Plaintiff v Defendant [2006] VSC 47 | Case summary

Plaintiff v Defendant [2006] VSC 47 | Case summary | Zoe

[4]

Introduction

1 On 19 September 2003 I published my reasons for judgment on liability in each of these proceedings.[1] Relevantly, in proceeding No. 2078 of 2000 ("the Foxeden proceeding") I found that there was an implied term of the agreement between the plaintiff, Foxeden Pty Ltd ("Foxeden"), as the nominee of Mr Warwick Hawksworth, and the first defendant, IOOF Building Society Limited ("IOOF" or "the Building Society"), concerning the operation of IOOF's Mildura branch that the agreement could be terminated by either party without cause on reasonable notice.[2] I also found that a period of one year would have been reasonable notice to Foxeden at the end of June 1999; and that IOOF repudiated the agreement by electronically transferring all of the Mildura branch customer accounts, including deposits and loans, to the nearest Bendigo Bank branch on 30 June 1999,[3] without any prior notice, let alone the required one year's notice, to Foxeden of its intention to bring the agreement to an end, thereby denying Foxeden exclusive access to the customers of the Mildura branch and to the customer lists and depriving it of the opportunity to have personal dealings with these customers when they visited the branch during the ensuing notice period.[4]

2 In proceeding No. 2085 of 2000 ("the Taylor proceeding") I found that, as from 24 March 1997, there was a term of the agreement between the plaintiffs, Kenneth and Janet Taylor, and IOOF, concerning the operation of IOOF's Frankston branch that the agreement could be terminated by either party without cause on 60 days' notice in writing, but that IOOF was estopped from relying upon or enforcing that term and that in order to make good the assumption on which the estoppel was based the matter should proceed on the footing that there was an implied term that the agreement could be terminated on reasonable notice.[5] I also found that a period of one year would have been reasonable notice to the Taylors at the end of June 1999;[6] and that IOOF repudiated the agreement by electronically transferring all of the Frankston branch customer accounts, including deposits and loans, to the nearest Bendigo Bank branch on 30 June 1999, without any prior notice, let alone the required one year's notice, to the Taylors of its intention to bring the agreement to an end, thereby denying the Taylors exclusive access to the customers of the Frankston branch and to the customer lists and depriving them of the opportunity to have personal dealings with these customers when they visited the branch during the ensuing notice period.[7]

3 Following a further hearing, the outstanding issue for determination in each proceeding is the quantum of damages recoverable by the plaintiff(s) from IOOF, the sole remaining defendant. This has been an extremely complicated exercise, not the least for the reason that the plaintiff(s) have frequently changed the ways in which their claims were put. Without going into all of the detail of the calculations of the differing amounts, it is worth noting, as a starting point, how the articulation and quantification of each claim has varied from time to time.

The Plaintiff's Claim for Damages in the Foxeden Proceeding

4 In its Statement of Claim dated 4 August 2000 Foxeden claimed:

[14]

8 After considering some issues raised by IOOF at the commencement of the damages hearing, Foxeden filed its final Further Amended Statement of Loss and Damage dated 21 October 2004 ("Foxeden's Claim"). In this document Foxeden reduced its principal claim for loss of the chance to earn financial planning income over time to $3,393,303 (instead of $3,802,428) by reducing the number of new clients to 846. In addition, Foxeden repeated the claims for $7,762 and $135,050 referred to in paragraph 7(a) and (d) above respectively; repeated the claim for the lost opportunity to maintain the benefits derived from operating the Mildura branch by transferring all of the customers to another building society agency or other similar banking agency on terms substantially similar to its agreement with IOOF ("the lost opportunity to transfer the Mildura customers to another financial institution"), and the claim for the lost opportunity to negotiate (either on its own behalf or in conjunction with the Taylors) with IVFS or the Building Society or Bendigo Bank for payment of an amount of compensation for agreeing to waive its entitlement to one year's notice of termination of the agreement ("the lost opportunity to negotiate compensation for agreeing to waive the period of notice") and increased the quantification of each claim to $3,393,303, alternatively the previous figure of $1,821,699; and deleted both the claim for the lost opportunity to sell its rights to the customers to Bendigo Bank, and the claim to an amount representing compensation for the additional benefit derived by IVFS from selling the Building Society for an inflated consideration.

9 One qualification to the calculation of the principal claim introduced at this time was that Foxeden purported to reserve the right to increase the amount of the average investment per client above $70,000 if the claimed number of financial planning clients lost was reduced below 846. In its Claim Foxeden had used the figure of $70,000 although it said that the actual average investment was approximately $78,000 per client.

10 Further, it was recognised in Foxeden's Claim that this figure of $3,393,303 would have been received over a period of time and therefore that it had to be discounted to ascertain the net present value. Using calculations said to have been prepared by its expert witness, the figure was discounted to a net present value of $1,972,024. However, subsequently that expert witness produced another set of calculations, which were tendered, which resulted in a net present value of $2,849,250. The difference between the two figures was never satisfactorily explained.

11 Foxeden also accepted in its Claim that this figure might have to be further discounted "to the extent that the Court, having concluded that it is more probable than not that the plaintiff lost the chance referred to in this paragraph, assesses that there is a risk that the plaintiff would not have derived the full sum claimed." Thus, the figure of $2,849,250 was the maximum amount that could be claimed, prior to any award of interest.

The Plaintiffs' Claim for Damages in the Taylor Proceeding

12 In their Statement of Claim dated 29 August 2000 the Taylors claimed:

[24]

16 After considering some issues raised by IOOF at the commencement of the damages hearing commenced, the Taylors filed their final Further Amended Statement of Loss and Damage dated 21 October 2004 ("the Taylors' Claim"). In this document the Taylors increased their principal claim for loss of the chance to earn financial planning income over time to $2,620,042 (instead of $2,576,093) by increasing the number of new clients to 775. In addition, the Taylors repeated the claim for $163,447 referred to in paragraph 14(b) above; repeated the claim for the lost opportunity to transfer the Frankston customers to another financial institution , and the claim for the lost opportunity to negotiate compensation for agreeing to waive the period of notice and increased the quantification of each claim to $2,620,042, alternatively the previous figure of $1,558,000; and deleted both the claim for the lost opportunity to sell its rights to the customers to the Bendigo Bank, and the claim to an amount representing compensation for the additional benefit derived by IVFS from selling the Building Society for an inflated consideration.

17 The Taylors also qualified the calculation of the principal claim introduced at this time by purporting to reserve the right to increase the amount of the average investment per client above $59,000 if the claimed number of financial planning clients lost was reduced below 775. In their Claim the Taylors had used the figure of $59,000 although they said that the actual average investment was approximately $82,000 per client.

18 The Taylors also recognised in their Claim that this figure of $2,620,042 would have to be discounted to a net present value, which was initially said to be $1,522,641, according to the expert witness' calculations. However, that witness' subsequent set of calculations, which were tendered, resulted in a net present value of $2,199,965. Again, the difference between the two figures was never satisfactorily explained.

19 It was also accepted that the figure of $2,199,965 was the maximum amount that could be claimed, prior to any award of interest, and that it might have to be further discounted to take account of the risk that the plaintiffs would not have derived the full sum claimed.

Applicable Legal Principles

20 It seems to me that the following statements of legal principle are applicable to the task of assessing the damages to be awarded to Foxeden and the Taylors:

[25]

(a) "... where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed" (per Parke B in Robinson v Harman[8]);

(b) "... the plaintiff is entitled to recover such damages as arise naturally, that is, according to the usual course of things, from the breach, or such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract as the probable result of the breach" (per Mason CJ and Dawson J in The Commonwealth v Amann Aviation Pty Ltd[9] restating Alderson B's "renowned formulation" in Hadley v Baxendale[10]);

(c) "The award of damages for breaches of contract protects a plaintiff's expectation of receiving the defendant's performance" (per Mason CJ and Dawson J in Amann[11]);

(d) "... a plaintiff is not entitled, by the award of damages upon breach, to be placed in a superior position to that which he or she would have been in had the contract been performed" (per Mason CJ and Dawson J in Amann[12]) and "... the parties to the contract are kept to the benefits and the burdens of the contract they have made: the plaintiff recovers no more than the net benefit he would have received under the contract; the defendant acquires no right to profit by his breach" (per Brennan J in Amann[13]);

(e) "If the law is to take account of future or hypothetical events in assessing damages, it can only do so in terms of the degree of probability of those events occurring. The probability may be very high - 99.9 per cent - or very low - 0.1 per cent. But unless the chance is so low as to be regarded as speculative - say less than 1 per cent - or so high as to be practically certain - say over 99 per cent - the court will take that chance into account in assessing the damages. Where proof is necessarily unattainable, it would be unfair to treat as certain a prediction which has a 51 per cent probability of occurring, but to ignore altogether a prediction which has a 49 per cent probability of occurring. Thus, the court assesses the degree of probability that an event would have occurred, or might occur, and adjusts its award of damages to reflect the degree of probability" (per Deane, Gaudron and McHugh JJ in Malec v JC Hutton Pty Ltd[14]);

