P M SULCS v DAIHATSU AUSTRALIA PTY LTD

LEGISLATION CITED : Income Tax Act, 1936 (Cth) Income Tax Act, 1997 (Cth)

CASES CITED : P M Sulcs v Daihatsu Aust - Costs and Interest [2001] NSWSC 798 Rabelais Pty Ltd v Cameron & Ors (unreported, 31 July 1995)

PARTIES : P M Sulcs & Associates Pty Ltd (Pl) Daihatsu Pty Ltd (Def)

COUNSEL : J Garnsey QC (Pl) N Hutley SC/M Izzo (Def)

SOLICITORS : Connah, Steed & Co (Pl) Clayton Utz (Def)

IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION

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

JUDGMENT (in respect of Order No. 6 of 13.9.01) 1 On 1 August 2001, after a lengthy trial, I published my reasons for the following orders: (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 thereafter relisted in order to deal with outstanding issues. Two of the issues identified were as follows: (Judgment 13 September 2001: P M Sulcs v Daihatsu Aust - Costs and Interest [2001] NSWSC 798, para [2]) · "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. … · 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 As to the first issue, I was persuaded that the amount awarded for the loss of a chance did require adjustment. As to the matter of taxation, an issue arose at the resumed hearing as to whether I had the power to vary the order I had made on 1 August 2001. The impact of taxation upon the verdict was not raised by either party until after I had given my reasons (para [89]). It had been overlooked. Both experts had provided opinions upon the value of the lost chance based upon net earnings. In the judgment on the resumed hearing, the following was said: (para [90]) "90. … 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." 4 Ultimately, a ruling was made that there was power to deal with the issue, and leave was given to amend the previous orders (para [101]). The liability to taxation was then considered (para [103]ff), referring to submissions made by the parties. There was uncertainty as to whether tax would be payable and, if it was, the basis upon which it would be payable (whether as income or as a capital gain). There was an issue as to whether the acquisition of P M Sulcs by Mr Hooper in 1990 may have had an impact upon taxation which was unrelated to Daihatsu. Against that background, I made the following statement: (para [114]) "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." 5 The judgment then continued in these terms: (para [115]) "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." 6 The first possibility was a declaration that, if the plaintiff were held liable for tax, it was entitled to be indemnified by the defendant. The second was an undertaking by the defendant to the plaintiff in the event of there being a liability to pay tax. The third possibility, which I favoured, was expressed in these terms: (para [118]) "118. Finally, in Rabelais Pty Ltd v Cameron & Ors (unreported, 31 July 1995) Hodgson J said this: '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.'" 7 The judgment then continued: (para [119]) "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." 8 The orders made were as follows: "1. 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.

2. 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.

3. 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." 9 Short Minutes in accordance with these orders were then taken out by the parties and entered.

