Lovick & Son Developments Pty Ltd & Anor v Doppstadt Australia Pty Ltd & Anor

The Plaintiffs' Damages Case 5Developments and Engineering claimed damages under the Trade Practices Act, s 82. Their damages case was advanced upon the hypothesis that if the defendants had not engaged in misleading and deceptive conduct then: they would have purchased a Peterson grinder in February 2004 rather than the AK430K; and, if they had purchased a Peterson grinder then, the plaintiffs would have generated a profit from operating the Peterson machine that substantially exceeded the profit the plaintiffs actually made in using the AK430K machine after February 2004, a difference which persisted until the plaintiffs acquired the Peterson machine in February 2005. 6Were this hypothesis to be established the plaintiffs sought to have damages assessed under two broad heads: (1) a loss said to have been suffered, principally by Developments, by reason of its purchasing a defective machine which had a lower market value than the consideration that Developments paid for it; and (2) a loss of profit principally suffered by Engineering by reason of it operating the AK430K, rather than the higher-earning Peterson machine, between February 2004 and February 2005. The plaintiffs' case encountered problems with proof and with its damages methodology under both these heads of damage. 7But before considering these two claimed heads of damages and the defendants' answers to them, it is first necessary to determine the threshold question: whether the plaintiffs' causation hypothesis is correct. Would Developments have purchased a Peterson machine in February 2004? 8There is good foundation for the plaintiffs' case on causation of loss, based both in the principal judgment and in relevant supplementary findings made in this second judgment. I conclude in this section that if the defendants' misleading and deceptive conduct had not induced Mr Lovick to cause the plaintiffs to purchase the AK430K, then Mr Lovick would have had them purchase the Peterson machine. The appropriate starting point towards this conclusion is the Court's existing findings. 9The Court's principal judgment was more concerned with finding whether or not the defendants' misleading and deceptive conduct induced the plaintiffs to purchase the AK430K. It was less concerned with what the plaintiffs would have done had they not been so misled. But in the principal judgment the Court found, that Mr Lovick investigated a number of alternative machines before purchasing the AK430K, that these inspections included a Peterson machine, and that when problems emerged in 2004 with the AK430K, Mr Lovick had ordered a Peterson machine to replace the AK430K by August 2004: Lovick & Son Developments Pty Ltd & Anor v Doppstadt Australia Pty Ltd & Anor at [4], [39] and [188]. Mr Lovick's investigations of other machines, including a Peterson, in late 2003 did not reveal any lack of availability of these machines. I find that a Peterson machine would have been available for the plaintiffs to purchase, had Developments attempted to acquire one in late 2003 or early 2004. 10In my view Mr Lovick had a strong preference for the Peterson machine. He found it difficult to make up his mind between the Peterson machine and the AK430K. That is one of the reasons, in my view, why Mr Lovick went back to Mr Davis more than once in late 2003 and in early 2004 to seek further assurances from him about the performance of the AK430K. The Court has already made findings about Mr Lovick's need for reassurance from Mr Davis about the performance of the AK430K, due to Mr Lovick's purchasing indecision: Lovick & Anor v Doppstadt Australia Pty Ltd & Anor at [110], [226] and [227]. 11There is not a great deal of evidence about Mr Lovick's further investigations of alternative machines in August 2004. But in my view he went straight back to the Peterson machine and ordered it, because in his own mind, it was his considered next preference for purchase after the defendants had persuaded him that his first preference was to purchase the AK430K. I also accept Mr Lovick's own direct evidence that if he did not purchase the AK430K that he would have purchased the Peterson machine in February 2004. 12But in summary, in my view, the inference from the existing evidence is clear: without the influence of the defendants' contravening conduct Mr Lovick would have caused Developments to purchase and Engineering to operate a Peterson machine rather than the AK430K. 13Before assessing the plaintiffs' two claimed heads of damage there are some other preliminary questions relating to causation of loss which require short analysis: the question of what loss was suffered by each plaintiff; and, the question of the liability of the individual defendants for damages for the particular representations that the Court has found to be misleading and deceptive. Two other preliminary matters relating to causation of loss 14Does it matter what loss was suffered by each plaintiff? The plaintiffs set up a dual structure, explained in the principal judgment, in which Developments acquired heavy earthmoving equipment and leased it to Engineering to operate the equipment under contract with third parties for a profit: Lovick & Anor v Doppstadt Australia Pty Ltd & Anor at [3]. 