I do not think that I should readily infer that it was likely that Clos would have left Bronson & Jacobs in the absence of the Defendants' conduct when that conduct was directed at achieving that very goal. One might well ask why the Defendants did what they did if they thought that Clos would have changed distributors in any event. Mr Sullivan's answer to that question was to say that their conduct should be seen as an example of abundant caution. But it is clear that they went to considerable lengths to attract Clos away from Bronson & Jacobs. As a consequence of their conduct, it is impossible to know now with any certainty what Clos would have done. That uncertainty should not be allowed to operate in the Defendants' favour.
40 Taking these matters into account, in my opinion, the acquisition of Bronson & Jacobs by Orica increased the risk that Clos would terminate its Distributorship Agreement. Ingredients Plus would have been set up some time after 26 February 2005. Mr Bontoux had a close relationship with Mr McCartney and Mr Bontoux would have known that Mr McCartney had some connection with Ingredients Plus, although Mr McCartney would have said nothing to Mr Bontoux to encourage him to change distributors. The likelihood, however, is that key employees - Ms Nguyen, in particular - would have remained at Bronson & Jacobs. That would have been an important consideration to Mr Bontoux. I deal later in this judgment with the question of precisely what reduction should be made to Orica Investments' damages to take account of these facts.
Approach 1 or Approach 2?
41 In my opinion, Mr Potter's Approach 2 is preferable to his Approach 1. The difficulty with Approach 1 is that it assumes there would be no substantial changes in Bronson & Jacobs' business when it is clear that there were. Mr McCartney was obviously a very important person to Bronson & Jacobs' business. However, the position was that he would not continue with Bronson & Jacobs as Managing Director and would only continue for a limited period of time as a consultant. The acquisition of Bronson & Jacobs by Orica was likely to cause a significant disruption to Bronson & Jacobs' business and was likely to have some effect on the way in which Bronson & Jacobs did business. Approach 1 makes no allowances for these changes.
42 To a considerable degree, Approach 2 overcomes these difficulties. By taking the actual sales of Bronson & Jacobs and Ingredients Plus, it takes some account of the disruption caused by Orica's takeover and of the reorganisation that entailed. At the same time, it makes what I think is the correct assumption that key employees of Bronson & Jacobs were likely to remain with it.
43 Mr Sullivan submits that even Approach 2 over-estimates the likely cash flows that Bronson & Jacobs would have earned from the Clos Distributorship. In his submission, the evidence suggests that Bronson & Jacobs would not have been as effective as Ingredients Plus in selling Clos product. Since Ingredients Plus was substantially the old Bronson & Jacobs, the result, in his submission, of taking its actual sales would be to overstate the expected sales of the new Bronson & Jacobs.
44 I do not accept this submission. Some allowance has already been made for the points raised by Mr Sullivan in taking the actual sales of Ingredients Plus and the actual sales of Bronson & Jacobs. Those sales are likely to have been affected by the disruption caused by Bronson & Jacobs' new practices and the uncertainty in customers' minds of what was happening following the establishment of Ingredients Plus. In addition, on Approach 2, the actual sales of the two companies is used as a proxy for the expected sales of Bronson & Jacobs in the event that Mr McCartney had complied with his contractual obligations. In that event, the likelihood was that key staff would remain with Bronson & Jacobs. Although they no doubt would have confronted difficulties in dealing with Orica's new procedures and systems, I think the likelihood is that they would have retained most of the customers who became customers of Ingredients Plus. Finally, I propose to discount Bronson & Jacobs' claim for damages to take account of contingencies in relation to the Clos Distributorship Agreement. I think that that discount adequately takes account of the risks associated with the sale of Clos products going forward.
Gross Margins and Overheads
45 In the case of Approach 2, Mr Potter takes the actual gross margin earned by Bronson & Jacobs on sales of essential oil products and combines that with the margins achieved by Ingredients Plus to produce a combined gross margin. Mr Potter makes no allowance for overheads incurred by Bronson & Jacobs.
