Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: North Sydney Leagues' Club Limited v Synergy Protection Agency Pty Limited [2012] NSWCA 168
• Hearing dates: 9 December 2011
• Decision date: 08 June 2012
• Before: Beazley JA at [1]; Macfarlan JA at [84]; Whealy JA at [91]

Decision

Appeal dismissed with costs.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

• Catchwords: CONTRACTS - Contract for provision of security services - Breach of contract - Award of expectation damages - Whether overhead expenses should be included in the assessment of damages - No absolute principle that account must be taken of overhead expenses - Plaintiff is entitled to such damages as place it in the same position it would have been in had the contract been performed - The Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64; DAMAGES - Contract - Breach of contract - Sufficiency of evidence to prove claim for damages - Challenge to the reliability and admissibility of accounting evidence - Inaccuracies were not of sufficient size or volume to raise sufficient doubt as to overall accuracy of accounting evidence - Sufficiency of evidence is a matter for the trial judge; EVIDENCE - Evidence Act 1995, s 146 - Exhibits derived from business records - Statutory presumption - Section 146 relates to documents produced by processes, machines or other devices - Presumption not directed to underlying accuracy of information contained in a document or record that is reproduced
• Legislation Cited: Evidence Act 1995; Evidence Act 1995 (Cth); Interpretation Act 1987; Uniform Civil Procedure Rules 2005
• Cases Cited: Bartonvale Management Services Pty Ltd v International Linen Services Pty Ltd [2002] SASC 254; British Westinghouse Electric and Manufacturing Company Limited v Underground Electric Railways Company of London Limited [1912] AC 673 at 688; Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64; Dart Industries Inc v Decor Corporation Pty Ltd [1993] HCA 54; 179 CLR 101; Deputy Commissioner of Taxation, in the matter of ABW Design & Construction Pty Ltd v ABW Design and Construction Pty Ltd [2012] FCA 346; Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89; Kyogle Shire Council v Muli Muli Local Aboriginal Land Council [2005] NSWCA 4; 62 NSWLR 361; North Sydney Leagues' Club Ltd v Synergy Protection Agency Pty Ltd (formerly Joseph Merhi Industries Pty Ltd) trading as Synergy Protection Agency [2008] NSWSC 413; North Sydney Leagues' Club Ltd v Synergy Protection Agency Pty Ltd (formerly Joseph Merhi Industries Pty Ltd) trading as Synergy Protection Agency [2010] NSWSC 52; North Sydney Leagues' Club Ltd v Synergy Protection Agency Pty Ltd (formerly Joseph Merhi Industries Pty Ltd) trading as Synergy Protection Agency [2010] NSWSC 256; Robinson v Harman (1848) 1 Exch 850; Synergy Protection Agency Pty Ltd v North Sydney Leagues' Club Ltd [2009] NSWCA 140; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; 236 CLR 272; Western Web Offset Printers Ltd v Independent Media Ltd [1996] CLC 77
• Category: Principal judgment
• Parties: North Sydney Leagues' Club Limited (Appellant); Synergy Protection Agency Pty Limited (Formerly Joseph Merhi Industries Pty Limited) t/as Synergy Protection Agency (Respondent)
• Representation: Counsel: M L Einfeld QC; R Bromwich SC (Appellant); K P Smark SC; J Mitchell (Respondent); Solicitors: Lander & Rogers (Appellant); Carroll & O'Dea (Respondent)
• File Number(s): CA 2011/156102
• Publication restriction: No

Decision under appeal

• Citation: North Sydney Leagues' Club Ltd v Synergy Protection Agency Pty Limited (Formerly Joseph Merhi Industries Pty Limited) t/as Synergy Protection Agency [2011] NSWSC 286
• Date of Decision: 2011-04-14 00:00:00
• Before: Einstein J
• File Number(s): SC 2006/268578

Judgment

1 BEAZLEY JA: This is an appeal from a judgment of Einstein J in which his Honour ordered the appellant to pay damages to the respondent for the wrongful termination of two contracts. Under the contracts, the respondent was responsible for the provision of security services at the premises of two clubs operated by the appellant, North Sydney Leagues' Club and the Seagulls Club at Tweed Heads.

2 The appeal, which is from his Honour's assessment of damages, raised the following issues:

(1)Whether the trial judge erred in disregarding indirect or overhead costs when determining the respondent's lost profit: appeal grounds 1-8;

(2)Whether, in any event, the respondent had adduced evidence of its loss: appeal ground 9.

3 The appellant submitted that the first issue raised a point of principle. The second issue raised the question of the sufficiency of the evidence, including whether there was sufficient doubt to displace the presumption in the Evidence Act 1995, s 146(2).

