Gordon & Gotch Australia Pty Limtied v Horwitz Publications Pty Limited [2007] NSWSC 960 | Case summary

Gordon & Gotch Australia Pty Limtied v Horwitz Publications Pty Limited [2007] NSWSC 960 | Case summary | Zoe

50108/07 GORDON & GOTCH AUSTRALIA PTY LIMITED v HORWITZ PUBLICATIONS PTY LIMITED JUDGMENT 1 The plaintiff, Gordon & Gotch Australia Pty Limited, distributed magazines (the Publications) for a number of years on behalf of the defendant, Horwitz Publications Pty Limited, to newsagents, supermarket proprietors, convenience stores and sub-agents (the Outlets). An agreement dated 1 April 2002 (the Agreement) between the plaintiff, as "the Distributor", and the defendant, as "the Company" provided, inter alia, that the plaintiff was entitled to deduct from the total purchase price of the Publications payable to the defendant, an amount in respect of Publications that had not been sold by the Outlets (cl 7.2(a), Sch 1 cl 3(ii)). 2 The parties fell into dispute in relation to the basis upon which the plaintiff was entitled to deduct that amount and, pursuant to the Agreement (cl 14), they referred their dispute to arbitration before the Honourable MJ Clarke QC (the Arbitrator). The plaintiff claimed that it was entitled to make the deduction on the basis of the number of Publications the Outlets claimed were unsold without verifying the accuracy of the claim by counting the Publications that had been returned to it by the Outlets. The defendant claimed that the plaintiff was only entitled to make the deduction on the basis of the actual number of the unsold Publications returned to it by the Outlets, requiring the plaintiff to count the returned Publications. Background 3 At the time the Agreement was entered into the plaintiff received the Publications for sale from the defendant and distributed them to approximately 5,600 Outlets which then offered the Publications for sale for a particular period. On a date determined by the defendant, defined in the Agreement as the "Recall Date", the plaintiff was required to issue a "returns notice" to the Outlets for return to it of particular unsold Publications. The Outlets, also referred to in the Agreement as the "Designated Purchasers", then recorded the number of unsold copies of each Publication it was returning to the plaintiff in a "completed form" which they sent, together with all unsold copies of the Publications, to the plaintiff's warehouse in Albury, in south west New South Wales. The plaintiff then physically counted those returned Publications using its scanning/barcode counting machine and reconciled that figure with the figure given by the Outlet in the completed form. 4 There were exceptions to this practice. Outlets in Western Australia, Northern Territory, Tasmania, remote areas and supermarkets were not required to return the copies of the unsold Publications to Albury for counting (the excluded group). 5 In October 2003 the plaintiff changed its system, apparently because of the excessive costs expended and time taken in the counting of the returned Publications. From October 2003 Outlets, except the excluded group, furnished a returns form recording the number of unsold Publications to the plaintiff's premises at French's Forest in Sydney. These Outlets still returned the unsold Publications to Albury, however the plaintiff did not scan or count them but instead instituted a random audit system. When the defendant became aware of the change in the plaintiff's system it complained that the data relating to returns was increasingly inaccurate. The defendant also had access to the plaintiff's audit process and after a review of it concluded that it was not sufficiently robust to rely upon the accuracy of the return forms submitted by the Outlets. The Awards 6 The Arbitrator delivered four Awards; the First Interim Award on 10 May 2005 relating to the construction of the Agreement and the basis upon which the plaintiff was entitled to deduct the amount for returned Publications from the purchase price; the Second Interim Award on 1 November 2006 assessing damages; a Further Interim Award on 3 May 2007 relating to the question of interest; and the Final Award on 4 July 2007. The Arbitrator ordered that the plaintiff pay to the defendant $832,390.27 together with interest calculated to 22 June 2007 in the amount of $203,363. Relief sought 7 The plaintiff seeks an order pursuant to section 38(4)(b) of the Commercial Arbitration Act 1984 (the Act) that it be granted leave to appeal from the Interim Awards dated 10 May 2005 and 1 November 2006 and the Final Award dated 4 July 2007. The plaintiff also seeks orders pursuant to s 38(3) or s 42 of the Act that the Interim Awards dated 10 May 2005 and 1 November 2006 and the Final Award of 4 June 2007 be set aside. Finally the plaintiff seeks an order pursuant to s 44 of the Act that the Arbitrator be removed. 8 The matter was heard on 30 and 31 July 2007 when Mr FM Douglas QC leading Mr MM Macrossan and Mr DC Price appeared for the plaintiff and Mr NC Cotman SC appeared for the defendant. Leave to appeal 9 Section 38 of the Act provides relevantly: (2) Subject to subsection (4), an appeal shall lie to the Supreme Court on any question of law arising out of an award.

