Damages - loss of expected benefits
424 Par 122 of 2FASC particularises the damages claim. I have rejected the first way in which Hayle seeks to put its case, namely that were it not for ATG's misleading and deceptive conduct, Hayle's Sydney operation would have been closed down on 30 June 1995, and venture capital sought and obtained in the USA. It is not necessary for me to deal with the damages claimed on that basis.
425 The alternative way in which the case is put, is that were it not for the misleading and deceptive conduct on the part of ATG (which I have found), Hayle would not have entered into the agreement of 13 November 1995 with ATG, the Sydney operation would have been closed down on about 15 November 1995, and venture capital sought in the USA. Hayle contends that venture capital would have been obtained in the USA in about March 1996 in return for a 25 per cent equity in a business ("Hayle-USA") which would have been established, and successfully operated, in conformity with that part of the Hayle/ATG Business Plan for October 1995 which relates to the USA.
426 The case is that the results which would have been achieved by Hayle-USA from the commencement of its operation to 30 June 2000 would have been those predicted in that part of the Business Plan which relates to the USA (subject to minor adjustments), and that the forecast results for the financial year 2000 are a reasonable prediction in real terms of the results likely to be achieved thereafter.
427 On that basis, Hayle's expert accountant, Mr Vella, has calculated that:
- Hayle's share of the pre-tax profits which would have been hypothetically derived by Hayle-USA from the commencement of its operations until 30 June 2000 is $9.4 million.
- The hypothetical value of Hayle's 75 per cent interest in Hayle-USA at 30 June 2000 would be $33.25 million. That value is in addition to the accrued profit entitlement, and is based upon multiplying the forecast earnings in the year 2000 by price earnings multiple of 9.
(Fourth report of Vella, par 3)
428 Hayle claims $42.65 million, or alternatively, damages for loss of chance to make profits, and to have a valuable business. In addition, various items of expenditure are claimed upon the basis that as a result of ATG's misleading and deceptive conduct, the expenditure on those items was wasted.
429 Mr Vella did not undertake any assessment as to the reasonableness of the projections contained in the Business Plan, or as to whether his calculations were a reflection of the loss which Hayle suffered in consequence of the misleading and deceptive conduct of which it complains. On the basis of the assumptions he was required to make, he concluded that a multiple of 9 was appropriate to a business which is assumed to have traded up to the financial year 2000 with the results as shown in the projections. ATG adopted a multiple of 10 in its internal consideration of the project (AB 2/494). Ms Exner, an accountant called by ATG, thought that a multiple of 3 was appropriate, because although instructed to assume that Hayle-USA performed in accordance with the Business Plan until financial year 2000, in her opinion, the risk associated with Hayle was significantly higher than that of an established company, and a multiple of 3 is more appropriate to a business of that character (see Joint Report of Vella and Exner, dated 6/6/00 par 13-16).
430 As indicated in par 234 above, Mr Browne's evidence was that he formed the view in February 1996, that it would be impossible to attract venture capital to any business which had Hayle's experience with ATG in the recent past. In Mr Browne's view, the fact that Hayle had attracted a venture capitalist who had then, after a short period, abandoned the deal would be impossible to explain away, even though the explanation might completely exonerate Hayle and the HayleSystem.
431 Between 8 April 1996 and 16 July 1999, Hayle made seven trips to the USA, (and at least once to Europe), in attempts to secure a licensing agreement for the HayleSystem. Hayle retained three advisers to assist in those attempts. The following trips were made:
1. 8 April 1996-20 May 1996;
2. 15 October 1996-15 November 1996;
3. 17 May 1997-30 May 1997;
4. 20 June 1997-1 August 1997;
5. 28 February 1998-19 April 1998;
6. 28 January 1999-6 March 1999;
7. 7 June 1999-16 July 1999.
Hayle incurred costs of $132,649.31 by way of trip expenses (AB 4/1636) and $61,922.62 in consultants' fees (AB 4/1473), a total of $194,571.93, in its unsuccessful attempts to secure a licensing arrangement.
