Second issue: the "IAMS" scenarios
22IAMS is a corporation that is part of the multinational Proctor and Gamble Group. It carries on, worldwide, the business of manufacture and supply of what it calls "super-premium" pet foods.
23In 2003 and 2004, IAMS was interested in carrying on business in Australia. It conducted extensive discussions with BestCare. On any view, there were extensive consultations between officers of IAMS and of BestCare, and substantial offers of assistance from IAMS to BestCare, to enable BestCare to manufacture product to IAMS' specifications.
24A contract (the IAMS contract) for the supply of pet food products was made on 28 May 2004 between BestCare and IAMS, after BestCare had relocated its business to Dubbo. That contract had a duration of four years. It provided for five optional cumulative yearly extensions. Under the contract, IAMS estimated that it would require a quantity of fourteen thousand tonnes of products per year. (There is some confusion, or lack of specificity, in the evidence between metric tonnes and American tons. For convenience, although perhaps from time to time inaccurately, I will use the metric usage throughout these reasons.) However, there was no minimum, or "take or pay", purchase obligation.
25The IAMS contract provided, in effect, that each sale of products under it would constitute a separate contract, evidenced by purchase order and invoice, and incorporating the terms of the IAMS contract.
26It was clear that IAMS might take more than 14,000 tonnes of products from BestCare in any year. Obviously, BestCare hoped that it would. The contract that was made was an "open book" cost plus contract. Under that contract, BestCare was entitled to receive an agreed margin on the cost of production; and IAMS was entitled to have full access to BestCare's records to satisfy itself as to the costs of production. Thus, the relationship was inherently profitable for BestCare, and the dollar (although not necessarily percentage) value of the business would increase with increasing production. In fact, if production volumes increased, there might be efficiencies or amortisations of overheads that would increase the profitability to BestCare in any event.
27IAMS did not proceed with the contract. The referee found that this was a result of the supervening administration of BestCare. In my view, the referee's finding on that point was soundly based; and in any event, being an available factual conclusion based on a comprehensive review of the evidence, is one that should stand. Further, the referee found, the explosion and fire were either the or a cause of the administration, in the sense that they were a necessary condition to the occurrence of the administration. (I have expressed this in terms of s 5D of the Civil Liability Act 2002; the referee used the language of the common law. Nothing turns on the difference.) Again, in my view, the referee's finding was soundly based on the evidence; and again, in any event, being an available finding of fact, it is one that should stand.
28The experts retained by BestCare for the purposes of the reference assessed damages on the basis of two alternative assumptions as to the quantities of products that BestCare would manufacture and sell to IAMS. Those scenarios were known as "IAMS 1" and "IAMS 2". The quantities projected did not include such quantities as might be taken by other purchasers (including Nestlé, Doane, and Safcol).
29IAMS 1 and IAMS 2 were alternative projections that the relevant experts were asked to assume, for the purpose of calculating loss of profit, of the quantities that might be sold and delivered under the IAMS contract. They were not, as the referee appeared to suggest at some points, separate and cumulative contracts, or possible contracts, that BestCare had made or might make.
30The referee concluded that it was appropriate for loss to be assessed on the IAMS 2 scenario. He did so because he was satisfied that:
"All of the evidence about IAMS' approach to the contract, in which I include that trial products had proved successful, satisfies me that, in all probability, the IAMS 2 contract (sic) would have gone ahead, but for the explosion" (R549).
31Further, the referee concluded:
"... I am satisfied that in so far as the experts worked on assumptions to be proved by the evidence of Messrs Strobl and Goldring, those assumptions have been established" (R905).
32Messrs Goldring and Strobl were executive directors of BestCare, who between them effectively had responsibility for the conduct of its business. In particular, Mr Goldring was the point of contact with IAMS. The referee formed a favourable view of the credibility of each of those gentleman.