(f) "... the general standard of proof in civil actions will ordinarily govern the issue of causation and the issue whether the applicant has sustained loss or damage. Hence the applicant must prove on the balance of probabilities that he or she has sustained some loss or damage. However, in a case such as the present, the applicant shows some loss or damage was sustained by demonstrating that the contravening conduct caused the loss of a commercial opportunity which had some value (not being a negligible value), the value being ascertained by reference to the degree of probabilities or possibilities. It is no answer to that way of viewing an applicant's case to say that the commercial opportunity was valueless on the balance of probabilities because to say that is to value the commercial opportunity by reference to a standard of proof which is inapplicable" (per Mason CJ, Dawson, Toohey and Gaudron JJ in Sellars v Adelaide Petroleum NL[15]);

(g) "The role of the court in making an assessment of damages which depends upon its view as to what will be and what would have been is to be contrasted with its ordinary function in civil actions of determining what was. In determining what did happen in the past a court decides on the balance of probabilities. Anything that is more probable than not it treats as certain. But in assessing damages which depend upon its view as to what will happen in the future or would have happened in the future if something had not happened in the past, the court must make an estimate as to what are the chances that a particular thing will or would have happened and reflect those chances, whether they are more or less than even, in the amount of damages which it awards" (per Lord Diplock in Mallett v McMonagle[16]); and

(h) "... mere difficulty in estimating damages does not relieve a court from the responsibility of estimating them as best it can," sometimes even to the extent of being involved in "guess work rather than estimation" (per Mason CJ and Dawson J in Amann[17] referring to a passage from the judgment of Dixon and McTiernan JJ in Fink v Fink[18] and to a passage from the judgment of Menzies J in Jones v Schiffmann[19]).

[26]

The Damages Hearing

21 On the first day of the liability hearing I ordered that the two matters should be heard together and that the evidence in one proceeding be evidence in the other.[20] Subsequently, at an early stage of that hearing I ordered pursuant to r.47.04 of the Supreme Court Rules that liability in each proceeding be determined as a separate question.[21] Prior to the commencement of the damages hearing, on 16 September 2004, I ordered that, pursuant to r.40.11, the evidence taken at the liability hearing be evidence at the damages hearing.

22 The plaintiff(s) called eight witnesses. Mr Hawksworth and Mr Greg Smart, the former manager of the Mildura branch, gave evidence concerning Foxeden's claim and Mr and Mrs Taylor gave evidence concerning their claim. A witness statement by Mr William Cleland, a former partner of a firm of solicitors in Frankston, White Cleland, was tendered on behalf of the Taylors, but he was not cross-examined. Mr Andrew Mainprize, a former General Manager of the Building Society, and Ms Glenda Robson, a financial planner employed by Foxeden at the Shepparton financial planning office, were also called by the plaintiff(s). Finally, the plaintiff(s) called as an expert, Professor Wesley McMaster, an Adjunct Professor of Financial Planning at RMIT University and the principal of McMaster Securities Pty Ltd, a business consultancy specialising in financial services. Much of Professor McMaster's evidence was based on the Dashboard Report concerning financial planners for the year ended 30 June 2003 prepared by Strategic Consulting and Training Pty Ltd; the Principal Member Survey, Professional Practice prepared for the Financial Planning Association of Australia Ltd ("FPAA") by Professor McMaster in November 2003; and the Consumer Sentiment Survey prepared for FPAA by Professor McMaster in May 2003.

23 During the damages hearing, on the application of the plaintiff(s), I ruled[22] that two of the witnesses who had given evidence on behalf of the defendants at the liability hearing, Mr Raymond Schoer, the former Chairman of the Building Society's Board of Directors, and Mr Alan Mollison, the former finance manager of the Building Society, should be recalled by the sole remaining defendant, IOOF, for the purpose of being cross-examined by the plaintiff(s) as part of the damages hearing.

24 Apart from the special circumstances of Mr Schoer and Mr Mollision, IOOF called only two witnesses. The first, Dr Allen Truslove, a director of Cumpston Sarjeant Truslove Pty Ltd, was a former Government Actuary and had been the Consulting Actuary to the IOOF Friendly Society since 1994. The second witness was Ms Piera Murone, a partner of PKF Chartered Accountants and Business Advisers and a director of PKF Corporate Advisory Services (Vic) Pty Ltd, who had prepared an expert report in respect of the damages claims of the plaintiff(s).

The Entitlement of the Plaintiff(s) to the Financial Planning Income

25 Before examining the Claims of the plaintiff(s) in each proceeding in detail, I turn first to consider an important preliminary point raised by the Building Society, namely whether Foxeden and the Taylors were entitled to receive the financial planning income and, if not, whether they in fact suffered any relevant loss. As will be seen, this defence relates only to the financial planning income and does not affect any entitlement of the plaintiff(s) to damages for lost building society commissions, or for the loss of the opportunity to negotiate compensation for waiving the period of notice, or for the loss of the opportunity to transfer the customers to another financial institution.

Foxeden and Decagold Pty Ltd

26 IOOF submitted that if there had been any loss of financial planning income as a result of its repudiation of the agreement with Foxeden, that loss was sustained by Decagold Pty Ltd ("Decagold") and not Foxeden.

27 Decagold was a company incorporated by Mr Hawksworth in February 1998 in the following circumstances. Winchcombe Carson Financial Planning Pty Ltd ("Winchcombe Carson") was a subsidiary of, and the financial planning arm of, IVFS. Mr Hawksworth was an authorised representative of Winchcombe Carson. He owned a series of eight Winchcombe Carson franchise offices throughout Victoria. When Foxeden took over the operation of the Building Society's branch office in Mildura on 28 May 1997 Mr Hawksworth remained an authorised representative of Winchcombe Carson, entitled to the financial planning commission. At no stage did Foxeden have an authority from Winchcombe Carson. However, according to Mr Hawksworth, he passed on the financial planning commission he received from Winchcombe Carson to Foxeden because it was incurring all of the expenses of operating the Mildura branch.

28 It appears that following an approach by Mr Hawksworth to Winchcombe Carson about him having to pay PAYE tax on the financial planning commission, he was advised by Mr Adrian Hondros of Winchcombe Carson that the only way he could avoid paying PAYE tax was to form a separate company. Mr Hawksworth maintained, and I find, that Winchcombe Carson wanted one separate company to receive the commission, rather than Foxeden, in respect of the Mildura, Shepparton and Echuca branches and Portmark Pty Ltd in respect of the other branches. After the incorporation of Decagold in February 1998, at the direction of Mr Hawksworth Winchcombe Carson paid the financial planning commissions to it. Although Decagold never entered into any written agreement with Winchcombe Carson, drafts of such an agreement were prepared.

29 How then did Foxeden claim that it had lost financial planning income? Mr Hawksworth said that he controlled both companies and that, although there was no agreement in writing between Decagold and Foxeden, there was an agreement between them that Decagold would receive the financial planning commissions as the nominee of Foxeden and would pass on that income to Foxeden. This claim was strongly criticised by IOOF. It submitted that Mr Hawksworth was not an employee of Foxeden so that Foxeden had no entitlement to receive the financial planning commissions due to him; that the financial statements and books of account of Foxeden and Decagold did not show all of the commissions received by Decagold being paid by it to Foxeden; that Decagold was not a mere nominee company and that its taxation returns described it as operating a financial planning business and not as a nominee; that there was no credible evidence that there had ever been any agreement between Decagold and Foxeden regarding the collection or payment of the financial planning commission; and that the appointment of Decagold as the entity entitled to financial planning commission from Winchcombe Carson was made to obtain a taxation advantage and that Foxeden could not now contend that it was not effective.

30 Although Mr Hawksworth's evidence on this issue was at times confusing, if not contradictory, I accept that as far as he was concerned, as the controlling mind of both Decagold and Foxeden, Decagold was receiving the financial planning commissions on behalf of Foxeden and that all, or some, of that income would be remitted to Foxeden to enable it as far as possible to meet its expenses. After that had been done, I consider that any remaining income would have been distributed in the most tax effective way. As far as Mr Hawksworth was concerned, Foxeden had earned some or all of the financial planning income because it had incurred all of the expenses in running the Mildura branch of the Building Society, through which the financial planning income had been, or would have been, generated. Simply stating in the taxation return of Decagold that it was operating in the financial planning category of business activities does not detract from Mr Hawksworth's evidence that Decagold was only a nominee for Foxeden.

31 It therefore seems to me that Foxeden can legitimately claim to have suffered a loss as a result of the Building Society's breach of their agreement in that Foxeden lost the chance to receive all or part of the financial planning income which, at the direction of Mr Hawksworth, would have been paid by Winchcombe Carson to Decagold, over the following years as a result of the efforts of Mr Hawksworth to generate that income during the period of the one year's notice of termination, and which in turn would have been paid by Decagold to Foxeden.

32 The same analysis applies to the financial planning income which would have been paid by Winchcombe Carson to Mr Greg Smart, the manager of the Mildura branch office, over the following years as a result of his efforts to generate that income during the period of notice. I accept the evidence that, although Winchcombe Carson insisted that this commission had to be paid to Mr Smart or his nominee company, pursuant to the terms of his employment by Foxeden Mr Smart was obliged to pay all of the commission income he received to Foxeden.

The Taylors and Pastel Manor Pty Ltd

33 IOOF also submitted that if there had been any loss of financial planning income as a result of its repudiation of the agreement with the Taylors, that loss was sustained by Pastel Manor Pty Ltd ("Pastel Manor") and not the Taylors. Pastel Manor was the trustee of the Taylor Family Trust.

