North Sydney Leagues' Club Ltd v Synergy Protection Agency Pty Ltd

North Sydney Leagues' Club Ltd v Synergy Protection Agency Pty Ltd - [2011] NSWSC 286 - NSWSC 2011 case summary — Zoe

[4]

Synergy's submissions 9Synergy's submissions were rather lengthy. I take their overall argument to be: (1)Synergy claims expectation damages. The task for the Court is to compare the actual position Synergy found itself in (with Norths having breached the relevant contracts) with the hypothetical position that Synergy would have been in had Norths performed its contractual obligations to Synergy. (2)Synergy makes no claim for reliance loss (3)So far as mitigation is concerned, it would have been open to Norths to maintain that Synergy was not entitled to the whole amount of lost profit it established, because it had unreasonably failed to take some step to mitigate its loss, for example by failing to take reasonable steps to secure replacement contracts, or by failing to rearrange its business affairs in some way. However, no such claim was pleaded, and when cross-examination threatened to stray into the area, it was not allowed. (4)In reference to calculating the revenue lost due to North's breach, Synergy submitted: (5)Synergy had been providing appropriately licensed, experienced and uniformed Security Operatives to Norths for some years from which it earned revenue. (6)The best guide to calculating this revenue is the average level of invoicing rendered in the pre-breach service period. This is reflected in Template 1 of the Blue Appeal Book. (7)An average over the 62-65 weeks of the relevant contracts (is likely to be a more reliable estimate than one based on 26 weeks as advocated by Norths. Further, it is not open to Norths to contend that it was entitled to rely on the possibility that it would simply have taken steps to "require" less and less of the services of Synergy (or even that a trend in that direction was already to be discerned in the six-month period preceding breach. This is because of the Court of Appeal's conclusion of "the essentially objective character of the notion of 'requirements of the Club'. See Synergy Protection Agency Pty Ltd v North Sydney Leagues ' Club Ltd [2009] NSWCA 140 at [30]) and per Allsop P at [38]. (8)As for the alternative (or perhaps primary) basis on which Norths contends the Court should proceed, namely by reference to the Barrington's figures, the difficulty is that the Court can have no confidence on the evidence that it is comparing like with like, except in a gross sense. Although the figures for the hours invoiced are before the Court (Ex PX, vol 5), the Court is not informed of the terms of any contracts under which those services were rendered, nor the extent to which those services were supplemented by "in house" services by Norths during the post-breach services period. (9)In Synergy's Reply Submissions it conceded the Court may be minded to find that the likely revenue stream was somewhere between the pre-breach figures relied on by Synergy and the post-breach figures relied on by Synergy. Alternatively, the Court may think that the period contended for by Norths (the last six months of trading, pre-breach) may represent an appropriate finding. 10Turning to the question of overhead costs, Synergy argued: (1)The Court should find that the amount of Synergy's loss was not reduced by reason of its obligation to pay rent. Mr Merhi gave evidence that Synergy continued to pay rent after the Norths contracts were repudiated. Any obligation to pay rent was irrelevant to Synergy's loss from the breach of the Norths' contracts, because it played no part in the comparison necessary to establish expectation loss. Whether the obligation to pay rent was $1 per month or $1 million per month, or did not exist at all, is beside the point. Likewise it was beside the point if the obligation to pay rent was due to end during the post-contract period, or to continue for another 10 years. It simply did not impact upon Synergy's loss. In measuring that loss, the question was what the difference was between where Synergy in fact ended up, and where it would have ended up if Norths had not repudiated the contracts. (2)There was no saving in respect of wages or salary to the CEO, by reason of Norths' repudiation. This is hardly surprising, although it is not impossible to imagine how such a saving might occur, for example if the CEO were entitled to a bonus based on turnover or the like. However, there is no need to speculate in this case, because Mr Merhi gave positive evidence on the matter, which ought to be accepted. (3)The same may be said in respect of the two other officers, namely the operations manager and the office manager. (4)Norths seek to argue that various other expenses ought to be taken into account so as to reduce the measure of Synergy's loss. In this respect, it is submitted that the Court should find, consistently with Mr Merhi's that none of the expenses of Synergy were saved by reason of Norths' repudiation of its contracts with Synergy, except to the extent recorded in Template 1. 11To summarise Synergy's argument in relation to overhead costs: Synergy's position was clearly worse than it would have been had the Norths' contracts not been repudiated. It is worse by the amount of revenue Synergy lost as a result, less any costs that were saved as a result of not having to perform the contracts. Synergy's overhead costs had nothing to do with the proper calculation of Synergy's loss. There is no basis to find that the loss of the Norths contracts meant that Synergy saved money on its overheads, and that is the only basis on which the overheads would be relevant. 12Finally addressing inflation, Synergy submitted: (1)It is not appropriate that any adjustment be made over the short period of time with which the case is concerned by reference to any increase in expenses, and that no basis has been demonstrated for such an adjustment, whether by reference to the terms of the Norths contracts or otherwise. (2)The 4.8% rate of inflation applied by Norths, applies the expected increase over the breach period (about 1 3/4 years) as if it had occurred on the first day of the period, whereas in fact it is reasonable to assume that the increases occurred progressively throughout the period in question. If the CPI figures are to be applied, a pragmatic rule of thumb (like that often used in interest calculations - see John Fairfax & Sons Ltd v Kelly (1987) 8 NSWLR 131) would be to cut the applicable rate in half and then apply it to the whole period. (3)There are further reasons to doubt that even an adjustment of that order would be appropriate, especially in relation to wages. So far as wage expenses which Synergy accepts have to be deducted (that is those of security operatives, whether employees or contractors), it will be recalled that under the contracts between Synergy and Norths, the contract price was fixed for the duration of the contract. In those circumstances, it is improbable that Synergy would increase the rates it paid out to its employees and contractors during the life of the contract, because the equivalent amount of revenue generated would not increase.