Assessment of the value of a lost opportunity
33As will be seen from what I have said, the question, in relation to future profits, was one of the assessment of the value of what the referee concluded was the opportunity to make profits in the future that had been lost by reason of what (as is now established by the conclusions of Nicholas J) was the breach of contract and negligence of Origin. The referee was thus required to consider, necessarily by hypothesis, what was likely to have happened but for the explosion, the fire and the consequent (as the referee found it was) administration of BestCare.
34That task requires a consideration of the principles discussed in Malec v J C Hutton Pty Limited (1990) 169 CLR 638 and subsequent cases.
35Mr Malec was a labourer employed by the defendant, Hutton, in its meatworks. He contracted brucellosis in the course of his employment, and as a result of Hutton's negligence. The brucellosis in turn led to a neurotic condition, the effect of which was to make Mr Malec permanently unemployable. He was thus, at least prima facie, entitled to be compensated for loss of earning capacity over the remainder of his working life. However, he suffered from an unrelated degenerative condition of the lumbar and cervical regions of his spine, which might also have led to a neurotic condition rendering him unemployable.
36In the High Court, the majority (Deane, Gaudron and McHugh JJ) stated, at 640, that the issue for decision was the assessment of damage caused to Mr Malec by Hutton's tortious conduct, in the light of a finding "that it is more likely than not that the damage would have occurred in any event as the result of conditions or events for which the defendant is not legally responsible".
37At 642-643, Deane, Gaudron and McHugh JJ discussed the principles governing the assessment of damages for future or potential events. Their Honours drew a distinction between events that had occurred and events that were to, or might, occur. As to the former, they said, the question was whether, on the balance of probabilities, the event had occurred. Thus, if the court is satisfied that the probability of occurrence is greater than the probability of non-occurrence, it decides that the event did occur; and conversely, if the probability of non-occurrence is greater than the probability of occurrence, it decides that the event did not occur.
38However, as to the future, their Honours noted that a different approach had to be taken. They said that the court is required to assess the degree of probability of occurrence of the event, and to reflect that degree of probability in the award of damages. Their Honours accepted that there were limiting cases where the probabilities were so high as to be certain (over 99%) or so low as to be speculative (below 1%). I set out the relevant passage of their Honours' reasons:
When liability has been established and a common law court has to assess damages, its approach to events that allegedly would have occurred, but cannot now occur, or that allegedly might occur, is different from its approach to events which allegedly have occurred. A common law court determines on the balance of probabilities whether an event has occurred. If the probability of the event having occurred is greater than it not having occurred, the occurrence of the event is treated as certain; if the probability of it having occurred is less than it not having occurred, it is treated as not having occurred. Hence, in respect of events which have or have not occurred, damages are assessed on an all or nothing approach. But in the case of an event which it is alleged would or would not have occurred, or might or might not yet occur, the approach of the court is different. The future may be predicted and the hypothetical may be conjectured. But questions as to the future or hypothetical effect of physical injury or degeneration are not commonly susceptible of scientific demonstration or proof. If the law is to take account of future or hypothetical events in assessing damages, it can only do so in terms of the degree of probability of those events occurring. The probability may be very high - 99.9 per cent - or very low - 0.1 per cent. But unless the chance is so low as to be regarded as speculative - say less than I per cent - or so high as to be practically certain - say over 99 per cent - the court will take that chance into account in assessing the damages. Where proof is necessarily unattainable, it would be unfair to treat as certain a prediction which has a 51 per cent probability of occurring, but to ignore altogether a prediction which has a 49 per cent probability of occurring. Thus, the court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect the degree of probability. The adjustment may increase or decrease the amount of damages otherwise to be awarded. See Mallett v. McMonagle (9); Davies v.Taylor (10); McIntosh v. Williams (11). The approach is the same whether it is alleged that the event would have occurred before or might occur after the assessment of damages takes place.
39Brennan and Dawson JJ, in a joint judgment, agreed with the reasons of Deane, Gaudron and McHugh JJ "subject to some brief observations" (see at 639). Their Honours drew an analogy between hypothetical past situations and future possibilities (again at 639):
... in one case the court must form an estimate of the likelihood that the hypothetical situation would have occurred, in the other the court must form an estimate of the likelihood that the possibility will occur.