34 In 1990, and later in May 1991, Pastel Manor and Winchcombe Carson entered into an agreement pursuant to which Pastel Manor was appointed the agent of Winchcombe Carson responsible for providing the financial planning services of the authorised representative Mr Taylor. Pastel Manor was entitled to receive the commission which Winchcombe Carson paid in respect of those services. Pursuant to the agreement Pastel Manor was responsible for the remuneration of Mr Taylor. In fact, by June 1999 both Mr and Mrs Taylor were employed by Pastel Manor and were paid a salary by it.

35 IOOF submitted that merely because Pastel Manor paid the Taylors to provide some services did not make them the people entitled to the commission from Winchcombe Carson. Whilst I agree with that proposition, it does not follow, in my opinion, that the Taylors cannot legitimately claim to have suffered a loss as a result of the Building Society's breach of their agreement. Mr Taylor gave evidence that he and his wife determined the level of their salaries each year and that it was calculated by ascertaining "what was left over after paying expenses". He said that all of the commissions earned from the financial planning services received by Pastel Manor was either spent on expenses or paid to Mr and Mrs Taylor in the form of salaries. Therefore, the Taylors lost the chance to have their remuneration increased by Pastel Manor receiving the financial planning income from Winchcombe Carson over the following years as a result of the efforts of Mr Taylor to generate that income during the period of the one year's notice of termination. It therefore seems to me that the Taylors are entitled to look at lost financial planning income as one possible way of calculating the damages payable to them by IOOF.

The Final Claims for Damages

36 The claim by Foxeden for $7,762 for unpaid commission payable by the Building Society on loans written through the Mildura branch after 28 May 1997 can be put to one side. As I understand it, IOOF accepted during the hearing that this amount was payable, but it is not clear to me whether it was actually paid and whether interest on the outstanding sum was taken into account. If the amount of $7,762 and/or interest thereon is still outstanding, then Foxeden is entitled to have the appropriate amount included in the judgment.

37 The next point is that after the evidence had been completed and final written submissions exchanged, both Foxeden and the Taylors sought to amend their Claims yet again. Although IOOF objected to leave being granted to make any further amendments at this late stage of the hearing, it was content to argue the matter as part of the final submissions.

38 The first proposed amendment was to the principal claim in paragraph 1(d) of Foxeden's Claim. It sought to add the following words to the existing claim that the average investment for each lost financial planning client was not less than $70,000 and that the actual average investment was approximately $78,000 per client:

[30]

42 A similar amendment was proposed to the description of the principal claim in paragraph 1 of the Taylors' Claim.

43 I consider that the first sentence in these proposed amendments to be unnecessary because the fact that it was being claimed that the commissions would have been earned over a six year period had already been made clear by paragraph 1(c) of each claim.

44 I turn then to the second sentence which contained the real point of these proposed amendments. What the plaintiff(s) were seeking to include was a further alternative scenario, namely that if it had been known that the one year period of notice was required to be given, then given the problems that would have caused it was unlikely that IOOF would have sought to terminate the agreements so that the plaintiff(s) had suffered loss by being deprived of commissions which they would otherwise have continued to earn over the long term.

45 IOOF strenuously objected to this part of the second proposed amendments. It submitted that the suggestion that notice of termination might not have been given was a completely new way of putting the plaintiff(s)' claims and that it was quite unfair for such a change to be made after the evidence had closed. It was also submitted that this approach contradicted the findings made in the liability trial.

46 I agree. It seems to me that the plaintiff(s)' claims in the damages hearing were always based on the various attempts to quantify the loss suffered by the plaintiff(s) as a result of IOOF's failure to give, as I found in the liability trial, the required one year's notice of termination. To now suggest that another way of quantifying the plaintiff(s)' loss was to proceed on the basis that no notice of termination would have been given is simply to fly in the face of not only the findings made at the liability trial but also of the approach adopted by the plaintiff(s) up until that stage at the damages trial. I therefore refuse the application for leave to make the second proposed amendment to each Claim on the grounds that, in my opinion, it would be inappropriate and unfair to the defendant to allow such amendments.

47 In any event, even if I allowed the second proposed amendments, it seems to me that I could not be satisfied that any such opportunity had been lost. For the reasons given below when discussing the claim based on the lost opportunity to negotiate compensation, I consider it so likely that IVFS would have decided not to proceed with the sale of the Building Society that the chance of it occurring has to be discounted completely.

48 This means that I have to consider the four different ways in which Foxeden and the Taylors have articulated and quantified their claims for damages. I propose to consider each of these different ways in the following order:

[35]

57 A number of explanations were advanced for the fall in the number of accounts. In particular, it was suggested that the introduction of fees led to customers consolidating separate accounts into one. But this should not have resulted in any reduction in the amount of the balances held in the lesser number of accounts. Another explanation was that funds had been transferred from the building society accounts to other IOOF Group products. On the other hand, Foxeden drew attention to the fact that the figures in the above table showed that of the total decline in combined balances of $1,446,154 between 31 May 1997 and 25 June 1999, $697,798 had been lost by 23 February 1999 and $748,356 in the next four months. That is, over half of the total decline occurred in the months after the sale was announced. Foxeden therefore submitted that "if there were no sale, the deposit balances of the Mildura branches would have stabilised at around $14,500,000". Its figure of $108,750 for anticipated building society commissions was arrived at by calculating the commission at the rate of 0.75% on $14,500,000.

58 However, I consider that this calculation proceeds on the false premise of the sale not occurring. On the contrary, the relevant hypothetical fact situation in which damages have to be assessed is that the sale of the Building Society to Bendigo Bank proceeded but that IOOF was bound to give Foxeden and the Taylors one year's notice of termination of the agency agreement which would have expired on 30 June 2000. Therefore, it seems to me that the assumption that the amounts of the deposits would have "stabilised" at around $14,500,000 is not justifiable. A more likely outcome, in my opinion, taking into account all of the uncertainties and before allowing for the impact on deposits of increased financial planning investments, is that the deposits would have "stabilised" at the June 1999 total of approximately $13,800,000. This would mean that the figure for the lost building society commission would be $103,500.

59 IOOF calculated the building society commissions which would have been earned in the 2000 financial year at $101,000 as follows. It submitted that the building society commissions earned by Foxeden during the time it operated the Mildura branch decreased not increased, dropping from approximately $118,996 in the 1998 financial year to approximately $114,854 in the 1999 financial year, because the total amount of the funds deposited at the Mildura branch was reducing. Even assuming that Foxeden's earlier estimate of at least $115,000 in building society commissions in the 2000 financial year was likely rather than a continued decrease, IOOF submitted that Foxeden had not taken into account the fact that, if as Foxeden claimed many building society customers would have been converted into financial planning clients during the notice period, the total amount of the funds deposited with the Building Society would have been substantially reduced with a consequent reduction in the amount of the building society commission. IOOF argued that Foxeden's claimed increase of 100% or $75,000 in financial planning business earning 3% commission would have meant that approximately $2,500,000 would have been transferred from building society deposits into financial planning products. It was said that the lost commission of 0.55% on this $2,500,000 would have been $14,000, thus producing the figure of $101,000. (In fact, the precise calculation would have resulted in lost commission of $13,750.)

60 I do not consider that all of this deduction of $14,000, or even $13,750, is justifiable. I am satisfied that the evidence of Mr Hawksworth and Mr Taylor that most of the funds invested by newly converted financial planning clients came not from their building society deposits but from other sources, such as superannuation or bequests from deceased estates or simply other more significant investments, meant that the successful conversion of Building Society depositors would not have significantly affected the total amount of the funds deposited with the Mildura branch. I therefore consider that about one third of IOOF's actual figure, or $4,585, is an appropriate reduction on this basis. When the $4,585 is deducted from $103,500 the final figure for lost building society commission comes to $98,915.

61 During the course of argument, I pointed out to counsel for Foxeden that in my opinion the figure given by Foxeden for savings in expenses of $112,000 was not correct. The suggested savings totalled $90,000 and it seemed to me that it was this figure, if correct, not the continuing expenses of $112,000, which should be brought to account. After considering the matter, Foxeden accepted that the deduction of $112,000 was not correct, and re-affirmed that the savings in expenses were indeed $90,000, made up of $33,000 in rent, $52,000 in salaries and $5,000 in superannuation. I still consider this deduction to be too much. The $33,000 savings in rent came about because Foxeden moved premises at about this time. But this reduced rent would have occurred even if the one year's notice had been given and, therefore, it seems to me that it is not correct to treat the $33,000 as a savings in expenses which would have been incurred in the notice period but which were not in fact incurred because no notice was given. The resulting figure of $57,000 for savings in expenses is very close to Ms Murone's estimate of $55,500. The average of the two estimates is $56,250 which seems to be the appropriate figure to use.