[5]

North's' submissions 13North's' submissions were equally detailed and lengthy. In reference to lost revenue they submitted: (1)Synergy's submissions misstate the situation in relation to the evidence as to the replacement contracts. First, it is incorrect to say, "the Court was not informed of the terms of the replacement contracts". The replacement contracts were in evidence along with evidence from the two employees of Norths responsible for their administration and the services they covered, making it clear that they were replacement contracts for the services supplied by Synergy. This is a fact admitted by Synergy in their Reply Submissions on Damages. (2)There was never any suggestion that there was any supplementation of those services "in house". (3)The criticisms now made of Norths' evidence demonstrating hours actually worked on the replacement contracts (and thus enabling a more accurate calculation of revenue foregone) were not put to Norths' witnesses. To the contrary, in cross-examination of the security manager of Norths' Sydney premises, Mr Makasa, it was put to him, and he agreed, that a division of a company called Barringtons took over the services that Synergy had been providing and continued to provide those services until November 2007. The invoices for the replacement services in Sydney and Tweed Heads formed part of the tender bundle The totals thus derived were used to calculate the actual crowd and patron control services provided in the breach period and used for Norths' calculations of revenue foregone. That was plainly the best evidence available as to revenue foregone, because it was what really happened in terms of security guard hours actually worked. This evidence was better than mere prophecy. 14Addressing overhead costs: (1)On the evidence and in the circumstances of this case, a proportionate share of Synergy's indirect or overhead costs should be taken into account in calculating expectation loss. There is no evidence before the Court that justifies not deducting a proportionate share of expected indirect or overhead costs from expected revenue so as to produce the best ordinary measure of loss in a breach of contract case, namely loss of net profit. (2)Synergy's case has the practical effect, although not the form, of assuming that the proportion of fixed indirect or overhead expenses fairly attributable to the Norths contracts is to be treated as a loss that would have been incurred by Synergy by having to meet those expenses anyway without any offsetting revenue. That appears to be the sole justification advanced for failing to deduct those expenses. However there is no evidence to support that assumption or conclusion. (3)The assumption is that absolutely none of the time of the three persons employed by Synergy, apart from casual and contractor guards, being the persons who actually ran the business, should have any of their time at all attributed to about a third of that business at that time (being the performance period used to calculate profitability for projection purposes). For the purposes of the performance of the Norths contracts, on Synergy's case, the CEO, the Operations Manager and the Office Manager are to be regarded as completely irrelevant. The same approach applies to most other expenses that were other than direct expenses. For the purposes of most of Synergy's calculations, unless an expense is a direct expense or a variable indirect expense, it had no bearing of profitability in the performance period. Virtually all indirect fixed or overhead expenses were to be met by the other 61.1% of Synergy's business, without any evidence to support that approach. 15North's position on overhead costs may be summarised as follows: As a matter of principle, it is difficult to see why overhead costs should not have to be brought into account. If, in order to provide the contractual services, it was necessary for the contracting party to pay expenses including for maintaining an office, insurances, utility bills, maintaining plant and equipment and paying head office staff, why is not some proportion of that expense properly to be regarded as an expense which should be brought into account when calculating net profit? 16Finally in reference to inflation Norths submitted: (1)There is no principled reason why inflation, using CPI, should not be applied to Synergy's expenses, in the absence of any evidence to rebut that being applicable. Inflation as published by the Australian Bureau of Statistics was real and there is no reason why it should not be taken into account. Mr Merhi at least conceded in cross-examination that " perhaps " he should have made an allowance for inflation. It should be noted that CPI was not applied to rent. (2)The appropriate rate is 4.8%, the overage for Sydney over the relevant period. This was later revised to 2.4% in consideration of Synergy's explanation.

