LED Builders Pty Ltd v Eagle Homes Pty Ltd

1990 0 24 1991 8 33 1992 6 39 1993 9 80 1994 31 144 1995 27 149 1996 6 133

No doubt various interpretations of these figures can be suggested. The figures for 1996 suggest to me that Eagle was able to maintain its increased level of sales even when its sales of houses built in accordance with infringing plans had fallen away. 15 I do not accept LED's submission that if Eagle had offered non-infringing plans as alternatives to the infringing plans, it would still not have sold any more than the 65 per cent of houses I have previously concluded it would have sold in any event without the infringing plans. Evidence was not adduced directed to the present issue. Consistently with the evidence before me, Eagle might well have received revenue from the construction of houses built in accordance with both its existing non-infringing plans and alternative non-infringing plans, as great as, or even greater than, the revenue which it in fact received from the construction of houses in accordance with the infringing plans. 16 Unlike the position in Kettle Chip, there is no satisfactory evidentiary basis on which I can assess, with reasonable approximation, how successful any alternative plans and selling activity would have been. I do not think it appropriate to give credit to Eagle for some percentage less than 100 per cent of the general overheads attributable to the construction of houses in accordance with infringing plans.

Interest received by Eagle 17 As noted above, the question is raised whether certain interest received by Eagle during the period in question should be taken into account. LED submits that it should be deducted from interest paid by Eagle to financial institutions in the same period. Eagle submits that it should not be taken into account. I will not consider other possibilities to which submissions are not addressed. 18 The evidence relating to the interest receipts in question is sparse. Eagle concedes that certain interest received by a related company, Eagle Management Australia Pty Ltd ("Eagle Management"), should be deducted from Eagle's own overheads. Those interest receipts are referred to in balance sheets for Eagle Management which were annexed to an affidavit of Valeri. However, the parties have not referred me to balance sheets or similar documents relating to Eagle itself and I have not been able to locate any. The interest receipts of Eagle are referred to in a report of Deborah Anne Cartwright ("Cartwright"), the expert accountant called by LED. Eagle does not appear to dispute that the amounts referred to by Cartwright were in fact received by it by way of interest. In fact, it submits that the amounts were received from "other Eagle Group companies". For its part, LED referred to the payments as "interest from related companies for funds lent to them". I proceed on the footing that the payments were in the nature of interest received by Eagle from loans of surplus funds to related companies, and that the question is whether they should be taken into account. 19 LED notes that Tony Vella ("Vella"), the expert accountant called by Eagle, accepted in one of his reports that the interest received by Eagle Management should be deducted. Eagle, on the other hand, relies on the following passage from a report prepared by Vella: "In her calculations Ms Cartwright includes interest income of Eagle Management as an offset to overhead costs. [It appears that Cartwright in fact meant to refer to interest income of Eagle, as Vella himself had proposed that interest income of Eagle Management be offset against Eagle's overheads.] In my view the interest income is properly referable to the investment of surplus monies. This is not an appropriate adjustment to overhead costs. In Ms Cartwright's terms this interest income is not related to the project home business. If [LED] were awarded interest on any account of profits, there would be 'double-counting' to the extent of any award of interest on an account of [Eagle's] profits which already include interest." 20 In my opinion, to take into account interest received by Eagle would not lead to "double counting". LED is not suggesting that Eagle should be required to account for the interest received by it from "the investment of surplus monies"; rather, LED's submission is simply that the interest should be treated as an offset. 21 The true question is whether the fact that the interest was not directly derived from Eagle's main business, building project homes, signifies that it is irrelevant to the calculation of overheads. In my view it does not have that effect. If, as is common ground, interest paid by Eagle on its borrowings is properly to be seen as a general overhead expense, interest received by it on the investment of funds surplus to its immediate requirements should, in my opinion, also be taken into account, in my view. 22 LED submits that the interest received by Eagle should be deducted from the interest paid by it. Eagle does not seem to oppose that approach if I should reject its submission that interest received is to be ignored completely. 23 Accordingly, I am content to accept LED's submission.