40As their Honours said at 639 - 640, those situations were to be distinguished from events said to have been actually occurred. As to this, they quoted from the speech of Lord Diplock in Mallett v McMonagle [1970] AC 166 at 176:
The role of the court in making an assessment of damages
which depends upon its view as to what will be and what
would have been is to be contrasted with its ordinary function
in civil actions of determining what was. In determining what
did happen in the past a court decides on the balance of
probabilities. Anything that is more probable than not it treats
as certain. But in assessing damages which depend upon its
view as to what will happen in the future or would have
happened in the future if something had not happened in the
past, the court must make an estimate as to what are the
chances that a particular thing will or would have happened
and reflect those chances, whether they are more or less than
even, in the amount of damages which it awards.
41In Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, the plurality (Mason CJ, Dawson, Toohey and Gaudron JJ) said at 350 that the approach taken in Malec (their Honours had referred to the passage in the reasons of Deane, Gaudron and McHugh JJ that I have set out at [38] above) were not confined to the assessment of damages for personal injury. They said that, on the contrary, that the approach applies with equal force to the assessment of damages for loss of a commercial opportunity.
42After a detailed review of the authorities, the plurality stated the principles relating to loss of opportunity. Their Honours said at 355 that, once some loss of damage was shown, the value of the loss of opportunity was to be ascertained by reference to the probability of its occurrence. Their Honours emphasised that it was inappropriate to say that if the opportunity was not proved on the balance of probabilities then it should be regarded as valueless. I set out the relevant passage of their Honour's reasons:
... 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 some value (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.
43In the same case, Brennan J (who agreed that the appeal should be dismissed, but gave separate reasons) noted at 364 (in a passage cited with approval by Gummow ACJ in Tabet v Gett (2010) 240 CLR 537 at [34]) that a commercial opportunity may be valuable both because it may produce a financial return and because of the prospect of the substance of that return. I set out the relevant paragraph of his Honour's reasons:
As a matter of common experience, opportunities to acquire commercial benefits are frequently valuable in themselves, not only when they will probably fructify in a financial return but also when they offer a substantial prospect of a financial return. The volatility of the market for speculative shares testifies to both the valuable character of commercial opportunities and the difficulty of assessing the value of opportunities which are subject to serious contingencies. Provided an opportunity offers a substantial, and not merely speculative, prospect of acquiring a benefit that the plaintiff sought to acquire or of avoiding a detriment that the plaintiff sought to avoid, the opportunity can be held to be valuable.
44In my respectful opinion, although his Honour was speaking in the context of s 82(1) of the Trade Practices Act 1974 (Cth), his Honour's observations are of more general application.
45Nonetheless, as Brennan J pointed out at 364 and again at 367 (in a passage to which Kiefel J referred, apparently with approval, in Tabet at [136]), there is nonetheless a need to prove:
... a causal relationship between the loss of such an opportunity and the defendant's contravening or tortious conduct... before any issue of assessment of the amount of the loss arises.
...
Although the loss of a valuable opportunity and the assessment of its amount are concepts that can be logically separated, in practice it will usually be the same body of evidence that tends to establish both the existence of a loss and the amount to be recovered. That evidence may establish the loss of a valuable opportunity more clearly than the value of the opportunity lost. The court approaches the determination of these issues in different ways... .
46Returning to the reasons of Deane, Gaudron and McHugh JJ in Malec at 643, what is required to be proved is the existence and loss of an opportunity that is more than speculative. But it is not necessary to prove that, more probably than not, the opportunity would have arisen for exploitation. On the contrary, once it is concluded that the existence of the opportunity is shown to have been more than merely speculative, the probability of its occurrence is reflected in the assessment of the value of what has been lost.
