Claim for Hungerfords v Walker damages
84 As previously indicated, Metco made a claim for damages based on the decision of the High Court in Hungerfords v Walker (1990) 171 CLR 125. This was a claim for compensation for loss of the use of the money of which Metco had been deprived by the defendant's negligence. It was submitted that the measure of this compensation should be compound interest, at rates 5 per cent higher than the interest rates from time to time prescribed under schedule J to the Supreme Court Rules, on the amount of the damages otherwise recovered by Metco.
85 The primary basis on which the claim for Hungerfords v Walker damages was made was that, if Mr Nemes had not been negligent and if all the assumptions underlying scenario A would have been fulfilled (as I have held), then Metco would have used the monies recovered through the appointment of a receiver and the monies which it would not have had to expend, if a receiver had been appointed (the legal and accountancy costs) and the assets which it would have acquired from a receiver of Jesseron (Jesseron's lines of distribution and brand names) in carrying on profitably, and indeed expanding, the business formerly carried on by Jesseron of distributing packaged dates and figs to supermarkets. The business would have been expanded inter alia by exploiting the links Mr Akhyani claimed to have with a company in Iran called Mobinkala, which is a subsidiary of a large Iranian bank.
86 Alternatively, it was submitted that, if the monies received and saved had not been used in carrying on the business formerly carried on by Jesseron, they would have been put to some other profitable business use.
87 Counsel for Metco referred to Hungerfords v Walker itself and to some subsequent decisions, particularly the decision of Giles J, as his Honour then was, in Hobartville Stud Pty Limited v Union Insurance Co Limited (1991) 25 NSWLR 358.
88 In Hungerfords v Walker the appellant accountants negligently erred for several years in calculating the amounts of depreciation allowable as deductions in the income tax returns of the respondent clients. As a result the clients paid more income tax than they should have. When the error was discovered, the amounts of income tax overpaid in the later years were recovered but the right to recover amounts of tax overpaid in the earlier years was statute-barred. The clients sued the accountants in contract and in tort for the loss of the amounts which were not recoverable, with compound interest at market rates of interest upon those amounts and upon the increased amounts of provisional tax which had been paid.
89 The trial judge held that the clients could, in addition to recovering the amounts overpaid, recover damages for the loss of the use of the monies overpaid. The trial judge calculated these damages on the basis that most of the monies which had been overpaid would have been used in the clients' business and by reference to an interest rate of 10 per cent.
90 The Full Court of the Supreme Court of South Australia held that damage resulting from the loss of the use of the money which had been overpaid was compensable. The Full Court increased the rate of interest at which the damages should be assessed to 20 per cent, on the footing that the monies, if not lost, would have been used to repay loans carrying that rate of interest or invested in the clients' business to earn profits at that rate.
91 The High Court dismissed a further appeal by the accountants. The Court held by majority that expenses incurred and opportunity costs arising from money being paid away or withheld as a result of a breach of contract or negligence are losses suffered as a result of the defendant's conduct and are not too remote to be recoverable.
92 In Hobartville Stud v Union Insurance Co Giles J said at p364:-
"It still remains necessary to undertake a factual investigation into the loss suffered through being held out of the money. At the end of the day it may be determined that market rates of interest are the appropriate measure of the loss, but that is not necessarily so. Whether the plaintiff would have made a profit from the use of the money withheld from it, and the amount of the profit, must be determined on the evidence, and there is not an automatic allowance of interest upon the money withheld.
These and other passages demonstrate that the plaintiff's loss and its quantum are to be found as a fact and assessed on the evidence, not assumed from the withholding of the money and automatically assessed by the application of current market rates of interest.
