Malec v J C Hutton

Supreme Court of NSW|2001-09-13|Before: Kirby J, Cole J, Trading Co P, Keers P, Liftronic P, Rabelais P, Hodgson J

CITATION : P M Sulcs V Daihatsu Aust - Costs & Interest [2001] NSWSC 798 CURRENT JURISDICTION: Common Law Division FILE NUMBER(S) : SC 11489/93 HEARING DATE(S) : 17/08/01 30/08/01 JUDGMENT DATE : 13 September 2001

PARTIES : P M Sulcs & Associates Pty Limited (Plaintiff) Daihatsu Australia Pty Limited (Defendant) JUDGMENT OF : Kirby J

COUNSEL : C Stevens QC/T J Hancock (Pl) S D Rares SC/D B Studdy (Def) SOLICITORS : Oliveri Attorneys (Pl) Clayton Utz (Def) CATCHWORDS : Damages for the loss of a chance - Discounting back to date of breach - Discretion to reduce costs - Award of interest - Taxation on verdict - whether allowance should be made - Re-opening the orders - the power to re-open - The Slip Rule NSW Supreme Court Act, 1970 LEGISLATION CITED : Evidence Act, 1995 Workers' Compansation Act, 1926 Malec v J C Hutton (1990) 169 CLR 638 MacKinnon v Petersen (Cole J, unreported, 19.04.89) Hughes v Western Australian Cricket Association (Inc) (1986) ATPR 40-748 Cretazzo v Lombardi (1975) 13 SASR 4 Pheeney v Doolan (No 2) [1977] 1 NSWLR 601 Bennett v Jones [1977] 2 NSWLR 355 Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322 Anderson's (Pacific) Trading Co P/L v Karlander New Guinea Line Ltd [1980] 2 NSWLR 870 Gill v Australian Wheat Board [1980] 2 NSWLR 795 CASES CITED : NSW Cancer Council v Sarfaty (1992) 28 NSWLR 68 Daniels v Anderson (1995) 37 NSWLR 438 Storey & Keers P/L & Anor v Johnstone (1987) 9 NSWLR 446 De L v Director General of the NSW Department of Community Services [No 2] [1997] 190 CLR 207 Liftronic P/L v Commissioner of Taxation (1966) 66 FCR 175 Whitaker v The Commissioner of Taxtion (1998) 82 FCR 261 Rogers v Whitaker (1992) 178 CLR 479 Bonic v Fieldair (Deniliquin) P/L & Ors [1999] NSWSC 636 Provan v HCL Real Estate Ltd 24 ATR 238 Tuite & Anor v Exelby & Ors 93 ATC (Qld) 4,293 Rabelais P/L v Cameron & Ors (Hodgson J, unreported, 31.07.91) DECISION : Ref para 120

THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

11489/93 - P M SULCS & ASSOCIATES PTY LIMITED v DAIHATSU AUSTRALIA PTY LIMITED

1 HIS HONOUR: On 1 August 2001, I published my reasons for an order in these terms: (para 915)

"1. There should be a verdict for the plaintiff in the sum of $1,862,600, plus costs and interest.

I will reserve for submission (in the absence of agreement) the precise orders which should be made in respect of costs and interest.

The matter should come back before me at a time convenient to the parties, within 14 days, for submissions on outstanding matters. The parties have liberty to approach my Associate to fix a time." 2 The matter was listed on 17 August 2001, and again on 30 August 2001, to deal with outstanding issues. The following matters were the subject of argument: · First, whether in the calculation of the amount allowed for the loss of a chance ($1,683,600), there was need for a further adjustment to bring the amount back to the date of the breach, 4 July 1989. · Secondly, the costs that should be awarded. · Thirdly, whether interest should be awarded. · Fourthly, whether having used net figures in assessing the loss of a chance, an amount should be allowed for any taxation that may be payable upon the sum awarded. 3 I will deal with these issues in turn.

The Loss of a Chance 4 In assessing the loss of a chance I had the benefit of expert testimony called by each party. The experts, however, approached the issue of valuing the chance lost to P M Sulcs in markedly different ways (para 809). Mr Weeks (called by the plaintiff) used future maintainable earnings as a method of valuation. Mr Lonergan (called by the defendant) adopted a discounted cash flow methodology. I accepted the criticisms of Mr Lonergan of the methodology used by Mr Weeks (para 813). Mr Lonergan, in using the discounted cash flow method, produced certain tables of the projected earnings of P M Sulcs. An abbreviated version of Mr Lonergan's table is reproduced as Table 2 (para 902). It was my view that the assumptions made by Mr Lonergan in producing those figures were, with one or two exceptions, reasonable. Making adjustments to reflect the exceptions, that is the assumptions which I believed appropriate, I then produced Table 3 (para 902). Table 3 sets out the potential net profit after tax of P M Sulcs in the financial years 1990 to 1996 inclusive. 5 The following reproduces the bottom line of Table 3: Year ended 30 June 1990 $'000 1991 $'000 1992 $'000 1993 $'000 1994 $'000 1995 $'000 1996 $'000 Net profit after tax 592 769 275 285 293 294 294

6 The total of these amounts is $2,806,000. That stream of income represented, in my belief, the income which P M Sulcs would have earned from the reference site with its converted software, if everything had fallen into place. The issue then became, in accordance with Malec v J C Hutton (1990) 169 CLR 638, a matter of assessing the prospects of the plaintiff earning that stream of income. In that context I said this: (para 913) "The discount rate, as applied in a valuation based upon a discounted cash flow methodology, provides some guidance in determining the prospects of success had the plaintiff been permitted to exploit the chance which it lost. In my assessment, the appropriate discount, reflecting the plaintiff's prospects of successfully achieving the earnings set out in Table 3 is 40%. In other words, I assess the plaintiff's prospects of earning the stream of income in Table 3 as 60%. Applying that rate, the loss of the chance should be valued at $1,683,600." 7 That paragraph generated a good deal of debate. I had, of course, simply added the net income earned by P M Sulcs each year between 1990 and 1996. I had then allowed 60% of that sum ($1,683,600). The defendant suggested that I had missed out one step. The value of the lost chance had to be assessed as at the date of the breach (4 July 1989). In accordance with valuation practice, and adopting the discounted cash flow methodology (which both valuers agreed was appropriate for a product with a limited life) (supra para 814), it was necessary to discount back to July 1989 the stream of income which would have been earned progressively to 1996. The issue was: What sum of money would it have been necessary to invest in order to produce the stream of income in Table 3? 8 The plaintiff suggested that I should not disturb the finding I had made ($1,683,600). Rather, when dealing with the separate question of interest, I could do justice to the parties by recognising that the money would be progressively earned, and allow interest on each sum as it would have been earned (taking the mid point of each year). 9 I am persuaded, however, that I did overlook the need to discount the stream of income earned between 1990 and 1996 back to 1989, the date of the breach. In respect of that issue, the approach of Mr Lonergan and Mr Weeks appeared to be the same. Mr Weeks said this: (Aff 27.8.01) "7.2 According to accepted valuation principles, in order to determine the value of a stream of future receipts at a valuation date (in this case 5 July 1989) that stream of receipts must be discounted by a Present Value Factor applicable to each period of receipt. This is consistent with the 'time value' of money concept, namely that money received today is worth more to the recipient than the same amount of money received in the future." 10 The issue arises as to the appropriate discount rate. That rate should not reflect any risk or uncertainty in achieving the results set out in Table 3. I have already assessed that risk as a 60% chance (or, in other words, a 40% discount). The risk free rate was described by Mr Weeks in the following terms: (Aff 27.8.01) "7.4 On this assumption, the appropriate discount rate to apply in the methodology referred to in paragraph 7.2 is the 'risk-free' rate which is the 'price of certainty'. For this income stream, the risk-free rate should be approximated using the 10 Year Government Treasury Bond rate at 5 July 1989. That rate was 13.6%." 11 Mr Lonergan had the same view. That is a compounding rate, in contrast to the interest that may be awarded under s94 of the Supreme Court Act. 12 The loss of a chance discounted at that rate to the date of the breach (4 July 1989) is as follows: (Lonergan: Aff 29.8.01) Table 3 - total $2,806,000 Discounted to 4.7.89 $2,019,800 Discounted by 40% $1,211,900