4 The respondent filed a notice of contention in which it contended that irrespective of the operation of s 146, the respondent's evidence on which it based its claim for economic loss had been admitted by the trial judge and was sufficient to prove its claim.

5 Before dealing with the issues on the appeal, an understanding of the manner in which the matter proceeded before his Honour is useful.

6 The proceedings were commenced by the appellant by way of summons, in which it sought twofold declaratory relief: first, that upon the proper construction of the contracts, the appellant was not compelled to use the services of the respondent to any fixed or minimum extent; and secondly, that its use of the services of any other provider did not constitute a breach of contract. The respondent resisted the appellant's declaration on the basis that upon their proper construction, the contracts required the appellant to use only their services at the two premises. The respondent also brought a cross-summons, in which it sought a declaration that the contracts had been wrongly repudiated by the appellant and claimed damages for breach.

7 The trial judge delivered four judgments in the matter.

8 In the first judgment: see [2008] NSWSC 413 (9 May 2008), his Honour accepted the construction of the contracts for which the appellant contended, but nonetheless found that the appellant had repudiated the contracts. However, his Honour refused the respondent's claim for damages on the basis that the respondent had not pleaded a claim for damages based upon the construction of the contract for which the appellant had successfully contended.

9 The respondent appealed. On the appeal, the Court upheld the construction of the contracts for which the respondent had contended before Einstein J. On that construction, the appellant had wrongfully terminated the respondent's services. The Court of Appeal thus remitted the matter to the trial judge for assessment of damages: Synergy Protection Agency Pty Ltd v North Sydney Leagues' Club Ltd [2009] NSWCA 140.

10 On remittal: see [2010] NSWSC 52 (12 February 2010), the parties by consent agreed to the determination of the following separate questions pursuant to the Uniform Civil Procedure Rules 2005 (UCPR), r 28.2:

"i.Whether sufficient doubt has been raised for the purposes of sub-s.146(2) of the Evidence Act 1995, such that the evidence contained in Exhibits JM-1 and JM-3 cannot be relied on by [the respondent] presumptively to prove the outcome relied upon, namely that the expenses attributable to the performance of the subject contracts have been brought to account for the purposes of proving the existence and quantum of expectation damages ('the outcome');

ii.If the answer to 1 above is 'yes', whether the evidence before the Court otherwise establishes the reliability of the reports contained in Exhibits JM-1 and JM-3 to produce the outcome, without reliance on the presumption in sub-s.146(2);

iii.Whether, in determining the quantum of expectation damages attributable to breach of contract by [the appellant] by way of net profit that was lost [by the respondent] by reason of such breach, indirect or overhead costs (i.e. costs not directly related to the provision of services) in the period in which the contracts should have been performed, should be taken into account."

11 Exhibits JM-1 and JM-3 were derived from another exhibit, Exh JM-2. As the source of the material in Exhs JM-1 and JM-3 and their status in the proceedings were central to the appellant's argument on the appeal, their derivation is explained more fully below.

12 The trial judge answered the separate questions (i) and (ii) as follows:

Separate question (i): no;

Separate question (ii): does not fall for consideration.

13 In a further determination: see [2010] NSWSC 256 (7 April 2010), his Honour answered separate question (iii) in the affirmative.

14 The respondent sought leave to appeal from his Honour's answers to separate questions (i) and (ii). On 23 February 2011, the Court (Giles and Tobias JJA, Sackville AJA, unreported) made the following orders:

"(1)Grant leave to appeal.

(2)Set aside the order made by the trial judge on 4 February 2010 that three questions be determined separately to the extent that that order posed question 3 for separate determination.

(3)Remit the matter to the trial judge for hearing in the manner earlier indicated.

(4)Each party to pay its own costs of the application for leave to appeal including its preparation as if an appeal."

15 The effect of these orders was that the matter was remitted to the trial judge for the making of factual findings and the determination of the amount of damages recoverable by the respondent. In the judgment on the appeal, Giles JA commented that "[a]t least with the benefit of hindsight", it was apparent that the order for determination of separate question (iii) should not have been made. His Honour further stated that the reasons given by the trial judge for his answer to separate question (iii) would not stand as a judgment binding in any way on the parties.

16 In the fourth judgment: see [2011] NSWSC 286 (14 April 2011), his Honour gave his reasons as to the principles that applied and the manner in which damages should be calculated.

17 On 22 July 2011, his Honour ordered that there be judgment for the respondent in the sum of $334,547.51, together with interest up to and including 19 July 2011 in the sum of $141,564.99.