In so holding I decline the plaintiff's invitation to depart from the view I expressed in McBeath v Sheldon (Giles J, 8 August 1990, unreported). I there said, speaking of Hungerfords v Walker :
'It was recognised that damages for breach of contract could include the profit which the plaintiff would have made from the use of money of which he was deprived by the defendant's breach, but while this may be called damages by way of interest that description is liable to mislead. If the assessment of the lost profit is by reference to interest which would have been earned on the money had the plaintiff had its use, or to interest paid in borrowing other money which goes to reduce the profit the plaintiff would otherwise have made, that is coincidental: the interest rate is simply an available and appropriate measure, in the particular circumstances, of the lost profits. In such a case, whether the plaintiff would have made a profit, and the amount of the profit, are issues of fact to be determined on the evidence, and there is not an automatic allowance of interest on any money expended by the plaintiff.'
I am not persuaded that this view is wrong, and I adhere to it".
93 It was submitted by counsel for Metco that, if a receiver had been appointed, the receiver would have carried on the business of Jesseron and would not simply have realised its assets in a fire sale and I have already accepted this submission.
94 It was further submitted by counsel for Metco that there would have been no legal impediment to a receiver of Jesseron selling the assets of Jesseron to Metco as the secured creditor who had appointed him. In support of this submission I was referred to a passage in O'Donovan Company Receivers and Administrators (2nd Ed 1998) at p406, in which it is stated:-
"On the other hand, it appears that a sale by a receiver to the mortgagee who appointed him will not be improper on that ground alone. While it would be inappropriate to apply a strict fiduciary principle to such a sale, the court should carefully scrutinise the terms of the bargain and the surrounding circumstances to ensure that the company's interests have not been sacrificed. The court should jealously guard the interests of the company because a sale by a receiver to the mortgagee who appointed him amounts to a de facto foreclosure, yet the company will remain liable under the personal covenant in the mortgage or charge to pay the balance of the debt owing to the mortgagee or chargee. In the foreclosure this personal covenant is extinguished".
95 I am prepared to accept what O'Donovan says as a correct statement of the law, although I note that what O'Donovan says is somewhat guarded and qualified.
96 An important question for me to determine is whether on the evidence, if the monies recovered and saved had been used by Metco in the carrying on of the business formerly carried on by Jesseron and if the assets of Jesseron had been acquired by Metco, the business would have been carried on profitably and, if so, at what amount or rate of profit.
97 In paragraph 16 of his affidavit of 12 July 1999 Mr Akhyani estimated that, in the circumstances I have postulated, Metco would have achieved a net profit of between $150,000 and $200,000 a year. Mr Akhyani based this estimate on what he said were the actual sales of Jesseron in the period from 1 July 1992 to 30 April 1993, $917,768.24, as shown in the accounts for this period prepared by Mr Crick. However, the figure of $917,768.24 was not the figure for sales in the accounts prepared by Mr Crick for Jesseron but the figure for sales in the accounts prepared by Mr Crick for Metco. A consequence of this error was that Mr Akhyani's calculation of the ratio of the cost of sales to sales was also erroneous.
98 In paragraph 16 of his affidavit of 12 July 1999 Mr Akhyani, on the basis of "my experience in business", estimated the "expenses", that is the expenses not included in the calculation of the gross profit, as being $100,000. Mr Akhyani said that he believed that all his estimates (including the estimate of expenses) were "realistic".
99 In a document which became exhibit D at the hearing and in oral evidence at the hearing Mr Akhyani put forward a revised estimate of the profit which would have been made by Metco from carrying on the business of Jesseron. This estimate was based on the accounts which Mr Crick had prepared for Jesseron for the ten month period from 1 July 1992 to 30 April 1993. In these accounts Mr Crick showed sales as being $1,412,798.85 the cost of sales as being $1,045,304.59 and the gross profit as being $367,494.26. In exhibit D Mr Akhyani adjusted these figures for a ten month period to annual figures of sales $1,695,358.62, cost of sales $1,254,365.51 and gross profit $440,993.11. Mr Akhyani then adjusted sales down to $1,600,000 and made a corresponding proportional reduction to the cost of sales so as to produce a figure of $1,183,811.37, thus producing a gross profit of $416,188.63.