13 The appropriate amendment to para 914, therefore, is as follows: · Licence Fee $75,000 · Maintenance Fee $22,500 · Modifications $81,500 · Loss of Chance $1,211,900 Verdict $1,390,900

Principles as to Costs 14 Costs are in the discretion of the Court (s76(1) Supreme Court Act 1970). Ordinarily, costs follow the event, unless it appears to the Court that some other order is appropriate (Pt52A r11). 15 Cole J, in the context of a construction dispute, made the following remarks in MacKinnon v Petersen (unreported, 19 April 1989) at pp 6/7: "In my view, as a general rule, it is wrong in concept to regard litigation in the construction industry in which a sum claimed comprises a multitude of claims requiring resolution, as being a series of separate and distinct claims each of which should attract separate consideration in relation to costs. Normally the general rule will apply. Of course, there may be cases in which a particular item, issue or aspect of the litigation is so dominant or separable that, in the exercise of a judicial discretion, it will be appropriate to award costs to a party successful on that issue although unsuccessful overall, or to decline to award the successful party overall the costs of that issue. However, in the usual case where the parties are concerned with the amount of money payable by the owner to the builder, or vice versa, and resolution of that issue involves the determination of many separate issues, claims or aspects of liability, the normal approach should be to regard the party who obtains a verdict as being successful in the litigation and entitled to its costs. The real dispute between parties in such circumstances is not the entitlement in relation to each of a multitude of claims, but the overall entitlement or obligation of one party from or to the other. The circumstance that many smaller constituent claims require consideration will not normally, of itself, be a sufficient ground for departing from the usual rule prescribed by Pt 52 r 11." 16 Toohey J, when sitting in the Federal Court, in Hughes v Western Australian Cricket Association (Inc) (1986) ATPR 40-748, made a number of observations concerning the powers of the Federal Court to order costs. The Federal Court Act, and its rules, are expressed in terms not dissimilar to the Supreme Court Act and rules. Referring to the wide discretion to award costs, Toohey J said this: "The discretion must of course be exercised judicially. There are decisions, both of Australian and English courts, that throw light on the way in which the discretion is to be exercised. I shall not refer to those decisions in any detail; I shall simply set out in a summary way what I understand to be their effect. 1. Ordinarily, costs follow the event and a successful litigant receives his costs in the absence of special circumstances justifying some other order. Ritter v Godfrey (1920) 2 KB 47. 2. Where a litigant has succeeded only upon a portion of his claim, the circumstances may make it reasonable that he bear the expense of litigating that portion upon which he has failed. Forster v Farquhar (1893) 1 QB 564. 3. A successful party who has failed on certain issues may not only be deprived of the costs of those issues but may be ordered as well to pay the other party's costs of them. In this sense, 'issue' does not mean a precise issue in the technical pleading sense but any disputed question of fact or of law. Cretazzo v Lombardi (1975) 13 SASR 4 at p 12." 17 His Honour drew attention to the judgment of Jacobs J in Cretazzo v Lombardi (1975) 13 SASR 4 where the following was said: (at p 16) "But the trials occur daily in which the party, who in the end is wholly or substantially successful, nevertheless fails along the way on particular issues of fact or law. …. There are, of course many factors affecting the exercise of the discretion as to costs in each case, including in particular, the severability of the issues, and no two cases are alike. I wish merely to lend no encouragement to any suggestion that a party against whom the judgment goes ought nevertheless to anticipate a favourable exercise of the judicial discretion as to costs in respect of issues upon which he may have succeeded, based merely on his success in those particular issues." 18 Toohey J, applying these principles to the matter before him, said this: "In the present case it is true that if one took a head count of the causes of action pleaded in the statement of claim, the applicant failed on more than he succeeded, and by some margin. Nevertheless, the applicant succeeded in his primary aim, viz, to challenge the operation of r2:38:1 of the rules of the Cricket Council in so far as the rule operated to preclude him from playing district cricket by reason of his participation in the South African tours." 19 His Honour added: "It is relevant, but not conclusive, to consider how much time of the hearing was taken up with evidence and submissions relating to those issues on which the applicant failed. This is not an easy task because much of the evidence bore upon more than one cause of action. Counsel for the applicant did offer some dissection of time spent, by reference to the evidence of particular witnesses and to addresses and noted what he contended was the relatively little time taken up in addresses on those issues on which the applicant failed." 20 Ultimately, the order made by his Honour was in these terms: "In my view justice would be served by awarding the applicant 75% of his costs."