18 This appeal is from his Honour's fourth judgment.

Trial judge's reasons on the overhead costs issue

19 Before the trial judge, the parties agreed that the respondent was entitled to an award for expectation damages. Expectation damages are awarded so as to place a party, who has sustained loss by reason of a breach of contract, in the same situation with respect to damages, as if the contract had been performed: Robinson v Harman (1848) 1 Exch 850 at 855. See also Western Web Offset Printers Ltd v Independent Media Ltd [1996] CLC 77 at [79] and The Commonwealth of Australia v Amann Aviation Pty Ltd [1991] HCA 54; 174 CLR 64 at 81.

20 His Honour identified the primary dispute between the parties as being the amount of the respondent's expenses that needed to be deducted from its estimated future revenue in order to arrive at a fair value for expectation damages. His Honour observed, at [22], that there were "no established and clearly defined principle[s]" to guide the court in determining what expenses should and should not be deducted. His Honour concluded, at [39], that the guiding principle was to determine "how the breach of contract caused loss to the particular party": see Western Web Offset Printers at 80-81. His Honour considered he was thereby required to determine how best to place the respondent in the position it would have been had the appellant not breached its contract.

21 His Honour then stated:

"41The correct way to achieve this is to deduct from forecast revenue which expenses 'would have increased when the contract was being performed, and would have diminished when it ended...' while 'outgoings, such as accounting fees, rent, rates and taxes, would not reduce as a result of the termination of the contract' and should therefore not be adjusted for, per Doyle CJ in Bartonvale Management Services Pty Ltd v International Linen Services Pty Ltd [2002] SASC 254 at [23].

42Contrary to [the apepllant's] assertion, no apportionment of fixed costs, ie those costs which would not increase or decrease with the loss of the [the appellant's] contract, should be considered."

22 His Honour summarised, at [58], the parties' submissions as to how the respondent's damages were to be assessed:

"(1)[The appellant] has allocated all overhead costs, both fixed such as rent and variable such as telephone bills, on a pro-rata basis to Synergy's costs.

(2)[The respondent] has looked at each expense individually, irrespective of whether it is a direct cost or overhead, and determined what cost was saved as a result of the loss of the contract."

23 His Honour, at [59], accepted the respondent's submission and, at [60], stated:

"It is wrong for both fixed and variable overheads to be apportioned on a pro-rata basis. Instead, fixed costs should not be factored in at all while variable costs, whatever their nature, should be included only to the extent they are saved by the breach of contract."

24 His Honour considered that a further reason for rejecting the pro rata approach for which the appellant contended was its inaccuracy in circumstances where more accurate measures were available to assess loss. As his Honour observed, at [61]:

"... it would be inaccurate to postulate that simply because a contract represents 30% of one's business, there will be a 30% saving if that contract ends."

25 His Honour also developed a 'model' he considered explained how to correctly determine damages. Notwithstanding that the appellant directed criticism to his Honour's model, it is not necessary to consider it for the purposes of determining the two issues raised on the appeal.

First issue: should overhead expenses be included in the assessment of damages?

26 The appellant submitted that the trial judge erred, at [42], in holding that no apportionment of fixed costs should be deducted from the respondent's estimated future revenue. The appellant's primary submission was that "overheads" must be brought into account in a claim for loss of profits arising from the wrongful termination of contract: see Dart Industries Inc v Decor Corporation Pty Ltd [1993] HCA 54; 179 CLR 101 at 125-133 per McHugh J. The appellant submitted that this approach was consistent with the principles stated in Commonwealth v Amann Aviation at 80.

27 The appellant submitted, alternatively, that overhead expenses were to be deducted on a proportionate basis. On this approach, if, for example, a contract constituted 38 per cent of an entity's overall business (as was the position here), a deduction of 38 per cent of total overheads was to be made from gross profit in the assessment of damages for breach of contract. The appellant acknowledged that this approach would yield to actual evidence that overheads did not abate proportionately. However, it contended that the respondent had failed to adduce contrary evidence, so that the trial judge was at least required to apply the alternate approach of deducting a portion of overhead expenses from gross profit, in order to properly assess the respondent's damages.

The case law

28 It is convenient to refer first to Commonwealth v Amann Aviation and then to consider Dart Industries, upon which the appellant relied.

Commonwealth v Amann Aviation

29 In Commonwealth v Amann Aviation, Mason CJ and Dawson J stated, at 80, that the general rule at common law for the award of damages for breach of contract (that is, expectation damages) was that stated in Robinson v Harman (see [19] above). Their Honours noted, at 81, that expectation damages were the combination of expenses justifiably incurred in the performance of a party's contractual obligations and any amount by which gross receipts would have exceeded those expenses. The second amount is the net profit.