100 In the accounts he prepared Mr Crick showed expenses as being $407,768.04. With expenses at that figure, Mr Crick showed Jesseron as having made during the ten month period ended 30 April 1993, not a profit, but a loss of $40,273.78.
101 In exhibit D, on the other hand, Mr Akhyani estimated expenses for the twelve month period ended 30 June 1993 on sales of $1,695,358.62 as being $320,000 and on sales of $1,6000.00 as being $300,000. With these estimates of expenses, the profit was $120,993.11 on expenses of $320,000 and $116,188.63 (rounded off to $116,000) on expenses of $300,000.
102 His reasons for departing from Mr Crick's figures for expenses were set out by Mr Akhyani at the foot of the revised profit estimate in exhibit D as follows:-
"1 About half of expenses are fixed so they do not increase by sales.
2. Amount of stock imported was overestimated in year 1, so on consecutive years a better management based on past experience would have resulted in less interest payments as well as less storage costs.
3. Many of expenses in year 1, were promotion and new line fees, which by nature were not recurring in consecutive years of operating the business.
4. With use of broker and payment of commission some expenses would be reduced.
5. Brokerage for established lines could be negotiated down, in subsequent years".
103 In his oral evidence at pp134-139 of the transcript Mr Akhyani gave a detailed breakdown of his estimate of expenses, by commenting on each item of expense shown in the profit and loss statement prepared by Mr Crick and saying whether in his opinion each expense would be lower or higher or about the same, if Metco was carrying on Jesseron's business. Mr Akhyani claimed to be qualified to give this evidence by virtue of his experience in working in the office of Jesseron and his general business experience.
104 Many of Mr Akhyani's estimates were different from Mr Crick's figures. The differences included estimates by Mr Akhyani which were lower than Mr Crick's figures for advertising and promotion, art work and type setting, bad debts, consulting, freight costs, entry and wharfage charges, customs clearance, discounts allowed, dumped goods, legal fees, insurance, motor vehicles, fumigation and quarantine, storage fees and telephones and faxes.
105 Apart from the reasons given in exhibit D, some of the lower estimates were sought to be justified by Mr Akhyani on the basis that the higher figures in Mr Crick's accounts were attributable to coconuts and Metco, if it had carried on Jesseron's business, would have abandoned the distribution of coconuts.
106 It was submitted on behalf of the plaintiff, and I would accept, that the figure of $1,600,000 for sales is supported, not merely by the figure for sales in Mr Crick's accounts for Jesseron for the ten month period ended 30 April 1993 but also by the figure for sales in Jesseron's accounts for the full year ended 30 June 1993.
107 It was also submitted, and I would accept, that the gross profit margin disclosed in Mr Crick's accounts for the ten months ended 30 April 1993 and adopted by Mr Akhyani in his revised profit estimate is supported by accounts of Jesseron for the full year ended 30 June 1993, in which sales are shown as $1,509,252 and the cost of sales as being $900,613.01, producing a gross profit which Mr Donnelly in cross-examination agreed was very close to 40 per cent of sales.
108 As regards other expenses, it was submitted on behalf of Jesseron that I should accept Mr Akhyani's estimate for the reasons given in exhibit D and in his oral evidence. It was accepted by counsel that Mr Akhyani's estimates of expenses were not in accordance with the actual historical results of Jesseron for any period. While under Mr Pritchard's control Jesseron had not traded profitably. However, it was submitted that this was because of the low level of sales achieved while Jesseron was under Mr Pritchard's control. It was submitted that the business being carried on by Jesseron was a kind of business such that, if sales could be expanded, there would not be a commensurate increase in expenses, with the consequence that, if a higher level of sales could be achieved, a profit would be achieved and that Metco, if it had been carrying on Jesseron's business, would have been able to achieve a higher level of sales.