62 I have therefore reached the conclusion that assessing Foxeden's damages by the first way in which it put its claim results in a figure of $126,760. The calculations leading to this figure are as follows:

[39]

67 Overall the total amount held in both the savings accounts and the term deposits increased, but there was a significant fall in the number of accounts from a high at 30 June 1997. Again there was a sharp decline in the balances held in those accounts in the months after the sale was announced. In the four months between 23 February and 25 June 1999, $999,345 was lost from the savings accounts and $33,947 from the investment accounts. The Taylors submitted that the figures in the above table showed an overall increase of approximately 10% per annum and therefore that "if there were no sale, the Frankston deposit balances would have continued to increase at a rate of about 10% per annum during the 12 month notice period". A 10% increase on what was said to be the building society commission earned in the 1999 financial year of $83,588 (and 1998 financial year of $72,078) was the figure of $91,947.

68 IOOF calculated the building society commissions which would have been earned in the 2000 financial year as follows. It submitted that, in calculating the lost building society commissions initially, the Taylors had wrongly claimed that building society deposit and loan balances were increasing by 20% per annum. This had been brought about by the Taylors mistakenly omitting the deposits of just over $2 million obtained through the solicitors White Cleland from the commencement figure but including the White Cleland deposits of $2.26 million in the final figure. This meant that, in fact, the increase over the period was more like 8%. Ms Murone's analysis of the amount of, and the growth in, building society commission income, suggested that the appropriate figures to use for calculating the income in the 2000 financial year were an 11% increase on $60,000, resulting in a figure of $66,600.

69 For the reasons already given, the Taylors' calculation, based on a 10% increase in deposits and commission, proceeds on the false premise of the sale not occurring. A more likely outcome, in my opinion, taking into account all of the uncertainties and before allowing for the impact on deposits of increased financial planning investments, is that the deposits would have "stabilised" at approximately $12,850,000, or slightly more than the June 1999 total, including the White Cleland deposits. This would mean that the figure for the lost building society commission would be approximately $70,675, which is not that different from Ms Murone's figure.

70 Further, for the reasons already given, I do not consider that IOOF was justified in reducing its figure of $66,600 by $24,000, being 0.55% of the extra financial planning investments of $4,370,000, calculated by using the Taylors' claimed increase of 30% or $131,000 in financial planning business earning 3% commission, on the basis that all of these investments would have come from the building society deposits. Instead, I consider that one third of IOOF's figure, or $8,000, is an appropriate reduction on this basis. When the $8,000 is deducted from $70,675 the final figure for lost building society commission comes to $62,675.

71 Again, for the reasons already given, I do not accept the approach adopted by IOOF in calculating the figure of $24,000 for lost financial planning commissions. The Taylors' calculations under this approach and IOOF's criticisms of them are examined in detail in the next category of loss. It is sufficient for present purposes to note that IOOF based its calculation on 28 new financial planning clients from the building society base with an average investment of $19,000. This would have produced actual income in the 2000 financial year of $18,100.

72 The Taylors claimed that their financial planning commission income would have increased by at least 30%, based on the following historical figures:

[41]

The Loss of the Chance to Earn Financial Planning Income Over Time

75 I turn then to consider the second way in which Foxeden and the Taylors put the claim for damages. It was alleged that it and they lost the chance to earn financial planning income over a number of years by using the one year's period of notice to convert depositors with the respective branch of the Building Society, either during that year or in subsequent years, into financial planning clients. It seems to me that logic and common sense support the proposition that, had Foxeden and the Taylors been given the required one year's period of notice of termination, it and they would have continued to earn financial planning income not just in that period but over a longer period. I am therefore satisfied, on the balance of probabilities, that contact made with the depositors of the Building Society branch during that year would have resulted in some depositors being converted into financial planning clients both during the one year's notice period and in subsequent years and that Foxeden and the Taylors thus lost both up front commission and trail commission.

76 As set out above, Foxeden submitted that the maximum amount which could be claimed for its lost chance expressed in net present value terms was $2,849,250. Its starting figure of $3,393,303 was calculated by claiming that, if Foxeden had been given the required one year's notice of termination, during that period and for up to five years thereafter 846 customers of the Mildura branch (or 60% of the 1,410 depositors who were not already financial planning clients of Foxeden) would have become financial planning clients with an average investment of not less than $70,000 thus generating over time funds of $59,220,000. It was further claimed that the up front commission on those funds would have been 3% and that the trail commission would have been 0.39% per year over the likely investment period of seven years. The lost up front and trail commission on the $59,220,000 was therefore said to be $1,776,600 and $1,616,706 respectively. Thus, the correct total was actually $3,393,306, not $3,393,303.

77 As also set out above, the Taylors submitted that the maximum amount which could be claimed for the lost chance expressed in net present value terms was $2,199,965. Their starting figure of $2,620,042 was calculated by claiming that, if they had been given the required one year's notice of termination, during that period and for up to five years thereafter 775 customers of the Frankston branch (or 60% of the 1292 depositors who were not already financial planning clients of the Taylors) would have become financial planning clients with an average investment of not less than $59,000 thus generating over time funds of $45,725,000. It was further claimed that the up front commission on those funds would have been 3% and that the trail commission would have been 0.39% per year over the likely investment period of seven years. The lost up front and trail commission on the $45,725,000 was therefore said to be $1,371,750 and $1,248,292 respectively.

The Number of Financial Planning Clients Lost

78 Mr Hawksworth gave evidence that had he been given one year's notice, he would have taken steps to accelerate the growth of the financial planning business through the exclusive access to the customer lists. He said that he believed that had he had the opportunity to undertake an intensive marketing and interviewing exercise, he could have placed funds in alternative investments on behalf of about 90% of the savings account holders and term depositors at the Mildura branch over the notice period of one year and a further period of about five years. Not surprisingly, he said that he would have first approached the high net worth customers (presumably as indicated by their deposits with the Building Society).

79 Foxeden submitted that the exercise proposed by Mr Hawksworth of interviewing each of the 1410 customers of the Mildura branch who were not already financial planning clients of Foxeden in order to obtain basic information from them, such as name, address, telephone number, age, assets, liabilities, income, expenses and risk profile, for later use by the financial planners once the branch had been closed, was well within the physical capability of Mr Hawksworth and Mr Smart and their staff, with the possible assistance of other financial planners employed by Foxeden at other of its financial planning branches.

80 Mr Taylor also gave evidence about the marketing activities which he would have undertaken, had he been given one year's notice. He said that he believed that he could have placed investments for approximately 85% of the customers of the Frankston branch who were not already financial planning clients over the notice period of one year and a further period of about five years. He said that he would have "targeted high worth customers first".

81 The Taylors submitted that they had adequate resources to enable Mr Taylor, Mrs Taylor and their son Greg Taylor to interview 1292 customers and gather information necessary to enable them to prioritise customers and then pursue the best prospects. They pointed out that an initial 20 minutes interview for each of the 1292 customers would take 430.66 hours, or 143.5 hours per interviewer. This amounted to less than three hours per week for each interviewer if spread over the whole 52 week period. Further, it was said that additional staff could have been hired, if necessary.

82 The plaintiff(s) further submitted that not only was the figure of 60% less than Mr Hawksworth's claimed 90% rate and Mr Taylor's claimed 85% rate, it was also supported by Mr McMaster's evidence and the Dashboard Report. They therefore submitted that 60% was a conservative estimate.

83 There was a considerable body of evidence which supported the plaintiff(s)' submissions that their claims that as financial planners they would have been able "to harvest" the customer base of the Building Society over time accorded with the thinking of the IOOF Group prior to the making of the agreements with Foxeden and the Taylors. It was also submitted that by mid 1999 these customers were, in a sense, "ripe for the picking". A majority of the members of the Building Society were over 55. Most of these people, who were approaching retirement, increasingly had superannuation and other assets apart from their deposits with the Building Society. The building society branches were seen by the IOOF Group as the "distribution channels" into the financial planning business. As was said in the Group's December 1997 draft strategic plan:

[43]

84 Nevertheless, I consider that both the figure for Foxeden of 846 customers, being 60% of 1410 customers, and the figure for the Taylors of 775 customers, being 60% of 1,292 customers, were, as IOOF submitted in its final submissions, "grossly overestimated". First, such a claim assumes that each of the 1410 customers of the Mildura branch of the Building Society and each of the 1,292 customers of the Frankston branch of the Building Society were likely candidates for becoming a client of a financial planner. There is no basis for this assumption, in my opinion, and runs counter to the evidence that no more than about 20% of the Australian population have engaged financial planners. There is no reason why the proportion would be any higher in this group. On the contrary, there was evidence to suggest that the depositors with IOOF were in the lower socio-economic groups in the community and at "the lower net worth end of the market". Whilst it is not only the rich who would benefit from the services of a financial planner, there must come a point when the amount of assets available for investment by a depositor is so small or virtually non-existent that it is ridiculous to suggest that the depositor is likely to become a client of a financial planner. Further, some of the depositors may already have engaged their own financial planner or they may have obtained financial advice from other people such as accountants, stockbrokers, family or friends.

85 Another way of reaching the same conclusion is to look at the breakdown of the amounts invested at both the Mildura and Frankston branches. These figures are complicated because there were more accounts than customers, that is some customers must have had more than one account, and yet most of the breakdown is in terms of accounts rather than customers. A further complication was that some of the savings accounts had a negative balance.

86 Nevertheless, the following picture of each branch clearly emerges. At Mildura, there were 1,171 savings accounts, including those with a negative balance, with less than $2,000 invested. The average amount in the savings accounts with a positive balance was only $4,161. At Frankston, there were 1,047 savings accounts, including those with a negative balance, with less than $2,000 invested. The average amount in the savings accounts with a positive balance was only $3,094. In my opinion, these figures indicated that it was probable that many of the customers at each of the two branches would not have had the funds to warrant them being considered as potential financial planning clients.