Defendant's Submissions 21 The defendant's ultimate submission was that the plaintiff should have no more than 50% of its costs. It based that submission upon a number of matters. Paraphrasing its arguments, they were as follows: · First, the defendant pointed to the extravagant nature of the plaintiff's claim, compared to the amount recovered. · Secondly, there was a substantial body of evidence which was either inadmissible or not pressed. · Thirdly, the plaintiff discovered important additional material part way through the trial (the financial records of P M Sulcs). · Fourthly, the "fractured nature" of the trial was largely due to the failure of the plaintiff to provide admissible evidence in a timely way. 22 Dealing with these issues, the plaintiff certainly put what may be thought to be an ambit claim. Particulars were supplied from time to time, as requested by the defendant. Affidavits in support of the plaintiff's case were also filed (notably from Dr Bradley), attempting to provide a basis for such claims. There was significant variation in the amounts claimed. The defendant's submission accurately recorded that variation in these words: (Daihatsu Subs: 16.8.01, para 5(a)) "(a) the Plaintiff's claim during the course of these proceedings has ranged from an unspecified amount for breach of contract and alternatively $191,988.50 for quantum meruit, $2,998,308.84 for 'direct loss' and $132,758,388.96 for 'loss of chance', $702,306,172.28 for breach of contract (which included loss of a chance) and $191,988.50 for quantum meruit, $3.1 billion, a claim not less than $100 million, $45.6 million and $17.1 million." (footnotes omitted) 23 The amount awarded (as adjusted by this judgment, namely, $1,390,900) is a very small fraction of the amount claimed. However, a defendant can, of course, protect itself against extravagant claims by an Offer of Compromise. 24 The plaintiff tendered correspondence between the solicitors for the parties in respect of offers of settlement which were "without prejudice". The material was tendered on the issue of costs pursuant to s131 of the Evidence Act, 1995. It was to answer a claim by the defendants that "the sheer size and the vigour with which the (claim) was pressed meant that the defendant had no choice but to meet it at face value" (Plaintiff's Subs: 3.09.01, para 3). However, I do not believe that it is necessary for me to examine this material. I accept that offers were made, back and forth, between the plaintiff and the defendant. However, relevantly, the offers of the defendant were not such as to effect the plaintiff's entitlement to costs. Nor were they such as to entitle the plaintiff to indemnity costs. I do not, therefore, regard them as relevant or helpful. 25 I should move to the second argument, since there is some overlap between the points being made. The second argument has more substance. The source of the extravagant claims by the plaintiff was the opinion of Dr Bradley. Dr Bradley was an expert retained by the plaintiff. He furnished an affidavit in March 1999. He assessed the lost chance at $2.91 billion realistically, and $1.45 billion pessimistically. A further affidavit from Dr Bradley was sworn on 10 December 1999. The value of the chance was recalculated to be $3.04 billion realistically and $1.27 billion pessimistically. 26 The defendant protested that these affidavits were patently inadmissible, and they were right. The evidence was struck out on 17 August 2000. The assumptions made by Dr Bradley had not been stated, nor his methodology adequately explained. There was a companion affidavit by Professor Deegan. Essentially Professor Deegan had checked the calculations of Dr Bradley. An order was made that P M Sulcs file any further expert evidence upon which it relied by 6 November 2000. The plaintiff then made a decision to abandon Dr Bradley and Professor Deegan. It filed a supplementary affidavit from Mr Musson (sworn 6.11.00). It also qualified Mr Alan Weeks, a Chartered Accountant (Aff 7.11.00). On 14 November 2000, the admissibility of Mr Musson's supplementary affidavit was argued. Deficiencies were apparent. Mr Musson was asked to address a number of issues. He was given until 21 November 2000 to do so, at which time a decision would be made on the admissibility of his evidence. On 20 November 2000 Mr Musson furnished a supplementary report. His evidence was ultimately admitted. 27 Mr Weeks met Mr Lonergan on 14 December 2000 in the hope of narrowing their differences. Mr Weeks acknowledged (Exhibit S: supra para 814) that, if the software was viewed as having a relatively short life (as I ultimately found), the discounted cash flow method of valuation (used by Mr Lonergan) would be the "correct methodology" (Exhibit S, para 5: supra para 814). Mr Weeks thereafter made calculations according to that methodology in a report of February 2001. 28 On 1 August 2001, when I handed down my judgment, I reserved for submissions the precise orders which should be made in respect of costs (and interest). I had in mind the evidence of Dr Bradley. I also did not know whether the defendants had made any offer of compromise exceeding the amount awarded. As it happens, they had not. 29 Moving to the third argument of the defendant (the late production of the financial records of P M Sulcs), I do not see that matter as particularly relevant. The records should have been produced earlier. They were plainly relevant. However, no significant disadvantage, in terms of costs, was occasioned by their late production. At the time they were produced, the trial was in its third week. Only three weeks had been set aside. It was plain the matter had to go over. Some costs were thrown away, but very little. 30 The final argument related to the stop/start nature of the trial. The defendant said this: (Daihatsu Subs: 16.8.01, para 5(g)) "(g) The fractured nature of the trial was largely a consequence of the way the Plaintiff chose to conduct its case including the various unsuccessful attempts to adduce admissible evidence on damages. This had the consequence that the Defendant had to unnecessarily incur a large amount of time and expense to revisit the evidence, including the transcript. The time and expense would not have been necessary had the Plaintiff initially filed admissible evidence, or at least having done so after its first attempt, and been in a position to conduct its case in the normal way." 31 However, I do not believe the plaintiff can be blamed for the "fractured nature of the trial". Each time the matter proceeded, both parties underestimated the time that would be needed to complete the evidence. A specific period was allocated, and each time it was not enough. 32 Undoubtedly time was lost in arguing the admissibility of material ultimately rejected, and through the plaintiff having to put such material into admissible form. However, that is an incident of all litigation. It was, perhaps, more significant in this case though not markedly so. The plaintiff took advantage of breaks in the proceedings to put its house in order. 33 The plaintiff has said that it will not seek to recover any costs in respect to Dr Bradley or Professor Deegan. However, that does not go far enough. Although the defendant always asserted that Dr Bradley's affidavits were patently inadmissible, it was obliged to consider that material, and to prepare for the contingency that such evidence, or part of it, may be admitted. The affidavit of Ms Narelle Smythe, the solicitor for the defendant (dated 16.8.01). describes the considerable work done in meeting the Bradley/Deegan material, which was wasted. Counsel and experts considered that material (which was bulky). Part of that consideration was, no doubt, beneficial in that it acquainted the experts with material relating to the relationship between P M Sulcs and Daihatsu, and the context within which the claim was being made. 34 Two alternatives are available. Either the costs thrown away by the affidavits of Dr Bradley and Professor Deegan could be awarded to the defendant, or some discount made on the costs awarded to the plaintiff. I believe the latter course is preferable, first, because the basis for a discount extends to some extent beyond Dr Bradley and Professor Deegan, and secondly, because it would be hard to identify, in the case of experts, and indeed the solicitors, exactly what was wasted effort, and what was partly useful for the case ultimately presented. 35 What discount on the costs payable by the defendant to the plaintiff should, in fairness, be made? Ms Smythe, in her affidavit, provided an estimate of the costs which were wasted as a consequence of this material. Her estimate was $260,000 (para 6). However, Ms Smythe added that it was not a precise figure and not based upon time sheets. Affidavits were filed by both the plaintiff's solicitor and the defendant's solicitor as to the overall costs which had been incurred in the presentation of their respective client's cases. Clayton Utz, acting for the defendant, estimated that the costs and disbursements on a solicitor/client basis, were approximately $2.2 million. The estimate provided by the plaintiff's solicitors was significantly higher (approximately $3 million). I find the latter figure staggering. Costs have obviously not yet been assessed. The estimate is obviously broad brush. I cannot imagine that the plaintiff's party and party costs will exceed the solicitor/client estimate provided by the defendant, that is, exceed $2 million. 36 However, that may be, I believe in the circumstances that awarding the plaintiff 80% of the party and party costs does justice to the overall position in respect to the various issues which I have described. At the time of the Notice of Motion for security for costs (in August 2001), I reserved costs. The Notice of Motion was unsuccessful (apart from an additional guarantee provided by Mr Hooper). The defendant should pay the plaintiff's costs of the Motion.

The Award of Interest 37 It is convenient to restate, in this context, the order made on 1 August 2001:

"1. There should be a verdict for the plaintiff in the sum of $1,862,600, plus costs and interest.

I will reserve for submission (in the absence of agreement) the precise orders which should be made in respect of costs and interest. …" 38 The plaintiff sought interest from the date of the breach (4 July 1989) to the date of judgment. It made a distinction, however, between the amounts awarded. Different considerations arise, in terms of interest, in respect of the monies payable under the contract, as a consequence of the defendant's breach ($179,000), and the damages awarded for the lost chance (now $1,211,900). Interest on the latter should be at the rate specified in Schedule J of the Supreme Court Rules (Practice Note 92). However, the rate of interest in respect of monies payable under the contract should be determined by reference to the Terms and Conditions of Sale of P M Sulcs. That agreement included the following clause: (clause 3) "Interest shall be charged by PMS on any amounts which become due under this Agreement and remain unpaid for a period in excess of the Terms of Payment at the rate of the then standard overdraft rate charged by Westpac Banking Corporation, or its successors or assigns, for overdraft accommodation for amounts of less than one hundred thousand dollars ($100,000), calculated on a daily basis from the due date thereof, to the date of actual payment." 39 That clause, according to the plaintiff, reflected an entitlement to compound interest, applying the relevant Westpac overdraft rate. The claim was opposed by Daihatsu. The Westpac overdraft rate is significantly higher than the Supreme Court rate (Schedule J). My initial reaction, which I stated, was adverse to the plaintiff's submission. No evidence was placed before me as to the Westpac overdraft rate for the period 1989 to date. I will approach both aspects of the plaintiff's claim for interest as claims at the rate specified in Schedule J.