109 It was submitted by counsel for the plaintiff that I should accept evidence by Mr Akhyani that under his control the business of Jesseron could have been operated as a one man operation. All that would have been required was an office, a telephone and a fax machine. Metco would have used the services of finance providers, customs agents, warehouse organisations and brokers. In this way some of the expenses shown in Mr Crick's accounts would have been saved.
110 In opposing the claim for Hungerfords v Walker damages counsel for the defendant made a number of submissions.
111 Some of the submissions made by counsel for the defendants should be rejected. It was submitted that Metco had not shown how it would otherwise have used the money which it had outlaid in its venture with Jesseron but this submission mistakes the nature of Metco's case on Hungerfords v Walker damages. Metco did not claim Hungerfords v Walker damages on the basis that, if it had not entered into the venture with Jesseron, it would have outlaid the money which it outlaid in the venture with Jesseron in pursuing one or other of the other business opportunities which Mr Akhyani in his affidavit of 12 July 1999 said he had investigated before Metco entered into the venture with Jesseron. It was also submitted by counsel for the defendants that the claim for Hungerfords v Walker damages was a claim for expectation damages "by the back door". However, Metco's claim, properly understood, should not be so characterised. Metco's claim was not a claim for damages for the loss of something which would have been gained, if some promise by the defendants had been true or had been performed.
112 However, other arguments made by counsel for the defendant have more force and I have concluded that I should not allow the claim for Hungerfords v Walker damages.
113 As stated by Giles J in Hobartville Stud v Union Insurance Company I should not automatically allow damages for the loss of the money lost to the plaintiff but should determine on the evidence whether, in the circumstances I have outlined, Metco would have made a profit and the amount of the profit.
114 I have already stated that I accept that Metco in carrying on the business formerly carried on by Jesseron would have been able to achieve sales and a gross profit. However, I do not consider that I should accept Mr Akhyani's revised estimate of the expenses of the business as being as low as $300,000 per annum.
115 The estimate of the amount of the expenses on which Metco relies is an estimate given by its own principal Mr Akhyani. It is, of course, open to me to accept Mr Akhyani's evidence but it is appropriate that I should approach his evidence with some caution.
116 I do not set much store on Mr Akhyani's error in his affidavit of 12 July 1999 in using the figure for Metco's sales instead of the figure for Jesseron's sales. However, I consider that the other error made by Mr Akhyani in his affidavit is more significant. Mr Akhyani's original estimate of the expenses, which he made in his affidavit, was $100,000. In his affidavit he described this estimate as being based on his business experience and as being "realistic". In his oral evidence Mr Akhyani admitted that the figure of $100,000 was wrong, that it bore no resemblance to reality and that at the time he made his affidavit the figure had not stood out to him as being wrong. I consider that Mr Akhyani's original, quite unrealistic, estimate of the expenses throws doubt on his subsequent revised estimate.
117 Mr Akhyani's revised estimate of expenses as being $300,000 seems to me likely to be far too optimistic in its assumptions about what expenses could be avoided altogether or significantly reduced. For example, I am not persuaded that expenses could be reduced by the use of brokers or that Mr Akhyani would be able to negotiate down brokerage rates in subsequent years. It seems to me unlikely that the business could have been conducted without, for example, any legal costs, without allowing any discounts and without suffering any losses through dumped goods. Mr Akhyani said in his evidence that he had not allowed anything for discounts but then claimed that an allowance for discounts had been built into his sales figure of $1,600,000.
118 It seems to me unlikely the business of Jesseron could have been run as a one man operation in the way envisaged by Mr Akhyani. For much of the year ended 30 June 1993 both Mr Akhyani and Mr Pritchard worked long hours in the business of Jesseron. Mr Pritchard, whatever his other deficiencies, had, unlike Mr Akhyani, experience and skills in marketing and devoted considerable time to marketing and I do not consider that the functions which Mr Pritchard had performed could simply have been entrusted to a broker.