30 Their Honours considered that a party may be able to recover expectation damages even though no net profit would have been generated, or where the amount of profit cannot be proved. As their Honours observed, at 81:

"If the performance of a contract would have resulted in a plaintiff, while not making a profit, nevertheless recovering costs incurred in the course of performing contractual obligations, then that plaintiff is entitled to recover damages in an amount equal to those costs in accordance with Robinson v. Harman, as those costs would have been recovered had the contract been fully performed."

31 These are well established principles. The appellant's contention was that McHugh J's approach to the assessment of damages in Dart Industries was consistent with Commonwealth v Amann Aviation and was the correct approach to the assessment of damages in this case. McHugh J dissented in Dart Industries. It is appropriate, therefore, to commence with a brief consideration of the reasoning of the plurality.

Dart Industries Inc v Decor Corporation Pty Ltd

32 Dart Industries involved a claim for an account of profits for infringement of a patent for press-button seals used to seal plastic kitchen canisters. The question in issue was how overheads should be dealt with in the taking of the account. The plurality, Mason CJ, Deane, Dawson and Toohey JJ, observed, at 111, that an account of profits was based on the principles of unjust enrichment and was confined to the recovery, by the patentee, of profits actually made by the infringer. Their Honours concluded, at 114:

"Where the defendant has forgone the opportunity to manufacture and sell alternative products it will ordinarily be appropriate to attribute to the infringing product a proportion of those general overheads which would have sustained the opportunity. On the other hand, if no opportunity was forgone, and the overheads involved were costs which would have been incurred in any event, then it would not be appropriate to attribute the overheads to the infringing product."

33 McHugh J took a different approach. His Honour, at 125-135, reviewed the authorities in the United States and Australia as to the principle that applied in allocating overheads. His Honour concluded, at 133, that in the case of infringement of a patent, the "absorption method of cost accounting" was the proper method for allocating overheads. As explained by the plurality, at 112, the "absorption method" involves:

"... a costing method whereby general overheads are apportioned by some appropriate means, often by sales or volume, to the manufacture or sale of each product."

34 McHugh J, in accepting that mathematical precision was not possible and that a reasonable approximation was required, also noted, at 135, that the appropriate method of allocation would depend upon the nature of the business in question and the circumstances of the particular case. In Dart Industries itself, his Honour considered that an acceptable approach was for the sales ratio form of allocation.

35 The respondent submitted that the principles stated by McHugh J in Dart Industries had no application to the present case for the following reasons. First, the onus lay upon a different party. In a case of breach of contract, the onus was on the party alleging breach to prove its loss. In the case of a breach of copyright, the onus was on the infringing party. Secondly, an account of profits was based on the principles of unjust enrichment, whereas contractual damages focused upon putting the innocent party in the position as if the contract had been performed: see Robinson v Harman at 855; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; 236 CLR 272 at [13] 285-286. Thirdly, McHugh J's approach in Dart Industries, to the extent the appellant sought to apply it to a case of loss of expectation damages, was inconsistent with the authorities and, in particular, with the decision of Bartonvale Management Services Pty Ltd v International Linen Services Pty Ltd [2002] SASC 254 at [23] and [24], as well as with the established authorities such as Western Web Offset Printers; and British Westinghouse Electric and Manufacturing Company Limited v Underground Electric Railways Company of London Limited [1912] AC 673 at 688.

36 As the respondent's position supporting his Honour's determination was based upon the correctness of Bartonvale, it is appropriate at this stage to consider what was said in that case.

Bartonvale Management Services Pty Ltd v International Linen Services Pty Ltd

37 Bartonvale involved the supply of laundry services to Bartonvale Management Services Pty Ltd (Bartonvale), which conducted a nursing home. Bartonvale breached the contract by terminating it approximately 14 months into the three year term of the contract. Doyle CJ (Williams and Gray JJ agreeing), at [15], held that International Linen Services Pty Ltd (International Linen) was entitled to an award of expectation damages: see Commonwealth of Australia v Amann Aviation at 80-81.

38 Relevantly for present purposes, the issue on appeal to the Supreme Court of South Australia was whether the trial judge had erred in failing to deduct from the gross income all costs incurred in fulfilling the contract, together with an allowance for the appropriate proportion of the general overheads of the business that could reasonably be attributed to the performance of the contract. Examples of the latter included the rent for premises, for which it was argued some deduction should have been made.