The Defendant's Submissions 40 The defendant also drew a distinction between amounts payable under the contract and damage for the lost chance. As to the former, Daihatsu acknowledge that interest should be paid (per Schedule J) from the time monies became payable, namely: · 19 April 1989 in respect of the $75,000 Licence Fee and the $22,500 Maintenance Fee. · 18 July 1989 (being 14 days after the "invoice post 4 July 1989") in respect of the $81,500 modification of the software. 41 However, the defendant submitted it would be punitive to award interest on the money awarded for the lost chance from the date of the breach. Broadly, two reasons were advanced. First, there was significant delay in bringing and prosecuting the claim. Secondly, because of the extravagant nature of the claim, the defendant was at a disadvantage. Indeed, it was not until Mr Weeks, the expert retained by the plaintiff, formulated the plaintiff's claim by an acceptable methodology (the discounted cash flow method) that the defendant was at last apprised of the claim made by the plaintiff. That did not occur until 26 February 2001. Interest should run from that date on damages awarded for the lost chance (creating an entitlement to $68,300).

The History of the Claim 42 The defendant filed an affidavit of 16 August 2001 of Ms Narelle Smythe, a partner in Clayton Utz, the solicitors for the defendant. Although the breach was 4 July 1989, the plaintiff did not file a Statement of Claim until 29 April 1993. Demands had been made before that time, with no success. 43 The Statement of Claim, when issued, included a claim for interest. Particulars were sought by the defendant on 31 March 1993. They were not furnished until 1 February 1994. When furnished, the particulars were said to have been incomplete. On 15 March 1994 the defendant required further particulars. They were furnished on 5 September 1994. On 8 November 1994, the defendant's solicitor wrote to the plaintiff's solicitor, suggesting that the particulars bore so little relation to the Statement of Claim that an Amended Statement of Claim was required. On 28 March 1995 an Amended Statement of Claim was filed. 44 On 22 October 1997, the Court ordered the plaintiff to file its affidavits by 28 November 1997. An extension of time was given until 19 December 1997. Two affidavits were sworn by Mr Hooper and served on 7 January 1998. A further affidavit from Mr Santa Maria was served at the same time. In one of Mr Hooper's affidavits he referred to the particulars which accompanied the Statement of Claim. He expressed the opinion that the amounts claimed were reasonable. In November 1999 that evidence was rejected. 45 On 9 March 1998 the defendant arranged for the matter to be relisted. It sought an order that the plaintiff furnish proper expert evidence. An affidavit of Mr Musson (8 April 1998) was then filed (together with an affidavit of Dr John Bradley). Mr Musson identified the basis for the plaintiff's claim (although not in admissible form, and not in sufficient detail in terms of his assumptions and methodology). Eventually, that part of his affidavit in which he expressed his opinion as to the number of sales was struck out on 17 August 2000. Mr Musson, as mentioned, was required to prepare a supplementary report, which he provided on 20 November 2000. His evidence (which did not change in substance) was then admitted. 46 On 31 March 1999 a further affidavit of Mr Musson was filed, as well as another affidavit of Dr John Bradley. 47 The matter came before me in November 1999. Three weeks had been set aside. It was adjourned in the third week, in circumstances that have been described. The plaintiff produced previously undiscovered financial records of P M Sulcs which were material to the plaintiff's net loss. 48 The matter was again listed in February 2000. It could not proceed, however, because of another trial (involving a jury) in which I was then involved. It was relisted in August 2000. The first week was taken with an unsuccessful application by the defendant for further security for costs. On 17 August 2000 the admissibility of certain evidence was considered. It was apparent that Dr Bradley's evidence was not in admissible form. It neither set out the assumptions which he relied upon, nor provided an adequate explanation of his methodology. It also incorporated a commentary upon matters which were patently outside Dr Bradley's expertise. 49 By the time these issues were dealt with, however, it was plain that the period allocated (after consultation with the parties) for the completion of the hearing was insufficient. On 8 September 2000 the plaintiff was ordered to file any further expert evidence upon which it relied by 1 November 2000. 50 On 6 and 7 November 2000, two affidavits were filed, one being a supplementary affidavit from Mr Musson (sworn 6 November 2000), and the other from Mr Weeks, a Chartered Accountant retained by the plaintiff. Mr Weeks estimated the value of the chance lost to P M Sulcs at between $42.1 million and $45.6 million. On 14 November 2000, as mentioned, Mr Musson's affidavit was considered. A ruling was made that an elaboration upon certain aspects was required before it could be admitted (stating the basis for certain conclusions). That was done on 20 November 2000. 51 The experts conferred on 14 December 2000. They produced a joint statement (Exhibit S, para 814). Mr Weeks undertook to provide a supplementary report providing a valuation of the lost chance using the discounted cash flow method, at a discount rate which he thought appropriate. 52 The evidence was completed (subject to Mr Weeks' report and any rejoinder from Mr Lonergan) on 20 December 2000. 53 The matter was then stood over for the preparation of written submissions. Mr Weeks, meanwhile, produced his supplementary report on 26 February 2001 (in which he expressed the opinion that the value of the lost chance was $17.1 million). Mr Lonergan responded shortly thereafter. 54 The parties spoke to their submissions in April 2001. Judgment was reserved on 30 April 2001.