47As Gummow ACJ pointed out in Tabet at [48], where breach of contract is shown the plaintiff is normally entitled at least to nominal damages for loss of the contractual benefit: the opportunity to profit from performance of the defendant's broken obligation. However, as his Honour said at [50], in other cases where damage is the gist of the action, some compensable loss or damage must be proved, as a question of causation, before any question of assessment arises.
48Kiefel J dealt with the same question in Tabet at, among other places, [135] and following. I set out what her Honour said at [135] to [137]:
[135] It is important to bear in mind, in connection with this aspect of the appellant's argument, the distinction between the loss or damage necessary to found an action in negligence, which is the injury itself and its foreseeable consequences, and damages, which are awarded as compensation for each item or aspect of the injury (215).
[136] Different standards apply to proof of damage from those that are involved in the assessment of damages. Sellars v Adelaide Petroleum NL confirms that the general standard of proof is to be maintained with respect to the issue of causation and whether the plaintiff has suffered loss or damage (216). In relation to the assessment of damages, as was said in Malec v J C Hutton Pty Ltd, "the hypothetical may be conjectured" (217). The court may adjust its award to reflect the degree of probability of a loss eventuating. This follows from the requirement that the courts must do the best they can in estimating damages; mere difficulty in that regard is not permitted to render an award uncertain or impossible (218).
[137] Thus in the case of the loss of a commercial opportunity, the plaintiff must first establish the fact of the loss, for example by reference to the fact that it had a commercial interest of value which is no longer available to be pursued because of the defendant's negligence. The damages assessed of that loss, the estimation of its value, reflect the chance, often expressed in a percentage, that the opportunity would have been pursued to a successful outcome. The award is proportionate in that sense.
49It is apparent that, if damage is not the gist of the action, or if at least nominal damage follows from the defendant's breach, then loss of opportunity, as an element of causation, ceases to remain relevant. The focus turns to assessment of damages.
50Allsop P (with whom Beazley JA agreed) dealt with this question in Silverbrook Research Pty Ltd v Lindley [2010] NSWCA 357 at [2] and following. His Honour said at [2] that damages for loss of an opportunity will be recoverable in contract where the contract as a whole or its particular provisions promise an opportunity of benefit. Further, his Honour said, such damages will be recoverable where a commercial opportunity is lost, within the rules of remoteness, as the consequence of a breach of contract. In those circumstances, his Honour said:
The task is to identify and characterise what, in substance was promised and what has been lost or denied by the breach of contract.
51In that case, the plaintiff claimed to have lost a bonus which was expressed to be payable "entirely within the discretion of" his employer. As Allsop P said at [5], the task was thus to assess both the prospect that the bonus would have been paid, and the amount likely to have been paid. That in turn focused attention on (at least) the nature of the discretion, the purposes of the contract intended to be served by the promise of a bonus, and the question of whether the discretion could be exercised capriciously or arbitrarily or unreasonably.
The referee's reasons
52The referee concluded that it was more likely than not that BestCare would have achieved sales to IAMS at the level projected in the IAMS 2 scenario. Having done so, he proceeded to assess the net present value of those sales, and then to discount the valuation to reflect the possibility that sales at that level might not have been achieved. At R908 of his report, the referee referred to a number of decisions including Malec, Sellars, his own decision (when a judge of this Court) in Hungry Jack's v Burger King [1999] NSWSC 112 and the Court of Appeal's decision in the same case [2001] NSWCA 187. The referee quoted from [606] of his reasons in Hungry Jack's.
In the present case I consider that the probability is that HJPL would have continued to develop restaurants, but for the breach by BKC. However, I cannot be 'practically certain', to the extent of 99%, that such development would have proceeded over each of the five years, at the rate of 17 restaurants per year. Therefore, I must take the chance that it would not have into account. The fact that I am satisfied, on the balance of probabilities, that HJPL would have proceeded to develop restaurants, does not entitle it, as a matter of law, to all the damages it claims on the hypothesis that it would have developed 17 restaurants each year, because I must assess that there was a risk that that might not have happened, such adjustment reflecting the chance that factors unconnected with the breach might have precluded its happening".