7.1 (a) The Company shall from time to time establish Recommended Retail Prices for the Publications and shall notify the Distributor of those prices. (b) Unless agreed in writing between the Company and the Distributor, the Distributor must purchase the Publications in accordance with the terms specified in Schedule 1 of this Agreement. (c) The Company will retain control of the number of copies of each Publication to be distributed by the Distributor. The Company must consult with the Distributor on the number of copies of each Publication required by the Company. (d) The parties acknowledge that the Publications are provided by the Company to the Distributor on a sale or return basis, and the Distributor will purchase copies of a Publication in accordance with clause 3(iv) of Schedule 1. Notwithstanding any pre-payment or part payment of an invoice by the Distributor to the Company, title in copies of a Publication will not pass from the Company to the Distributor until they are purchased by the Distributor in accordance with clause 3(iv) of Schedule 1. The Company acknowledges that during the period that copies of the Publications are in the possession of Outlets risk will be with the Outlet and the Distributor will have no liability in respect of any loss or damage to the Publications whilst they are in the possession of an Outlet. (e) The Distributor must pay the Company for each issue of each Publication in accordance with the terms specified in Schedule 1. (i) Unless otherwise instructed by the Company, Re-issue Publications shall be re-issued by the Distributor on or about the first anniversary of the initial issue. (ii) Copies of Re-issue Publications intended for re-issue shall at the discretion and cost of the Company remain in the care and at the risk of the Distributor until re-issued. (iii) In respect of each Re-issue Publication, the Distributor must either destroy or return to the Company those copies in excess of the number of copies prescribed for re-issue. If the Distributor elects to destroy those excess copies, it must provide to the Company reasonable evidence that it has done so. Those excess copies will be deemed returned to the Company when that evidence of their destruction is provided to the Company.

24 Clause 7.2(b) required the plaintiff to "undergo ongoing spot checking of returns in line with its normal procedures". The plaintiff submitted that if there were a necessity to count the returned Publications there would be no need for "spot checking". I disagree. This clause deals with something different. It refers to the "returns" with a small "r". This sub-clause does not refer to the checking of the "number of" returns nor does it refer to checking the "Returns Credit" which is defined as the "full copy unsold copies of any of the Publications returned to the distributor by Outlets". I am satisfied that the normal procedures, whatever they were at the time of the entry into this Agreement, were to be complied with for spot checking of the returns in general. It seems to me that clause 7.2(b) is a quality control clause rather than a quantity control clause. 25 The plaintiff submitted that the Arbitrator's reliance on clause 7.2(c) to support the interpretation he placed on the Agreement was misconceived. It was submitted that the acknowledgement within the sub-clause that the plaintiff "does not warrant the condition or quantity of the Unsolds returned by the Designated Purchasers" provides strong confirmation of the view that because these are items which lose their value after a period of time, there would be no necessity to conduct a physical count, as distinct from the system of relying upon the "claim" made by the Outlets, monitored by spot-checks. The plaintiff submitted that the express negativing of a warranty in respect of a quantity of the Unsolds returned appears contrary to the interpretation of the expression "claimed" reached by the Arbitrator. 26 The Arbitrator did not refer to that part of clause 7.2 (c) containing the acknowledgment that the plaintiff did not give the warranty as to condition or quantity of the Unsolds returned by the Outlets as support for his interpretation of the Agreement. He limited the reference to clause 7.2(c) to the plaintiff's obligation to destroy the Unsolds returned to it, subject to the identified exceptions. The plaintiff's point is that the recognition that there is no warranty by the plaintiff as to the quantity of the Unsolds returned to it by the Outlets, seems inconsistent with a requirement for it to count the Unsolds. I disagree. The two things are quite separate. The context in which the acknowledgment in relation to the lack of warranty appears was an "undertaking" by the plaintiff that subject to certain exceptions it was to destroy all the Unsolds within 30 days of Finalisation. The exceptions were: (1) the Unsolds of an issue of a Publication that the defendant requested the plaintiff to "hold" which the plaintiff was obliged to hold for 30 days following the month in which the Recall Date occurred; and (2) Re-issue Publications that had to be returned to the defendant. The defendant was obliged to "promptly" pay to the plaintiff "all storage, freight and other handling expenses, charges and fees" incurred as a result of the request to hold the Unsolds. The acknowledgment of the lack of warranty as to condition and quantity of the Unsolds destroyed or held or returned to the defendant pursuant to the regime in this clause meant that the defendant could not pursue the plaintiff for breach of any warranty in respect of these Unsolds. The plaintiff was obliged to "confirm" the number of Unsolds to the Outlets but it was not obliged to give a "warranty" to the defendant.