Principles Relating to Interest 55 Section 94(1) is in these terms: "s94(1) In any proceedings for the recovery of any money (including any debt or damages or the value of any goods), the Court may order that there shall be included, in the sum for which judgment is given, interest at such rate as it thinks fit on the whole or any part of the money for the whole or any part of the period between the date when the cause of action arose and the date when the judgment takes effect." 56 The section gives rise to a broad discretion. That discretion must be exercised judicially, that is in a principled way (Moffitt P in Pheeney v Doolan (No 2) [1977] 1 NSWLR 601 at 604). Reynolds JA, in that case, identified the various aspects of that discretion: (at 611) "The sections confers a four-fold discretion: (1) Whether to award interest or not; (2) whether on the whole or part of the award; (3) whether for the whole or part of the period between cause of action and judgment; and (4) as to the rate of interest." 57 The nature of an award of interest was discussed by Moffitt P in the same case, in these terms: (at 605) "While the essential nature of the award is to compensate a plaintiff by reason of delay in payment of moneys, there is no entitlement to interest. The Court must be persuaded that it is just, between the plaintiff and defendant, to make an award of interest in relation to each of the elements referred to in the section, namely the rate, the sum to bear interest, and the period for which interest is to accrue." 58 His Honour added: (at 605) "It would be a wrong approach to order interest on the whole judgment, or for the full period, on the basis that the section permits it, and that no reason is shown to the contrary or why the plaintiff should be deprived of it." 59 Reynolds JA made comments to the same effect. He said, referring to the power under s94, these words: (at 613) "It provides an ancillary power akin to an order for costs, and its purpose is to aid the count to do more complete justice between the parties than it otherwise possible." 60 Pheeney v Doolan involved a claim under the Compensation to Relatives Act, 1897. The Court awarded the widow interest on the damages awarded between the date of death and the date of payment of death benefits under the Workers' Compensation Act, 1926 (the amount under that Act being comparable to the damages ultimately awarded). 61 In Bennett v Jones [1977] 2 NSWLR 355, in the context of a personal injury claim, the defendants submitted that no interest should be awarded "by reason of the delay of the respondent's legal advisers in bringing the case to trial, and in supplying the material required of a plaintiff by various procedures of the Court" (at 367). Moffitt P (Hutley and Samuels JJA agreeing) identified the issue in these words: (at 367) "…. it is relevant to inquire what is the relevance of delay. If a plaintiff fails in some respects to give to a defendant all the information required under the court's procedures, or fails, before the action, to volunteer all information that would enable a defendant to tender or pay the sum eventually awarded, or, if the plaintiff defaults in court procedures in some other way, ought this attract a discretion not to award interest, or to limit the award?" 62 The President, in considering that issue, said this: (at 369) "When a cause of action for damages accrues, consistent with reasonable conduct on the part of all parties, some time necessarily elapses before agreement or verdict is possible." 63 His Honour then referred to the delay, and the causes of delay, which may be many. He said: (at 369/370) "It may be due to the court processes. It may be added to by the conduct of the parties, which is unreasonable on any view, or which is unreasonable to one party, but reasonably serves the interest of the other party. However, the lapse of time caused between accrual of the cause of action and payment or verdict has the consequence that the defendant has not had to pay moneys and the plaintiff has not received moneys in that period." 64 Moffitt P then identified the principle in these words: (at 370) "I see no reason why the simple fact that a defendant does not have to pay money when his liability arises, and has the benefit of non-payment for a period, should not provide a basis to make a discretionary order for payment of interest for the whole period. One has the money, and the other not." 65 His Honour elaborated: (at 371) "Unless it can be seen that there is likely to have been some relevant detriment to the defendant, it will be irrelevant that the plaintiff has not proceeded with complete promptness, or that he, or his solicitor, has not properly and fully complied with all court procedures. Such cases, of which the present is an example, are to be distinguished from cases of deliberate delaying tactics of a plaintiff or defendant, where it appears there is likely to be financial detriment to the other party." 66 The issue re-presented in the context of a commercial cause in Simonius Vischer & Co v Holt & Thompson [1979] 2 NSWLR 322. The claim in that case arose in 1960. Proceedings were commenced in 1966. The Supreme Court Act, 1970 introduced s94, giving the right to claim interest. The first trial, in November 1974, aborted due to the illness of the Judge. A claim for interest was first made a few months before the second trial in 1977. In that context, Moffitt P said this: (at 338) "The weight of the views variously expressed by this Court in Pheeney v Doolan [No2] and Bennett v Jones is that the discretion is one to be exercised in each case having regard to what is fair between the parties." 67 His Honour added: (at 338) "It has been long generally accepted that, whatever be the cause, delay between cause of action and judgment is productive of unfairness to one or other or both parties. While accepting that the defendant has the advantage of not having to pay the money and has the use of it, it does seem to me that, to make an order for the payment of interest at commercial rates extending for long periods into the past is prima facie productive of unfairness to the defendant; and that it is the more so if he has had no notice, or no early notice, of such a claim." 68 Moffitt P then made the following observation in relation to the plaintiff's delay: (at 339) "Of course, the plaintiff himself may be worse off by the delay in not receiving the money to which he is entitled, but if the delay is his, this factor may have less weight. At least, it is reasonable to conclude the plaintiffs had it in their power to bring their claim to a conclusion some years earlier than they did." 69 Other members of the Court (Reynolds JA at 339, and Samuels JA at 367) agreed. 70 In Anderson's (Pacific) Trading Co Pty Ltd v Karlander New Guinea Line Ltd [1980] 2 NSWLR 870, the Court was concerned with a claim in which there had been significant delay by the plaintiff. The cause of action arose in 1971. The writ was issued in April 1972, and was regularly renewed thereafter. It was ultimately served in April 1976. 71 There being no evidence from the plaintiff providing reasons for the delay, Hunt J determined that it was reasonable for the defendant to assume that the claim had been abandoned until the Statement of Claim was served in 1978. His Honour then made the following award: (at 877) "However, I see no detriment to the defendant in having to pay interest for at least some period during which it has had the use of the plaintiff's money. The amount it must now pay by way of damages has been fixed in terms of 1971 currency but it is to be paid in terms of the reduced value of that currency almost ten years later. In these circumstances, I propose to award interest, but not for the full period. In my view, the defendant should have anticipated a claim for interest being made as soon as the writ was served, on 24th April, 1978." 72 Here, the plaintiff was slow to commence proceedings. There was also some delay, although not substantial (given that it was a complex claim), in the provision of particulars. Finally, there was some delay in providing the defendant with expert evidence which, of course, is the intellectual basis for the various claims advanced. Even when such material was furnished, it was less than satisfactory, and ultimately, in the case of Dr Bradley and Professor Deegan, was abandoned. In the case of Mr Musson, it required re-presentation and supplementation. 73 On the other hand, a number of observations should be made to put these matters in context. 74 First, it is plain from the affidavit of Mr Oliveri (dated 27.08.01), he being the plaintiff's solicitor, that there were difficulties in the plaintiff's representation. The file passed back and forth between a number of solicitors, before Mr Oliveri received instructions in June 1998. That is perhaps not surprising. It was a large and complex matter. It appears that the solicitors acting for the plaintiff have not yet been paid. There is no evidence that the plaintiff deliberately delayed the proceedings. Delay, at least in part, one infers, came about through the complexity of the subject matter, and the difficulty the plaintiff had in representation. 75 Secondly, damages have been assessed, as the defendant urged, using the Discount Cash Flow method of valuation. As set out above, that required the calculation of the likely earnings of the plaintiff, and the discounting back of such earnings to the date of the breach. The discount rate (as set out above) was the ten year Government Treasury Bond rate as at 5 July 1989 (13.6%), the theory being that the sum awarded could have been invested in Government Bonds without risk. The 13.6% was a compound rate. As a consequence, the plaintiff's potential claim on this aspect was reduced from the arithmetical total of $2,806,000 to $2,019,800 (supra para 12). Whilst it cannot be said that the defendant had the use of the amount awarded for the lost chance (unlike the sums payable under the contract), nonetheless, it had the benefit of the reduction which arises from the valuation method (and the discount rate based upon an assumed ability to invest at 13.6% compound). 76 Thirdly, the defendant pointed to no specific detriment occasioned by the delay (apart from the "prima facie unfairness" arising out of the award of interest at commercial rates for an extended period) (per Moffitt P in Simonius Vischer & Co v Holt & Thompson (supra at 338). Part of the delay was the consequence of the listing system which then operated (whereby a matter went over part-heard at the end of the time allocated) and the failure of both parties to realistically estimate the time necessary to complete the hearing. 77 Fourthly, the means are given to a defendant to protect itself against interest by s94(3) of the Act, which is in these terms: "s94(3) In any proceedings for damages, the Court may not order the payment of interest under subsection (1) in respect of the period after the date on which an appropriate settlement sum (or the first appropriate settlement sum) has been offered unless the special circumstances of the case warrant the making of such an order." 78 An "appropriate sum" is defined in the next section, s94(4), as a sum offered by a defendant after the commencement of proceedings in settlement where the judgement does not exceed such sum by 10%. 79 No doubt it would have been advantageous to the defendant to have had, in proper form (with assumptions identified and documented), the view which the plaintiff ultimately put forward, through its experts, on the issue of damages. On the other hand, the broad basis of the plaintiff's claim was, in my view, apparent from Mr Musson's affidavit, filed in April 1998 (complying with a Court order to produce such material made in March 1998). Although Mr Musson's material was supplemented and refined, the disadvantage to the defendant can be overstated. Even when armed with that material, it did not make an offer of settlement which was an appropriate offer within s94(3). It is plain that this defendant had a view about the merits, which made it difficult to settle on any realistic basis. 80 Mr Lonergan and Mr Weeks have each made various calculations of the interest payable, depending upon the approach taken. The following table reproduces some of the calculations of Mr Lonergan: (Aff. 29.08.01) Loss of Other Items Total opportunity $'000 $'000 $'000 Amount per judgement Table 3 2,806.0 Discounted to 4 July 1989 2,019.8 Discounted by 40% 1,211.9 179.0 1,390.8 Interest from: 4 July 1989 - being the date of contract by DAP 1,845.7 272.6 2,118.3 29 April 1993 - being the date PM Sulcs filed its statement of claim 1,080.2 159.5 1,239.7 8 April 1998 - being the date of the first affidavit of Mr Musson 415.4 61.4 476.8 26 February 2001 - being the date of service of Mr Weeks' reports using DCF methodology 68.3 10.1 78.4

81 My order, at the time of judgment, disclosed my prima facie view, that justice required the award of interest to the plaintiff. Having heard detailed argument, I am persuaded that some adjustment is appropriate in respect of the interest payable on the sum awarded for the lost chance. Balancing the justice of the plaintiff's claim for interest, and the defendant's complaints about delay, and other matters, I believe it is appropriate to award interest as follows: · First, interest on the amount payable under the contract ($179,000) from the dates acknowledged by the defendant in submissions (set out in para 40) to the date of judgment. The sum calculated by Mr Lonergan ($272,600) will require adjustment since he used a commencement date of 4 July 1989, and calculated to 31 August 2001. · Secondly, interest on the sum awarded for the lost chance ($1,211,900) at the rate specified in Schedule J to run from one year after the date of the breach (ie from 4 July 1990) to date.