432 On 22 May 1996, after the first trip, Hayle wrote to 3M (AB 4/1256). The letter stated that Mr Browne had been "meeting with potential investors/licensees with the view to launching the HayleSystem" in the USA. The first trip report (AB 4/1257) refers to a meeting with a very wealthy potential investor, who was impressed with the presentation, and would be an investor if Hayle decided to go that way. There is also a reference to a lady from Hankin Investment Banking, discussing a possible appointment as a non-exclusive finder of "potential investor/licensee" (AB 4/1259). My attention was not drawn to any other entries in the trip report which unambiguously referred to meetings with potential investors. Nor was my attention directed to any entry in the trip report to the effect that ATG's withdrawal had any adverse effect upon potential investees or licensees. There was no cross-examination on the trip reports.
433 No cross-examination was directed to Mr Browne to the effect that his evidence that the stigma of the failed ATG deal would make a venture capital deal impossible, was an opinion which he did not genuinely hold.
434 Two United States experts were called in the field of venture capital. Hayle called Mr Rider, who had a background of 30 years experience in venture capital investing. ATG called Mr Feigen, whose background in venture capital was as a regulator, as a consultant, and as a teacher but who had some involvement in the provision of venture capital himself.
435 In Mr Rider's first report the following question was posed:
"3. What was the likelihood that Browne could have secured venture capital funding for Hayle USA after January 1996 in light of the history of the association between ATG and Hayle in Australia in 1995 and early 1996, and in particular in light of ATG's withdrawal from the deal on 29th January 1996?"
Mr Rider's answer to that question was:
"Highly unlikely".
The reason which he gave for that answer is that US venture capitalists would be likely to follow the lead of the Australian firm and to assume that ATG must have discovered some serious problem with the deal, and used the 3M problem as an excuse to exit. Further, deals in the venture capital market are either dead or alive. "By early 1996 the Hayle deal was dead".
436 Mr Feigen was of the view (First Report of Feigen, dated 10/2/00 par 10) that Mr Browne would have substantially the same likelihood of obtaining venture capital funding for the investment after January 1996 as he would have had during the second half of 1995:
"If a US venture fund received negative 'vibes' during the due diligence process because another fund turned a deal down or backed out of the deal, it might raise serious questions, but would not automatically kill the deal as long as the US market clearly demonstrates a distinct opportunity to grow exponentially, the product is proven unique, and the plan and the entrepreneurs make sense. If there are insurmountable reasons why the deal may no longer be attractive or the risk becomes too great then it would be difficult to raise interest. However, it is not unusual in the US for six venture firms to turn a deal down while six months to a year later six other venture firms actually do the same deal with some modifications."
437 The disagreement between the experts upon this issue was not removed by their joint report. As I understand that report:
- Mr Rider answered question 3 "Highly unlikely" because of his view as to the negative impact upon US venture capitalists of ATG's refusal to proceed with its proposed investment.
- Mr Feigen answered that question "Unlikely", because it was his view that Hayle-USA would not have been funded in 1995, and Hayle would have had substantially the same likelihood of obtaining funding for the investment after January 1996 as it would have had in 1995.
438 In Mr Rider's third report he was asked this question:
"3. Would potential investors have viewed Browne's withdrawal from ATG negotiations in October 1995 negatively?"
His answer to that question was:
"No."
The question is put in the context of an assumption that Mr Browne withdrew from negotiations with ATG in consequence of its requirement made on 27 October 1995 that if for some reason the roll-out was slower than expected, and bridging funds became necessary between tranches, Mr Browne would provide half of those funds and ATG would provide the other half.
439 Mr Feigen's response to the same question was:
"Unlikely."
because prospective investors and entrepreneurs often go their separate ways during the negotiations process (Second Report of Feigen 24/5/00).
440 As I understand the expert evidence, it is to the effect that Hayle's prospects of obtaining venture capital in the USA would not have been materially lessened on the hypothesis that Hayle called off the proposed deal with ATG because ATG imposed a requirement that Hayle should contribute to bridging finance, a requirement to which Hayle would not agree.
441 The experts could not agree on whether or not Hayle would have been able to secure funding if it sought it in November 1995. The following question was put to the experts:
"Whether Browne, in early 1996, in your opinion, would have secured $US1.15 million in venture capital funding in the USA to finance the commercial exploitation of the HayleSystem in the United States based on a Business Plan ... which would have actually been the same as the October 1995 Hayle/ATG Business Plan ... except that the Australian operations, having been closed down in November 1995, would not be a part of the new Hayle USA Business Plan and the focus would have been exclusively on the United States."