27 The plaintiff next attacked the Arbitrator's reasoning in respect of clause 7.3(c). The plaintiff accepted that this provision is against its position in so far as it refers to the "reasonable cost of hand processing" the relevant Unsolds, however it was submitted that this is a very indirect means of imposing an obligation upon the plaintiff to carry out a physical count of the number of Unsolds claimed by the Outlets. It was submitted that whilst this clause may provide limited support for the defendant's argument it is also support for, or at least consistent with, the plaintiff's interpretation. It was claimed that there are circumstances contemplated by the Agreement in which the plaintiff would actually have carried out a physical count of Unsolds. One of those circumstances includes where a report is required as to the variance between the claimed Unsolds and the actual Unsolds (cl 4(a)(12)(c)). 28 I agree with the Arbitrator's observation in paragraph 30(e) in relation to the importance of clause 7.3(c). If a Publication did not have the required barcode printed on it, the defendant was obliged to pay the plaintiff "its reasonable costs for hand processing the relevant Unsolds". The counting system in Albury was an automatic mechanical system reliant upon the barcodes. I agree with the Arbitrator that where the counting could not be done mechanically because of the absence of a barcode the plaintiff was obliged to "hand process" or hand count the Unsolds ("the full copy unsold copies of any of the Publications returned to the Distributor by the Outlets") and the defendant was obliged to pay for the extra cost incurred in that hand counting. This aspect of the matter was relied upon by the Arbitrator, correctly in my view, as supportive of the interpretation he placed on the Agreement. 29 The Arbitrator also referred to clause 4(a)(12)(c) (the sub-clause) pursuant to which the plaintiff was required to report to the defendant on a quarterly basis any "variance" between the "Unsolds claimed by the Outlets" and the "actual number of Unsolds returned" to the plaintiff during that period. It was submitted that the clause was intended to ensure, by a form of audit or checking, that there was no significant variance between the actual count and the claims made. The following submission was then made: Moreover, if, as the Arbitrator concludes in paragraph [32], the expression "claimed" in the definition of "Certification of Unsolds" means claimed by the Outlets by the physical return of the Unsold Publications, then there can be no variance because the amount claimed on that interpretation must necessarily coincide with the actual number of Unsolds returned to the [plaintiff] during that period. Put another way, if claimed means physically returned in the definition of Certification of Unsolds, it either means the same in clause (4)(a)(12)(c), in which event there is no comparison to make, or it means claimed in the sense contended for by the [plaintiff] and therefore its meaning differs in two critical clauses of the Agreement.

30 The Arbitrator recognized that "on the one hand" the sub-clause provided "support" for the plaintiff's submission in relation to the meaning of the word "claimed". Certainly the sub-clause anticipates a difference between what is "claimed" and what is the "actual number of " Unsolds" returned to the plaintiff. Although the Arbitrator did not explain further the "support" provided by the sub-clause, it is fairly clear that he recognised that the expression "claimed" in the sub-clause could be understood as the "number" of "Unsolds" claimed but not counted, or verified, by the plaintiff as against the "actual" number of "Unsolds" to be ascertained by verifying, or counting, the number of " Unsolds claimed" by the Outlets. The plaintiff submitted that if the expression "claimed" in this sub-clause is to be given that meaning then it must be applied to the meaning of "claimed" in clause 1.1, in the definition of "Certification of Unsolds". 31 It is important to remember that the sub-clause uses the expressions "Unsolds claimed" and the "actual number of Unsolds returned". The expression "Unsolds" is defined as "the full copy unsold copies of any of the Publications returned" to the plaintiff by the Outlets. The definition of "Certification of Unsolds" uses a different expression. It refers to "the number of unsold copies of each Publication claimed by the Outlets". It makes no reference to "full copy unsold copies" although a Certification may include other details. That much is clear from the words "including but not limited to" in the definition. What the plaintiff was obliged to do under the sub-clause was to report to the defendant every quarter the variance between the claimed "full copy unsold copies of any of the Publications returned" to the plaintiff by the Outlets and the actual "full copy unsold copies of any of the Publications returned" to the plaintiff by the Outlets. 32 The Arbitrator's recognition in paragraph 31 of his reasons of the different meaning to be attributed to the word "claimed" in the sub-clause is manifested by his reference to the fact that it could not be "understood to override the obligation" on the plaintiff "to count, physically or mechanically, the unsolds and to claim only a credit for those established by that count". 33 There was no mechanism within the Agreement for any adjustment, either by way of credit to or debit from the plaintiff's account, in respect of any variance reported pursuant to the sub-clause. The parties included a mechanism for adjustment to the amount of the Purchase Price payable by the plaintiff to the defendant if the Advance Amount exceeded the total Purchase Price (Sch 1; par 3 (iii)). Although there was a deeming provision in respect of the number of copies "sold" by the plaintiff in what was referred to as the "final accounting", there was no express recognition of any adjustment to any amount paid or payable by the plaintiff by reason of any "variance" reported under the sub-clause (Sch 1; par 3(iv)). The absence of such a mechanism seems to me to suggest that the sub-clause is not, as the plaintiff described it, a "critical" clause, at least in respect of the regime for payment. It is a clause in the context of the audit structure or regime the defendant required the plaintiff to put in place, but had no bearing on the way in which the plaintiff was able to deduct an amount for the "Returns Credit". In those circumstances the fact that the Arbitrator's interpretation of the meaning of the word "claimed" in clause 1.1 may be different to the meaning of the word "claimed" in the sub-clause does not do violence to the language of the Agreement. 34 The plaintiffs referred to the regime for the calculation of the Returns Collection Fee in Schedule 1 for the purpose of comparing it with the process for the calculation of the Purchase Price. The Returns Collection Fee was to be paid to the plaintiff "per Unsold collected" by the plaintiff and "held at the direction" of the defendant. The Purchase Price was to be adjusted by the deduction, inter alia, of the Returns Credit. The amount to be deducted for the Returns Credit was the relevant amount for the "number of unsold publications set out in the Certification of Unsolds. 35 The plaintiff submitted that the number set out in the Certifications of Unsolds is conclusive because there is no process stipulated in the Agreement for the defendant to challenge the Certificate. In support of this submission the plaintiff relied upon Dobbs v National Bank of Australasia Limited (1935) 53 CLR 643 in which the High Court held, at 651, that a certificate provided for in a guarantee enabled the Bank to dispense with the proof of the "actual" indebtedness of the customer/guarantor. The indebtedness was able to be ascertained "conclusively" by the certificate. In Dobbs the bank manager was required to state the balance of principal and interest "due" to the Bank in the certificate. It is obvious that the Bank was required to review the account of the customer for the purpose of stating the amount accurately. 36 The plaintiff also relied upon Lanlex No 29 Pty Ltd v Leach (1997) Aust Contract R 90-077. That was a case in which the Court considered inconsistent special conditions in a contract for the sale of land and the effect of builder's certificate of completion. Sheller JA, with whom Mahoney P and Simos AJA agreed, said at 90,553: The parties agree that the builder's certificate of completion substantially in accordance with the approved plans and specifications shall be deemed to be conclusive evidence that the vendor has fully and completely complied with its obligations under special condition 26, that is to say that the vendor has proceeded with all due diligence to cause the building to be constructed in accordance with the finishes. The word "deemed" indicates an artificial extension of what the certificate evidences on its face. … It has this effect … because the parties have agreed that the builder's certificate will have this effect. 37 Both of the cases relied upon by the plaintiff are distinguishable from the present case. In my view the fact that there was no mechanism for the defendant to challenge the Certificate in the Agreement in this case, supports the commercial common sense and businesslike interpretation given to the Agreement by the Arbitrator. There is also the additional factor that in the Arbitration Agreement contained in paragraph 14 of the Agreement there was express reference in clause 14(b) to a "conclusive" Certificate in disputes in which only the amount is in issue. The absence to such a reference in relation to the Certificate in relation to Unsolds in those circumstances makes it even more unlikely that the parties intended such a consequence. To suggest that the parties to the Agreement in this case intended that third parties would be able to dictate the plaintiff's entitlement to payment and the defendant's obligation to pay, without any obligation to check the accuracy of the numbers in a Certificate that is immune from challenge, seems to me to be inconsistent with the commercial intentions of the parties

