Pownall & Ors v Conlan Management Pty Ltd

REASONS FOR JUDGMENT HIS HONOUR: On 13 December 1996 reasons were published in this matter ("the first reasons") in which it was held the respondent breached s 52 of the Trade Practices Act (1974) (Cth) ("the Act"). It was found the conduct of the respondent in December 1994 in not disclosing to the applicants a deadline had been reached for taking up a milk round known as the Maddington zone was causative of a loss of commercial opportunity to the applicants. At pp38‑39 of the first reasons it was said: "The commercial opportunity which the applicants lost was evidently of value; namely, a value approximating the value of the milk round which would have been allocated to them as the result of the opportunity to conclude a contract. The possibilities or probabilities of that occurring were extraordinarily high; indeed their opportunity or chance was at the very highest end of the scale of probability: ... The respondent accepted it could not allocate the Maddington zone elsewhere unless the applicants were not contracting for it. The evidence for the applicants was that they would have contracted had they known the opportunity to do so was to be lost. The applicants had a substantial prospect of acquiring the benefit, the loss of which was caused by the misleading conduct of the respondent." On the question of damages the Court then had before it the report of the applicants' expert Thompson. For the respondents there were expert reports of Ernst & Young. After examination of issues raised by these reports and the evidence relating to them the first reasons made certain preliminary findings (at pp43‑44): "In my opinion, the damages to which the applicants are entitled should be calculated on the following basis: (a) The years 1986/87 - 1994/95 should be addressed in the valuation. (b) The growth rate in the last two years should be reduced to a level which allows for the effect of the Woolworths supermarket. This should not be a rate which equates to the pre-Woolworths rate because there should be allowance for growth in the economy and less milk vendors being in the market place. Actual growth rates on a compound basis after the above adjustments should be applied. (c) No adjustment should be made for loss of Browne's (sic) white milk sales on the basis these will be compensated for by sales picked up from Brown's (sic) subcontractors. (d) Adjustment should be made for the margin in white milk sales. (e) It should be assumed that to continue in the business the applicants would have been required to purchase a refrigerated truck. (f) Allowance for tax should be at personal rates on the basis the applicants always operated as a partnership. The evidence shows different discount rates used by the experts but provides no basis on which the Court can select the appropriate rate and determine whether it should be applied before or after tax. There is the further question whether or not provision should be made for repayment of the DAAS payment in the calculation of damages. These and the foregoing issues were not the subject of evidence from the experts or submissions from counsel in terms of how they should be translated into the calculation of damages. It will therefore be necessary for the applicants' expert to provide a further account prepared in the light of items (a) - (f) above and resolution of the appropriate discount rate. The statement should be prepared on the alternative bases that DAAS is or is not to be repaid. Submissions should follow." The process envisaged in this portion of the reasons has now been completed and further submissions, oral and written, received. These reasons proceed to the assessment of damages and are therefore to be read in continuity with the first reasons. Experts' Reports The experts' reports given on the following dates are defined as follows: (1) Applicants' expert J R Thompson of Jarot Business Assessments: · Report dated 15 April 1996 ("the First Thompson Report") · Report dated 23 May 1996 ("the Second Thompson Report") · Report dated 3 February 1997 ("the Third Thompson Report") · Report dated 11 July 1997 ("the Fourth Thompson Report") · Report dated 4 August 1997 ("the Fifth Thompson Report") (2) Respondent's experts Ernst & Young: · Report dated 10 May 1996 ("the First Ernst & Young Report") · Report dated 29 May 1996 ("the Second Ernst & Young Report") · Report dated 19 February 1997 ("the Third Ernst & Young Report") · Calculation of loss ("the Fourth Ernst & Young Report") Objections have been allowed to specified portions of the Third and Fourth Thompson Reports. I accept the submissions for the respondent that where the Third and Fourth Thompson Reports refer to matters not raised at trial (as detailed in pars 31, 33 and 35 of the respondent's submissions on the damages hearing) no reliance should be placed upon them. I exclude from this the item in par 33(b) referable to the 2 per cent discount. It is submitted for the respondents the above matters cannot be excised from the Third and Fourth Thompson Reports and accordingly both those reports should be disregarded. This is said to be supported by reference to Pownall & Ors v Conlan Management Pty Ltd (1995) 12 WAR 370 at 374 and 387. The essential question is whether this is a case where the inadmissible hearsay and the admissible evidence are so intertwined they cannot readily be separated so the entire body of evidence, namely the two reports, should be rejected. In my opinion that is not the case in relation to the matters referred to and the relevant expert opinions (excluding the portions to which objection has been taken) should be admitted subject to weight. There is not a risk of injustice when the Third and Fourth Thompson Reports, with the exclusion of the inadmissible portions, are read in conjunction with the First and Second Thompson Reports. Growth in the business The First Thompson Report sought to explain the extraordinary increase of 71 per cent in the net profit of the business in the year ended 30 June 1994 as attributable to the following factors: "(a) the rapid growth in the WA economy since 1990/91; (b) the swing from home deliveries to shop rounds; (c) the introduction of discounted milk products at major supermarkets; (d) the