The Notice of Motion. 10 The plaintiff filed a Notice of Motion supported by affidavits seeking, amongst other things, to vary Order 6. It appears that, after judgment, there was disagreement between the plaintiff and his former solicitors concerning costs. The plaintiff then changed solicitors. There has been litigation between the plaintiff and his former solicitors, which is still unresolved. Its resolution is material to the plaintiff's liability to pay tax, since he is able to claim as a deduction the costs not recovered from the defendant. The consequence of this unresolved litigation has been that the plaintiff has not yet submitted its taxation return for the years ended 30 June 1989 and following. 11 However, the plaintiff sought a private ruling from the Commissioner of Taxation on 24 February 2004. The ruling was given on 16 July 2004. The ruling was that the award of damages for the loss of a chance, and interest thereon, was income according to ordinary concepts and must be treated as assessable income. A private ruling, where "favourable" (as defined), is binding upon the Commissioner. The plaintiff contends that the ruling was favourable in that sense. 12 The plaintiff, in these circumstances, acknowledges that the precondition of Order 6 has not yet been satisfied: the plaintiff has not yet been assessed liable to pay tax on the award of damages for the loss of the chance, or interest thereon. The plaintiff seeks to vary or amend Order 6 to take advantage of the taxation ruling, and to reflect the intent of that order, asserting that in its present form, there is uncertainty arising from the following: (Pl's Subs 12.6.08: pp1/2) "3. … The matter arises principally because, strictly speaking, the terminology of order 6 is not consonant with the Income Tax Act , 1936 (Cth) (the '1936 Act') or the Income Tax Act , 1997 (Cth) (the '1977 Act'), as it assumes that P M Sulcs is 'assessed as liable to pay tax on' individual items, which are only two of the items which would be included in its taxable income for the relevant year." 13 The plaintiff asserts there is power to amend, and thereby overcome the precondition of Order 6, which cannot at this point be satisfied, in one of three ways: (Def's Subs 20.6.08: p2, para [4]) "(1) by seeking an amendment of the Order on the basis that it does not reflect the true intent of the judicial officer who made it; (2) by seeking a variation of the Order on the basis that it was interlocutory; or (3) by seeking a declaration for the construction of the Order." 14 Addressing the suggested uncertainty in Order 6, the defendants contended, first, that there is no uncertainty. The meaning and intent of Order 6 is plain. Secondly, given that it is plain, there is no warrant in looking for elucidation to the reasons for judgment which have been provided. Thirdly, even if there were uncertainty, as the plaintiff contends, the removal of the requirement of an assessment could not be justified. All that might be justified is the specification that, the plaintiff be assessed for income tax in respect of income which includes, as a component, the award of damages for loss of a chance and interest thereon. 15 I believe there is uncertainty, for the reasons given by the plaintiff. An amendment, at least in the terms suggested by the defendant, is therefore warranted, that is, that Order 6 should be amended so that it is in the following form: "6. 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 for income tax in respect of income which includes, as a component, the award of damages for loss of a chance and interest thereon." 16 However, such an amendment does not satisfy the plaintiff's application, since it would not permit the company to take advantage of the Commissioner's ruling. Is some further amendment warranted at this time? Is there power to make that amendment? I believe that there is power and that Order 6 was interlocutory. However, the defendant suggests that the private ruling was not "an assessment" within the intent of Order 6 for the following reasons: (Def's Subs: p5) "14. It is apparent from these passages that Kirby J gave two distinct reasons for refusing to gross up the damages award, namely, (i) uncertainty as to whether the Plaintiff would be liable for tax by reason of the damages award, and (ii) uncertainty as to what deduction would be available to the Plaintiff to offset that liability." 17 The defendant added: (Def's Subs: p6) "16. Irrespective of whether the first reason given by Kirby J refusing to gross up the damages award has fallen away, the second reason definitely has not. The Plaintiff's evidence is that, until the costs dispute between it and its former solicitors is resolved, the Plaintiff cannot proceed with an assessment of the costs payable by the Defendant to it under the costs orders made by the Court in these proceedings: affidavit of Malcolm George Brown, sworn 1 May 2008, para 18. It follows that, until that dispute is resolved, the Plaintiff will not know to what extent it will be able to deduct any unrecovered costs from its assessable income. (The answer to Question 2 in the private ruling makes it clear that the Plaintiff is in fact entitled to deduct such costs.) Until these matters are resolved, the Court still has no means of knowing the extent of the ' injustice ' which it is being asked to correct by grossing up the damages award." 18 I accept these arguments as a reasonable construction of my judgment and its intent. They suggest that this application is premature and must await the Commissioner's assessment, including his assessment in respect of any deduction in relation to legal costs. 19 Having heard argument on the costs, I believe it is appropriate that the plaintiff should pay 75 percent of the defendant's costs on this Motion.

1. Order 6 of the orders made on 13 September 2001 is varied, so as to read as follows: "6. 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 for income tax in respect of income which includes, as a component, the award of damages for loss of a chance and interest thereon."

2. Subject to that amendment, the plaintiff's Motion is dismissed.

3. The plaintiff should pay 75 percent of the defendant's costs on this Motion.

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