53The referee's assessment of damages included past items, as to which the "Malec" approach did not apply. But that approach did apply, as he recognised, to the claim for loss of the opportunity to make future profits. The referee was satisfied that, "in all probability", sales would have been achieved at the IAMS 2 level. However, his reasons for achieving that state of satisfaction were confined, at least expressly, to the last sentence of R549, which I have set out at [30] above. It may be, however, that the referee intended those reasons to be supplemented by what he had said at R905, as set out at [31] above.
54Although the express reasoning of the referee, as to sales at the IAMS 2 level, was confined in the manner set out in the previous paragraph, it is clear from a reading of the whole of the report that the finding must be read in the context of the referee's detailed discussion of the evidence which preceded it. It is clear that the referee paid close attention to the evidence of the relevant witnesses. Those witnesses included (although they were not limited to) Messrs Goldring, Strobl and Morkunas. I have mentioned the role of Messrs Goldring and Strobl.
55Mr Morkunas was an expert in the pet food industry called by Origin. It is clear that the referee thought that his evidence, to the extent that it was admitted, provided support for BestCare's case. In particular, it is clear that the referee thought that the evidence of Mr Morkunas provided support for the conclusion that, under the control of Messrs Goldring and Strobl, and but for the explosion and fire, the business of BestCare would have grown and expanded, as did the business of a company controlled by Mr Morkunas (which was ultimately sold for about $95 million).
56In short, I think, the referee's reasoning was to the effect that, based on his detailed review and analysis of, and conclusions drawn from, the evidence of (in particular) the three witnesses to whom I have referred, the last sentence of R549 followed as a matter of inference and conclusion.
The parties' submissions
57The essential issue disputed between the parties was whether there was evidence on the basis of which the referee could have reached the degree of satisfaction stated at R549.
58Mr Walker (who by agreement between counsel addressed first, and thus in reply) submitted that there was simply no evidence to support the referee's conclusion, at R549, "that, in all probability the IAMS 2 contract would have gone ahead, but for the explosion".
59Mr Walker submitted that the "evidence" as to sales at the IAMS 2 level of production was evidence of calculation or assessment based on assumptions that such a level of sales would be achieved. Equally, he submitted, the "evidence" as to sales at the IAMS 1 level was similarly limited.
60Mr Walker noted that no one called for BestCare had expressed the opinion that it might achieve sales at the IAMS 2 (or, for that matter, IAMS 1) level. Nor, he noted, had anyone been called from IAMS to give such evidence. In those circumstances, he submitted, the best evidence of the lost opportunity was the way in which it had been characterised in various internal documents of BestCare, and in the largely unchallenged evidence as to how IAMS had in fact acted following the administration of BestCare.
61As to the former: Mr Walker pointed to various documents in which BestCare (in particular, through Messrs Goldring and Strobl) had projected sales, and produced financial budgets or forecasts. In none of those were sales projected at the IAMS 2 level. As to the latter: Mr Walker pointed to the fact that after extremely detailed investigations and negotiations, the only contract that IAMS was prepared to enter into was the one in which there was no stipulation as to quantity, and merely an estimate that 14,000 tonnes per annum might be taken.
62Mr Walker pointed to records of BestCare which, he submitted, identified the real commercial value of the IAMS contract as being not so much the level of production (or prospects of a level of production anywhere near the IAMS 2 quantities) but, rather, the security of what was viewed as a "nine year contract" with a major participant in the pet food industry.
63Mr Walker dealt further, and at length, with the evidence of various witnesses on whom BestCare relied to support its case as to the strength and value of the relationship with IAMS.