"Above market" rent 24 LED contends and Eagle appears to accept that certain rent paid by Eagle which Eagle seeks to have taken into account as an overhead was paid to a related entity at above market rates. Vella and Cartwright agree that the rent paid and the market rent for the years in question are as follows: Year Rent paid Market rent Difference [A] [B] [A] - [B] 1991 9,600 8,074 (1,526) 1992 20,800 16,316 (4,484) 1993 20,800 16,608 (4,192) 1994 50,326 70,647 20,321 1995 237,649 198,792 (38,857) 1996 213,817 197,775 (16,042)

The largest discrepancy occurred in 1995 when Eagle paid rent at around market rent plus 19.5 per cent, or, to express the comparison differently, market rent was 83.7 of the rent actually paid. 25 LED submits that Eagle should be allowed only market rent, not the rent actually paid where that rent exceeded the market rent. Eagle, on the other hand, submits that LED must "take the business of the infringer [Eagle] as it is": Dart v Décor at 133, per McHugh J. LED replies that this principle does not apply in the case of a non-commercial transaction between related companies. 26 There must be cases in which the principle identified by Eagle does not apply. For example, if the rent paid by Eagle were so grossly inflated that it had the effect of increasing its overheads to the point where Eagle appeared to make no profit from the construction of the infringing houses, the rent actually paid would surely be ignored. The reason is that Eagle would be making a profit from the construction which would be concealed by an accounting device. Indeed, in my Reasons for Judgment of 7 May 1999 I held that certain superannuation payments made to the directors of Eagle should not be taken into account as they were "so irregular that I [did] not see a basis for inferring that they form[ed] part of a salary package and therefore part of the cost of the construction of the [infringing] houses." 27 The question here is whether the discrepancy between the actual rent and the market rent is so great that the actual rent should be ignored. While the figures do, perhaps, give some cause for suspicion, I do not think that it is. I note that in 1994 Eagle in fact paid rent at below market rate. I note also that there is no suggestion that the premises in respect of which the rent was paid were not used in Eagle's business of constructing project homes. 28 In my view, this is a case in which the general principle applies and LED must take Eagle's business as it finds it.