[7]

Synergy ' s Authorities 24In written submissions Synergy referred to a number of authorities that were subsequently critiqued at length by Norths. What essentially emerged from this argument was there is no definitive statement of the law in relation to accounting for overhead costs. The matter turns on its individual facts. The cases put forward by Synergy were merely examples supporting their contention, rather than authoritative indications of the law. 25Synergy cited the recent judgement of Ball J in Orica Investments Pty Ltd v McCartney [2010] NSWSC 488 which proved useful in defining the overarching question to be considered in relation to this matter: "The question that must be determined is what loss Bronson & Jacobs suffered as a consequence of the Defendants' conduct. From Bronson & Jacobs' point of view, it had very substantial overheads, whether or not it retained the Clos Distributorship. ...In those circumstances, it seems to me that a reasonable approach is to ask what incremental costs Bronson & Jacobs would have incurred if it had retained the Clos Distributorship." 26Despite this clear expression, I accept North's argument that this was a case in which damages were assessed for breach of restraint of trade, not repudiation of contract. Further, the matter ultimately turned on its facts and evidence, and in particular on detailed evidence of what had actually happened in the breach period. It does not therefore represent a standalone principle that overhead costs should not be deducted. 27In oral submissions, Synergy also made reference to Bartonvale Management Services Pty Ltd v International Linen Services Pty Ltd [2002] SASC 254 and Cardwell Shire Council v Calabrese & Anor (1975) 49 ALJR 164. These cases were to a similar effect, supporting the general proposition advanced by Synergy that that the correct approach in assessing damages is to deduct from revenue the expenses that would have increased when the contract was being performed. See Bartonvale at [23].

