? 27 The Defendants say that the answer to that question was that the chance was very high – indeed, almost a certainty. They give two reasons. First, they say that I should accept the evidence of Mr Bontoux who said that, following the acquisition of Bronson & Jacobs by Orica, he had formed the view that Clos should terminate the Distributorship and that the only issue for him was whether to enter into a Distributorship with Ingredients Plus or with another distributor. Secondly, they say that even if I do not accept Mr Bontoux' evidence, there was a high probability that Clos would have terminated the Distributorship in view of the findings of White J concerning Mr Bontoux' dissatisfaction with Bronson & Jacobs following its acquisition by Orica, Mr Bontoux' relationship with those behind Ingredients Plus, the fact that the Distributorship Agreement was oral and terminable at will and the fact that a number of other distributors had terminated their distribution arrangements with Bronson & Jacobs following the takeover. 28 White J found that Mr Bontoux was not a reliable witness and I do not think that Mr Bontoux fared any better in the hearing before me, for three main reasons. 29 First, I do not think that the reasons Mr Bontoux gave for saying that he would have terminated the Distributorship Agreement with Bronson & Jacobs were credible. One reason he gave was that he had experienced poor sales figures to Bronson & Jacobs shortly before he terminated the Distributorship Agreement. However, none of the contemporaneous records record that as a reason for termination given by him. Mr Bontoux did not mention it as a reason in the evidence he gave in connection with the liability hearing. He offered no sales figures to support the claim. On the other hand, Bronson & Jacobs' own sales figures to its customers suggested that sales had not dropped off. Mr Bontoux says that he was concerned by the fact that he was receiving enquiries from third parties which specified Bronson & Jacobs' codes for Clos's products. Mr Bontoux gave the impression that those enquiries suggested to him that customers were dissatisfied with the service that they were getting from Bronson & Jacobs and consequently were seeking to acquire product directly from Clos. In fact, Mr Bontoux knew that those enquiries were coming from a competitor of Bronson & Jacobs. Mr Bontoux said that Bronson & Jacobs had created a conflict of interest by acquiring Keith Harris Ltd which had ties to Charabot, a competitor of Clos's. Again, however, this reason was not raised by Mr Bontoux in any of the contemporaneous correspondence. In fact, Bronson & Jacobs only acquired the flavouring manufacturing and fragrance manufacturing businesses of Keith Harris. Mr Bontoux accepted when cross-examined that those acquisitions would not have created a conflict of interest. Although there is no evidence to suggest that Mr Bontoux was aware that the acquisition was limited to those divisions, it is hard to believe that someone as experienced and knowledgeable in the industry as Mr Bontoux would not have made enquiries concerning the acquisition if he had been genuinely concerned about it. 30 Secondly, Mr Bontoux gave evidence that, because of his concerns about Bronson & Jacobs following Orica's takeover, he had decided that Clos should terminate the Distributorship Agreement and that the only question for him was whether to go to Ingredients Plus or some other distributor. However, there is no contemporaneous evidence suggesting that Mr Bontoux approached other distributors. He said in his affidavit that he could have looked up David Burke who had previously worked for Bronson & Jacobs, who had left by 2005 and who he regarded as another friend and knowledgeable in the area. However, he knew nothing about the business carried on by Mr Burke. In addition, Mr McCartney, when asked to list the competitors of Ingredients Plus and Bronson & Jacobs, did not include Mr Burke's business in his list. It is hard in the light of that evidence to believe that Mr Bontoux regarded Mr Burke's business as a genuine alternative. 31 Thirdly, Mr Bontoux was cross-examined about substitutes for Clos's products. Mr Bontoux no doubt appreciated that this cross-examination was relevant to the question whether Bronson & Jacobs had taken reasonable steps to mitigate its loss. In cross-examination, Mr Bontoux denied that Clos promoted its products as being special and distinctive and denied that it did a certain amount of blending of its own to try to distinguish its product from those of others. However, those denials contradicted evidence given by Mr Bontoux in his affidavit. That evidence was given to explain why Ms Dalziel (a Bronson & Jacobs' employee engaged following the Orica takeover) did not have the necessary knowledge or experience to sell Clos's products. 32 The fact that I do not accept Mr Bontoux' evidence is not the end of the matter. It is still necessary to examine the surrounding circumstances to determine the likelihood that Clos would have terminated the Distributorship Agreement at some time following Orica's acquisition. The context in which that determination must be made has a number of aspects to it. 33 First, the context is one in which Mr Bontoux remained good friends with Mr McCartney, but one in which Mr McCartney did nothing to encourage Mr Bontoux to change distributors. 