46 Mr Potter obtained his figures for Bronson & Jacobs' gross margin from a spreadsheet prepared by Mr O'Connor. That spreadsheet contains a complete list of Clos products sold by Bronson & Jacobs and, for each item on that list, specifies the costs of sale. Mr Sullivan pointed out that, in some cases, the figures recorded in that spreadsheet seemed to be absurd. For example, there were entries for significant sales where no costs were recorded against those sales. There were others where the costs of sale were equal to or greater than the cost of the product. Mr Sullivan cross-examined both Mr O'Connor and Mr Potter about these discrepancies. Both witnesses said that they were unable to give an explanation of them without investigating each sale. Mr O'Connor suggested that, in some cases, the discrepancies could have arisen as a consequence of a stocktake which revealed the presence of un-recorded stock or the absence of recorded stock. Mr Potter said that there were a number of possible explanations and that it was not unusual in his experience to find anomalies of that sort in large data sets. Mr Potter also pointed out that the margin he used (32%) was consistent with the margin achieved by Ingredients Plus.
47 I do not accept Mr Sullivan's submissions that the figures used by Mr Potter for Bronson & Jacobs' gross margin were unreliable. The critical figures are the total figure for sales and the total figure for the costs associated with those sales. I do not think that the points raised by Mr Sullivan cast doubt on the reliability of those figures. It is possible that mistakes were made in recording amounts against particular sales. It is possible that, on some occasions, the costs of sale were apportioned unequally against a group of sales for one reason or another. Similarly, it is possible, as Mr O'Connor said, that some of the discrepancies arise from adjustments following a stocktake. But I do not think that it follows from that the figures as a whole are unreliable. That is particularly so in circumstances where the gross margin achieved by Bronson & Jacobs does not seem unreasonable when compared with the gross margin achieved by Ingredients Plus.
48 Mr Sullivan also criticises Mr Potter's decision to make no allowance for overheads. However, I do not accept this criticism. 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. The position is complicated by the fact that, following the acquisition by Orica, a number of those overheads were absorbed by Orica, no doubt as Orica sought to achieve efficiencies following the acquisition of Bronson & Jacobs. 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.
49 Mr Lonergan, the expert accountant called by the Defendants, said under cross-examination that "based on general commercial experience … if you lose a couple of million dollars of sales you cut overheads no matter who you are." However, Mr Lonergan did not attempt to identify what those costs might be in this case.
50 Despite this criticism, I think the approach taken by Mr Potter was reasonable. Mr Potter accepted that there would be some overheads associated with the Clos Distributorship. However, he thought that those overheads were likely to be negligible. In his view, given the size of Bronson & Jacobs and of Orica, in particular, it was reasonable to assume that most overheads associated with the Clos Distributorship would be absorbed by the existing business. In addition, he took the same approach to the additional costs incurred by Bronson & Jacobs in seeking to find a substitute supplier to Clos. He assumed that those costs would be absorbed as part of the business and he did not include those costs in calculating Bronson and Jacob's loss, although, subject to any failure to mitigate on the part of Bronson & Jacobs, they were clearly recoverable. Consequently, to some extent at least, any incremental costs that Bronson & Jacobs might have incurred in keeping the Clos Distributorship were offset by the costs incurred by Bronson & Jacobs in searching for an alternative for which Mr Potter made no allowance at all. In my opinion that was a reasonable approach and I do not think any adjustment needs to be made to Mr Potter's calculations to take account of these matters.
