Hudson Resources Limited v Australian Diatomite Mining Pty Limited & Anor

IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST

Monday 27 May 2002 ex tempore Revised Thursday 30 May 2002

50001/01 HUDSON RESOURCES LIMITED v AUSTRALIAN DIATOMITE MINING PTY LIMITED & ANOR JUDGMENT 1 In proceedings No. 5001 of 2001 a reserved judgment was delivered on 3 May 2002. 2 Leave was reserved to the parties to address submissions in relation to the appropriate orders to be made and submissions have accordingly been so addressed. In the result the parties have agreed on the following matters: · the plaintiff's entitlement to $22,612 representing loss of royalties between 1 May 2000 and 30 June 2000, together with interest on that amount of $4,483.37 calculated between 1 July 2000 and 27 May 2002 as follows: Interest on Royalties Period Interest Rate No. of Days Amount Outstanding Interest (a) 1 July 2000 to 31 August 2000 at 10% pa ($22,612 x 10%) 62 days 0.1 62 $22,612 $384.09

(b) 1 September 2000 to 31 August 2001 at 11% pa ($22,612 x 121%) 365 days 0.11 365 $22,612 $2,498.32

(c) 1 September 2001 to 28 February 2002 at 10% pa ($22,612 x 10%) 181 days 0.1 181 $22,612 $1,121.31

(d) 1 March 2002 to 27 May 2002 at 9% pa ($22,612 x 9%) 88 days 0.9 88 $22,612 $490.65 TOTAL $4,483.37

· The plaintiff's entitlement to the amount of $735,971 representing loss of profits in respect of the entire Thrifty Cat business of the plaintiff for a six-year period from 1 July 2000 calculated on a contribution margin of $54.95 per tonne and using a discount rate of 24 percent. The calculations accepted by both parties are as follows:

Contribution Margin per tonne $54.95 Loss of Profits Per Annum $196,501.20

Regains market after 6 years $735,971 Interest on loss of profits component 3 The first issue which separates the parties concerns the plaintiff's claim which is pressed in terms of interest on the loss of profits. The plaintiff's claim is to an amount of $66,217.23 said to be appropriate to compensate the plaintiff for the loss which it has suffered and being interest on the amount of $735,951 from 1 July 2001 until 27 May 2002, being the anticipated date of judgment. In this regard the plaintiff's written submission was as follows: "Both expert accountants were requested to, and did, calculate the loss of profits from 1 July 2000 (paragraph 5.2.1 of Mr Pascoe's first report PX 2 page 10; paragraph 6.2 of Mr Potter's first report, PX 3). Both expert accountants discounted the annual losses to a present value (paragraph 5.2.15 of Mr Pascoe's first report, PX 2 page 10; paragraph 7.1 of Mr Potter's first report, PX 3). Both expert accountants added no interest for the annual loss in the year 1 July 2000 to 30 June 2001 and discounted the annual losses for the years after 1 July 2001 back to a present value at 1 July 2001 (paragraph 7.4 of Mr Pascoe's first report, PX 2 page 16; paragraph 9.1 (iii) of Mr Potter's first report, PX 3). The findings in paragraphs 161, 166, 216 and 217 of the Judgment reflect the same approach utilising a 24% discount rate. The consequence of these matters is that the Court has found that the Plaintiff has suffered a loss of $735,951, in respect of which the annual losses between 1 July 2001 and 30 June 2006 have been discounted at 24% to give a present value as at 1 July 2001 and the annual loss between 1 July 2000 and 30 June 2001 has not been discounted, or the subject of any interest addition. In order to compensate properly the Plaintiff for the loss which it has suffered it is necessary to award interest on the amount of $735,951 from 1 July 2001 until 27 May 2002, the date of judgment. Otherwise, the value of the five years of annual losses is, through the discounting process, reduced for among other reasons the time value of money (paragraph 5.2.15 of Mr Pascoe's first report, PX 2 page 13; paragraph 7.2 of Mr Potter's first report, PX 3) - without the same time value of money being recognised in respect of their losses, through interest under s94. Equally, in relation to the annual loss in the year from 1 July 2000 to 30 June 2001 there should be an award of interest from 1 July 2001 up to the date of judgment. Such an approach accords with principle. In Bennett v. Jones [1977] 2 NSWLR 355, 363 Moffit P, with whom Samuels JA agreed (376) said: "It is in point to observe that the component of an award in respect of future elements, in which the date of trial provides the base date for discount, means that such component of the verdict has not been outstanding, so that the occasion to exercise the discretion to award interest in relation to that part of the verdict does not arise. The wide discretion given by s94, would not extend to awarding interest on such a component not outstanding … it would be different if future elements, i.e. forward from the date of the accident had been discounted using the date of the accident as the base date for discount ." (underlining added). A similar theme is manifest in the Court of Appeal's judgment in Burger King Corporation v Hungry Jack's Pty Limited, unreported, [2001] NSWCA 187 at [643] and [644]. The Court of Appeal there accepted that it was appropriate, in a loss of future profits case, to calculate the loss at the date of judgment by discounting losses post-judgment date at an appropriate discount rate and by not awarding interest from the date of the cause of action to the date of judgment. That approach avoids rewarding a defendant for the time value of money without also rewarding a plaintiff for the time value of money. Indeed, if that approach were to be applied to the present case the overall verdict amount would increase, by reason of the differential between the 24% discount rate and the Schedule J rates up to 27 May 2002." The precise form of calculation leading to this claim is as follows:

Interest on Loss of Profits Claim Period Interest No Amount Interest Rate PA of Days Outstanding (a) 1 July 2001 to 31 August 2001 at 0.11 62 $735,971 $13,751.57 11% pa ($735,971 x 11%) 62 days (b) 1 September 2001 to 28 February 0.1 181 $735,971 $36,496.10 2002 at 10% pa ($735,971 x 10%) 181 days (c) 1 March 2002 to 27 May 2002 at 9% pa ($735,971 x 9%) 88 days 0.09 88 $735,971 $15,969.56 $66,217.23

4 The defendants' submissions in this regard are that no interest should be awarded to the plaintiff for that amount of the loss of profits which constitutes a future loss. The further submission is that if the plaintiff be entitled to interest at all on the loss of profits component of its claim, then that interest should only be on that portion of the loss of profits that the plaintiff would have earned up to the date of judgment, namely 27 May 2002. 5 It seems to me that the defendants' further submission is correct. I accept as correct the approach taken by the defendants in their written submissions as follows: "Interest is not awarded on compensation for loss or damage which will be suffered in the future: · Fire and All Risks Insurance Co v. Callinan (1978) 140 CLR 427; · Atlas Tiles Ltd v. Briers (1978) 144 CLR 202; · Bennet v. Jones [1977] 2 NSWLR 355.

The defendants accept that each of the expert accountants calculated the loss of profits from 1 July 2000 and each did so to discount the annual losses to a present day value. The relevant divergence in the accountant's views was the appropriate discount rate to be applied. The discount rate is applied to take into account all contingencies and risks associated with future possible profits of the Thrifty Cat product, including cash flow, market loss and other matters. Mr Potter, in his first report at pages 20 -26 goes into great detail as to the factors by which he reached the discount rate of 24%. His opinion was confirmed in his second report (see pages 4-6). The opinions of Mr Potter were accepted by the Court (see paragraphs 212 to 216 of the judgment). The discount rate is also applied to take into account the fact that the plaintiff has the money in a lump sum now rather than as a future income stream (thus avoiding all of the exigencies of obtaining the money in the future). The application of the discount rate to the loss of profits does not, however, change the character of that award, namely, an award for future losses . The usual rule as to no interest being payable for damages future losses applies.

The awarding of interest is compensatory. If the Court awarded the Plaintiff interest on future loss of profits in this case, in effect it will be over compensating the plaintiff for the future loss. It would also be significantly eroding the appropriate discount rate of 24% that it found, on the evidence before it, to be appropriate." 6 In the result, in the Court holds that the appropriate amount of interest on loss of profits is an amount of $38,151.60 calculated as follows: Interest on Loss of Profits Claim