[8]

Norths ' authorities 28Norths also relied on a number of authorities in support of its approach, the primary one being TC Industrial Plant Pty Ltd v Roberts (Queensland) Pty Ltd (1963) 180 CLR 130. Here the High Court approved of the damages formula detailed in the English case of Cullinane v British "Rema" Manufacturing Co Ltd [1954] 1 QB 292. 29In that case, loss of profit was derived by subtracting from estimated receipts running costs, office expenses, interest and depreciation. The High Court also observed that it would not have been right to award loss of profits without deducting depreciation as well as capital expenses, because that would entail awarding full profit without the expense of earning it. 30Properly read, TC does not stand for the proposition that in calculating lost profit, indirect or overhead costs such as running costs and office expenses should be deducted. What the Court was relevantly observing was that an innocent party cannot claim expectation losses and reliance losses to the extent of the overlap. If reliance losses are claimed then only that part of the profit that remains after reducing the profit by the capital losses incurred can also be claimed. Otherwise there is double counting of the innocent party's capital expenses resulting in injustice to the breaching party. 31Norths also relied upon AJ Lucas Drilling Pty Ltd v McConnell Dowell Constructors (No.3) [2008] VSC 315 . In this case, Byrne J made a deduction for overheads in calculating damages. However, his Honour falls far short of establishing this approach as a general principle to be applied in assessing all loss of profit cases. 32Further , AJ Lucas is distinguishable from the present case. It concerned breach of a construction contract which included a contractual provision that provided the basis for quantifying damages: see at [2]. That clause, clause 24.4, is referred to in the Victorian Court of Appeal judgment: see AJ Lucas Drilling Pty Ltd v McConnell Dowell Constructors (Aust) Pty Ltd [2009] VSCA 310 at [17]. The judgments accordingly concern the proper construction and application of the provisions of that clause, and not any principle applicable to contractual damages generally. 33A final principal authority relied upon by Norths is Dart Industries Inc v Dcor Corporation Pty Ltd (1993) 179 CLR 101. In that case, the infringer Dcor successfully argued that it was not wrong in principle to deduct some amount of fixed overheads when calculating the profit it had made by infringing Dart's patent. 34As noted by Norths, this case was concerned with an account for profits resulting from a patent infringement. The principles underlying damages in such situations are very different to the present. The present case is concerned with placing Synergy in the position it would have been in had Norths not breached its contract. As will be apparent from the discussion below, this requires very different considerations. As such, the principles do not apply.

[11]

The principled approach 39At the outset I wish to express my agreeance with Ward LJ's observation in Western Web Offset Printers Ltd v Independent Media Ltd [1996] CLC 77, at 80H-81A that: "too slavish an adoption of classifications such as direct and indirect costs or net and gross profit is liable to be distracting from the general principle of ascertaining the loss of the bargain. Confusion is only avoided by going back to the basic principle of ascertaining how the breach of contract caused loss to the particular party." 40In this vein, I keep in mind that the question in this case is how to best place Synergy in the position it would have been in had Norths' not breached its contract. 41The correct way to achieve this is to deduct from forecast revenue which expenses "would have increased when the contract was being performed, and would have diminished when it ended..." while "outgoings, such as accounting fees, rent, rates and taxes, would not reduce as a result of the termination of the contract" and should therefore not be adjusted for, per Doyle CJ in Bartonvale Management Services Pty Ltd v International Linen Services Pty Ltd [2002] SASC 254 at [23]. 42Contrary to North's assertion, no apportionment of fixed costs, ie those costs which would not increase or decrease with the loss of the Norths contract, should be considered. 43In order to dispel the widespread confusion over allowing for different costs, I now seek to set out by way of example why Synergy's approach is the only one that accords with the principle of expectation damages. 44This explanation touches on some key economic and accounting concepts and as such I have adopted a simplified model, which is common to these disciplines. 45This model is based on the following assumptions: (1)There are three identical contracts; (2)Each contract earns $100 of revenue; (3)Variable costs expended to achieve this revenue are $20; (4)Total fixed costs are $90 which can be allocated equally between the three contracts; and (5)Contract 3 is the breached contract. 46Assuming first that all three contracts are on foot. Revenue Variable Costs Fixed Costs Total Costs Profit (TR - TC) Contract 1 100 20 30 50 50 Contract 2 100 20 30 50 50 Contract 3 100 20 30 50 50 Total 300 60 90 150 150