34 Second, it must be assumed that Ingredients Plus would still have been established by Mr Graeme Love. However, that would not have happened until after 26 February 2005, when Mr McCartney's Consultancy Agreement had terminated. That is because Mr McCartney provided essential working capital to Ingredients Plus and, on White J's findings (see [300]), Mr McCartney was in breach of his Consultancy Agreement but was not in breach of clause 15.1 of the Share Sale Agreement in doing so. 35 Thirdly, the context is one in which there was some disruption to Bronson & Jacobs' business resulting from a variety of administrative changes, including the introduction of a new database system (known as SAP), the reorganisation of warehouses, changes to the system of ordering so that orders had to be placed through Melbourne and the restructuring of the business generally with the result that some employees were made redundant and the role of others was changed. I accept that would have caused annoyance to suppliers, including Clos, customers and staff. 36 Fourthly, the context is one in which Clos was at liberty to terminate the Distributorship Agreement at will. 37 Fifthly, however, I think that the context is one in which Ms Nguyen and Ms Lynam were likely (in the sense of more probable than not) to remain with Bronson & Jacobs rather than move to Ingredients Plus. Ms Nguyen was particularly important to the essential oils business. Mr McCartney, in his affidavit evidence, said that as a result of her 12 years experience at Bronson & Jacobs she had come to know the essential oils business "very well". He also said that Ms Lynam knew the business "well". White J found that Ms Nguyen was dissatisfied with changes made by Orica including the fact that her role was changed so that she no longer dealt with customers. However, His Honour also found (at [48]) that this change was consistent with Orica's well founded concern that Mr McCartney might breach the restraints imposed on him. Orica recognised that Ms Nguyen was a key employee and it was natural in those circumstances that it would seek to protect its business by limiting her role in case she was enticed to leave. It is unlikely that that change would have been made if the Defendants had not breached their duties to the Plaintiff. In addition, White J found (at [73] – [74]) that both Ms Nguyen and Ms Lynam were encouraged to leave Orica by Mr McCartney's promise of support to Ingredients Plus. Finally, Ms Nguyen did not give evidence although it seems clear that she was available to do so. It can be more readily inferred from that fact that she was likely to have stayed with Bronson & Jacobs but for Mr McCartney's breaches of the restraints imposed on him. The departure of Ms Nguyen was the principal reason Mr Bontoux gave in his affidavit in the liability hearing (but not at the hearing before me) for terminating the Distributorship Agreement. 38 Mr Sullivan also submitted that I should take into account the fact that a number of other suppliers terminated their Distributorship Agreements with Bronson & Jacobs following Orica's takeover. However, I do not place any weight on that fact. No doubt, other suppliers stayed with Bronson & Jacobs; and I do not think that the fact that some left without more says anything about the likelihood of Clos doing so. 39 Lastly, I think that the principle derived from Armory v Delamirie (1722) 1 Stra 505; 93 ER 664 is relevant in this context. That principle was stated in these terms by Handley JA (with whom Mason P and Beazley JA agreed) in Houghton v Immer (1997) 44 NSWLR 46 at 59: [T]he Court should assess the compensation in a robust manner, relying on the presumption against wrongdoers, the onus of proof, and resolving doubtful questions against the party "whose actions have made an accurate determination so problematic." (quoting Hodgson J in Investments Pty Ltd v Howard Chia Investments Pty Ltd (1989) 24 NSWLR 499 at 508) I do not think that I should readily infer that it was likely that Clos would have left Bronson & Jacobs in the absence of the Defendants' conduct when that conduct was directed at achieving that very goal. One might well ask why the Defendants did what they did if they thought that Clos would have changed distributors in any event. Mr Sullivan's answer to that question was to say that their conduct should be seen as an example of abundant caution. But it is clear that they went to considerable lengths to attract Clos away from Bronson & Jacobs. As a consequence of their conduct, it is impossible to know now with any certainty what Clos would have done. That uncertainty should not be allowed to operate in the Defendants' favour. 40 Taking these matters into account, in my opinion, the acquisition of Bronson & Jacobs by Orica increased the risk that Clos would terminate its Distributorship Agreement. Ingredients Plus would have been set up some time after 26 February 2005. Mr Bontoux had a close relationship with Mr McCartney and Mr Bontoux would have known that Mr McCartney had some connection with Ingredients Plus, although Mr McCartney would have said nothing to Mr Bontoux to encourage him to change distributors. The likelihood, however, is that key employees – Ms Nguyen, in particular – would have remained at Bronson & Jacobs. That would have been an important consideration to Mr Bontoux. I deal later in this judgment with the question of precisely what reduction should be made to Orica Investments' damages to take account of these facts. Approach 1 or Approach 2? 