64Mr Williams referred, with some degree of hyperbole, to what he characterised variously as a "wealth" or a "mountain" of evidence available to support the referee's finding. That evidence included:
(1) the extent and detail of the negotiations between BestCare and IAMS;
(2) as part of those negotiations, the extensive investigations that IAMS carried out of BestCare's production facilities and methods;
(3) the very substantial technical help provided by IAMS to BestCare;
(4) the very valuable concessions and promises undoubtedly made by IAMS to BestCare: for example, that IAMS would sell plant and equipment to BestCare at 30% of its written down value; and that IAMS would bear the costs of raw materials used in the manufacture of products for it, so that BestCare would not have a financing cost in respect of those raw materials;
(5) the undoubted expertise of the relevant executives of BestCare, in particular Mr Goldring;
(6) the fact (apparently, clearly demonstrated) that IAMS held Mr Goldring in particular in very high regard; and
(7) what he characterised as significant concessions made by witnesses called for Origin that support the case for BestCare.
65In addition, Mr Williams relied on two specific pieces of evidence. One was an offer apparently made by a Mr Rutemiller of IAMS to say, if it would help BestCare in its application for finance, that IAMS would take up to 80,000 tonnes of products per annum.
66The other was a request made by IAMS, after BestCare went into administration, of a company known as VIP Petfoods (VIP) to quote for the supply of products. At that stage Mr Goldring was retained as a consultant to VIP. Mr Williams submitted that this demonstrated, among other things, the esteem in which IAMS held Mr Goldring. Be that as it may, the significance of the quotation, on Mr Williams' analysis, was that VIP was requested to quote to supply on two alternative bases:
(1) "Bid A": at the rate of about 17,000 tonnes per annum; and
(2) "Bid B": at the rate of 40,000 tonnes per annum, increasing to 80,000 tonnes per annum.
67VIP provided the requested quotations. In a later email from IAMS (or Proctor and Gamble) to VIP, IAMS specified three phases of production, at 44,500, 60,900 and 79,700 tonnes per annum.
68That material showed, Mr Williams submitted, that IAMS was interested in taking products for sale in Australia and Asia at up to the rates specified.
Decision
69For the reasons that I have given, and putting aside for the moment that what I am concerned with is the question of adoption of a referee's report, the starting point of the analysis should be whether it has been shown that the breach of contract and negligence of Origin caused BestCare to lose an opportunity of commercial value. If that question of causation is answered in favour of BestCare, the second stage of the inquiry is to value the opportunity that is lost. If I may say so with respect, I think that the submissions of counsel did not focus with sufficient clarity on the two stages of the inquiry. In particular, they did not focus on the task identified by Allsop P in Silverbrook Research, of identifying with precision what it was that was lost or denied by the wrongful conduct of Origin.
70There is no doubt that BestCare had a commercial opportunity of value available to it. That opportunity was the opportunity represented by the IAMS contract: to sell pet food to IAMS on a profitable basis. True it is that IAMS was not obliged to take any particular quantity of pet food in any given year. But it can hardly be thought that IAMS would have engaged in the very detailed process of negotiation, cooperation and what the referee characterised as "due diligence", simply to make a contract that had no commercial purpose.
71I shall not recount the referee's findings as to the extent and detail of the pre-contractual dealings between BestCare and IAMS; let alone the underlying evidence, to part of which I was referred, that provides more than ample support for those findings. It is clear that IAMS contracted with BestCare because it wanted to become established in the pet food market in Australia. It did so in a way that would allow for the possibility of growth, by entering into a contract under which there were neither minimum nor maximum requirements for the sale and delivery of products, but under which it could order on an as "needs" basis.
72It is equally clear, on the referee's findings, that the benefit of that contract was lost to BestCare because it went into administration; and that the or a cause of the administration, in the relevant legal sense, was the explosion and fire caused by the breach of contract and negligence of Origin.
73Thus, the question of causation is satisfied.
74I should mention that I do not think that this was in dispute. I have dealt with it simply because it is necessary, as a matter of correct analysis, to resolve the question of causation before turning to the question of loss; and identification of the value of the loss will depend on showing what it was that was lost. What was lost was the opportunity to derive the benefits that were available (although not assured, for the reasons I have indicated) to BestCare under the IAMS contract.