15When this issue was dealt with in the principal judgment it was anticipated that issues might arise in the assessment of damages about which of these two companies Developments and Engineering had suffered any claimable loss: Lovick & Son Developments Pty Ltd & Anor v Doppstadt Australia Pty Ltd & Anor at [9] and [36]. But this issue has not remained during the course of argument on damages. Both Developments and Engineering are joined as plaintiffs. Mr Lovick controls both entities. Between them Developments and Engineering account for all the relevant purchase and operating decisions that caused any of the loss claimed to have been suffered as a result of the defendants' contravening conduct. There is no other entity, which acquired or operated the AK430K, which the defendants say suffered any relevant loss. It is therefore not necessary in these reasons to apportion any loss between the two plaintiffs. Any damage suffered can be attributed to them jointly. 16That is the approach taken in these reasons. Indeed, often in these reasons, because Mr Lovick can speak for both plaintiffs, there is no need to distinguish between Developments and Engineering other than incidentally. 17Does the plaintiff's failure to make out some representations affect the present damages assessment? The plaintiffs did not make out all of their pleaded representations against all defendants. The question arises whether the plaintiffs' failure to make out some of the pleaded representations means that the plaintiffs cannot establish a causal link between the defendants established contraventions of the Trade Practices Act and the Fair Trading Act, and the loss they have claimed. 18The Court has found that the defendants have made a series of misleading and deceptive representations as pleaded: Lovick & Son Developments Pty Ltd & Anor v Doppstadt Australia Pty Ltd & Anor at [143] to [156] and [210] to 223]. In my view, each one of the misrepresentations, which were found to have been made, induced the plaintiffs to purchase the AK430K. All of the representations were made before the plaintiffs' purchase of the AK430K. And each was misleading and deceptive at the time of purchase and was operative on Mr Lovick's mind inducing him to cause Developments to make the purchase of the AK430 instead of the Peterson machine. Thus, each of the pleaded representations has the same damages effect and is sufficient on its own to account for the damages assessed in these reasons. There is no need to distinguish among the various misrepresentations for the purpose of assessing damages. 19A similar issue presents itself in relation to whether there is a different assessment of the quantum of damages as against Doppstadt Australia and against Mr Davis. The Court has found that misleading conduct, for which Mr Davis was responsible as a principal (whether the conduct relates to future matters for which insufficient grounds have been established to displace the defendants' onus of proof under Trade Practices Act, s 51A or Fair Trading Act, s 42, or whether it relates to present misleading conduct) was mostly also the conduct of Doppstadt Australia inducing the plaintiffs to purchase the AK430K: Lovick & Son Developments Pty Ltd & Anor v Doppstadt Australia Pty Ltd & Anor at [237]. Both Doppstadt Australia and Mr Davis engaged in sufficiently overlapping contravening conduct leading to the AK430K's purchase, rather than the purchase of the Peterson machine, that the same assessment of the quantum of any damage is warranted against each of them. On the findings the Court has made there is no difference in the assessment of damages against Doppstadt Australia and Mr Davis. 20The plaintiffs' two heads of claimed damage are: (1) a claim for loss based on the difference between the price Developments paid and the market value of the AK430K at the time of acquisition; and, (2) a claim for loss of profits during the first 12 months of Engineering's operation of the AK430K. (1) The plaintiffs' claim for undervalue upon acquisition of the AK430K. 21The plaintiffs' case for the assessment of damages based upon loss at the moment of acquisition of the AK430K may be shortly stated. The plaintiffs submit that the market value of the AK430K was significantly lower than the price of that was paid for it. The difference is claimed as a head of damage. Conventionally when such a claim is presented plaintiffs obtain expert evidence about the actual market value of the inadequate product compared with the price paid on acquisition. The difference between the two is a well-recognised head of damage for misleading and deceptive conduct: Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281. 22But here the plaintiffs did not call any expert evidence about the market value of the AK430K at the time of acquisition. No particular criticism should be levelled at the plaintiffs for this. They originally advanced their claim in many different ways, in contract, and for various other alleged misrepresentations, that were either abandoned or were not made out. The case now advanced was the only one not abandoned. That some of its evidentiary ingredients might be a little lacking was perhaps not entirely surprising. 