119 Mr Akhyani's estimates of the expenses and of profit are not supported by any of Jesseron's actual results, including its accounts for the period of ten months ended 30 April 1993 prepared by Mr Crick; its accounts for the period of twelve months ended 30 June 1993; and its accounts for the period of four months from 1 July 1993 to 31 October 1993.
120 In accounts for the twelve months ended 30 June 1993 sales are shown as $1,509,252.92, the total cost of sales is shown as $900,613.01 and total expenses are shown as $623,165.10, producing an operating loss of $14,525.19, before an amount designated as "other income" $46,317.89, which is not explained, is brought into account.
121 In accounts for the four months ended 31 October 1993 total income is shown as $520,435.80, the total cost of sales is shown as $439,520.48 and total expenses are shown as $190,674.86, producing an operating loss of $109,759.54. After certain other items of income and expense are taken into account a final loss of $101,109.09 is shown.
122 In my opinion, it is quite speculative that if Jesseron's business had been carried on by Metco, Metco would have been able to substantially increase sales and thereby increase profitability.
123 In August 1993 Mr Crick prepared some budgets and forecasts for Jesseron for the year ended 30 June 1994. The document is addressed to someone on behalf of Corporate Advising and Training Pty Limited and its purpose is unclear. In the document Mr Crick expressly makes a large number of assumptions. He says that he has not had the opportunity of discussing "these amended figures" with Mr Pritchard. I do not consider that I should give any weight to these budgets and forecasts.
124 In the proceedings in the Equity Division of the Court brought by Jesseron in 1993 Mr Crick on behalf of Jesseron made an affidavit to which he annexed copies of the accounts of Jesseron for the year ended 30 June 1993, including a profit and loss statement showing sales of $1,509,253, costs of sales of $901,470 and expenses of $624,327, producing an operating loss of $16,544. When "other income", which was not identified, was taken into account, a net profit for the year of $29,774 was produced.
125 In reply to this affidavit an affidavit by Mr Beale on behalf of Metco was filed. In this affidavit Mr Beale, for the specific reasons advanced by him, including the omission of an expense, an unjustified re-valuation of an asset, the treatment of a non-revenue item as revenue and the inclusion of an adjustment from a previous year, expressed the opinion that the stated profit in Mr Crick's profit and loss statement of $29,774 was an "overstatement" by a total amount of $211,426, that is to say Jesseron in the year ended 30 June 1993 had really made a substantial loss.
126 In his oral evidence at the hearing Mr Akhyani said that he did not remember seeing Mr Beale's affidavit at the time of the equity proceedings. However, I am satisfied, particularly in view of Mr Akhyani's keen interest in the equity proceedings, that he would have been aware of Mr Beale's affidavit and would have approved of it being used in the equity proceedings. Accordingly, in September 1993 Mr Akhyani was adopting the position that Jesseron had been operating at a very substantial loss, much worse than the results shown in the accounts prepared by Mr Crick.
127 On the evidence I am not satisfied that, if a receiver had been appointed and Metco had applied the monies received through the appointment of a receiver and the monies which it would not have had to expend if a receiver had been appointed and the assets which it would have acquired from the receiver of Jesseron in carrying on the business formerly carried on by Jesseron, it would have made a profit in carrying on the business formerly carried on by Jesseron or, if it had made a profit, what amount of profit it would have made.
128 If the monies received and saved had been utilised in some other venture, then it is utterly speculative whether Metco would have made a profit and, if so, what would have been the amount of the profit. On the evidence Mr Akhyani has no record of having successfully carried on business in Australia.
129 I accordingly reject the claim for Hungerfords v Walker damages. Metco will of course be entitled to interest, that is simple interest, on the damages it recovers at the rates set out in schedule J to the Supreme Court Rules, which since 1992 have varied between 9.5 and 12 per cent per annum.