75It is at this point that identification of the lost opportunity becomes important. Mr Walker identified it as the loss of the opportunity to sell 80,000 tonnes per annum. Mr Williams did not deal with the point explicitly, but appeared to agree with that characterisation. If he did not agree, he did not put any alternative characterisation. However, in my view, that is not the correct characterisation of the opportunity that was lost.
76BestCare lost the opportunity to receive and fulfil orders from IAMS, and to profit from those orders, under the IAMS contract. The question of valuation of the loss of that opportunity thus depends, necessarily, on assumptions as to what the volume of those orders might have been. The contract was not one for the sale of 80,000 tonnes (or any other tonnage) per annum. The lost opportunity was therefore not loss of an opportunity to sell either at 80,000 tonnes per annum or, more generally, at the IAMS 2 levels. To that extent, I disagree with the referee's analysis.
77However, that does mean that the IAMS 2 scenario therefore becomes irrelevant to the assessment of loss.
78Once it is established that BestCare lost the opportunity to benefit from the performance of the IAMS contract, the question becomes one of assessment of the value of that lost opportunity. Clearly enough, that assessment can only be made by projecting profitability at various assumed levels of annual production over the assumed life of the contract. As to the latter: the initial term of the contract was four years. It provided for five optional accumulative one year extensions. It is thus necessary to make some assumption as to whether any, or all, of those optional extensions would have been taken up.
79It is in the context of the former set of assumptions - as to levels of annual production - that, in my view, the IAMS 1 and IAMS 2 scenarios are relevant. Each provides a guide to the measure of loss on the assumption that production at the levels postulated by it would have been achieved. It is thus a legitimate method of analysis to take one of those scenarios, assess the loss flowing on the assumption that the tonnages postulated by it would have been achieved, and then to ask, in effect: "what was the prospect that quantities of that magnitude would in fact have been sold and delivered?"
80In my view, this is precisely what, in substance, the referee did. As a matter of commonsense or pragmatic analysis, it could be said that the referee assessed the value of the lost opportunity on the basis that, over the expected life of the contract (and I shall return to this), production was likely to have been achieved at about 60% of the IAMS 2 levels. That is not an exact way of analysing what the referee did, because his allowance for vicissitudes necessarily encompasses not only levels of production but also the likely duration of the contract (specifically, how many of the extensions might have been taken up) and other possible supervening events that would have impacted on the rate and total, and hence value, of production over the life of the contract.
81To put it slightly differently: it would have been open to the referee, based on the material before him, to reach a conclusion as to the likely duration of the contract (perhaps nine years in all); and to reach a conclusion as to the average annual rate of sales under that contract (X tonnes per annum). Having done so, and using the information provided by the experts, the referee could have reached a conclusion as to the likely value of those sales, discounted back to the agreed starting point. Once that was done, it would have been open to the referee, again based on all the relevant material, to reach a conclusion as to the appropriate allowance for other vicissitudes.
82The referee's analysis did not include all those steps. Perhaps it did not do so because the parties did not identify the task with the degree of precision, particularly in relation to the two-stage process of determination of causation and identification of the opportunity lost thereby, which in my view is necessary. But the fact that the referee compressed the process (as, apparently, did the parties) does not seem to me to be a reason for rejecting his conclusions, if the basic methodology is justifiable, according to applicable principles, on the facts proved before the referee. In my view, as a matter of methodology or principle, what the referee did is justifiable.
83That turns attention to the detail. Was it open to the referee to conclude, as he did, that the loss of opportunity should be valued, in effect, at 60% of the net present value of sales at the IAMS 2 level? In essence, that is a question of fact which must be answered on a review of all the material. The referee had the advantage (and, I would add, burden) of hearing and considering all the evidence on this point. He was not, as was I, merely referred to snippets selected by each party for the purpose of advancing its case on adoption, variation or rejection of the report. Unless it can be shown that the referee could not have reached the conclusion that he did on all the material that he had, the court ought adopt his conclusion.