Mr Rider's answer to that question was:
"Yes"
and Mr Feigen's answer was:
"Unlikely."
Their respective answers to a similar question as at mid-1995 was, in the case of Mr Rider, "Yes", and in the case of Mr Feigen, "No". Thus their views were less polarised in relation to the position at the end of 1995 than they were in relation to the position as at mid-1995 because in the second half of 1995 the venture capital market in the United States was stronger than it had been at mid-year.
442 One of the factors which Mr Feigen took into account in expressing his view is that Mr Browne's visits to the United States at the end of 1994 and in early 1995 had not exposed any serious interest by a potential venture capitalist in investing in the project. Hayle submits that this assumption does not accord with Mr Browne's evidence that his trips to the United States prior to April 1995 were merely to investigate opportunities, rather than to ask venture capitalists for money and follow through such requests to finality.
443 One of the reasons that Mr Browne went to the United States in March 1995 was to pursue sources of finance, and to determine what the level of interest was in the provision of finance (T 198). Mr Feigen had some difficulty in coming to grips with an assumption that serious interest was expressed on these trips which Mr Browne simply elected not to follow through because "anytime anybody expresses interest you want to follow up on it" (T 849). Nonetheless he accepted that if it were the fact that in the early part of 1995 American venture capitalists had expressed serious interest in investing in Hayle, then he could not give a negative answer to the question which was put to him (T 850-851).
444 I was invited to prefer the evidence of Mr Rider over that of Mr Feigen because of their differing backgrounds and because of Mr Feigen's erroneous assumption in relation to the pre-April 1995 expressions of interest by venture capitalists investing in the HayleSystem.
445 On the evidence, I do not think that Mr Feigen made an erroneous assumption as to the level of interest on the part of US venture capitalists prior to April 1995. One of the reasons for the March visits was to ascertain the level of interest in the provision of venture capital, which resulted in Mr Browne having "a couple of expressions of sort of very tentative prima facie interest" (T 218). Nor do I think that their different backgrounds provides a sufficient, or indeed any reason for preferring the evidence of one over that of the other. It is simply a case in which two experts have a different opinion on a matter where legitimate differences of opinion might well be expected.
446 Mr Rider's evidence is given in the most general of terms. He does not say that he would have been prepared to invest money in the project, nor does he identify any particular venture capitalist who, in his opinion, would have been prepared to do so. Nor does he describe any market practice which would enable a conclusion to be drawn that the Hayle proposal fell within some accepted parameters which guided the provision of venture capital. His assessment is an intuitive one, that Mr Browne and the HayleSystem were likely to be attractive to venture capitalists. Given the heterogeneous nature of the market, that must mean attractive to some venture capitalists.
447 Mr Rider's third report is based upon the assumption that by December 1995 Hayle had secured the verbal commitment of the 3M company to fund and conduct a twelve month trial of the HayleSystem involving between 200 and 500 employees at the 3M plant in Austin, Texas, as soon as the HayleSystem infrastructure was in place (Assumption 8). His report does not refer to the significance of this assumption (as distinct from the corresponding assumption made in the first report), or to the likelihood of venture capital being provided in tranches.
448 Of course if Hayle were seeking venture capital in the USA in and after November 1996, it would be doing so in a context where the 1,000 person trial with 3M in St Paul would not be achieved. The October 1995 Business Plan was based on the successful completion of this trial, inasmuch as at least initially Hayle intended to rely on the domino effect of the success at 3M to increase the level of corporate sponsorship. The number of corporate sponsors was estimated to be 10 in the first year, 20 in the second, 40 in the third, 75 in the fourth and 100 in the fifth (AB 2/586). Apart from the Business Plan itself, there is no material which indicates the likelihood of that level of sponsorship being achieved.
449 Whether Hayle suffered any loss or damage in consequence of the misleading and deceptive conduct which I have found involves a comparison between what actually happened, and what would have been the case if the misleading and deceptive conduct had not occurred. What actually happened is that Hayle entered into the agreement with ATG on 13 November 1995 and received $300,000 pursuant to that agreement. The agreement was terminated on 29 January 1996, and Hayle agreed to pay $300,000 to ATG. What would have been the case if the misleading and deceptive conduct had not occurred is that Hayle would not have entered into the agreement with ATG, but would have sought venture capital in the USA from about November 1995.