[13]

Contract 1 and Contract 2 are unaffected and still earn $50 of profit each. 49There is however $0 revenue earned from Contract 3 and there is also $0 of variable costs. This is because all the costs needed to achieve this revenue are no longer necessary. In Synergy's case this represents the lack of need to hire labour to carry out the security contract and other similar variable expenses such as phone calls to Norths to arrange security. 50The fixed costs, which are by definition unrelated to output, remain steady at $90. Therefore theoretically the breached contract still has $30 of fixed costs allocated to it. This represents the unchanged rent and similar expenses Synergy endured after breach. It is this fixed cost which Norths claims should be apportioned to Synergy. 51Total profit following breach is $70. This is the sum of the revenue minus variable costs earned on the first two contracts, less the total fixed costs of $90. 52It is evident from this analysis that the fair sum of compensation under expectation damages is $80. This would ensure that the wronged party is in the same position they would have been in but for the breach. 53The $80 is obtained by subtracting from the $100 of predicted revenue, the $20 of variable expenses required to achieve this revenue. 54This award of damages is rationale in an economics sense in that the wronged party would expect to earn $80 from this contract and then allocate a portion of this profit to meet its fixed expenses. 55Had the alternate approach advocated by Norths been taken, the wronged party would have received only $50 (Total Revenue minus Total Costs). 56From this damages award, the wronged party would need to allocate a further $30 to meeting its fixed costs. Effectively the wronged party is forced to pay its fixed costs twice. On the first instance it pays fixed costs by way of a deduction in damages. In the second instance is takes this award and allocates part of it to paying its real fixed costs, which remain the same despite the loss of the contract. 57In summary there is no reduction in fixed costs as a result of the breach and therefore to put the wronged party in the same position there can be no corresponding reduction in their awarded damages. To do otherwise misconstrues the nature of fixed costs, which are by definition accrued independent of output. It would be wrong to bring such costs into a calculation of this nature.

[15]

Norths ' claim that Synergy did not adequately prove its loss 63Another issue in this hearing was whether Synergy adequately proved its loss so as to entitle it to the recovery of expectation damages. It was accepted that the evidence relevant to this question was that adduced in the original hearing. North Sydney Leagues Club Limited v Synergy Protection Agency Pty Limited (formerly known as Joseph Merhi Industries Pty Limited) trading as Synergy Protection Agency [2008] NSWSC 413. 64In relation to this claim, Norths advanced two propositions: (1)Synergy did not provide adequate evidence of its loss; and (2)The evidence provided was not reliable. 65The onus of proof in a claim for expectation damages lies with the plaintiff on the balance of probabilities. Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at [80], [83-84]. 66Difficulty in precisely calculating loss is no bar to the recovery of expectation damages ( Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286 at 301), in such circumstances the Court must do the best it can, Biggin & Co Ltd v Permanite Ltd [1951] 1 KB 422 at [438]. 67There was some discussion about whether Norths bore any onus in a claim for expectation damages. The authorities indicate they did not. The notion of a shifting onus is only relevant to a claim for reliance damages see: Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 per Mason CJ and Dawson J at [86] - [90]. The parties made it clear that no such claim was advanced. 68At all times the onus of proof lay with Synergy. It was certainly open to Norths to challenge Synergy's evidence in an effort to diminish its probative value. Indeed this is something Norths attempted to do. However, at no times did Norths bear an onus in this regard. 69In support of its proposition of unreliability, Norths highlighted its cross-examination of Mr Merhi relating to the derivation of the saved cost figures. This cross-examination was contained at p.149 of the Black Appeal Book. Norths submitted that this evidence proved that there was no proper basis for the figures contained in Template 1. 70In response, Synergy usefully pointed the Court to Mr Merhi's affidavit of 11 December 2007, located at p.14 of the Blue Appeal Book in which Mr Merhi explained the process of estimation used to arrive at his figures. 71In making a decision on this issue, I gave weight to my finding in the original proceedings, that Mr Merhi was generally a reliable and careful witness. (see: North Sydney Leagues Club Limited v Synergy Protection Agency Pty Limited (formerly known as Joseph Merhi Industries Pty Limited) trading as Synergy Protection Agency [2008] NSWSC 413 at [55]-[57]). I also carefully considered the explanation given by Mr Merhi as to how these figures were derived. His explanation for these estimates was more than reasonable. 72Synergy had an onus to prove their loss on the balance of probabilities. On the basis of the above findings this onus was discharged.