Provision for Taxation 82 When calculating the value of the lost chance, each of the experts used net figures, that is, earnings from which taxation (at the rate of 38%) had been subtracted. Accordingly, when I made the calculations in Table 3 I also used net earnings. The following table reproduces the relevant part of Table 3: Year ended 30 June 1990 1991 1992 1993 1994 1995 1996 $'000 $'000 $'000 $'000 $'000 $'000 $'000 Net profit before tax 955 1240 444 460 472 475 480 Tax (363) (471) (169) (175) (179) (181) (182) Net profit after tax 592 769 275 285 293 294 298

83 As set out above, net earnings were then used in calculating the value of the lost chance, applying the following discounts: · First, a 13.5% discount compounding to bring the stream of earnings back to the date of the breach, 4 July 1989 (Discount 1). · Secondly, the discount appropriate (40%) in view of the determination that the plaintiff's prospects of earning the stream of income were 60% (Discount 2). 84 Applying these discounts to the allowance made for tax, the position is as follows:

Total Tax Subtracted from $1,720,000 Gross Earnings 1990/96 Discount 1 (13.5% compound) $1,238,081 Discount 2 (40%) $742,849

85 The plaintiff asserts that it will be liable to pay tax on the verdict and interest. The tax payable, therefore, should be added to the verdict. Using the formula in the cases, the verdict should be "grossed up" for the income tax payable on the damages and interest (Gill v Australian Wheat Board [1980] 2 NSWLR 795, per Rogers J; approved in New South Wales Cancer Council v Sarfaty (1992) 23 NSWLR 68 at 87; and Daniels v Anderson (1995) 37 NSWLR 438 at 585). 86 The defendant resisted any such order. It did so upon two bases: · First, there is no power to make such an order. · Secondly, even if there were power, the order is unnecessary. The damages and interest awarded for the lost chance are capital, not income. No tax is payable. If it is payable, it is because the plaintiff is liable to capital gains tax arising from the sale in March 1990 of the shareholding in P M Sulcs to Mr Hooper and his private company. However, that was not something in the contemplation of the parties. It is therefore not something for which Daihatsu is responsible. It is too remote. The order contemplated by the judgment of 1 August 2001 should, therefore, not be disturbed. 87 I will first examine the issue of power.

The Power to Vary the Order of 1 August 2001 88 I have already altered the verdict announced on 1 August 2001. I have reduced the verdict to take account of the discount back to the date of the breach (Discount 1) (supra para 13). That was a step in a complex calculation which I overlooked. In the debate which followed, it was not suggested that I had no power to make such an amendment. In my view I did have that power. Judgment had not been entered. The reasons published on 1 August 2001 contemplated that the parties would check my calculations, and Short Minutes would ultimately be taken out. 89 Can the same be said in respect of the issue of taxation? The impact of taxation upon the verdict was not raised by either party until after the publication of the reasons of 1 August 2001. Both plaintiff and defendant, through experts, put forward opinions as to the value of the lost chance based upon net earnings. The defendant, in these circumstances, made the following submission: "2. It is submitted that the taxation consequences should be disregarded at this time and Sulcs should not be allowed, in effect, to reopen on a new and substantive issue. Tax consequences were not part of Sulcs' case, which proceeded as a case for a claim net of tax." 90 The plaintiff says that the failure to advert to the tax consequences of the verdict was an oversight. The defendant, in the computation of damages for the lost chance, had the benefit of the tax which the plaintiff would have paid on the stream of income earned. Applying what I have termed Discounts 1 and 2, the sum of $742,849 has been subtracted from the damages which the plaintiff would otherwise have been awarded (supra para 84). The amount which would have been awarded for the value of the lost chance would plainly have been higher, had gross figures been used. If the plaintiff is liable for tax, and the defendant is not liable to repay the amount deducted, there will be an injustice. The plaintiff, in effect, will have been required to pay tax twice, once when damages were calculated, and then to the Commissioner. The defendant, on the other hand, will have had a windfall. 91 The plaintiff relied upon the power under either Pt20 r10(1) (the Slip Rule) of the Supreme Court Rules, or Pt40 r9(1). 92 Dealing first with the Slip Rule, the authorities in which that Rule had been applied were reviewed by McHugh JA (when sitting in the Court of Appeal) in Storey & Keers Pty Ltd & Anor v Johnstone (1987) 9 NSWLR 446 at 449ff. His Honour identified the principle in these words: (at 452) "If the proposed variation of an order relates to a matter which was in issue in the proceedings or to something which was incidental to such a matter, the court, in my opinion, has power to amend its order if the need for the variation is the result of an accidental omission or mistake. Matters such as costs or interest on a judgment, for example, are almost always incidentally involved in proceedings, and the court has power to deal with them even though they are not specifically raised at the hearing provided, of course, the omission was accidental." 93 A question of characterisation arises. Here the defendant asserted that the issue was simply not argued. It is, in effect, a new claim. The plaintiffs asserted, on the other hand, that the issue was raised. Alternatively, the claim is incidental to issues which were raised. 94 The issue of the tax which the plaintiff would have been required to pay upon the assumed stream of earnings was certainly raised (see Table 3). The consequences, if any, of the inclusion of that item in the value of the lost chance, and the ultimate verdict, were not raised. I accept that the failure to refer to this issue was an oversight. It was but one issue amongst many in what was a complicated question. In my view, it is appropriate to characterise the matter as "incidental" to an issue in the proceedings. 95 Does that mean that one can apply the Slip Rule? Is it beyond the scope of the power given under that Rule? McHugh JA, in the same case, added the following: (at 453) "The rationale of the slip rule also requires that an omission or mistake should not be treated as accidental if the proposed amendment requires the exercise of an independent discretion or is a matter upon which a real difference of opinion might exist: cf Brew v Whitlock (No 3) (at 506). In general the test of whether a mistake or omission is accidental is that applied by Lord Herschell in Hatton v Harris (at 558) if the matter had been drawn to the court's attention would the correction at once have been made?" 96 Here, if liability to pay tax is assumed (at that assumption will be examined below), then the only discretion which may arise is the form of the order which should have been made. There are a number of variations, and controversy may be thought to surround each. Should the verdict be grossed up to include tax? If the tax is incapable of calculation, should the plaintiff be given leave to make further application if it is assessed? There are other alternatives which I will shortly examine. 97 Addressing the second aspect referred to by McHugh JA (Lord Herschell's test), had the issue been raised, and my attention drawn to the potential windfall to the defendant, on the one hand, and the injustice to the plaintiff, on the other, an order would have been made to ensure that that did not occur. The form of that order is less certain. With some hesitation, I am inclined to think that Pt20 r10(1) is available to correct the problem (assuming the plaintiff is liable to pay tax). 98 However, if I am wrong in that conclusion, the issue arises whether there is power under Pt40 r9(1) of the Rules upon which the plaintiff also relied. That Rule is in these terms: "Pt40 r9(1) The Court may set aside or vary a judgment where notice of motion for the setting aside or variation is filed before entry of the judgment." 99 The plaintiff has not filed a Notice of Motion. However, I will not delay the matter on that account. Submissions were made on 30 August 2001 directed to that Rule. No point was taken that no such submission could be entertained in the absence of a Notice of Motion. Plainly a Notice of Motion should have been filed. 100 Turning to the power given by that provision, in De L v Director General of the NSW Department of Community Services [No 2] (1997) 190 CLR 207, the High Court (Toohey, Gaudron, McHugh, Gummow and Kirby JJ) said this: (at 215) "The power of this Court to reopen its judgments or orders is not in doubt. The Court may do so if it is convinced that, in its earlier consideration of the point, it has proceeded 'on a misapprehension as to the facts or the law' ( Autodesk Inc v Dyason [No 2] (1993) 176 CLR 300 at 302) where 'there is some matter calling for review' ( Smith v NSW Bar Association (1992) 176 CLR 256 at 265) or where 'the interests of justice so require' ( Autodesk Inc v Dyason [No 2] (supra) at 322). It has been said repeatedly that a heavy burden is cast upon the applicant for reopening to show that such an exceptional course is required 'without fault on his part' ( Wentworth v Woollahra Municipal Council (1982) 149 CLR 672 at 684; cf State Rail Authority of NSW v Codelfa Construction Pty Ltd (1982) 150 CLR 29 at 38, 45-46; Nintendo Co Ltd v Centronics Systems Pty Ltd (1994) 181 CLR 134 at 168) ie without the attribution of neglect or default to the party seeking reopening ( Autodesk Inc v Dyason [No 2] (supra) at 303). By such expressions of the power to reopen final orders, courts seek to recognise competing objectives of the law. On the one hand, there is the principle of finality of litigation which reinforces the respect that should be shown to orders, final on their face, addressed to the world at large and upon which conduct may be ordered reliant upon their binding authority. On the other hand, courts recognise that accidents and oversights can sometimes occur which, unrepaired, will occasion an injustice. In the case of a final court of appeal, such as this Court, that injustice may be irremediable, unless the Court itself, acting promptly, is persuaded to reopen its orders so as to afford relief in the exceptional circumstances of the case ( Autodesk Inc v Dyason [No 2] (supra) at 302; Wentworth v Rogers [No 9] (1987) 8 NSWLR 388 at 394-395; Logwon Pty Ltd v Warringah Shire Council (1993) 33 NSWLR 13 at 28-29)." 101 Here, the application to reopen the issue was made upon the first return day after the judgement of 1 August 2001. I accept that the omission to deal specifically with the tax implications of the amount awarded for the lost chance came about without neglect or default on the part of the party seeking the reopening, namely, the plaintiff. It was an issue which was overlooked. In the context of a long and large case, it was a small issue, although one which has potentially large consequences. Were Pt20 r10(1) not available as a source of power, I believe Pt40 r9(1) would be available to correct, if justified, what may otherwise be an injustice to the plaintiff. 102 I then turn to the issue whether the plaintiff does face the prospect of a taxation assessment in respect of the damages awarded.