revamped Woolworths supermarket was run more efficiently with a consequent increase in sales; (e) the reported increase in milk consumption per head for a third year in a row in 1995/6." In the Second Thompson Report, the applicants' expert concedes the sales of generic discounted milk (par (c) above) would not have created extra growth after February 1995. As to par (b) there was no evidence led. For any increase in sales to be accountable due to this factor, persons living outside the Maddington area would have to have been shown to purchase their milk at supermarkets in Maddington. If it is able to be inferred the increase in business due to the establishment of the Woolworths store attracted persons from outside the area, that is further evidence of the extraordinary effect of that store. As to par (e) this was shown to be based on a sentence in an article in a newspaper. The Third Ernst & Young Report (at item 2.2) shows there is no correlation between milk consumption per head and the state of the applicants' business. It also refers to a decrease in Western Australia of milk consumption since 1992. Accordingly, there should be no allowance made for change in such consumption in the assessment of the applicants' estimated loss of profits. It is necessary therefore to turn to factors (a) and (d). Findings regarding economic growth This addresses the preliminary finding (b) in the first reasons so far as it said "there should be allowance for growth in the economy". In the First Thompson Report it was said the profit would be higher in each of the three years following 1994‑1995 due to less competition and "natural growth arising from the economy". Then followed the statement "a minimum growth rate of 20 per cent in the first year was likely, followed by minimal growth rates of 10 per cent in the last two years". In the Second Thompson Report growth in the economy was relied upon as a factor contributing to sales being made up after the loss of Brownes' white milk sales. In the Third Thompson Report growth rates of 18 per cent, 8 per cent and 8 per cent in years 1-3 respectively were relied on. The respondent submits no reliance should be placed on the effect of economic growth. Firstly, it is said there is no correlation between growth in the economy and the applicants' business. This is supported by reference to the Second Ernst & Young Report (item 2.3) where the absence of any historical correlation between the macro statistic of nominal Gross State Product ("GSP") and the quantum of business conducted by the applicants during the past 10 years of operation is supported by columnar and graphic comparisons of those two progressions. Secondly, it is said the growth in the economy was not factored into the assessment of the applicants' business from 1985 to 1995 and to treat it as a separate matter affecting future profits would create an unrealistic picture. In cross-examination, the applicants' expert Thompson testified he saw economic growth as one of a number of factors to be taken into account but was non-specific. In my opinion, the statistical and graphic material submitted to the Court on behalf of the respondent shows there is no necessary nor uniform connection between economic growth and the profit of the business of the applicants. This is evidence which is not rebutted by the case for the applicants. On this evidence I therefore conclude economic growth should not be taken into account in computing the damages. Effect of Woolworths store In par (b) of the preliminary findings in the first reasons, it was said the growth rate in the last two years should be reduced to a level which allows for the effect of the opening of the Woolworths supermarket. In the second Ernst & Young Report this issue was first raised as a reason why an allowance should be made for consistent growth in net profits. It was stated the growth was not sustainable as it was attributable to the new opening of the Woolworths store "which was a once‑off event". In the Third Thompson Report it was asserted the Woolworths supermarket was run more successfully than the predecessor Coles business so that sales thereby increased. In the Third Ernst & Young Report support for the respondent's submission was sought in data submitted by the first-named applicant in seeking the Dairy Adjustment Assistance Scheme Payments ("the DAAS payments") in which he detailed eight weeks of milk supply measured by volume from 7 April 1994 to 1 June 1994. That disclosed 42.5 per cent of the sales of the business by total volume of white milk were to Woolworths, so the business was heavily reliant on such sales. It was asserted it was a "once‑off event" which could not be expected to continue into the future. The report then addressed other factors to which the applicants' expert had attributed growth, namely growth in the economy; a shift from home deliveries to supermarket purchases; introduction of discounted milk; and an increase in milk consumption per capita. Having submitted none of these were established, the respondent's experts submitted the applicants' expert had not identified any factor which would justify the application of any growth in net profits and the net growth which did occur in 1994 and 1995 was not sustainable. In a supporting table of comparison of net profit of growth rates reflecting the views of each of these experts, an increase in growth is shown from 1993 to 1995 with the net profit then levelling out in accordance with the respondent's experts views, rather than continuing to increase in accordance with the applicants' experts views. In the Fourth Thompson Report it was made apparent the applicants' have lost or destroyed all relevant documents relating to sale of the Masters' and Brownes' milk products to the Coles store between March 1987 and October 1992. Accordingly there is no accurate data on which to compare the sales to the Coles store of all milk products before and after the takeover by Woolworths. Of the information on product sales which appears in evidence the applicants have extracted the total sales to the Woolworths store over the following years to be: Year Masters Brownes Total 1985 294,833 81,652 376,485 1986 322,737 95,478 428,215 1993 501,551 155,020 656,571 1994 593,599 222,266 815,865