[16]

Valuing Synergy's lost revenue 73The parties differ as to the best way for the Court to estimate the expected revenue in the post-breach service period. 74Synergy submitted that the best guide is the average level of invoicing rendered in the pre-breach service period. 75Norths contends to the contrary that either: (1)The level of services rendered in the last six months of the pre-breach service period should be used as the basis; or (2)The level of invoicing for services supplied by those who replaced Synergy during the post-breach service period should be used as the basis (The Barrington figures). 76In argument it was said by Norths that the Barrington figures provide the most accurate estimate of Synergy's actual lost revenue. In support of this, Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 at [293] - [295] was cited. 77Kizbeau refers to the English case of National Provincial Bank Ltd v Bradberry [1943] 1 Ch D 35 at [45] in which it is said: "Where facts are available they are preferred to prophecies" 78Furthering this proposition, Lord Macnaghten in Bwllfa & Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426 rhetorically asked at [431]: "In order to enable him to come to a just and true conclusion it his duty, I think, to avail himself of all information at hand at the time of making his award which may be laid before him. Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate?" 79It is therefore trite law that where up to date factual information regarding revenue lost is available, these are the figures that should be used. The complication in this case is determining whether the Barrington figures are "accomplished fact[s]" in the sense used in Bwllfa or whether the services performed by Barrington were quite different. 80One point of particular difference between the two contracts was the inclusion of "free hours" in the Barrington invoices. Neither party was able to explain the origin of these free hours or what they related to. I accept that they were for a relatively small amount but these "free hours" raise questions as to the appropriateness of using the Barrington figures to accurately estimate Synergy's lost revenue. 81In deciding this matter, I referred to references of the replacement contract in the previous hearings. In cross-examination, the security manager of Norths' Sydney premises, Mr Makasa, agreed, that a division of a company called Barringtons took over the services that Synergy had been providing and continued to provide those services until November 2007. This was consistent with the table at paragraph 6 of Mr Makasa's second affidavit sworn 26 March 2008 which made it clear that the services were " crowd and patron control ", that those services were supplied by a company before Synergy, by Synergy and then by Synergy's replacement contractor. 82The general manager of the Norths' Seagulls premises at Tweed Heads, Mr Kendrigan, provided corresponding evidence for those premises at paragraph 16 of his affidavit sworn 21 February 2008, which again made it clear that the services were " crowd and patron control ", and that those services were supplied by a company before Synergy, by Synergy and then by Synergy's replacement contractor. The only evidence in cross-examination of Mr Kendrigan also confirmed the evidence that Barringtons entities provided replacement services for those previously provided by Synergy. 83Norths has a general obligation to ensure the safety of their patrons through adequate crowd and patron control measures. I cannot see how Barrington's functions would have been substantially different to that of Synergy's, especially in light of the evidence referred to above. 84Given this, I will not engage in acts of prophecy when there is clear factual evidence before this Court. The correct figures to be used to calculate lost revenue are the Barrington figures. These represent the continuing downwards trend of security requirements at the Norths clubs, a trend which Synergy began to experience in the six months preceding Norths' breach. In accepting these figures, it is appropriate to add back the 'free hours' invoiced but not charged for. In absence of evidence to the contrary it is safe to say these hours were worked and would have been charged for by Synergy.

At a glance

Court

Decision date

Before

Source

Judgment (19 paragraphs)

Parties

Cases Cited (14)

Cited By (2)