23In the absence of expert evidence, the plaintiffs constructed their case for this head of damage in a different way. There was no issue that the plaintiff's purchased the AK430K for $602,328. The plaintiffs calculated their claim for loss of value at $275,048.64. To reach this figure the plaintiffs needed to infer the actual market value of the AK430K at the time of purchase by some means. They did so by the following steps: (1) they applied 12% depreciation to the purchase price of $602,328 to cover the first year's operations of the AK430K, being a depreciation figure of $72,279.36, leaving a net value after depreciation at the end of the first year's operation of $530,048.64; (2) they then deducted from this figure the AK430K's February 2007 sale price of $255,000, the figure negotiated when the plaintiffs sold the SK430K machine to Adelaide Hills; (3) as a result the plaintiffs reached a net figure for claimed loss of $275,048.64 (being $530,048.64 minus $255,000). But for many reasons this calculation does not allow the Court to infer the actual market value of the AK430K at the time of the plaintiffs' purchase. This prevents any reliable loss calculation under this head of damage being done. 24In the absence of expert evidence the plaintiffs' calculation seeks to take advantage of the only available evidence of the market value of the AK430K, the Adelaide Hills' sale price. But this is generated three years after the time at which the comparison should be made. In my view, the plaintiffs' calculation says nothing useful about market value of this machine in February 2004. The plaintiffs' calculation is no more than what it purports to be, the assumed depreciated value (from cost) of the machine over three years, compared with its then sale price. It is not a methodology that speaks to the machine's market value in February 2004. But there are other problems with the methodology. 25The depreciation calculation is flawed and arbitrary. Why was 12 per cent chosen? Why was depreciation calculated only over one year? Counsel for the plaintiffs candidly explained in submissions that the 12 per cent depreciation figure was taken "from some sort of tax guide". But the damages evidence as presented does not support an inference that this was an accepted depreciation figure to use in 2005 for heavy earthmoving equipment such as the AK430K. The Court should not be left to try and work an appropriate figure itself from other diffuse materials. Moreover, the one year calculation is wrong. The plaintiffs are trying to work forward three years to calculate the then depreciated value of the AK430K to compare it with the actual market sale price of $255,000 for the machine in February 2007. Three years depreciation, not one year's depreciation, should be used to achieve this objective. If three years depreciation at an assumed rate of 12 per cent is used the numbers look quite different: at the end of the second year the depreciated value of the machine at this rate is $466,442.80 (being $530,048.64 less $63,605.84 [$530,048.64 x 12 per cent] in depreciation); and, at the end of the third year the depreciated value of the machine is $410,469.66 (being $466,442.80 less $55,973.14 [$466,442.80 x 12 per cent] in depreciation). 26The difference between $410,469.66 and the February 2007 sale price of $255,000 is $155,469.66, a figure over $100,000 lower than the plaintiffs' calculated loss of $275,048.64. If a higher depreciation rate is used, as may perhaps arguably be appropriate for heavy machinery such as this, the plaintiffs' margin of claimed loss is much thinner. Doubling the depreciation rate to 24 per cent for example would significantly alter the plaintiffs' claim under this head. In my view, even if the plaintiffs' methodology is accepted, the uncertainties of undefined depreciation calculations over three years make the methodology unreliable in producing a proxy for the depreciated value of the price paid for the machine. 27The Adelaide Hills February 2007 sale price of $255,000 is not a reliable indicator of the market value of the AK430K in February 2004. Too much had happened to the machine in the intervening three years for any reliable inference to be drawn about its 2004 market value. The AK430K had: not been well managed by Mr Lovick to the point that the Court has assessed a discount of one third from the plaintiffs' damages on account of a failure to mitigate loss; been altered with extra steel plating and changed electrical systems and other repairs that made it different from the machine sold to the plaintiffs in February 2004; and, been left idle for two years from February 2005 to February 2007, without the regular maintenance that goes with daily operations, thereby increasing the risk of some forms of deterioration such as corrosion. The Adelaide Hills' sale price cannot be used to infer the market value of the machine in 2004. Expert evidence based upon examination of the machine may have been able to make reasonable allowances for some of the variables mentioned here. In the absence of expert evidence, the inference that the plaintiffs submit the Court should draw is no more than speculation. 