450 There is an issue between the parties as to whether Hayle needs to prove on the balance of probabilities that it would have succeeded in obtaining venture capital from an alternative source, or whether the Court is required to estimate the chance of that occurring, and to reflect the chance in the amount of any damages it awards.
451 Hayle's objective was to establish and successfully conduct the business of Hayle-USA in accordance with the Business Plan, so as to derive the benefits in terms of income and capital value reflected in Mr Vella's calculations. The damages claim is constructed on the basis that but for the misleading and deceptive conduct in question Hayle could and would have achieved that objective.
452 A number of contingencies lay in the path of that objective; venture capital had to be found, Hayle-USA needed to be established, the corporate sponsorships projected in the Business Plan needed to be obtained, and the other assumptions on which the Business Plan was based needed to be made good. So many contingencies lay in the path of that objective, that whether or not it would be achieved is a matter of pure speculation.
453 Alternatively, Hayle puts its case on the basis of a loss of a valuable opportunity. In order to succeed on that alternative case, Hayle would need to prove both that there was a valuable opportunity, and that in consequence of the misleading and deceptive conduct which I have found, that opportunity was lost to it.
454 Hayle's ability to exploit commercially the HayleSystem in a manner not involving ATG was restored to it when the Shareholders' Agreement was terminated on 29 January 1996. At least in theory, Hayle could then have entered into arrangements with a venture capitalist and proceeded to implement the Business Plan. That Hayle believed it had not lost the opportunity to exploit the HayleSystem commercially is illustrated by the fact that it attempted to so, albeit unsuccessfully, in the seven trips which Mr Browne made to the USA thereafter.
455 If, Hayle could and would have entered into a contract with a venture capitalist in the USA, instead of doing so with ATG, then, depending on the terms of that contract and any tranching conditions, Hayle would have had a prospect of acquiring the financial benefits it sought to achieve. The value of that opportunity could be ascertained by reference to the degree of probabilities or possibilities: Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, 355. That returns of the level shown by the Business Plan are expected by a venturer providing $2 million capital, demonstrates the magnitude of the risks which lie in the way of the achievement of those returns.
456 Causation and the existence of a loss needs to be established on the balance of probabilities, although that standard is inappropriate to the assessment of the amount of a loss where the assessment depends upon an evaluation of future possibilities: Sellars at 355 and 367. The finding that a loss has been suffered is to be made on the balance of probabilities whether or not the finding depends upon historical facts or evidence giving rise to competing hypotheses: Bennett v Minister of Community Welfare (1992) 176 CLR 408 at 423 per Gaudron J. See also Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494 at 511 where McHugh, Hayne and Callinan JJ referred to the plaintiff having to prove that he "could and would" have entered into an alternative contract but for his reliance on the misleading and deceptive conduct of the defendant.
457 Thus, in order to prove loss and causation Hayle needs to establish on the balance of probabilities that:
- but for the misleading and deceptive conduct which I have found, it would not have entered into the contract with ATG;
- it could and would have obtained venture capital to establish and operate Hayle-USA from an alternative source;
- it lost the opportunity of deriving profits from Hayle USA by reason of the misleading and deceptive conduct which I have found.
458 In Sellars the prejudice or disadvantage which the respondents suffered in consequence of the misleading and deceptive conduct was the loss of the opportunity or chance of securing commercial benefits, which entry into and completion of the Pagini agreement would have brought. Both the majority (p 356) and Brennan J (p 368) regarded it as significant that but for the misleading and deceptive conduct, the Pagini contract would have been entered into. Although, on the probabilities it would not have been completed because conditions precedent to the performance would not have been satisfied, there was a significant chance (40 per cent) that it would have been.
459 I am not satisfied on the balance of probabilities either that Hayle would have obtained venture capital in the USA had it broken off negotiations with ATG at the end of October 1995, nor am I satisfied to the requisite standard that whatever chance of obtaining venture capital which Hayle then had, was destroyed by the circumstances surrounding ATG's withdrawal from the project.