38 Although the plaintiff claimed that there was no proper basis for the Arbitrator to reach the conclusion that he did in paragraphs 32 and 33 of the First Interim Award, I disagree. This was a commercial contract and required a businesslike interpretation: McCann v Switzerland Insurance 176 ALR 711 per Gleeson CJ at par [22]. I am not satisfied that there is a strong and compelling argument supporting a grant of leave. The commercial reality and commercial common sense of the Arbitrator's reasoning and the businesslike interpretation of the Agreement is compelling. I see no manifest error on the face of this Award. 39 Leave to appeal from the First Interim Award is refused. Second Interim Award 40 In the Second Interim Award the Arbitrator dealt with estoppel and damages. The only matter that is the subject of these proceedings is the question of damages. The Arbitrator referred to two matters that he regarded as distinct from the assessment process. The first was that the defendant could not include in any claim for damages the amount in respect of the distribution of publications owned by Multimedia Publications (UK) Limited. The second matter was that the plaintiff claimed that, if the agreement for the "concession" and payment under it, did not provide it with a defence, the amount of the concession was a benefit to the defendant and acted in reduction of the damages it had suffered as a result of the breach of contract (par 23). The "concession" referred to by the Arbitrator was a reference to the plaintiff's concession on rates in the amount of $443,439 which the plaintiff claimed the defendant had accepted in full and final discharge of any claim it may have against the plaintiff (par 11). The Arbitrator held that the evidence did not support the claim made by the plaintiff that the concession was granted in consideration of the defendant promising not to sue in respect of any of the consequences "of what it claimed (correctly) to have been a breach of contract" by the plaintiff (par 14). The concession was offered by the plaintiff to the defendant in the course of negotiations "to assuage" the defendant without reference to any past or future claim (par 25). 41 The defendant quantified its losses on two bases; "lost sales per prior sales rate and lost sales per prediction rates" (par 26). The Arbitrator explained that the concession did not operate as a defence but it was to be applied to diminish the damage suffered and was most conveniently dealt with by deducting the appropriate figure from the assessment of damages (par 27). The Arbitrator also dealt with the onus of proof. He referred to but rejected the defendant's "intricate argument" that the concession reversed the onus of proof referring to the fundamental principle that the onus is on the party that claims damage for breach of contract to establish the loss that flows from the breach (par 28). The Arbitrator noted that the system provided for under the Agreement was a process whereby the plaintiff could ascertain accurately the relevant Returns Credit, referring to it as a "reliable system for measuring accurate sales (including lost or pilfered publications)" (par 30). Manifest Error of Law? 42 The Arbitrator's reasons included the following: 31. The [plaintiff's] breach of contract destroyed that system and, at the least rendered it very difficult to assess with any degree of certainty the appropriate compensation to [the defendant]. It is trite law that the wrongdoers should not benefit from its wrong and where, by its action, it renders the assessment of appropriate compensation difficult it cannot be heard to complain if the Tribunal of fact concludes that inferences and interpretations of given facts supportive of the [defendant's] view of the extent of loss to the [defendant] should more readily be accepted by it.