28The applicable legal principles in relation to the assessment of Trade Practices Act and Fair Trading Act damages are clear. The defendants point to many of these as significant hurdles to the plaintiffs establishing an entitlement to an award of damages in their favour. The question to be asked is not how much better off the plaintiffs would have been if the misleading or deceptive statements were true, but how much worse off they are established to be by reason of them having relied upon those statements: Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1. Merely showing wrongful conduct on the part of the defendant is not enough itself to found a claim in damages: Enzed Holdings Ltd v Wynthea Pty Ltd (1984) 57 ALR 167. The plaintiffs must prove through evidence a rational foundation for a proper estimate of damage: Schindler Lifts Australia Pty Ltd v Debelak (1989) 89 ALR 275 at 319, per Pincus J. To the extent the plaintiffs' claim is analogous to an action in deceit, the prima facie measure of damages is the difference between the price paid and the value of the thing purchased at the time of purchase, although losses induced by the fraud and directly incurred in conducting a business acquired as a result of misrepresentation may be awarded: Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281. 29Applying these authorities, in my view the plaintiffs have failed to establish through their evidence a rational foundation for their first head of damages. In the result therefore their claim for loss based on the difference between the price Developments paid and the market value of the AK430K at the time of its acquisition does not succeed. 30Under the next head of damages a contest took place about: what profit the plaintiffs would have made if they had purchased a Peterson grinder in February 2004, compared with the profit that they did make from the AK430K they purchased. (2) The claim for loss of profits during the first 12 months of operation 31The second head of the plaintiffs' damages was their contention that if they had not been misled in February 2004, Engineering would have been making profits from operating the Peterson machine and not the lower-profit making AK430K that was in fact operated between February 2004 and February 2005. 32The Court has found Engineering would have operated the Peterson machine between February 2004 and February 2005, if the plaintiffs had not been misled. The question now is whether the plaintiffs have established that they have suffered any loss as a result of operating the AK430K rather than the Peterson machine during this period. 33The plaintiffs faced a number of obstacles in proof. Principal among these was the fact that the plaintiffs did not retain all their primary financial records for the 2005-2006 Financial Year, the first year of operation of the Peterson grinder. But first it is necessary to state the plaintiffs' loss of profit case. 34The plaintiffs' case for loss of profits assumes that their proper measure of damages may go beyond the difference between the real value of the thing acquired as at the date of its acquisition and the price they paid for it. There is a proper legal basis for this approach. In some cases it may be appropriate to compensate not only for the difference between the value of the thing acquired and the price paid for it, but also the losses induced by the misrepresentation and directly incurred in either conducting a business, or as here, operating a piece of equipment: Gould v Vaggelas (1985) 157 CLR 215 at p 221-222, p 241, p 255, p 266-267, and Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281 at p 291. In my view this is an appropriate case where losses induced by the misleading conduct can be calculated for a limited period of 12 months. The calculation can be done with a reasonable degree of certainty and reliability for this limited period. 35The plaintiffs claim a loss of profits in the sum of $477,129. This figure is the difference between the profit per month made on the Peterson grinder of $42,210 in its first five months of operation (making an annual figure of $506,520), less the actual profit made by the AK430K in its first year of operation of $29,391. Thus, the plaintiffs are seeking to use the Peterson's actual figures for the five months after February 2005 as representative of the figures that would have been achieved 12 months before in February 2004. 36In my view the plaintiffs surmount this first hurdle. I find there was sufficient work available for the plaintiffs to use the Peterson grinder to the same capacity between February 2004 and February 2005 as it was in fact used between February 2005 and June 2005. Both Mr Lovick and Mr Hurley said this was the case, and I accept that evidence. Moreover, witnesses such as Mr Robert Wilton who straddle the 2004 operation of the AK430K and the 2005 operation of the Peterson machine did not speak of any major differences in demand. Subject to one matter, the two periods were in my view quite comparable. 