84It is in this context that, I think, the attack on the referee's reasoning and conclusions suffers from a failure to confront precisely what it was that the referee was required to do. He was not required to be satisfied that the opportunity was one of the loss of the benefit of a contract under which it was more likely than not that BestCare would have sold to IAMS at the IAMS 2 tonnages. He was required to consider.
(1) whether BestCare had a valuable opportunity available to it under the IAMS contract (undoubtedly, it did);
(2) whether it lost that opportunity because of Origin's breach of contract or negligence (on the findings of Nicholas J, it did);
(3) whether, thereby, it suffered loss (undoubtedly, it did); and
(4) what was the amount of that loss.
85For the reasons that I have sought to demonstrate, it is only at the last stage of this process that the assumption of a level of production becomes relevant. At the risk of repetition; it is not necessary to make that assumption at the stage of causation.
86The referee heard all the evidence relating to the commercial relationship between BestCare and IAMS. He heard from, and clearly was impressed by, Messrs Goldring and Strobl. He was given, and no doubt considered closely, the relevant documentation. He knew that IAMS had expressed interest in receiving quotations for supplies of products at various annual tonnages. It was up to him to consider whether, in the light of all the evidence, an analysis based on supply at the IAMS 2 levels, but discounted for vicissitudes, was appropriate.
87Taking into account the guidelines that are relevant to (although they do not limit or control) the exercise of the discretions given by UCPR r 20.24, and taking into account all the matters that I have just mentioned, I think that the Court should adopt the referee's conclusions on this aspect of BestCare's claim for damages.
88Before I move to the next issue, I should mention three matters.
89The first is that the referee was not confined to the IAMS 2 scenario. He was also presented with the IAMS 1 scenario, and with the detailed analysis and reasoning of the experts based on that, as an alternative to IAMS 2. It would have been open to the referee, had he thought that the prospects of BestCare's achieving sales at the IAMS 2 level were so remote as to be speculative, to turn instead to the IAMS 1 scenario.
90Equally, for that matter, it would have been open to the referee, had he thought that the prospects of BestCare's achieving sales at either the IAMS 2 or the IAMS 1 level were so remote as to be speculative, to consider sales at the estimated level referred to in the IAMS contract (14,000 tonnes per annum) for the minimum life of that contract (four years), or for some longer period, allowing for one or more extensions.
91I mention those matters to emphasise the point that, in my view, the various figures that were in evidence before the referee provided alternative quantitative materials bearing on the amount of damages, on which the referee was entitled to draw for the purpose of making his assessment. It was a question for him, based on the whole of the evidence, as to whether any of those alternatives provided an appropriate basis for the process of assessment. He concluded that the IAMS 2 scenario did. It does not follow, in my view, that it was necessary for him to find that it was more likely than not that BestCare would have achieved sales at the IAMS 2 level. But having so found, it was appropriate for the referee to assess damages on that basis, by making an allowance for the degree of probability inherent in that finding. This, in substance, he did.
92The second matter is that, as issue 2 is expressed, and as at least the written submissions for Origin were framed, the argument that was put was that the referee had misled himself by considering IAMS 1 and IAMS 2 as alternative contracts, rather than as possible "scenarios" for production (ie, sale and delivery) under the IAMS contract.
93It is correct to say, and I have adverted to this already, that there is from time to time some degree of confusion in the way that the referee referred to the IAMS 1 and 2 scenarios. But it is clear that, when the referee came to carry out his analysis of loss, he did so on the basis that it was a loss of the opportunities under the IAMS contract, which he assessed by reference to his estimate of the probabilities that production at the IAMS 2 levels would have been achieved. In short, whatever confusion of language there may have been from time to time in the report, that confusion is not reflected in any underlying error of reasoning.
94The third matter to be mentioned is that there was, before the referee, a significant debate as to whether BestCare could have raised the funds to gear up (including, by refitting and extending its production facilities) to cope with production at the IAMS 1 and IAMS 2 levels. The referee concluded that it could. There was ample material in the evidence for him so to conclude. This aspect of the attack was not pressed before me, as part of the submissions on issue 2.