460 As to the first of those matters, one of the reasons for the March 1995 visit to the USA was to ascertain the level of interest in providing venture capital to the project. Thereafter Hayle chose to proceed with its negotiations with ATG rather than pursuing whatever venture capital opportunities were available in America. No venture capitalist who was contacted on that visit gave evidence that it had any interest in providing venture capital to the project. No venture capitalist was called to say that it would have been prepared to provide venture capital, and if so, on what terms. No practice was established such as would enable one to conclude that the present case was one in which venture capital would ordinarily be provided on acceptable terms. Venture capitalists are a heterogeneous group of people and the evidence from each expert was little more than an educated speculation as to what others might or might not have done, falling short of proof on the balance of probabilities.
461 As to the second, again there is a disagreement between the experts. Both Mr Feigen and Mr Rider were witnesses who were honestly expressing different views, but I was more persuaded by the following evidence given by Mr Feigen in cross-examination:
"You do agree that the pull out of ATG within ten weeks of funding the matter the first time is a serious question which would need to be fully explained before a venture capitalist would invest? --- Yes, I think that's a significant question.
You agree that the fact that one venture capitalist had pulled out of a deal that it had agreed to fund is something that other venture capitalists would take seriously? --- They would ask questions. They wouldn't kill the deal.
Well, when you say it wouldn't kill the deal it would depend on just whether the venture capitalist was able to satisfy itself that there was no smell remaining about the deal, that's right, isn't it? --- What the issues are, yes, whether there is a smell or something else.
And unless the smell could be dispelled the venture capitalist wouldn't touch it, that's right, isn't it? --- It might express an interest but certainly when they due diligence they wouldn't do the deal until that was explained." (T 858)
than by the reasons given by Mr Rider in support of his "highly unlikely" answer to question 3 posed in the first report. Whilst I generally accept Mr Browne's evidence that in 1996, his concentration was upon securing licensees, rather than venture capital, it is clear from the trip reports that there were at least some venture capitalists who were spoken to, but there is no evidentiary foundation for a conclusion that any of them were deterred from investing by reason of the ATG experience.
462 It follows that Hayle has not made out its case to recover the pre-tax profits and the hypothetical value of its profit entitlement. Even if Hayle had established on the balance of probabilities that venture capital would have been raised by it, I would not have been satisfied on the balance of probabilities that the results projected in the Business Plan would have been achieved, or that the lesser ATG figures would have been achieved.
463 Either there would have to be an assessment of the chance of achieving those results, or the projections would need to be substantially discounted to allow for contingencies. Hayle was willing to part with a 30 per cent interest in the venture for a contribution of $2 million by way of venture capital and ATG was willing to pay $2 million in order to obtain a 30 per cent interest in the chance of obtaining the revenue stream predicted by the projections of the Business Plan. Its risks were hedged by the tranches and the tranching conditions, but on a very broad view, that suggests that, if venture capital is obtained, the value of a 70 per cent interest in the chance of obtaining the revenue stream predicted by those projections is of the order of $4.66 million. Whilst no evidence was called that this was an appropriate method of calculating damages, it approximates a market assessment of the value of the opportunity and in my view it more closely reflects reality than the artificial calculations undertaken by Mr Vella and Ms Exner.
464 Given my conclusion on the expert evidence, it is hard to make an assessment of the chances of Hayle obtaining venture capital in the USA before and after the ATG transaction. Nor, in view of my conclusion, is it necessary for me to do so. If I had to make a percentage estimate I would estimate the prospects of obtaining venture capital in the USA before the ATG transaction as being of the order of 30 per cent, and after the ATG transaction as being of the order of 10 per cent. But I would find it difficult to martial reasoned arguments in support of the particular percentages I have chosen rather than some other percentage which was less than 50 per cent, such as, eg, 40 per cent.
465 If I were wrong in my conclusion that Hayle needs to establish on the balance of probabilities that it would have been successful in raising venture capital in the USA, and it was sufficient to establish that it had, eg, a 30 per cent chance of doing so which was lost, then in the absence of any other evidence as to the value of the chance, I would have estimated the value of the lost chance of obtaining venture capital and achieving the projections of the Business Plan at 30 per cent of $4.6 million, ie $1.38 million.