45 The following passage of Dixon and Fullager JJ's judgment was relied upon in support of the plaintiff's submission (at 414): If we regard the case is a simple and normal case of breach by non-delivery, the plaintiffs have no starting point. The burden of proof is on them, and they cannot establish that they suffered any damage unless they can show that the tanker delivered in performance of the contract would have had some value, and this they cannot show. But when the contract alleged is a contract that there was a tanker in a particular place, and the breach asssigned is that there was no tanker there, and the damages claimed measured by expenditure incurred on the fate of the promise that there was a tanker in that place, the plaintiffs are in a different position. They have now a starting-point. They can say: (1) this expense was incurred; (2) it was incurred because you promised us that there was a tanker; (3) the fact that there was no tanker made it certain that the expense would be wasted. The plaintiffs have in this way a starting-point. They make a prime-facie case. The fact that the expense was wasted flowed prime facie from the fact that there was no tanker; and the first fact is damage, and the second fact is breach of contract. The burden is now thrown on the Commission of establishing that, if there had been a tanker, the expense incurred would equally have been wasted. This, of course, the Commission cannot establish. The fact is that the impossibility of assessing damages on the basis of a comparison between what was promised and what was delivered arises not because what was promised was valueless but because it is impossible to value a non-existent thing. It is the breach of contract itself which makes it impossible even to undertake an assessment on that basis. It is not impossible, however, to undertake an assessment on another basis, and, in so far as the Commission's breach of contract itself reduces the possibility of an accurate assessment, it is not for the commission to complain. 46 This passage supports the proposition that where the inability to make an accurate assessment of damages for breach of contract has been caused by the nature of the breach of contract it is not for the contract breaker to complain about the lack of precision in the measurement of damages. What the learned Arbitrator said in paragraph 31 of the Award is consistent with that proposition.

48 The presumption referred to in this passage covers two circumstances; the first in which a party intentionally destroys a document that the parties expected would be available to support a particular circumstance; and the second where the absence of such document was not intentionally caused by the party. The consequence in the first situation is the application of a stronger presumption against the defendant than in the second situation. In the first situation there is evidence that is unable to be corroborated by reason of the intentional destruction of the material and the presumption is adverse to the defendant. In the second situation there is evidence that is unable to be corroborated by evidence that would be expected to be available but which may have been innocently lost and any adverse finding may depend upon what other evidence is available touching upon the issue. 49 The plaintiff submitted that the Arbitrator concluded in paragraph 31 that "all necessary presumptions can be drawn against the contract breaker". I do not agree that this is what the Arbitrator was saying in that paragraph. It does not seem to me that the Arbitrator went any further in that paragraph than to say that where the nature of the breach by the plaintiff caused difficulty in the precise measurement of damages, the plaintiff cannot be heard to complain if and when the propositions put by the defendant that lack some precision in relation that assessment are accepted. I do not read paragraph 31 to mean that the Arbitrator would more readily accept less precise evidence if more precise evidence were available. Nor do I read paragraph 31 as extending the proposition found in the passage above from the judgment of Dixon and Fullager JJ in McRae. 50 In paragraph 34 the Arbitrator limited the consequences of the plaintiff's failure to produce the proof (ie to create or keep the relevant records) to instances in which there were equally competing inferences and then the inference would be against the plaintiff because it had ceased to keep the corroborative records. I do not agree with the plaintiff's characterisation of what the Arbitrator did in these paragraphs. I am not satisfied that it was an impermissible extension of particular principles or presumptions referred to in Allen v Tobias to a class of persons, "contract breakers", not previously amenable to such application. Irrespective of whether a party may be a so-called "contract breaker" or a tortfeasor, I am of the view that the Arbitrator was simply applying the ordinary processes of inferential reasoning in these paragraphs. Where as here the plaintiff claims that the defendant suffered no damage and the plaintiff has failed to produce the working records that could have corroborated that claim, in circumstances where: (a) there are equally available inferences; and (b) it was the plaintiff and not the defendant, who had the responsibility to create and/or keep those records, it is permissible to favour the inference of the party who was not obliged to make available the corroborative evidence. I am not satisfied that paragraphs 31 and 34 contain a manifest error of law on the face of the Award.