41 In my opinion, Mr Potter's Approach 2 is preferable to his Approach 1. The difficulty with Approach 1 is that it assumes there would be no substantial changes in Bronson & Jacobs' business when it is clear that there were. Mr McCartney was obviously a very important person to Bronson & Jacobs' business. However, the position was that he would not continue with Bronson & Jacobs as Managing Director and would only continue for a limited period of time as a consultant. The acquisition of Bronson & Jacobs by Orica was likely to cause a significant disruption to Bronson & Jacobs' business and was likely to have some effect on the way in which Bronson & Jacobs did business. Approach 1 makes no allowances for these changes. 42 To a considerable degree, Approach 2 overcomes these difficulties. By taking the actual sales of Bronson & Jacobs and Ingredients Plus, it takes some account of the disruption caused by Orica's takeover and of the reorganisation that entailed. At the same time, it makes what I think is the correct assumption that key employees of Bronson & Jacobs were likely to remain with it. 43 Mr Sullivan submits that even Approach 2 over-estimates the likely cash flows that Bronson & Jacobs would have earned from the Clos Distributorship. In his submission, the evidence suggests that Bronson & Jacobs would not have been as effective as Ingredients Plus in selling Clos product. Since Ingredients Plus was substantially the old Bronson & Jacobs, the result, in his submission, of taking its actual sales would be to overstate the expected sales of the new Bronson & Jacobs. 44 I do not accept this submission. Some allowance has already been made for the points raised by Mr Sullivan in taking the actual sales of Ingredients Plus and the actual sales of Bronson & Jacobs. Those sales are likely to have been affected by the disruption caused by Bronson & Jacobs' new practices and the uncertainty in customers' minds of what was happening following the establishment of Ingredients Plus. In addition, on Approach 2, the actual sales of the two companies is used as a proxy for the expected sales of Bronson & Jacobs in the event that Mr McCartney had complied with his contractual obligations. In that event, the likelihood was that key staff would remain with Bronson & Jacobs. Although they no doubt would have confronted difficulties in dealing with Orica's new procedures and systems, I think the likelihood is that they would have retained most of the customers who became customers of Ingredients Plus. Finally, I propose to discount Bronson & Jacobs' claim for damages to take account of contingencies in relation to the Clos Distributorship Agreement. I think that that discount adequately takes account of the risks associated with the sale of Clos products going forward. Gross Margins and Overheads 45 In the case of Approach 2, Mr Potter takes the actual gross margin earned by Bronson & Jacobs on sales of essential oil products and combines that with the margins achieved by Ingredients Plus to produce a combined gross margin. Mr Potter makes no allowance for overheads incurred by Bronson & Jacobs. 46 Mr Potter obtained his figures for Bronson & Jacobs' gross margin from a spreadsheet prepared by Mr O'Connor. That spreadsheet contains a complete list of Clos products sold by Bronson & Jacobs and, for each item on that list, specifies the costs of sale. Mr Sullivan pointed out that, in some cases, the figures recorded in that spreadsheet seemed to be absurd. For example, there were entries for significant sales where no costs were recorded against those sales. There were others where the costs of sale were equal to or greater than the cost of the product. Mr Sullivan cross-examined both Mr O'Connor and Mr Potter about these discrepancies. Both witnesses said that they were unable to give an explanation of them without investigating each sale. Mr O'Connor suggested that, in some cases, the discrepancies could have arisen as a consequence of a stocktake which revealed the presence of un-recorded stock or the absence of recorded stock. Mr Potter said that there were a number of possible explanations and that it was not unusual in his experience to find anomalies of that sort in large data sets. Mr Potter also pointed out that the margin he used (32%) was consistent with the margin achieved by Ingredients Plus. 47 I do not accept Mr Sullivan's submissions that the figures used by Mr Potter for Bronson & Jacobs' gross margin were unreliable. The critical figures are the total figure for sales and the total figure for the costs associated with those sales. I do not think that the points raised by Mr Sullivan cast doubt on the reliability of those figures. It is possible that mistakes were made in recording amounts against particular sales. It is possible that, on some occasions, the costs of sale were apportioned unequally against a group of sales for one reason or another. Similarly, it is possible, as Mr O'Connor said, that some of the discrepancies arise from adjustments following a stocktake. But I do not think that it follows from that the figures as a whole are unreliable. That is particularly so in circumstances where the gross margin achieved by Bronson & Jacobs does not seem unreasonable when compared with the gross margin achieved by Ingredients Plus. 48 Mr Sullivan also criticises Mr Potter's decision to make no allowance for overheads. However, I do not accept this criticism. The question that must be determined is what loss Bronson & Jacobs suffered as a consequence of the Defendants' conduct. From Bronson & Jacobs' point of view, it had very substantial overheads, whether or not it retained the Clos Distributorship. The position is complicated by the fact that, following the acquisition by Orica, a number of those overheads were absorbed by Orica, no doubt as Orica sought to achieve efficiencies following the acquisition of Bronson & Jacobs. In those circumstances, it seems to me that a reasonable approach is to ask what incremental costs Bronson & Jacobs would have incurred if it had retained the Clos Distributorship. 