87 Professor McMaster referred to a Consumer Sentiment Survey which he had prepared in May 2003 for the Financial Planning Association of Australia Ltd. This survey revealed that in 1999 51% of respondents had obtained financial advice from any source and that 29% to 30% of those obtaining financial advice had consulted financial planners, and that in 2003 41% of respondents had obtained financial advice from any source and that 39% to 40% of those obtaining financial advice had consulted financial planners. Of the approximately 16% of the respondents in 2003 who had consulted financial planners, the use of financial planners as distinct from other sources of advice increased as the clients' income and age rose.

88 Secondly, the success rates of 60% and above have been achieved in what were called "prospecting appointments". This was defined in the Dashboard Report as an "appointment with a prospective client for the purpose of discussing services provided by the adviser" and "conducting a fact find on the prospective client, presenting a financial plan or completing initial paperwork to commence the client/adviser relationship". Foxeden submitted that because of the personal relationship which would have already been built up between the building society customers and Mr Hawksworth and Mr Smart, the proposed interview of each of the 1410 customers could be regarded as a "prospecting interview". This is obviously not correct, in my opinion. The proposed form of the interviews during the notice period of the 1410 customers would not be the same as one where a potential client has agreed to meet the financial planner to discuss matters such as what the financial planner has to offer and to decide whether he or she wished to engage the services of the financial planner. Mr Taylor seemed to accept that the basic interview with each of the 1,292 depositors would have to be followed up with a longer interview, which could be considered to be similar to a "prospecting interview".

89 Thirdly, the proposed form of the universal interview was likely, in my opinion, to put off some depositors from considering becoming financial planning clients, rather than building a productive relationship. Simply obtaining basic personal details in order to build up a data base, without providing any subsequent advice, is hardly conducive to encouraging a positive view by the potential client of the hopeful financial planner. For example, Professor McMaster observed that whether a customer gets something of real benefit from an interview is a matter which might influence the prospect of the interview becoming successful and that conversely the prospects of success could actually be harmed by poor service.

90 Fourthly, as Professor McMaster said, a good guide to the success rate of a financial planner was to look at what the historical success rate of the adviser had been. Over the two years approximately during which Foxeden had run the Mildura branch of the Building Society, only about 17 depositors had become financial planning clients of Winchcombe Carson, perhaps seven in the first year and ten in the second year. In order to obtain these clients, Mr Hawksworth had conducted at least 120 interviews with prospective financial planning clients, which was neither a 90% nor a 60% success rate. It was more like 20%.

91 The historical success rate of the Taylors was also not encouraging. Over the three and a quarter years during which they Taylors had run the Frankston branch of the Building Society, only 85 depositors had become financial planning clients of Winchcombe Carson, an average of about 26 per year. In order to obtain these clients, Mr Taylor had conducted at least 300 interviews with prospective financial planning clients, which was neither an 85% nor a 60% success rate. It was more like 30%.

92 Fifthly, Foxeden had already been marketing the financial planning business to Building Society depositors over the preceding two years and therefore the scope for a really substantial increase over a short space of time did not exist. Evidence was given that approaches by letter and telephone had been made to customers, in particular those with maturing term deposits, and that all of the branch staff were well trained in looking for cross-selling opportunities when dealing with the depositors at the counter. Indeed, Mr Hawksworth agreed that, at the liability hearing, he had said that he had already identified and approached the best prospects from the customer list. Mr Smart also acknowledged that, at the liability hearing, he had agreed with the proposition that during the period between 28 May 1997 and 30 June 1999 he had approached a large number of the building society customers "for the purposes of financial planning".

93 I do not accept the evidence given in this hearing by Mr Hawksworth and Mr Smart that there was no urgency in transforming the depositors into financial planning clients and that their past efforts had been concentrated on building up the customer base and not "pillaging" the Building Society depositors. In my opinion, there were a number of reasons why Mr Hawksworth, and to a lesser degree Mr Smart, would always have been aiming at attracting financial planning business. That was the whole purpose of taking on the burden and cost of running the Mildura branch. The commission from financial planning was better than the modest building society commission. The need for people to engage a financial planner usually was at its highest when people retired or their parents died and these events would have been occurring throughout the period in which Foxeden ran the branch. Mr Hawksworth believed that generally clients did not leave an advisor once the relationship was consummated by the making of investments and there was competition in the area from other financial planners. Mr Hawksworth also believed, correctly, that most of the funds invested by newly converted financial planning clients came not from their building society deposits but from other sources. Therefore, it seems to me that Mr Hawksworth would have been keen to learn as much as possible about the most likely prospects amongst the depositors in order not to miss the chance to convert them into his financial planning clients should they come into funds and would not have been concerned that the successful conversion of depositors into financial planning clients would significantly reduce the total amount of funds deposited with the Mildura branch. Finally, as IOOF submitted, if Mr Hawksworth and Mr Smart were so concerned with maintaining the amount of the funds in the Building Society, one would have expected that they would have been aware of the decline in balances and account numbers, and yet, quite extraordinarily neither of them was, prior to it being pointed out to them when giving evidence at the damages hearing.

94 The same analysis applies to the Taylors. Similar evidence was given by Mr Taylor about the marketing of his services that had occurred over the preceding three and a quarter years. Indeed, Mr Taylor agreed that in his witness statement at the liability hearing he had said:

[47]

95 I do not accept the evidence given in this hearing by Mr Taylor that there was no urgency in transforming the depositors into financial year clients. Mr Taylor agreed in cross-examination that each year there was the potential for people amongst his Frankston branch customer base to receive superannuation or an inheritance who if not identified by Mr Taylor in that year might be lost to him forever, and that if he waited three years before he started actively identifying the real investment opportunities, he was likely to have lost forever three years' worth of customers receiving superannuation or an inheritance.

96 For all of these reasons I am not prepared to accept Foxeden's claim that, if it had been given the required one year's notice of termination, it would have held interviews with each of its 1,410 depositors who were not already financial planning clients or that it would thereby have gained over time 846 extra financial planning clients. Nor am I prepared to accept the Taylors' claim that, if they had been given the required one year's notice, they would have held interviews with each of their 1,292 depositors who were not already financial planning clients or that they would thereby have gained over time 775 extra financial planning clients.

97 It seems to me that realistically the maximum number of "prospecting interviews" which would have been obtained by Mr Hawksworth and Mr Smart at the Mildura branch in the notice period and the five subsequent years would have been about 353. I have calculated this figure by taking 25% of the 1,410 depositors who were not already financial planning clients. The reduction of 1,057 or 75% is my best estimate of the number of depositors at Mildura who were either not sufficiently wealthy to justify using the services of a financial planner, or for some other reason were not a suitable target for conversion, or were not interested in receiving financial advice, or were already receiving financial advice from other sources, or simply did not want to attend a "prospecting interview" with Mr Hawksworth or Mr Smart. It should be noted that my reduction of 1,057 is below the number of building society customers who had less than $2,000 in their savings account or term deposit. Thus, I have recognised to some extent that even some of these customers were potential financial planning clients. Adopting what I understood to be the clearly accepted standard success rate of 60% would mean that over time 212 new financial planning clients would have been gained by Foxeden. In using the 60% figure I have borne in mind that whilst Mr Hawksworth might have achieved a higher success rate, the relatively inexperienced Mr Smart might have achieved a lower rate. Finally, I note that on the assumption accepted by both sides that 50% of the new clients would have been gained in the first year, a figure of 106 in that first year would be a significant increase on what had previously been achieved at the Mildura branch. Even spreading the new clients evenly over the six years would still result in a figure of 35 to 36 per year, which would also be an increase on what had previously been achieved at the Mildura branch.

98 Similarly, it seems to me that realistically the maximum number of "prospecting interviews" which would have been obtained by Mr Ken Taylor and his son, Greg Taylor, at the Frankston branch in the notice period and the five subsequent years would have been about 388. I have calculated this figure by taking 30% of the 1,292 depositors who were not already financial planning clients. The reduction of 904 or 70% is my best estimate of the number of depositors at Frankston who were either not sufficiently wealthy to justify using the services of a financial planner, or for some other reason were not a suitable target for conversion, or were not interested in receiving financial advice, or were already receiving financial advice from other sources, or simply did not want to attend a "prosecting interview" with Mr Ken Taylor or Mr Greg Taylor. I have used a slightly higher percentage in the case of the Frankston branch compared with the Mildura branch because Mr Ken Taylor's connection with potential clients should have been stronger than Mr Hawksworth's given that Mr Taylor had been full time rather than part time at the Frankston branch and that he had been there over a longer period. Again, it should be noted that my reduction of 904 is below the number of building society customers who had less than $2,000 in their savings account or term deposit. Thus, I have recognised to some extent that even some of these customers were potential financial planning clients. Adopting what I understood to be the clearly accepted standard success rate of 60% would mean that over time 233 new financial clients would have been gained by the Taylors. In using the 60% figure I have borne in mind that whilst Mr Ken Taylor might have achieved a higher success rate, his relatively inexperienced son might have achieved a lower rate. Finally, I note that on the assumption accepted by both sides that 50% of the new clients would have been gained in the first year, a figure of 116 or 117 in that first year would be a significant increase on what had previously been achieved at the Frankston branch. Even spreading the new clients over the six years would still result in a figure of 38 to 39 per year, which would also be an increase on what had previously been achieved at the Frankston branch.