Discount Rate and Terminal Value
51 The discount rate used by Mr Potter of 13.4% was the discount rate he calculated in accordance with the Capital Asset Pricing Model (CAPM) for Orica. Mr Potter thought that that was at least an appropriate starting point on the basis that Bronson & Jacobs had been absorbed by Orica and consequently many of the risks that the discount rate is intended to reflect were absorbed by it. Mr Potter accepted that there was a possible level of specific risk in the Bronson & Jacobs' lost cash flows which were being valued which may not adequately have been accounted for by using Orica's risk profile. The lack of diversity of cash flow is an obvious example. Mr Potter readily conceded that he did not have any particular expertise in assessing those specific risks. In addition, he pointed out that it was common for specific risk to be reflected by adjusting the cash flows to which the discount rate would ultimately be applied rather than adjusting the discount rate itself. Nonetheless, he thought that the approach that he had taken reflected specific risks essentially in two ways. First, Approach 2 reflected the specific risks associated with a business such as Bronson & Jacobs because it used the actual cash flows of Ingredients Plus and Bronson & Jacobs. Secondly, he applied his discount rate both to the cash flows he determines for the period from 10 March 2005 to 31 May 2009 and to the terminal value calculated by him. In applying that discount rate to actual cash flows, he essentially engages in a form of double counting because the discount rate he used is intended in part to reflect a risk that those cash flows would not be earned.
52 In my opinion, however, some further discount is necessary. The business that is to be valued for the purpose of calculating damages is the business that Bronson & Jacobs was likely to have had as a result of the Clos Distributorship. That business has two important features. First, it was dependent on retaining the Clos Distributorship. For the reasons I have already given, I think that there was a significant risk that it would not have done so. Secondly, the business was heavily dependent on retaining TP Health as a customer since approximately 60% of the sale of Clos's products was to that customer. In fact, Ingredients Plus did lose TP Health as a customer for lavender oil recently.
53 There is no science to the determination of an appropriate discount. For the reasons I have already given, I think that there was a significant risk that Clos would have left Bronson & Jacobs in any event. But I do not think that it was greater than 50% or anything like it. I also think that some allowance should be made for the risks associated with the loss of TP Health as a customer. Taking these matters into account, I think that Bronson & Jacobs' claim for damages in respect of the initial period should be reduced by a further 20%.
54 Mr Lonergan argued in his report that Bronson & Jacobs should recover nothing after 31 May 2009 on the basis that at that time Mr McCartney was no longer bound by the restraints in the Share Sale Agreement. I do not accept this argument. By then Clos would have been with Bronson & Jacobs without Mr McCartney for a period of 5 years. The likelihood that Mr McCartney would still be keen to entice Clos away from Bronson & Jacobs and the likelihood of him successfully doing so by that stage would have been small. In those circumstances, I think that I should discount the damages claimed by Bronson & Jacobs in this period by a further 10% (that is, by a total of 30%) to allow for that fact that the application of the discount rate calculated by Mr Potter in this period does not involve the possibility of double counting of the type I referred to earlier and to allow for the fact that there was some small chance that Mr McCartney would, at some time after 31 May 2009, seek to persuade Mr Bontoux to leave Bronson & Jacobs and would succeed in doing so.
Failure to Mitigate
55 The Defendants say that the Plaintiff failed to mitigate its loss. They rely on two types of evidence in support of this submission. First, they adduced a substantial quantity of evidence to suggest that alternative suppliers were available who could have been used by Bronson & Jacobs. Mr McCartney gave evidence that it was his policy at Bronson & Jacobs to have at least one alternative supplier of every product for its customers. Detailed cards were kept recording that information. Mr Flower, who was the Regulatory Affairs Manager of the company which owned TP Health, gave evidence that it was his company's policy to maintain a second supplier for all raw materials purchased by it, although he did not reveal who those suppliers were for reasons of commercial confidence. Mr Bontoux gave evidence that the market is a fiercely competitive one and that there were a number of alternative suppliers to Clos. Secondly, Mr McCartney and Mr Graeme Love gave evidence which was heavily critical of the approach taken by Ms Dalziel to find alternative suppliers.
56 In my opinion, Bronson & Jacobs did not fail to mitigate its loss. The question is not so much what Bronson & Jacobs might have done to mitigate its loss as what it did do and whether, in all the circumstances, that was reasonable. As Lord MacMillan said in Banco de Portugal v Waterlow and Sons Ltd [1932] AC 452 at 506:
"[The] law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures and he will not be held disentitled to recover the cost of such measures merely because the party in breach can suggest that other measures less burdensome to him might have been taken."