49 Mr Lonergan, the expert accountant called by the Defendants, said under cross-examination that "based on general commercial experience … if you lose a couple of million dollars of sales you cut overheads no matter who you are." However, Mr Lonergan did not attempt to identify what those costs might be in this case. 50 Despite this criticism, I think the approach taken by Mr Potter was reasonable. Mr Potter accepted that there would be some overheads associated with the Clos Distributorship. However, he thought that those overheads were likely to be negligible. In his view, given the size of Bronson & Jacobs and of Orica, in particular, it was reasonable to assume that most overheads associated with the Clos Distributorship would be absorbed by the existing business. In addition, he took the same approach to the additional costs incurred by Bronson & Jacobs in seeking to find a substitute supplier to Clos. He assumed that those costs would be absorbed as part of the business and he did not include those costs in calculating Bronson and Jacob's loss, although, subject to any failure to mitigate on the part of Bronson & Jacobs, they were clearly recoverable. Consequently, to some extent at least, any incremental costs that Bronson & Jacobs might have incurred in keeping the Clos Distributorship were offset by the costs incurred by Bronson & Jacobs in searching for an alternative for which Mr Potter made no allowance at all. In my opinion that was a reasonable approach and I do not think any adjustment needs to be made to Mr Potter's calculations to take account of these matters. Discount Rate and Terminal Value 51 The discount rate used by Mr Potter of 13.4% was the discount rate he calculated in accordance with the Capital Asset Pricing Model (CAPM) for Orica. Mr Potter thought that that was at least an appropriate starting point on the basis that Bronson & Jacobs had been absorbed by Orica and consequently many of the risks that the discount rate is intended to reflect were absorbed by it. Mr Potter accepted that there was a possible level of specific risk in the Bronson & Jacobs' lost cash flows which were being valued which may not adequately have been accounted for by using Orica's risk profile. The lack of diversity of cash flow is an obvious example. Mr Potter readily conceded that he did not have any particular expertise in assessing those specific risks. In addition, he pointed out that it was common for specific risk to be reflected by adjusting the cash flows to which the discount rate would ultimately be applied rather than adjusting the discount rate itself. Nonetheless, he thought that the approach that he had taken reflected specific risks essentially in two ways. First, Approach 2 reflected the specific risks associated with a business such as Bronson & Jacobs because it used the actual cash flows of Ingredients Plus and Bronson & Jacobs. Secondly, he applied his discount rate both to the cash flows he determines for the period from 10 March 2005 to 31 May 2009 and to the terminal value calculated by him. In applying that discount rate to actual cash flows, he essentially engages in a form of double counting because the discount rate he used is intended in part to reflect a risk that those cash flows would not be earned. 52 In my opinion, however, some further discount is necessary. The business that is to be valued for the purpose of calculating damages is the business that Bronson & Jacobs was likely to have had as a result of the Clos Distributorship. That business has two important features. First, it was dependent on retaining the Clos Distributorship. For the reasons I have already given, I think that there was a significant risk that it would not have done so. Secondly, the business was heavily dependent on retaining TP Health as a customer since approximately 60% of the sale of Clos's products was to that customer. In fact, Ingredients Plus did lose TP Health as a customer for lavender oil recently. 53 There is no science to the determination of an appropriate discount. For the reasons I have already given, I think that there was a significant risk that Clos would have left Bronson & Jacobs in any event. But I do not think that it was greater than 50% or anything like it. I also think that some allowance should be made for the risks associated with the loss of TP Health as a customer. Taking these matters into account, I think that Bronson & Jacobs' claim for damages in respect of the initial period should be reduced by a further 20%. 