Simple or compound interest 29 In my Reasons for Decision of 7 May 1999, I held, for reasons then given which need not be repeated, that LED should have compound interest on the amount of profits for which Eagle is required to account. LED had made written submissions to that effect and had referred to them in its oral submissions. Eagle submitted, in effect, that no interest should be awarded, but did not make any submission as to the availability or appropriateness of compound interest. Eagle now seeks leave to reopen its submissions on this issue for the purpose of contending that compound interest should not be awarded. Eagle conceded that the failure to make submissions on the issue was due to oversight. LED opposes Eagle's application for leave. 30 In support of its application, Eagle refers to ICI Chemicals & Polymers Ltd v The Lubrizol Corp Inc [1999] FCA 662, in which Emmett J granted leave to the respondent to reopen after Reasons for Decision had been delivered. His Honour referred to the judgment of Mason CJ in Autodesk Inc v Dyason (No 2) (1993) 176 CLR 300, where the then Chief Justice said that a Court may exercise its jurisdiction to grant leave to reopen where: "the Court has apparently proceeded according to some misapprehension of the facts or the relevant law and … this misapprehension cannot be attributed solely to the neglect or default of the party seeking the rehearing." (at 303) Emmett J also referred to the principle that a court should not pronounce judgment against a person on a ground which that person has not had an opportunity to argue, but his Honour added: "where, in the course of argument, one party has raised a ground in express terms, the other party will have had sufficient opportunity to argue that ground." (at [7]) 31 In ICI v Lubrizol, the applicant ("ICI") claimed that a patent which had been granted to the respondent ("Lubrizol") was invalid. Lubrizol had abandoned some of the claims in the patent and Emmett J held that the remaining claims did not conform to the specification in that the specification was too wide. His Honour therefore considered that the patent was invalid by reason of non-compliance with s 40 (3) of the Patents Act 1990 (Cth). Non-compliance with s 40 (3) was one of the grounds of invalidity relied upon by ICI in its particulars of invalidity. However, the particulars it had given of that ground did not raise the issue upon which his Honour found the patent invalid. Nor was that issue raised in the detailed written submissions of ICI. Emmett J granted Lubrizol leave to reopen, saying (at [15]-[16]): "I am satisfied that the failure on the part of Lubrizol to address that question was the result of a misapprehension on the part of counsel for Lubrizol. That misapprehension may have been contributed to, at least in part, by the absence of reference to the question of disconformity in the Particulars of Invalidity and in the written submissions. … This is not a case where orders have been made. Further, the question now raised does not involve any further evidence and the matter was raised as soon as practicable after my earlier reasons had been delivered. Indeed, I am concerned that, in the circumstances, I may have proceeded according to a misapprehension of the facts and the law. I am not satisfied that any such misapprehension should be attributed to the neglect or default of Lubrizol. I consider, therefore, that the interests of justice require that I should have regard to such further submissions as Lubrizol wishes to make in answer to the contention advanced on behalf of ICI on the question of disconformity." 32 Eagle points out that the present case is also one in which orders have not yet been made and no further evidence is required. It submits, moreover, that its case for reopening is stronger than that of Lubrizol because other issues remained to be determined here, namely, those issues which I have resolved above. 33 Eagle has not shown, however, that its failure to make submissions against the awarding of compound interest was not solely attributable to its own "neglect or default", to use the words of Mason CJ in Autodesk v Dyason. It is true that LED's original written submissions on interest began by referring to s 51A of the Federal Court of Australia Act 1976 (Cth) pursuant to which simple and not compound interest may be awarded. But those submissions clearly went on to claim compound interest by analogy with the case of a trustee who had misused trust monies. LED's submissions referred to the cases upon which I relied in my earlier Reasons for Judgment in awarding compound interest. Those submissions were received by Eagle two weeks before it was required to file and serve submissions in reply and more than a month before the day set aside for oral elaboration on submissions. While the case was complex and raised many issues, I do not think that responsibility for Eagle's failure to make submissions on the present issue can be attributed to anyone but Eagle. 34 I do not understand the authorities relied on by LED to constrain my discretion to grant Eagle leave to reopen its submissions. The passages from Autodesk v Dyason and ICI v Lubrizol to which I have referred do not do so in my opinion. Clearly, the fact that a failure to make submissions on a point is, as here, solely attributable to the neglect or default of the party seeking leave will militate against the granting of the application for leave. But it will not necessarily defeat the application in all cases. A consequence of acceptance of the opposing view would seem to be the extreme one that counsel's failure, through oversight, to make submissions on an issue before he or she closed submissions in the morning could not be remedied by the granting of leave during the course of the hearing of other parties' submissions in the afternoon. I would not accept such a position unless authority clearly required me to do so. 35 In the present case, all that had happened by the time Eagle sought leave to reopen is that I had published my earlier Reasons for Judgment. Other issues remained to be addressed in submissions in any event. The application for leave and the further submissions of both parties on the question of "simple or compound interest", were able to be heard at the same time as the parties' submissions on the other outstanding issues. For these reasons, I think that Eagle should have the leave which it seeks. I grant that leave accordingly. 