Liability for Taxation 103 Mr Weeks, Chartered Accountant retained by the plaintiff, swore an affidavit (27.08.01) in which he expressed the following view concerning the amount awarded to P M Sulcs (p 9) "13.2 Therefore, it is my opinion that the judgment and interest amounts paid in the financial year 1 July 2001 to 30 June 2002 will be subject to the full rate of company tax in the year in which they are received by P M Sulcs." 104 Mr Weeks added that the accumulated losses of P M Sulcs are unlikely to be available as a deduction from the time P M Sulcs effectively ceased to trade (about 1990). 105 Mr Weeks did not provide the foundation for his views. They were simply stated as conclusions. They represented the position asserted by the plaintiff. 106 The defendant relied upon Mr Lonergan, Chartered Accountant. Mr Lonergan furnished an affidavit of 28 August 2001. The affidavit included a detailed analysis of the separate components of the damages and the potential of each for assessment, either as income or as a capital gain. The opinion formed by Mr Lonergan was summarised at the end of his report in these words: "38. In my opinion, no amount of gross up for tax should apply to the judgement sum compensation for breach of contract or interest. 39. This is because: (a) If, as is likely, the amount of damages for loss of a chance is referrable to the value of the goodwill of the Sulcs business the damages should not be assessable to capital gains tax as it relates to compensation for the destruction of a pre Capital Gains Tax asset which was effectively 'rolled over' at its 1989 value (or higher) in 1990, and as a result no capital gains has been realised (b) in the alternative, if the acquisition of Sulcs in 1990 is part of a profit making undertaking or scheme then no tax gross up should apply as the gain would have been taxed in Sulcs hands in any event (c) if the asset is the right to sue, this asset only arises because of the ownership change which did not arise out of the commercial arrangements between Sulcs and Daihatsu. Furthermore, the ownership change was too remote for Daihatsu and Sulcs to have contemplated when they transacted. It should not therefore be grossed up because it is taxable only as a result of the change in ownership (d) the amount attributable to the breach of the licence, maintenance and analysis contract would have been taxable income anyway in the 'but for' scenario and should not be grossed up (e) the amount attributable to interest will not be taxable if it is part of an undissected sum. Alternatively, if identified as interest, it would otherwise have been taxable income anyway in the absence of any breach by Daihatsu and should not be grossed up (f) Sulcs will obtain an income tax benefit equal to the income tax otherwise payable on interest and contract income sheltered by unrecovered legal costs incurred in the present case (g) Sulcs may also obtain the benefit of a carried forward capital loss equal to any unrecouped legal costs on capital account (h) the loss of tax losses of $382,372 was caused by the ownership change and not by Daihatsu." 107 One aspect of the verdict announced on 1 August 2001 can be disposed of at once. I agree with the defendant's submission that money payable under the contract ($179,000), and interest on such monies, are income in the hands of P M Sulcs. The plaintiff is liable to pay tax upon these amounts. There is no basis upon which it can ask Daihatsu to pay such tax. 108 The loss of the chance, and the interest on that loss, is less certain. The plaintiff, as mentioned, relies upon the view expressed by Rogers J in Gill v Australian Wheat Board (supra) (accepted by Gleeson CJ and Handley JA in New South Wales Cancer Council v Sarfaty (supra)). It also relies upon a decision by Foster J in Liftronic Pty Limited v Commissioner of Taxation (1966) 66 FCR 175, suggesting that the amount awarded is income. It should be grossed up to include tax, since otherwise there will be unfairness. 109 The defendant pointed to the judgement of the full Federal Court (Black CJ, Lockhart and Burchett JJ) in Whitaker v The Commissioner of Taxation (1998) 82 FCR 261. That was an appeal against an assessment of income tax, following litigation for personal injury (Rogers v Whitaker (1992) 178 CLR 479). The Court characterised the amount awarded for loss of earning capacity, and interest before judgment, as capital items, not income. In respect of interest, Black CJ said this: (at 263/4) "I agree with Lockhart J and Burchett J, for the reasons they give, that the amount of the pre-judgment interest does not have the character of income but was a receipt of a capital nature. It is well established that in actions for damages for personal injuries, the payment of what is called 'interest' in s94(1) of the Supreme Court Act and equivalent provisions in other jurisdictions is to compensate a plaintiff for the loss and detriment which he or she has suffered by being kept out of his or her money during the relevant period: see MBP (SA) Pty Ltd v Gogic (1991) 171 CLR 657 at 663 and Haines v Bendall (1991) 172 CLR 60 at 63. In other contexts the characterisation of an amount ordered to be paid as 'interest' as compensation for the loss or detriment suffered by a person by being kept out of his or her money would point to an amount receivable as income rather than as capital. The present context is, however, of a special character since there is a broader and fundamental function involved, namely the compensation of an injured person by means of an award of damages for negligence and the amount of interest is an integral and essential element in the attainment of that object: see Haines v Bendall at 63. An amount ordered as interest in these circumstances takes its character from the award of damages for negligence and is of a capital nature." 110 His Honour drew a distinction between the circumstances of Mrs Whitaker and "a commercial situation". He said this: (at 264) "I would add that the position here differs greatly from the commercial situation in which interest is payable as the price of being kept out of a specific or calculable principal sum. The entitlement to damages at the time of injury is entirely theoretical in a case such as the present and, at least in respect of non-economic loss, there can be no fixed or objectively calculable 'principal sum' until damages are assessed." 111 However, here, what was being assessed, according to the defendant, was the loss of a chance. It was not a debt. The same principle as applied to Mrs Whitaker, therefore, applies. 112 The defendant also drew attention to the decision of Davies AJ in Bonic v Fieldair (Deniliquin) Pty Limited & Ors [1999] NSWSC 636. The owners of a vineyard sought damages against their neighbour, and a crop dusting company (and pilot). Damage had occurred by spray falling onto vines. The defendants did not appear. The matter proceeded ex parte. In assessing damages, his Honour was obliged to value the chance lost of earning the income from the vines which were damaged (applying Malec v J C Hutton (1990) 169 CLR 638). In the course of doing so, Davies AJ said this, referring to an expert witness called by the plaintiff: (para 45) "45. In making these calculations, Mr Shields has assumed that the damages award will be a capital sum for the purposes of the Income Tax Assessment Act 1936 (Cth) and therefore that he should deduct tax from his estimates of profits in order to give a true reflection of the actual loss which the plaintiffs would have suffered. This approach is in my opinion correct. No submissions have been made with respect to the application of the capital gains tax provisions of the Income Tax Assessment Act and I have given them no consideration." 113 Here, the defendant asserted that the decision of Davies AJ is directly on point. They said this: "10. Here, Sulcs' new venture into Unix was stillborn, because, on the findings made, Daihatsu's breach prevented Sulcs ever exploiting its commercial opportunity. And, it is clear on the evidence that Sulcs' business, in effect, never was able to pursue the Unix venture although it serviced to some extent its existing customers and got no other business for its MC2 program. 11. Therefore on the findings made Sulcs' income earning assets or capacity from its MC2 program was ' destroyed or sterilized' by Daihatsu's breach. And this occurred in the context of the finding that Sulcs' association with Wang had been, even before 1989, a significant disadvantage." 114 Now the Commissioner, of course, is not bound by any opinion I may express on the liability, or the absence of liability, of P M Sulcs. Were I to determine that the verdict is capital, and not taxable (subject to the issue of Capital Gains Tax), and should the Commissioner be of a different view (and that determination not set aside), there may be an injustice to the plaintiff. Moreover, it is impossible to say, at this point, how great that injustice may be. Were the Commissioner to characterise the amount awarded for the lost chance as income, it is likely that the plaintiff could offset unrecovered costs in respect of this litigation (or a substantial part of them). Although I have affidavits from the solicitors for the plaintiff, and the defendant, dealing with that issue, I do not believe that I have any reliable basis upon which I can, at this point, even estimate the deduction that may be available to the plaintiff in such circumstances. 115 What then, should be done? In circumstances of uncertainty in respect of taxation, a number of different paths have been chosen in an endeavour to do justice between the parties. My attention has been drawn to three such paths. 116 First, in Provan v HCL Real Estate Limited 24 ATR 238, Rolfe J dealt with the matter by making a declaration in favour of the plaintiff in these terms: (at 259) "I declare that if the plaintiff is held liable to pay to the Commissioner of Taxation capital gains tax on the judgment, in circumstances the defendants acknowledge as constituting a proper defence by the plaintiff of any such claim made against him by the Commissioner of Taxation, the plaintiff is entitled to be indemnified for such amount together with such costs, on a solicitor and client basis, the plaintiff is required to pay in pursuing or defending any such proceedings in consequence of the defendants not making the acknowledgment to which I have referred." 117 Secondly, in Tuite & Anor v Exelby & Ors 93 ATC (Qld) 4,293, Shepherdson J formed a view that it was likely that the Commissioner would assess the plaintiff for income tax on the amount awarded. He, therefore, included the appropriate sum in the award. He thereafter required the plaintiff to give an undertaking in these terms: (at 4,301) "I have concluded that I should seek and obtain from the first plaintiffs their undertaking to be given in open Court that, in the event that such tax is not assessed at all or that such tax is assessed at less than $517,191, they will refund to the first and second defendants the whole of the $517,191 or the amount by which $517,191 exceeds the tax assessed as the case may be." 118 Finally, in Rabelais Pty Ltd v Cameron & Ors (unreported, 31 July 1991) Hodgson J said this: (at 4) "If and insofar as there is income tax or capital gains tax loss caused in this general way, it seems to me that it would be recoverable as an item of damages. It is apparent from what I have said, however, that it would not be possible for me to make any assessment of that loss. It is desirable that all aspects of damages be disposed of in one hearing, but because there is the possibility of substantial loss, I would be prepared in this case to reserve leave to the plaintiff to apply for additional damages referable to income tax or capital gains tax considerations." 119 It is, of course, desirable that all damages should be assessed at the one time, and the matter disposed of completely. However, I do not feel myself able to deal with this aspect at this time. There is uncertainty as to whether the plaintiff will be liable for tax, and, if it is, the basis of that liability. Different considerations arise if the amount awarded is characterised as income than if it is characterised as subject to Capital Gains Tax. There is also considerable uncertainty in respect of the deduction which may be available to the plaintiff to offset any such liability. I believe, in these circumstances, I should give leave to the plaintiff to apply for additional damages referable to Income Tax should it be assessed.