56 An arbitrator is required to include in an Award a statement of reasons for making the Award: (s. 29(1)(c) of the Act). Reasons are given, inter alia, to enable the parties to know that the conclusion reached is not arbitrary or influenced by improper considerations: Abigroup Contractors Pty Limited v Sydney Catchment Authority (No 3) [2006] NSWCA 282 at 131-132. The reasons should be in terms sufficient for the parties to understand why they won or lost with an explanation as to why the Arbitrator preferred one case over the other: Archibald v Bryon Shire Council (2003) 129 LGERA 311 per Sheller JA at 323, [54]. In R.P.Robson Constructions v D & M Williams (1989) 6 BCL 219, Giles J, as his Honour then was, said at 221-222: I respectfully agree with Smart J. when he said in Menna v. H.D. Building Pty Ltd (unreported, 1 December 1986): "Elaborate reasons finely expressed are not to be expected of an arbitrator. Further, the court should not construe his reasons in an overly critical way. However, it is necessary that the arbitrator deal with the issues raised before him and make all necessary findings of law. … The reasons must not be so economical that a party is deprived of having an issue of fact dealt with by the court." The reasons should, however, be sufficient to indicate to the parties why the arbitrator reached the conclusion or conclusions which he did as the foundation for his award: Soulemezis v Dudley (Holdings) Pty Ltd at 273, to apprise the parties of the broad outline and constituent facts of the reasoning on which he has acted. Further, the reasons should be sufficient to enable the Court to see whether there has been any error of law. 57 The submission to be addressed in this regard is whether the Arbitrator "entirely disregarded" the evidence of Dr Francis and if he did not, whether he gave adequate reasons for disagreeing with Dr Francis' conclusion that the defendant had not suffered any loss. The approach to be adopted in making this assesssment should be robust but fair: Raguz v Sullivan & Ors (2000) 50 NSWLR 236 per Spigelman CJ and Mason P at 248. 58 The plaintiff's expert, Dr Ivor Francis, is a director of ActiveCapital, a consulting practice in competitive corporate governance and management and statistics. Dr Francis was a Professor of mathematical statistics for three years at New York University's Stern Graduate School of Business Administration and for fourteen years at Cornell University's School of Industrial and Labour Relations. He was appointed to the Chair in Mathematical Statistics at Otago University, and held adjunct professorial positions at the business schools of Auckland and Sydney Universities. 59 In the arbitration the plaintiff relied upon Dr Francis' report entitled "Analysis of Sales Trends". Dr Francis was instructed to provide an opinion, based on sales and other information, on whether or not the defendants suffered any lost sales as a consequence of the change in the return systems in October 2003. The parties utilised a Table before the Arbitrator that was divided into two sections. The top half of the table referred to "lost sales per prior sales rate", referred to as table 1, and the bottom half referred to "lost sales per sales prediction rates" referred to as table 2. Dr Francis analysed table 1 and noted that the figure for calculated sales of a particular publication, "Mad", was 387,471. He observed that the number used as an estimate of the sales in the 21 months from October 2003 to June 2005 assumed: (a) the clearance rate was the same for all titles; (b) the clearance rate was constant for the period; (c) deliveries were constant for the period; and (d) the clearance rate was the same for the period as for the prior 12 month period prior to October 2003. Dr Francis expressed the opinion that the assumptions were untenable and that the calculations were fatally flawed such that an estimate of value lost as a result of the changes in October 2003 could not be relied upon. 60 The Arbitrator referred to the first way in which the defendant put its case in paragraph 43 of the Award being the lost sales per prior sales rate. He referred in paragraph 44 to the fundamental objection raised by the defendant being that the approach assumed a steady ratio and failed to take account of the trend of falling sales. Dr Francis had concluded that the only logical way to forecast future sales would be to examine the history of sales with a view to extending that into the future. However he also observed that, "given the erratic behaviour of sales, forecasting their future is difficult". The Arbitrator said that he "must take account" of the trend of falling sales and not simply proceed on the basis that the ratio would necessarily continue into the future. Indeed he said that it must be recognised that "the falling off in sales" was likely to continue (par 55). This seems to me to be a recognition of the opinion expressed by Dr Francis. 61 Dr Francis then looked at the second way in which the defendant put its case which was the lost sales per sales prediction rates. That claim was contained in table 2 and was based on "sales checks" during the period October 2003 to June 2005. Dr Francis posed the question as to whether the sales check data could be relied upon as more than a guide. He referred to the small number of issues used observing that there were far too few for drawing any kind of inference about future sales even if they were accurate. He expressed the opinion that they completely ignored variability, seasonal cycles, trends and the like. The Arbitrator referred to the deficiencies of the sales check figures in paragraphs 51 to 54 of the Award. 62 Dr Francis reached the conclusion that the sales checks figures were meaningless. He was critical of the small sample and concluded that there was no way that the figures could constitute a scientific sample but noted that they were not selected for that purpose. He expressed the opinion there was no justification for using them to estimate total sales. The Arbitrator effectively agreed with the thrust of Dr Francis' observations. He concluded that the sales checks figures were "unreliable" albeit that he said that the "comparison" provided general guidance in relation to the indication of something dramatic happening (par 52 and 54).