The Average Investment

99 In the plaintiff(s) final submissions, they based the claim that Foxeden's figure of $70,000 and the Taylors' figure of $59,000 for the average financial investment was both "realistic and conservative" on the following evidence:

[48]

(a) each of Mr Hawksworth's 3,263 financial planning clients with the new business, Capstone Financial Planning Pty Ltd ("Capstone"), had an average financial planning investment as at March 2004 of $78,000;

(b) at the Mildura branch as at 30 June 1999 a total of $8,101,482 was held in 169 savings and term deposit accounts of more than $15,000 each by depositors who were not financial planning clients of Foxeden, at an average of approximately $47,937 per account;

(c) at the Mildura branch as at 30 June 1999 the average amount of funds under investment of 24 financial planning clients was $100,229 at the date of investment or $68,660 if one looked only at the 17 "new" clients;

(d) each of Mr Taylor's 631 financial planning clients with Capstone had an average amount of funds under advice as at August 2004 of $82,160, although more than that amount would have been originally invested because the total was continually being reduced by capital repayments on investments such as complying immediate annuities;

(e) each of the 50 Capstone clients of Mr Taylor analysed by the Taylors had an average financial planning investment of $117,139 as at 30 June 1999 and of $241,856 as at 8 October 2004;

(f) the actual funds invested under the advice of Mr Taylor on behalf of 106 of the 126 depositors of the Frankston branch who were also financial planning clients of the Taylors averaged $190,838 per client (or $160,546 per client if all 126 are counted), and although some of the amounts may have been reinvestments of the same funds, so that the figure of $190,838 did not represent the average financial planning investment of those clients at any one time, the up front commission would have been earned on each investment;

(g) if the 25 clients at the Frankston branch who had investments placed prior to March 1996 (when the Taylors took over the branch) are excluded then the average amount invested for each of the 81 clients was $159,700 (or $128,076 per client if all 101 are counted);

(h) at the Frankston branch as at 30 June 1999 a total of $6,398,027 was held in 127 savings and term deposit accounts of more than $15,000 each by depositors who were not financial planning clients of the Taylors, at an average of approximately $50,378 per account;

(i) the Taylors' financial planning income figures showed that they would have begun to harvest the fruits of their relationship building over the preceding three and a quarter years in that in the 1999 financial year their financial planning income increased significantly from $236,599 to $437,540.

(j) Professor McMaster's evidence that a 2003 survey of the Principal Members of the Financial Planning Association of Australia showed that the average amount per client of funds under advice was $185,000, and that the Dashboard Report for the year ended 30 June 2003 showed average funds under advice per client of $133,329;

(k) each of the 50 Shepparton clients of Capstone analysed by Ms Robson had an average financial investment as at 30 June 1999 of $139,717; and

(l) most of the funds invested by newly converted financial planning clients came not from their building society deposits but from other, often newly received assets, such as superannuation or bequests from deceased assets or other more significant investments.

[49]

100 In its final written submissions IOOF argued that attention should only be given to the data that related to the actual business at the relevant time, not another business at a different time. It pointed out that in 2004 Capstone had 45 offices across Australia, $300 million funds under advice and about 4,300 clients. Accordingly, IOOF submitted that it was not valid to compare the customer profile of this large group in 2004 with that of Foxeden and the Taylors in 1999.

101 By way of contrast with the Shepparton figures, IOOF pointed out that the average financial planning investment of a Mildura client who was also a building society customer as at 22 April 1999 was only $23,140. As an illustration of the effect of inflation and of the growth that would occur after the making of the initial investment, IOOF also pointed out that by 30 June 2004 the average financial planning investment of the 50 Shepparton clients of Capstone had grown to $223,113. However, the plaintiff(s) argued that it did not matter that some of the figures were from 2003 and 2004, because their case was that they would have had those funds under investment over a six year period, that is up to 30 June 2005. Even though a client might make only a small initial investment, that did not mean that more significant investments would not be made over time.

102 IOOF further submitted that, even though it was common ground that the IOOF term depositors would have been a likely target group for conversion into financial planning clients, as at 30 June 1999 the amount of the average term deposit was only $16,920 at the Mildura branch and $19,062 at the Frankston branch, although it was accepted that the average term deposit per customer would have been slightly higher. Moreover, 72.55% of the term deposits at Mildura and 70.96% at Frankston were less than $15,000. However, at Mildura the remaining 27.45% represented 134 accounts with an average investment of approximately $45,250. Of these accounts, 22 held more than $70,000 on term deposit, at an average of about $117,080 per term deposit. The averages per customer would have been higher. At Frankston there were 115 accounts of more than $15,000 invested with an average investment of $50,528 per account. Of these accounts, 19 held more than $70,000 on term deposit, at an average of about $139,330 per account. Again, the averages per customer would have been higher. Further, as at 30 June 1999, the 79 savings and term deposit accounts of more than $30,000 held by depositors who were not financial planning clients of Foxeden, had an average investment totalling $78,482. The top 40 term depositors at Mildura, representing about 10% of the accounts, each had funds invested on average of $91,382. At the same date, the 65 savings and term deposit accounts of more than $30,000 held by the depositors who were not financial planning clients of the Taylors, had an average investment totalling $78,709. The top 36 term depositors at Frankston, representing about 10% of the accounts, each had funds invested on average of $71,954.

103 IOOF also analysed the available information for the 126 financial planning clients of Mr Taylor who were also as at 30 June 1999, depositors with the Frankston branch of the Building Society. It showed that as at 30 June 1999 the average investment of these 126 was $45,274 and as at 23 August 2004 was $107,221. IOOF also pointed out that these averages compared unfavourably with the averages put forward in respect of the Shepparton clients - $45,274 compared with $139,717 as at 30 June 1999 and $107,221 compared with $223,113 for mid 2004.

104 The plaintiff(s) placed great emphasis on what was called the 80/20 Rule, that is, that about 20% of the customer base of a financial institution represented about 80% of the total funds available to be invested. Thus, its reservation referred to above, that it could increase the average investment per client if the claimed number of financial planning clients lost was reduced, made some sense. The 80/20 Rule fits comfortably with the evidence of Mr Hawksworth and Mr Taylor that during the notice period they would have focused their attentions, in the first instance, on the depositors, particularly the term depositors, with the greatest amount of funds invested.

105 It was also pointed out by the plaintiff(s) that in their Claims no allowance had been made in the calculation for the loss of additional clients who would have been obtained by them through referrals from the additional financial planning clients who were depositors of the Building Society. I accept the evidence that much of a financial planner's business comes from such word of mouth referrals and have taken it into account in reaching my figures.

106 The greatest difficulty I have with Foxeden's average investment figure of $70,000 and the Taylors' figure of $59,000 is that they do not seem to me to be based on any analysis of the actual amounts invested by clients at the respective branches in June 1999. For example, the average claimed by Foxeden was significantly higher than that by the Taylors, even though on many comparative calculations the depositors at Frankston had a higher average than those at Mildura. Nor do the two sets of average investment figures seem to pay any attention to the numbers of clients holding the larger deposits. In what follows, I have attempted to rectify these defects in the approach by the plaintiff(s).

107 In the welter of figures for Foxeden set out above, the one that impressed me as the most relevant and helpful was that as at 30 June 1999 a total of $8,101,482 was held in 169 savings and term deposit accounts of more than $15,000 each by depositors who were not financial planning clients of Foxeden, at an average of approximately $47,937 per account. Everyone agreed that it was sensible to assume that the customers who held these accounts would have been the primary target for Foxeden's drive for more financial planning business. This is not to say, however, that all of these customers would have attended a "prospecting appointment", or that, if they had, they would have become clients. Assuming, not strictly accurately, that the 169 accounts represented 169 potential clients I have calculated that 51 would have become clients, by assuming 50% (or double the earlier figure) would have attended a "prospecting appointment" with Mr Hawksworth or Mr Smart and that 60% of these would have become clients. Given the evidence about the existence of other more substantial assets held by the depositors outside the Building Society accounts, it seems to me not unreasonable to proceed on the basis that each of these 51 new clients would have had on average an amount of $143,811 to invest, or three times the average amount of $47,937 in the 169 savings and term deposit accounts.

108 As far as the remaining 161 new clients are concerned, they would have had to come from those depositors holding the 526 savings and term deposit accounts of between $2,000 and $15,000 and the 1,070 such accounts of less than $2,000. The average amount in the 526 accounts was approximately $6,234. Again, it seems to me not unreasonable to proceed on the basis that each of the 161 new clients would have had on average an amount of $18,702 to invest, or three times the average amount in the 526 accounts.

109 By my calculations, 51 clients with an average financial planning investment of $143,811 and 161 clients with an average investment of $18,702 would generate funds of $10,345,383, or approximately $48,800 for each of the 212 new clients of Foxeden.