54 Mr Lonergan argued in his report that Bronson & Jacobs should recover nothing after 31 May 2009 on the basis that at that time Mr McCartney was no longer bound by the restraints in the Share Sale Agreement. I do not accept this argument. By then Clos would have been with Bronson & Jacobs without Mr McCartney for a period of 5 years. The likelihood that Mr McCartney would still be keen to entice Clos away from Bronson & Jacobs and the likelihood of him successfully doing so by that stage would have been small. In those circumstances, I think that I should discount the damages claimed by Bronson & Jacobs in this period by a further 10% (that is, by a total of 30%) to allow for that fact that the application of the discount rate calculated by Mr Potter in this period does not involve the possibility of double counting of the type I referred to earlier and to allow for the fact that there was some small chance that Mr McCartney would, at some time after 31 May 2009, seek to persuade Mr Bontoux to leave Bronson & Jacobs and would succeed in doing so. Failure to Mitigate 55 The Defendants say that the Plaintiff failed to mitigate its loss. They rely on two types of evidence in support of this submission. First, they adduced a substantial quantity of evidence to suggest that alternative suppliers were available who could have been used by Bronson & Jacobs. Mr McCartney gave evidence that it was his policy at Bronson & Jacobs to have at least one alternative supplier of every product for its customers. Detailed cards were kept recording that information. Mr Flower, who was the Regulatory Affairs Manager of the company which owned TP Health, gave evidence that it was his company's policy to maintain a second supplier for all raw materials purchased by it, although he did not reveal who those suppliers were for reasons of commercial confidence. Mr Bontoux gave evidence that the market is a fiercely competitive one and that there were a number of alternative suppliers to Clos. Secondly, Mr McCartney and Mr Graeme Love gave evidence which was heavily critical of the approach taken by Ms Dalziel to find alternative suppliers. 56 In my opinion, Bronson & Jacobs did not fail to mitigate its loss. The question is not so much what Bronson & Jacobs might have done to mitigate its loss as what it did do and whether, in all the circumstances, that was reasonable. As Lord MacMillan said in Banco de Portugal v Waterlow and Sons Ltd [1932] AC 452 at 506: "[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." That passage was quoted with approval by Yeldham J in Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5 at 9. One way of testing whether what the plaintiff did was reasonable is to look at the alternative courses available to it. But ultimately the question is not whether there was a better way of doing things but whether what the plaintiff did was reasonable. 57 Bronson & Jacobs was placed in a difficult position as a consequence of the Defendants' conduct. It lost key personnel who had established relations with customers. The Distributorship Agreement with Clos was terminated with little warning. In response to these events Bronson & Jacobs gave to Ms Dalziel the task of finding alternative suppliers. Ms Dalziel had been engaged by Bronson & Jacobs in December 2004 as the Product Manager – Essential Oils and Aromatic Chemicals. She did not have experience of the essential oils business at that time. However, Mr Clark had worked as a consultant for Bronson & Jacobs since 2000 following the acquisition by Bronson & Jacobs of the fragrance manufacturing part of Quest International's business (where Mr Clark had worked for approximately 37 years). He had extensive experience in the industry and was available to assist Ms Dalziel. Ms Dalziel gave evidence and she struck me as a competent and intelligent person. 58 Ms Dalziel gave evidence of the extensive steps she took to find alternative suppliers. She put in place a committee to assist her. She searched for suppliers of alternative products, prepared samples of Clos's products to send to those suppliers and asked them to prepare samples of substitute products to those supplied by Clos. She then evaluated those samples and and sought to convince customers that they were appropriate substitutes. Mr McCartney, Mr Love and Mr Clark were critical of this process. Mr McCartney said that it was a "rather enormous exercise" that it was unnecessary to carry out. Mr Clark says that it is not what he would have done, although he did not say that to Ms Dalziel at the time. In addition, he conceded in cross-examination that he thought that her actions were reasonable. 59 It may be that someone with the experience of Mr McCartney's would have approached the task confronting Ms Dalziel differently. Whether that would have made any difference is far from clear. Clos undoubtedly had a good reputation and produced products of a high quality. Many of Bronson & Jacobs' customers were used to those products. It is one thing to say that they would have accepted a substitute if Clos's products had become unavailable. It is another thing to say that they could have been persuaded to accept an alternative when they could acquire the product that they were used to from people with whom they were used to dealing simply be swapping suppliers. In any event, the question is not whether Bronson & Jacobs could have done a better job than it did to keep the customers it had in the difficult circumstances it found itself in. Rather, the question is whether it took reasonable steps to keep those customers. In my opinion it did. 60 It follows from what I have said that Bronson & Jacobs' damages should, subject to any correction of arithmetical errors, be assessed as $860,678 less 20% of that amount (that is, after rounding to the nearest dollar, $688,542) plus $1,246,718 less 30% of that amount (that is, $872,703, again after rounding to the nearest dollar) plus interest on the total of those two amounts (that is, $1,561,245) at court rates from 10 March 2005 to today's date. That interest is $743,452.04, making a total of $2,304,697.04. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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