63 Dr Francis addressed whether there was any evidence of material negative change in the pattern of sales figures beginning in or after October 2003 from which a conclusion could be reached that such change was due to the changed sales environment beginning in October 2003. He examined the sales of the publication Garden & Outdoor Living and described the methodology used to test whether there was a "structural break" due to the change made by the plaintiff to its returns system in October 2003. After this analysis Dr Francis concluded that "if anything, there is an improvement in sales post October 2003" and that sales became much better after January 2004 than before that time. However, he conceded that the analysis of the sales data for the publication Garden & Outdoor Living revealed several possible breaks but that none of them indicated a negative influence arising from the change in the returns system in October 2003. 64 Dr Francis then moved to the forecasting of future sales based on an examination of the history of prior sales. He used the Auto-Regressive Integrated Moving Average (ARIMA) model that he referred to as the "econometrician's preferred class" of models for forecasting. Two graphs were produced showing the forecasted estimates for sales post October 2003 based on the actual sales data before October 2003 with the realised sales post October 2003 superimposed on the graph for comparison with the forecast values. Dr Francis once again referred to the difficulty of forecasting especially for a long period into the future. However, although the margin for error gets wider the longer the period is, there was, in his view, no significant difference between the estimates for sales post October 2003 and the realised sales post October 2003. 65 Dr Francis then made the same analysis of five other titles, "Inside Sport", "Golf", "Mad", "TV Soap" and "Penthouse". He found similar results although some of the publications required additional modelling. He expressed the opinion that in no case was there significant evidence of a negative break in reported sales on or after October 2003 that would prove a negative impact due to the change in the returns system post October 2003. Having referred to the individual titles in detail, Dr Francis concluded that the results were a "convincing argument against the proposition that there was a material negative break" in the sales figures that was caused by a change in the returns system in October 2003. 66 The defendant submitted that although the Arbitrator does not refer to Dr Francis by name in the Award, it is perfectly clear that, for instance, in paragraphs 54, he dealt with the whole sampling issue and the validity of using samples by themselves as a predictor as distinct from a guide. Additionally, the Arbitrator referred to the sales trends. Dr Francis' proposition was that there were market forces impacting on the sales of the defendant's Publications and that this explained entirely the decline in the sales after October 2003 rather than the plaintiff's conduct in changing the system in October 2003 causing the decline in the numbers of reported sales. 67 Neither party propounded an assessment based on precise scientific analysis. Indeed the Arbitrator noted that he was not carrying out such an analysis, but rather an assessment of the probabilities in circumstances where the evidence provided only the broadest guidance (par 42). The Arbitrator analysed the differences in outcome in the assessment of loss according to the sales check method in paragraphs 49 and 50 of the Award. There is no doubt that the Arbitrator addressed the alternative inferences available from the evidence, including from the evidence of Dr Francis, in respect of the cause of the drop in sales post-October 2003.

68 The Arbitrator agreed with Dr Francis, although not naming him, that the prior sales ratio provided a better guide. He also concluded, consistently with the opinion expressed by Dr Francis that there had been a falling off in sales prior to October 2003 and that the falling off was likely to continue. It seems to me that the Arbitrator did address the evidence of Dr Francis by way of identifying the various arguments that were propounded in each party's case. In my view, in the exposure of his reasoning as to why he concluded that the cause of the reported decline in sales was the inaccurate returns as opposed to Dr Francis' theory of general market forces, the Arbitrator gave adequate reasons. I do not accept the plaintiff's submission that the Arbitrator "entirely disregarded" Dr Francis's evidence. Although the specific reference in arbitral awards to the detail of the evidence and the name of the witness, as opposed to the issues and arguments raised thereby, would have been more prudent in that it would have avoided what has happened in this case, I am not satisfied that the way in which the Arbitrator dealt with the matter amounts to technical misconduct. I am satisfied that he provided adequate reasons for his Award in this regard. 69 The plaintiff also submitted that the Arbitrator failed to provide any or any proper reasons as to the way in which he reached the figure of $900,000 awarded to the defendant for "compensation" for the breach. The plaintiff accepted that if it is difficult to assess damages it is permissible to make approximations. However it was submitted that the Arbitrator had to have evidence upon which he could conclude that the decline in sales figures was brought about by the conduct of the plaintiff in failing to count the returns after October 2003. It seems to me that the analysis on which the Arbitrator embarked did just that. He referred to the evidence of both parties in respect of pre-October sales and post-October predictions. He referred to the forecasting of future sales based on prior sales ratios and he referred to the evidence in relation to the history of the sales checks. He then weighed up that evidence and concluded that more probably than not (indeed overwhelmingly probably) the reason for the decline in sales was not that customers had decided not to purchase the defendant's publications or other market forces, but rather that the returns, or some of them, lodged by the retailers were inaccurate and the plaintiff failed to pick this inaccuracy up by actually counting the returns. This is abundantly clear from what the Arbitrator said in paragraph 51 of the Award. 70 The Arbitrator did not award the amount claimed by the defendant because he was dissatisfied with the nature of the evidence upon which the defendant relied. He was met with a very difficult task of making an assessment in circumstances where the returns had not been counted and did his best to approximate the loss to take account of the deficiencies of the system, the lack of records and the "overwhelming" probability of inaccurate returns. The difference between the figure of $598,901 and the amount awarded of $900,000 and the amount claimed did not require a precise breakdown on a dollar by dollar basis to those matters which he had taken into account. It was truly an approximation in very difficult circumstances which in my view was permissible. I am not satisfied that the Arbitrator was guilty of technical misconduct in this regard. Final Award 71 The Final Award includes the following: 1. That on its proper construction, and subject to the exceptions relating to Western Australia, Northern Territory, Tasmania, remote areas and supermarkets, the Distribution Agreement permitted Gordon & Gotch to a Returns Credit only in respect of those publications which had been returned by the outlets to Gordon & Gotch and in respect of which Gordon & Gotch had confirmed by count that the return had actually occurred. 72 The carving out the excluded group became a matter of controversy during final submissions in this application. It seems to be common ground that absent an agreed position or understanding that such carve out should occur, it would amount to a manifest error on the face of the Award. I allowed written submission on this aspect of the matter after the hearing had concluded. Written submissions were filed by the defendant on 3 August 2007 and by the plaintiff on 9 August 2007. Put shortly the defendant's position is that the carve out was "agreed" or was not part of the "dispute" referred to arbitration. The plaintiff denied that there was any agreement or common ground between the parties that the Arbitrator should, in construing the Agreement, carve out the excluded group. The plaintiff's submission dated 9 August 2007 included the following: 2. It would be expected that learned Arbitrator would have recorded in the Awards any such agreement or common ground. The absence of any such recording by the Arbitrator points against the existence of such an agreement or common ground as asserted by the defendant. 73 It is true that there is nothing recorded in the Final Award in respect of any such agreement. However in the First Interim Award the Arbitrator under the heading "Background of the dispute" referred to the system pursuant to which the Outlets recorded the number of unsold copies and returned them with the completed form to Albury. The Arbitrator referred to this in paragraph 4 of that Award and said that such system was "subject to some exceptions referred to below". In paragraph 6 the Arbitrator said: As indicated there were exceptions to this practice. The distributor had never required some outlets to return full copies of unsold publications. These included outlets in Western Australia, Northern Territory and Tasmania and outlets from far country regions. As well supermarkets were excluded. These facts were said to be known to the company but, apart from these exceptions, the general practice applied. For its part the company asserted that it had always believed that, apart from the instance of supermarkets in respect of which it acknowledged that there was a specific agreement, unsold publications from Western Australia, Northern Territory and Tasmania (and other remote regions) were returned to the distributors's relevant State office rather than Albury (either by way of full copy returns or by "cover returns"), and that these returns were in some way reconciled against the unsold publication claimed by the relevant outlets. I should add that there is some difference between the parties as to whether those outlets which returned copies were required to send return forms but that is presently of no moment in this dispute. 74 In the First Interim Award the Arbitrator also said: 34. In the remarks I have just made I have excluded consideration of the special cases of remote areas, distant states and supermarkets. It seems clear that specific arrangements were made and/or accepted by the company in relation to some of those circumstances. In others it may be that the company was ignorant of the precise practices of the distributor. These facts do not, in my opinion, bear on the construction of the agreement. Accordingly, this award deals only with those publications which were dealt with under the agreement and not subject to any specific exemption from its terms. 35. Confining my remarks in that way I would conclude that in changing its system, departing from its normal procedures for checking and counting of the publications which were returned to it, and making claims for credit based merely on the statement of numbers returned proffered by an outlet the distributor was making claims from returns credits on a false basis and not one authorised by the contract. The consequence is that the company is entitled to a declaration that states, in effect, that the distributor is only entitled to make a claim for a Returns Credit in respect of publications returned to it, the number of which is confirmed by counting with mechanical or hand counting. … … 38. … In my opinion a declaration should be made and it should be in the following form: That on its proper construction, and subject to the exceptions relating to Western Australia, Northern Territory, Tasmania, remote areas and supermarkets, the 2002 distribution agreement permits the distributor to a Returns Credit only in respect of those publications which have been returned by the outlets to the distributor and in respect of which the distributor has confirmed by count that the return is actually occurred.