Order 120 For these reasons I make the following orders:

The verdict in para 914 of the judgment of 1 August 2001 should be amended in respect to the amount awarded for the loss of a chance. The sum of $1,211,900 should be substituted for $1,683,000. The verdict for the plaintiff will, therefore, be $1,390,900.

In respect of costs (other than the Notice of Motion for Security for Costs in August 2000), the plaintiff should be paid by the defendant 80% of its costs.

In respect of the Notice of Motion for Security for Costs in August 2000 (in which costs were reserved), the defendant should pay the plaintiff's costs.

The defendant should pay the plaintiff interest (at the rate specified in Schedule J) on the Licence Fee ($75,000), the Maintenance Fee ($22,500) and the Modifications ($81,500) (Total $179,000) from the date specified in para 40 above, namely: · 19 April 1989 to date in respect of the Licence Fee and Maintenance Fee · 18 July 1989 to date in respect of the Modifications

In respect of interest on the amount awarded for the loss of chance (ie $1,211,900), the defendant should pay the plaintiff interest at the rate specified in Schedule J for the period 4 July 1990 to date.

In respect of the possible tax liability of the plaintiff for the amount awarded for the loss of a chance ($1,211,900) and the interest thereon, the plaintiff should have leave to apply for additional damages in the event of it being assessed as liable to pay tax on either or both of these amounts.

In order that judgment may be entered in the appropriate sum, calculations should be made in accordance with these orders. Short Minutes should be prepared. In the absence of agreement on the terms of the Short Minutes, the parties have leave to approach my Associate, within seven days, with a view to having the matter relisted. **********

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