Period Interest No of Days Sub Total- Rate Interest

(a) 1 July 2000 to 31 August 2000 0.11 62 $ 6,085.82

(b) 1 September 2000 to 31 August 2001 0.11 365 $26,767.23

(c) 1 September 2001 to 28 February 2002 0.10 181 $ 4,778.71

(d) 1 March 2002 to 27 May 2002 0.9 88 $ 519.83 TOTAL $38,151.60

Those calculations are supported by the defendants' Schedule D, a copy which is appended to this judgment as Appendix "A". 7 During the course of the submissions in relation to the short minutes of order on this issue, the defendants initially submitted that the parties were apparently agreed on the relevant principle, which is that where a loss of profits claim is concerned it is appropriate to consider an award of interest on the component of past loss of profits but not on the component of future loss of profits. Mr Cashion, SC, initially submitted that the complaint of the plaintiff could be solved by the experts being asked to calculate as at a date, for example, seven days from now, the past loss of profits figure so that one would be in a position to give interest in that regard and to likewise identify the figure for future loss of profits so that no interest in that regard would be ordered. 8 On reflection following Mr Wood having referred both the Court and the defendants to the detail which is to be found in schedule D of the defendants' submissions, that detail appears to comprehend with sufficient specificity the very point that Mr Cashion was suggesting may be appropriately the subject of further calculation. In that regard both parties, following their respective submissions, appeared to accept that if the Court was disposed to accede to the defendants' written submissions, the plaintiff would not pursue any further or other or different regime to achieve that end. To a certain extent this is then the result following the Court's indication of its tentative views, and those orders in respect of the damages to which the plaintiff is entitled will be made in a few moments. Costs 9 The second issue, which has drawn further submissions, relates to the appropriate orders to be made in respect of costs. 10 In my view the appropriate order is that sought by the plaintiff, namely, that the second defendant pay the plaintiff's costs of the proceedings, excluding any question of costs of or related to the cross-claim which has not been litigated and is to be litigated before the District Court. The appropriate course is for it to be noted that there is to be no order for costs in respect of the first defendant. Such an order, it seems to me, represents the proper exercise of the discretion under section 76 (1) of the Supreme Court Act 1970 and Part 52A rule 11 of the Supreme Court Rules in terms of the subject litigation. The factors which dictate, as it seems to me, this exercise of the courts discretion are the following: · The particularly technical nature of the issue involving the liability of the first defendant (paragraph 15 of the judgment). · The issue of the liability of the first defendant, as opposed to the second defendant, apparently being of no particular moment, having regard to the parent/subsidiary relationship (paragraphs 12, 15 and 19 of the judgment). · The finding that it was a matter for the election of the Defendants as to which was to be regarded as the licensee (paragraph 17 of the judgment) justified the prudent commencement of proceedings against both. · The common representation of the defendants, the minimal time spent on the issue of the identity of the contracting party and the absence of material significance in drawing a distinction between the two defendants (paragraph 19 of the judgment). 11 The final matters which were the subject of some address and submission concerned the defendants' claim that it was appropriate to order the judgment sum to be payable within 28 days. In my view, that is not the appropriate order, but I readily accept that the appropriate order once the court has made its formal orders is to stay the operation of those orders for a limited period of time. 12 In that regard, the defendants have clearly had since the date of delivery of the reserved judgment of 3 May 2002 to consider whether or not to appeal that judgment. 13 In most situations, on being informed, as I have been by the defendants' senior counsel, or counsel, that the defendants are closely considering whether or not to appeal, it would likely be my practice to simply as of course stay the operation of the orders for a period of 28 days in which to allow that to occur. In this situation, however, Mr Wood of counsel, who appears for the plaintiff, has indicated that the plaintiff has some real concerns on the question of the defendants' financial position and on the question of whether or not the second defendant has the wherewithal to pay the amount to be awarded. No evidence in that regard is before the court. It seems to me that notwithstanding Mr Cashion's submission, that the appropriate stay order should be for a period longer than approximately 10 days, it is appropriate for the court to simply stay operation of the orders for the period up to and including Wednesday, 5 June. The Court is cognisant of the fact that the Court of Appeal hears motions on Mondays. It is likely going to be necessary for the defendants, when they determine whether or not to appeal, to apply to the Court of Appeal for a stay. Naturally, this court has jurisdiction to order a stay, and, of course, the Court of Appeal has that jurisdiction. 14 To my mind, the fair course is to stay operation of the orders up to and including 5 June 2002 in anticipation of the defendants', if it is practicable for them to do so, filing a notice of appeal and a notice of motion for an extension of the stay before the Court of Appeal and seeking to have that motion heard on Monday, 3 May. If the defendants are unable to meet that tight timetable, then they are entitled, of course, to apply to me as the court of first instance to extend the stay, and that application would no doubt then be pursued some time probably on 5 May, but the fact is that by that point in time the plaintiffs may or may not have been able to mobilise some further materials going to this question of the financial position of the defendants. It seems to me that that is the proper course to protect the interests of both parties in circumstances where already some real period of time, in the order of three weeks, has passed since the delivery of the reserved judgment. 15 It is finally appropriate to mention that the proceedings were heard in a fashion which, as the judgment recorded, did not include litigation of the cross-claims for the reasons set out in the judgment. Neither party appears to oppose an order being made for the cross-claim to be transferred to the District Court to be litigated, and I propose to make that order. 16 In the result the Court's orders are as follows: 1. Judgment for the plaintiff against the second defendant in the sum of $801,217.97 2. Order that the second defendant pay the plaintiff's costs of the proceedings, costs of the cross-claim not yet litigated being reserved for the determination of the District Court of New South Wales; 3. Note that there is to be no order for costs in respect of the first defendant's costs of the proceedings; 4. Order pursuant to section 143 of the District Court Act 1973 that the cross-claim be transferred to the District Court. 5. Order that orders 1, 2 and 4 be stayed up to and including 5 June 2002.

I certify that paragraphs 1 - 16 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on Monday 27May 2002 ex tempore and revised on 30 May 2002

              Susan Piggott
              Associate
              30 May 2002

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