75 After the First Interim Award was made, the defendant amended its Points of Claim in the arbitration which included the following: "Outlet (s)" means an Outlet within the meaning of the 2002 Distribution Agreement not being a supermarket, an outlet in Western Australia, Tasmania, Northern Territory, or a remote rural outlet, which prior to 1 October 2003 was not required to make full copy returns to Gordon & Gotch in order to claim credit for unsold Publications. 76 The plaintiff responded to that amendment with an Amended Reply in which it claimed that the relevant calculations for the Purchase Price did not depend upon "actual returns" but rather upon the return is "claimed close quotes by the Outlets. The Amended Reply then claimed: There is a sound basis for structuring the Agreement in this way. Simply put, it has never been practical for all Publications to be returned to G & G. Even under the previous system, all Publications were not counted. This was known to Horwitz. 77 The defendant filed a Response to the plaintiff's Reply which included the following: The 2002 Distribution Agreement provides for bar-coding to facilitate that process and penalty charges if bar-coding is not adopted. As referred to above, Horwitz believed that, subject to the agreed exceptions, the balance of unsold Publications were returned to Gordon & Gotch by Outlets, that Gordon & Gotch required this in accordance with the provisions of the agreements entered into with Horwitz, and that Gordon & Gotch then counted all of the Publications returned to it. (Emphasis added) 78 In opening submissions before the Arbitrator reference was made to the fact that "supermarket figures" would be ignored and there was also a reference to "agreed remote areas". There was also an exchange with the Arbitrator that he was dealing with "newsagents only". The defendant submitted that the dispute that was referred to arbitration did not include supermarkets or remote areas. It was submitted that the Arbitrator's observation in paragraph 34 of the First Interim Award correctly identified the areas of dispute between the parties. 79 On balance, I am satisfied that the Arbitrator understood that the areas of dispute that had been referred to him for arbitration did not include the excluded group. That understanding seems to me to have been justified by reason of the way in which the parties conducted the arbitration. I am satisfied that the Arbitrator was justified in carving out the excluded group from the Award. Conclusion 80 The plaintiff's applications will be dismissed. The parties are to bring in Short Minutes of Order reflecting this result together with an agreed costs order. If the parties are unable to agree on a costs order I will hear argument when the matter is listed at 9.15 on 14 September for the filing of the Short Minutes of Order. ********************************

Gordon & Gotch Australia Pty Limtied v Horwitz Publications Pty Limited

At a glance

Court

Decision date

Before

Source

Judgment (112 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (9)