110 Similarly, with the Taylors the figure that impressed me as the most relevant and helpful was that as at 30 June 1999 a total of $6,398,027 was held in 127 savings and term deposit accounts of more than $15,000 each by depositors who were not financial planning clients of the Taylors, at an average of approximately $50,378 per account. Again it is these customers who held these accounts who would have been the primary target for the Taylors' drive for more financial planning business. But not all of these customers would have attended a "prospecting appointment", or if they had, would have become clients. Assuming, not strictly accurately, that the 127 accounts represented 127 potential clients I have calculated that 46 would have become clients, by assuming 60% (or double the earlier figure) would have attended a "prospecting appointment" with Mr Ken Taylor or his son and that 60% of these would have become clients. Again, it seems to me not unreasonable to proceed on the basis that each of these 46 new clients would have had on average an amount of $151,134 to invest, or three times the average amount of $50,378 in the 127 savings and term deposit accounts.

111 As far as the remaining 187 new clients are concerned, they would have had to come from those depositors holding the 347 savings and term deposit accounts of between $2,000 and $15,000 and the 979 such accounts of less than $2,000. The average amount in the 347 accounts was approximately $6,388. Again, it seems to me not unreasonable to proceed on the basis that each of the 187 new clients would have had on average an amount of $19,164 to invest, or three times the average amount in the 347 accounts.

112 By my calculations, 46 clients with an average financial planning investment of $151,134 and 187 clients with an average investment of $19,164 would generate funds of $10,535,832, or approximately $45,220 for each of the 233 new clients of the Taylors.

The Rates of Commission

113 IOOF did not really dispute the average rates of 3% for up front commission and 0.39% for the trail commission. Ms Murone said that the use of these rates "does not appear unreasonable" and Professor McMaster also supported them. I accept the validity of these figures.

The Length of Investments

114 Although there seemed to be no real challenge during the damages hearing to the claim that the likely period of the lost investments would have been seven years, IOOF in its final written submissions argued that it had "no evidentiary foundation". This was despite the fact that Ms Murone, IOOF's own expert witness, accepted that seven years was "not unreasonable". IOOF submitted that broad industry wide statistics were an unreliable source of information and were likely to be higher than the average length of duration for the potential clients at the Mildura and Frankston branches. I do not agree. In the absence of any other evidence I see nothing wrong with using broad industry wide statistics. Nor do I accept that simply because some of the potential financial planning clients had relatively short term deposits of around 12 months or less that this was any indication of the likely length of their financially planned investments.

The Appropriate Discount Rate

115 Finally, there is the question of the appropriate discount rate. This is required, in my opinion, to take into account two separate matters. The first is to build into the above calculations the degree of probability that the above matters might not have come to pass in part or at all. After all, the figures are simply my best estimates of what might have occurred in terms of the plaintiff(s) receiving some financial return, direct or indirect, from the new clients gained in the notice period and five years thereafter. Notwithstanding the reductions made in my calculations to the number of new clients and the amount of the average financial planning investment, I consider that in order to cater for these risks a discount of between 20% and 25% still needs to be applied.

116 The second matter to be taken into account is that any lost income would have been received over time and not all at once on 1 July 1999. It was assumed for this purpose that 50% of the amount invested would have been invested in year one, 25% in year two, 12.5% in year three, 7.5% in year four and 5% in year five and that in each year only 50% of the trailing commission on the amount invested in that year would be received in the year it would have been invested because it would have been progressively invested over the course of the year and paid monthly.

117 Although the parties agreed that there had to be a discount to establish the net present value of any amount received over time, they disagreed over the appropriate rate. Professor McMaster simply used the average monthly interest rate on 90 day bank bills in the period from 1 July 1999 to 30 June 2004 of 5.22% per annum. Ms Murone, on the other hand, applied a 10% to 15% discount rate. She regarded this as the rate applicable to the future income stream of a financial planning business with a moderately low risk of attaining the projected income. She said that this future income stream was still susceptible to the normal vicissitudes affecting any business - the ongoing health of key personnel; the effect of new competitors; changes to the local environment affecting customer flows; the ebb and flow of the financial services industry generally, and so on. It was submitted that none of these risk sensitivities were taken into account by a discount for the mere time value of money. It seems to me that Ms Murone's approach was the correct one, and therefore that a 10% to 15% discount should also be applied.

118 Adding the two discounts together leads to a range of 30% to 40%, and I have decided that the appropriate discount rate to use is the mid-point or 35%.

Quantifying Foxeden's Lost Chance

119 The result of the above is that, in my opinion, the appropriate calculation of Foxeden's lost chance to earn financial planning income over time is as follows:

[53]

122 Again, as what has been lost is the chance to earn further financial planning income, I do not consider it appropriate to make any deduction for any financial planning income actually received in the 2000 financial year. That income flowed from efforts made in the previous years or from business not related to the building society customers and not from the efforts which would have been made in the one year's period of notice to convert building society customers into financial planning clients. Nor do I consider it necessary to include a figure for any savings in expenses given that the work proposed in my calculations could have been handled with the existing resources.

The Lost Opportunity to Transfer Customers

123 I turn now to consider the third alternative way in which Foxeden and the Taylors put the claim for damages, namely the lost opportunity to transfer customers to another financial institution.

124 Both Mr Hawksworth and Mr Taylor gave similar evidence about how they would have gone about arranging to transfer the customers to another financial institution had they been given the required one year's period of notice. It was said that there were 18 financial institutions with the appropriate characteristics to make them possible candidates to be approached to take over the $26 to $28 million approximately in deposits from the Mildura and Frankston branches. Although it was said that one of the requisite characteristics of the alternative deposit taken was that it was currently operating in Victoria, only one of the 18 institutions satisfied this criterion. More importantly, there was simply no evidence from any of these financial institutions that they would have had the slightest interest in pursuing the suggestion by Mr Hawksworth and Mr Taylor.

125 It was eventually accepted by the plaintiff(s) that their duty of fidelity to the Building Society would have prevented them from transferring their customers to another institution during the notice period. Nevertheless, they submitted that their duty of fidelity did not prevent them from contacting or making arrangements with an alternative deposit taker during the notice period and then transferring the customers at the conclusion of that period. Even accepting that arrangements could have legitimately been made with an alternative deposit taker during the notice period, the plaintiff(s) still faced the difficult task of attempting to persuade their former customers to transfer to the new financial institution when they would have ceased virtually overnight to be customers of the plaintiff(s).

126 A further difficulty is that seeking to transfer depositors from one financial institution to another is not the same as persuading financial planning clients to stick with their personal financial planner even though he or she might change employer. In my opinion, the relationship is quite different. And yet this was the basis on which it was said that there was evidence to support the claim that all or a significant proportion of the customers would have agreed to move. For many of the customers the decision might well turn on the interest rates being offered and obviously, in the absence of any evidence from a potential alternative deposit taker, there was simply no credible evidence as to what the competing rates might have been.

127 I consider it extremely unlikely that any of the borrowers would have been prepared to substitute their loan from the Building Society with a loan from the new financial institution without some real incentive in terms of a savings in interest, and again there is no evidence that this was available. The holders of term deposits were unlikely to agree to move those deposits prior to them maturing and by then in most cases the personal link would have been broken. For other customers, the effort of having to withdraw their money from the Building Society and transfer it to the new financial institution may have been too much. Mr Hawksworth agreed in cross-examination that he really had no idea of what the outcome would have been in terms of transferring the loans and deposits.

128 For all of these reasons I am not satisfied that IOOF's repudiation of the agreement meant that either Foxeden or the Taylors in fact lost the opportunity to transfer customers to another financial institution. The state of the evidence is such that I have reached the conclusion that the chance of this happening is so low that it has to be regarded as purely speculative. Therefore, this is not an appropriate way in which to put the claim for damages. Accordingly, it is not necessary to consider the criticisms made by IOOF of the method relied on by the plaintiff(s) of calculating the value of the alleged lost opportunity.

The Lost Opportunity to Negotiate Compensation

129 The final way in which the plaintiff(s) put the claim for damages was that Foxeden and the Taylors lost the opportunity to negotiate with one or more of IVFS, the Building Society or Bendigo Bank for compensation for agreeing to waive the one year's period of notice.

130 IOOF submitted that this was not an appropriate method of quantifying the damages because such an eventuality was not part of the parties' expectations and that the damages were meant to be compensation for what the plaintiff(s) were entitled to expect from the agreement and lost because of IOOF's repudiation. I do not agree with this submission. As I see the hypothetical situation, the question is what might IVFS or the Building Society have done about the agreements if, the Building Society having been sold to Bendigo Bank, IOOF then found that one year's notice of termination of the agreement was required to be given to both Foxeden and the Taylors, that is before the customers in those branches could have been switched to the Bendigo Bank. This hypothetical situation assumes that initially the parties' expectations are given effect to, by the requirement of one year's notice, but asks what might have then happened, without any breach of the two agreements occurring. It seems to me that it was logically possible that in these circumstances IVFS or the Building Society might have negotiated with both Foxeden and the Taylors to pay them a lump sum in return for them agreeing to waive the period of notice. This would not be a hypothesis which postulated the continued breach by the defendant of the agreements, or the continued non-performance by it of the relevant contractual term, as submitted by IOOF. Rather, the relevant contractual term is given effect to, but the possibility is raised that the parties might by agreement have brought about a different outcome. The loss of that chance could therefore be a legitimate way of putting the claim for the damages flowing from IOOF's repudiation of the agreements.