37It is necessary to briefly examine the various integers of the defendants' calculation of the plaintiffs' calculation. The plaintiffs base their 12 months lost profit from the Peterson machine ($506,520) by extrapolating over 12 months the $42,210 in monthly profit for the Peterson machine in the 5 months between February and June 2005, an amount of $42,210 per month. I accept this calculation as well based in the best financial evidence available. The monthly figure of $42,210 for that 5 month period is derived in the following way. For that period the Peterson grinder had sales revenue of $734,044, non-finance expenses of $267,296 and finance expenses of $255,696. For the 5 month period the difference between sales revenue of $734,044 and total expenses of $522,992, is $211,052 or $42,210.40 per month. 38I also accept the actual profit for the AK430K for its first 12 months was $29,391 (being revenue for the period of $510,481, less total expenses of $481,090). Subject to some further discounts and some matters put by the defendants I accept the plaintiffs' calculations. 39The plaintiffs' calculations do not allow for two factors. The first factor is that the Peterson figures for the first 5 months of 2005 are generated in a period when Mr Lovick had been in the contracting business using shredders for over 12 months. By then he had a highly capable operator, Mr Wilton, operating a Peterson machine. He was always going to have more difficulty in operating any machine in early 2004 than he was in 2005. His 2004 earnings should be discounted to reflect this. Second, they should be discounted to reflect the perhaps slight, possibility that something may have gone wrong with the purchase of the Peterson. In my view the plaintiffs' damages calculation should be discounted by 20 per cent to reflect these factors. Thus the loss of earnings from February 2004 to February 2005 is $381,703.20 (being $477,129 less 20 per cent). 40This figure should in turn be discounted on account of the plaintiffs failing to mitigate their loss, a discount of one third. Thus the final award of damages to the plaintiffs under this head of damages is $254,468.80 (being $381,703.20 x two thirds). 41Interest will need to be calculated on this sum by the parties. The figure is advanced as a pre tax figure. At the time of calculating interest, the parties may wish to advance any submissions in relation to the effect of taxation. 42The defendants point to a number of problems with this part of the plaintiffs' case. First, some of the plaintiffs' primary financial records are missing. But despite that I accept that the plaintiffs' account of the earnings for the relevant five month period are accurate and should be accepted. 43The defendant also said there was double counting between the plaintiffs' two heads of damage. But by reason of the Court's findings on the first head of damage this issue falls away. The defendants also sought to rely upon a supplementary report from Mr Grotte, an expert who sought to dispute aspects of the plaintiffs' figures. But this report was too late and I rule that it should not be admitted into evidence. Conclusions and Orders 44In the result therefore the plaintiffs have succeeded on one of their heads of damage but failed on the other. The plaintiffs have failed to establish any loss at the time of their acquisition of the AK430K in February 2004, by reason of the difference between the price that the plaintiffs paid for the machine and the actual market value of the acquired machine at the time. But the plaintiffs have succeeded in establishing, after discounts, a loss of profits of $254,468.80 by reason of their operating the AK430K rather than the Peterson machine between February 2004 and February 2005. These results mean that the parties will need to calculate interest under Civil Procedure Act 2005, s 100 up to the date of judgment based upon the Court's supplementary findings in these reasons. The parties should undertake those calculations and provide agreed calculations of interest to the Court by arrangement with my associate. 45Now that all the court's findings in relation to liability and damages are available the picture in relation to costs is clearer. Ordinarily costs will follow the event, unless the court otherwise orders. The plaintiffs have been successful but for considerably less than was claimed. The plaintiffs have only succeeded in establishing a claim for loss of profits between February 2004 and February 2005, which has been discounted for the plaintiffs' failure to mitigate their loss. These findings may perhaps generate argument about the appropriate costs orders in this case. Moreover one or other party may apply for a special costs order. At the same time as receiving any calculations of interest the Court will hear any argument about costs and the effect of taxation. This further hearing will be appointed at 9:30am one morning early in the 2013 Law Term. A suitable date at the commencement of the new law term should be arranged with my Associate. 46Accordingly therefore the Court will order or direct: (a) That the parties bring in short minutes order to give effect to these reasons, including any calculations of interest up to judgment pursuant to Civil Procedure Act, s 100 and the parties should provide those short minutes in draft to my Associate by 5pm on 12 February 2013. (b) Any party wishing to apply for a special costs order or to put submissions about the effect of taxation may file written submissions on that subject with my Associate by 5pm on 12 February 2013. (c) Grant liberty to apply.

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