36 On the substantive issue, Eagle refers to the judgment of Lord Browne-Wilkinson in Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1996] AC 669. In that case, the Council was due to make payments to the Bank under a swap agreement which was subsequently held to have been made ultra vires the Council. The Council was, however, ordered to repay the amount "borrowed" and still owing to the Bank together with interest. The question before the House of Lords was whether the interest should be simple or compound. His Lordship noted that it was common ground that there was no jurisdiction at law or under s 35A of the Supreme Court Act 1981 (UK) (the equivalent of s 51A of the Federal Court of Australia Act 1976 (Cth)) to award compound interest. He observed, however, that it was accepted that "in certain limited circumstances courts of equity can award compound interest": at 701. His Lordship said: "In the absence of fraud courts of equity have never awarded compound interest except against a trustee or other person owing fiduciary duties who is accountable for profits made from his position. Equity awarded simple interest at a time when courts of law had no right under common law or statute to award any interest. The award of compound interest was restricted to cases where the award was in lieu of an account of profits improperly made by the trustee. We were not referred to any case where compound interest had been awarded in the absence of fiduciary accountability for a profit." (emphasis supplied) Clearly, the passage assumes the importance of the requirement that a fiduciary must not profit at all from his or her position and that all profit made in breach of that principle must be accounted for. 37 His Lordship went on to refer with approval to the following passage from the judgment of Lord Hatherley LC in Burdick v Garrick (1870) LR 5 Ch App 233 at 241: "the court does not proceed against an accounting party by way of punishing him for making use of the plaintiff's money by directing rests, or payment of compound interest, but proceeds upon this principle, either that he has made, or has put himself into such a position as that he is to be presumed to have made, 5 per cent, or compound interest, as the case may be." In Burdick v Garrick, the plaintiff, as administratrix of her husband's estate, sought an account from a solicitor who had been instructed by the deceased husband to invest his funds in his name. Instead, the solicitor paid most of the funds into the general account of his firm. On the taking of the account the question of interest arose. Lord Hatherley LC said that where money received has been invested in an ordinary trade, "the Court presumes that the party against whom relief is sought has made that amount of profit which persons ordinarily do make in that trade, and in those cases the Court directs rests to be made [ie, that the interest be compounded]": at 242. However, his Lordship went on to say that "[t]here is nothing like compound interest obtained upon the money employed by a solicitor" and that as no profit making by the solicitor had been proved and none could be inferred, the interest should not be compounded: ibid. 38 In the Westdeutsche case, Lord Browne-Wilkinson considered that the principle in Burdick v Garrick was more fully stated by Buckley LJ in Wallersteiner v Moir (No 2) [1975] QB 373 at 397 as follows: "Where a trustee has retained trust money in his own hands, he will be accountable for the profit which he has made or which he is assumed to have made from the use of the money. In Attorney-General v Alford, 4 De GM & G 843, 851, Lord Cranworth LC said: 'What the court ought to do, I think, is to charge him only with the interest which he has received, or which it is justly entitled to say he ought to have received, or which it is so fairly to be presumed that he did receive that he is estopped from saying that he did not receive it.' This is an application of the doctrine that the court will not allow a trustee to make any profit from his trust. The defaulting trustee is normally charged with simple interest only, but if it is established that he has used the money in trade he may be charged compound interest: see Burdick v Garrick, 5 Ch App 233, per Lord Hatherley LC, at p 241, …. The justification for charging compound interest normally lies in the fact that profits earned in trade would be likely to be used as working capital for earning further profits. Precisely similar equitable principles apply to an agent who has retained moneys of his principal in his hands and used them for his own purposes: Burdick v Garrick." (emphasis supplied) 39 Wallersteiner v Moir (No 2) was a case in which an account was sought by a minority shareholder against a director who had misapplied company funds to purchase shares for his own benefit. Buckley LJ noted that there was no evidence of the profit that had in fact been made by the director by the acquisition of the shares. His Lordship went on to say (at 398): "The transaction was, however, clearly one of a commercial character, and in the absence of evidence to the contrary the court should assume that it has been profitable to him. Accordingly it is, in my opinion, equitable that the judgment awarded against him should include interest as a conventional measure of the profit he is to be taken to have made. Considering the nature of [the director's] operations as a financier and as a dealer in and manipulator of large shareholdings in commercial companies, it is in my opinion right to treat the investment in [the] shares … as made by him in the course of that business and as calculated to be commercially valuable to him in the prosecution of that business. I accordingly agree that this is a case in which it is proper to charge compound interest with yearly rests." Compound interest was awarded at 1 per cent above the official bank rate or minimum lending rate in operation from time to time. 40 In my opinion, the rationale for the award of compound interest in Burdick v Garrick and Wallersteiner v Moir (No 2), which were both cases of an accounting by a defaulting fiduciary,is applicable where a person, in the course of business, infringes another's copyright and is required to account for profits arising from the infringement. That rationale is simply that the defaulting fiduciary or copyright infringer should not be allowed to make any profit from the breach of breach of fiduciary duty or infringement of copyright and should therefore be required to account for all profits made from the breach or infringement. In the present case, I infer that the profits made by Eagle were "used as working capital for earning further profits". It is therefore proper to award compound interest in order that Eagle will disgorge all the profits it made from the infringement. 41 Eagle also submits that the rates of interest set out in Schedule J to the Rules of the Supreme Court of New South Wales are higher than commercial rates of interest, partly to reflect the fact that ordinarily only simple interest is awarded. It submits, accordingly, that an award of compound interest would have the effect of punishing it. However, Eagle has not pointed to any authority or other material in support of its present submission. It has not sought to prove that a rate of interest lower than that set out in Schedule J is more appropriate. In Namol Pty Ltd v AW Baulderstone Pty Ltd (No 2) (1993) 47 FCR 388 at 389, Davies J adopted the rates set out in Schedule J (albeit not compounded) "because those rates reflect commercial rates of interest". I also note that in Hagan v Waterhouse (1992) 34 NSWLR 308 at 393, Kearney J awarded compound interest at the rates specified from time to time in the Practice Notes of the Supreme Court of New South Wales. Currently, Practice Note 92 provides that the rates set out in Schedule J apply.

CONCLUSION 42 The proceedings will be stood over to a date for the making of orders, including orders as to costs. I certify that the preceding forty two (42) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Associate: Dated: 19 August 1999 Counsel for the Applicant: Mr P L G Brereton SC and Mr M J Leeming

Counsel for the Respondent: Mr D K Catterns QC and Mr R Alkadamani

Solicitor for the Respondent: Banki, Haddock, Fiora