131 The important remaining questions, which now need to be addressed, are whether there was some probability that such an opportunity would have occurred, and if so, what is the proper quantification of the lost opportunity. I turn then to the first of these questions.

132 I accept the submission of the plaintiff(s) that the opportunity to negotiate a payment in lieu of notice was a real and valuable opportunity by virtue of a number of matters. First, it was submitted that the price obtained for the sale of the Building Society of approximately $38 million was, as Dr Truslove described it, "too good to be refused". The price was far higher than the figure in IOOF's books for the value of the Building Society and well in excess of the valuation of approximately $8 million given by Dr Truslove in 1997. Dr Truslove estimated the profit at not less than $22 million in February 1999 whilst Mr Stephen Ryan, the General Manager-Finance of IVFS, prepared a report in March 1999 which estimated the profit on the sale at between $16 million and $20.6 million. Further, according to a position paper on the proposed sale of the Building Society to Bendigo Bank, presumably prepared by Mr Turner:

[61]

136 As at January 1999 the Building Society had a need for $35 million in the following six to eight weeks. In any event, selling mortgages would have reduced the assets of the Building Society with a likely consequential reduction in the sale price.

137 Thirdly, I consider that it was simply not practical for the sale to proceed without the Mildura and Frankston branches being transferred to Bendigo Bank. It is not realistic, in my opinion, to suggest that during the notice period Bendigo Bank could have traded as IOOF at those two branches whilst everything else was changed to Bendigo Bank. Dr Truslove gave evidence that from his "20 years of experience as a public servant responsible for the supervision of these entities, that it is not possible to sell a branch like that." Alternatively, IOOF would have had to retain the two branches with the associated costs of maintaining the existing systems for a limited number of customers which would have made the process quite uncommercial. Apart from the chaotic situation that would have prevailed during the one year's period of notice, reducing the amount of the deposits by approximately $26 to $28 million, even if only for the period of one year, might have led Bendigo Bank either to abandon the purchase or significantly reduce the purchase price. Neither course would have suited IVFS.

138 Fourthly, preserving the rights of the plaintiff(s) to exclusive access to the customers of each branch until the end of the one year's period of notice termination would likely have caused considerable problems for IOOF and Bendigo Bank whenever the instant transfer was attempted. It seems to me that the only sensible way to overcome these problems was for IOOF to give Bendigo Bank access to these customers before they were to be transferred, yet this could not be done without breaching the agreements with Foxeden and the Taylors.

139 I am, therefore, satisfied, that there was some reasonable possibility that, if IVFS had found that one year's notice of termination of the agreement was required to be given, it would have entered into negotiations with Foxeden and the Taylors in order to persuade them to waive the period of notice, rather than jeopardising the sale of the Building Society to Bendigo Bank. The payment of monetary compensation for the earlier than expected end of the agreements was the most obvious form of compensation. After all, payment in lieu of a period of notice, a well known concept in other areas such as an employment context, would not have been that unfamiliar to either side in the negotiations. Moreover, the Taylors had already attempted to raise the question of compensation in their meeting with Mr Turner, Ms Pearce and Mr Mollison in January 1999[23] and Mr Hawksworth had done likewise in his telephone conversation with Ms Pearce in about April 1999[24] and his telephone conversation with Mr Mollison in about May 1999.[25] Further, by a letter dated 3 May 1999 Feingold Partners had written on behalf of the Taylors and Mr Hawksworth to the Managing Director of IOOF. One matter mentioned was the clients' wish that there be "full, proper and reasonable negotiations in relation to our clients' rights and entitlements."[26] Finally, on 26 May 1999 Mr Taylor and Mr Hawksworth met with Mr Hondros, Mr Mollison and Ms Pearce. Notes of that meeting record that Mr Taylor and Mr Hawksworth both said that they believed that they were entitled to financial compensation for the loss of clients when the Building Society was sold.[27] All of these attempts to open negotiations on the question of compensation failed, of course, because IOOF simply ignored the plaintiff(s)' contractual entitlements. It would not be able to adopt this high-handed stance in the hypothetical situation.

140 I am strengthened in this conclusion by the absence of any evidence from Mr Robert Turner, the Group Managing Director. The question of what the Building Society would have done had it been faced with the requirement to give one year's notice of termination of the agreements with the plaintiff(s) is only one of many issues, in both the liability trial and the damages trial, on which one would have thought Mr Turner's evidence was absolutely critical. And yet, as senior counsel for the plaintiff(s) never tired of pointing out, Mr Turner stayed well away from the witness box.

141 The next question is, therefore, what is the proper quantification of this lost opportunity? The plaintiff(s) submitted that the amounts of well in excess of $1 million claimed, say $1.5 million to $1.6 million, could be justified on the basis that:

[63]

142 I do not accept that the plaintiff(s) would have entered the negotiation expecting not less than $1.5 million. The difficulty the plaintiff(s) have had in articulating their claims and their many changes in the claims shows just how uncertain they were of the value of what it was that they had lost by IOOF's repudiation. I accept that both Mr Hawksworth on behalf of Foxeden and Mr and Mrs Taylor would have entered the negotiations with a genuine sense of grievance at IOOF's conduct and the belief that they had lost a valuable right, but I have concluded that the likely position was that both Foxeden and the Taylors would have been prepared to accept an offer of much less than $1.5 million to give up their right to one year's notice of termination.

143 In reaching this conclusion I have discounted the submission that the plaintiff(s) would have held a number of "aces". It seems to me that the likely situation would have been that they would not have appreciated just what pressures there were on IOOF as this information was only revealed through IOOF's belated discovery. On the other hand, I do believe that IOOF would have been very keen to persuade the plaintiff(s) to agree to waive the notice period.

144 In attempting to put a value on this lost opportunity I have not drawn any distinction between Foxeden and the Taylors. Almost certainly they would have negotiated with IOOF together, and despite the minor factual differences between their breaches, I consider that the likely result would have been that the agreed figure for compensation would have been the same for both Foxeden and the Taylors.

145 Doing the best I can in attempting to estimate what the likely figure for compensation might have been and then discounting that quite significantly, by say 20% to 25%, for the risk that such a course of action may not have occurred and for all of the uncertainties surrounding a task such as this, I have concluded that the value of the lost opportunity to negotiate an amount of compensation for agreeing to waive the one year's notice of termination should be assessed at $400,000. Clearly, it would have been a term of any such agreement that the compensation would have been in full and final settlement of all outstanding claims by the plaintiff(s).

Mitigation of Damages

146 IOOF submitted that any damages otherwise payable to the plaintiff(s) should be reduced by reason of the failure of Foxeden to mitigate its loss and the failure of the Taylors to mitigate their loss. It was said that there were two aspects to the alleged failure to mitigate. First, the failure to use the customer lists which had been retained to attempt to contact former customers in order to convert them into (potential) financial planning clients, and secondly, the failure to accept the offer of an agency with Bendigo Bank.

147 The onus of proving that the plaintiff(s) have not fulfilled their duty to mitigate and the extent to which they have not done so rests on the defendant.[28] After considering the relevant evidence I am not satisfied that it has been established that either Foxeden or the Taylors failed to mitigate the damage caused by IOOF's breach.

148 The evidence concerning what customer lists were retained by the plaintiff(s) and what was contained in them was quite confusing. It appears that Foxeden had lists of term depositors of the Mildura branch which contained the names and addresses of these customers. But Foxeden did not have or retain any list containing the names and addresses of those customers with savings accounts.

149 It appears that the Taylors had three lists in their possession:

[68]

152 Given all of this evidence and the knowledge of the plaintiff(s) that IOOF regarded the customer lists as containing valuable confidential information and the very real confusion surrounding just what rights the plaintiff(s) had under their agreements with IOOF, I am not persuaded that the plaintiff(s) could be said to have failed to take reasonable steps to mitigate their damages by refraining from using the customer lists, or even their own knowledge of the customers, which they had to attempt to make contact with their former customers.

153 Secondly, it does not seem to me to have been disputed that the terms and conditions of the offer from Bendigo Bank were considerably less favourable to the plaintiff(s) than the agreements they had with IOOF. I accept that the most significant difference from the point of view of the plaintiff(s) was that they would not have been able to operate the branch and their financial planning business in the same way as they had with IOOF, and that they would therefore have been deprived of the day to day personal contact with the customers which was considered essential for the long term growth of their financial planning businesses. Accordingly, I consider that the plaintiff(s) did not act unreasonably and did not fail to mitigate their damages by not accepting the offer from Bendigo Bank. In reaching that conclusion, I have not overlooked that both Mr Hawksworth and Mr Taylor acknowledged that a factor in not accepting Bendigo Bank's offer was the concern that acceptance would compromise any claim they might have arising out of IVFS's sale of the Building Society to Bendigo Bank and IOOF's conduct in repudiating their agreements. Without that matter being resolved by Bendigo Bank and IOOF in particular, the plaintiff(s)' conduct was, in my opinion, not unreasonable.[29]

Summary of Foxeden's Claim

154 The result of the above findings and analysis is that in respect of Foxeden I have assessed the different ways in which it has sought to quantify its claim for damages as follows:

Plaintiff v Defendant

At a glance

Court

Decision date

Before

Source

Judgment (81 paragraphs)

Cases Cited (6)