39 At trial, the experts were divided as to the correct approach to the calculation of expectation damages. International Linen's expert deducted expenses he considered would have increased when the contract was being performed and would have diminished when it ended. The expert did not deduct any proportion of outgoings such as rent, rates and taxes, which he determined would not reduce as a result of the termination of the contract. Bartonvale's expert considered that the correct approach was to attribute a proportion of all overheads to each dollar of revenue earned. Doyle CJ concluded that the approach of International Linen's expert was correct. As his Honour observed, at [24]:

"The expenses that [Bartonvale's expert] would deduct, but that [International Linen's expert] did not deduct, would not have reduced with the termination of the contract."

40 Bartonvale is a recent decision of a co-ordinate appellate court in another Australian jurisdiction. It is not relevantly distinguishable from the present case. In accordance with the direction of the High Court in Farah Constructions Pty Ltd v Say-Dee Pty Ltd [2007] HCA 22; 230 CLR 89, this Court should follow that decision unless it is of the opinion that it is plainly wrong. The only reason advanced as to why this Court should not follow it was the appellant's submission that McHugh J in Dart Industries was correct and the Court should follow his Honour's approach to the assessment of damages. However, as the respondent pointed out, Dart Industries was a patent infringement case where the underlying principles relating to the assessment of damages are very different from the assessment of expectation damages. In my opinion, the appellant has not demonstrated that Bartonvale is wrong. As is apparent from the discussion below, it is consistent with long standing authority.

Western Web Offset Printers Ltd v Independent Media Ltd

41 Western Web Offset Printers also provides a useful demonstration of the application of the principle stated in Bartonvale to a factual circumstance not dissimilar to the present case. Western Web Offset Printers Ltd (Western Web) printed a weekly newspaper for Independent Media Ltd (Independent Media) pursuant to a contract which provided that notice of termination could not be given before 1 February 1992. Independent Media, in breach of that term, gave notice on 30 May 1991. Western Web claimed damages by way of loss of profit from June 1991 to the end of April 1992.

42 On appeal, Ward LJ identified the issue between the parties as being whether, subject to the duty to mitigate, Western Web was limited to the recovery of net profits, that is, the contract price less the direct expenses as well as indirect expenses, being an appropriate proportion of the overheads, or whether it was entitled to gross profit. It had been argued before the trial judge that Western Web was entitled to gross profit unless it had actually used the time for new revenue producing work in the timeslot that had been allocated for production of the newspaper for Independent Media.

43 On the facts, overheads could not reasonably be reduced, notwithstanding that Western Web was no longer printing the weekly newspaper for Independent Media. Ward LJ held that in that circumstance, overheads were not to be deducted. Importantly, his Lordship, at 80-81, cautioned against the use of labels:

"Even too slavish an adoption of classifications such as direct and indirect costs or net and gross profit is liable to be distracting from the general principle of ascertaining the loss, of the bargain. Confusion is only avoided by going back to the basic principle of ascertaining how the breach of contract caused loss to the particular party."

44 Sedley J agreed, emphasising that the quantum of damages recoverable for breach of contract is a question of fact: see British Westinghouse Electric v Underground Electric Railways at 688 per Viscount Haldane.

45 Nourse LJ observed that there may be cases where the assessment of a plaintiff's loss would bring to account general overheads attributable to the particular contract that was breached. However, his Lordship observed, at 82, that this assumed a "plaintiff was able to defray the indirect costs out of additional business taken on to fill the gaps in its schedule exposed by the loss of the defendant's business". On the facts found by the trial judge in Western Web Offset Printers, that was not the case. It followed in his Lordship's opinion that there should be no deduction for overhead expenses.

46 These authorities are clear that, in respect of a claim for expectation damages, there is no absolute principle, as submitted by the appellant, that account must be taken of overhead expenses. Nor, in my opinion, as a matter of general principle, is the alternate approach for which the appellant contended, correct. That approach requires that overhead expenses be taken into account proportionately, that is, proportionate to the value of the contract to the overall business, unless the evidence demonstrates some different deduction should be made. The appellant's reliance on McHugh J's judgment in Dart Industries was misconceived. The true principle is, as the trial judge found, that a plaintiff is entitled to such damages as place it in the same position as it would have been had the contract been performed.

47 There is the additional requirement that a party whose contract has been breached mitigate its damages. In this case, there was no allegation that there had been a failure to mitigate and the appellant rejected any suggestion that mitigation was a relevant issue in the proceedings. Rather, it contended that the onus at all times was upon the respondent to prove its damages and that it had failed to do so in circumstances where Exhs JM-1, JM-2 and JM-3 were either not admissible or were unreliable. This leads directly to the evidence issue.

The evidence issue

48 The appellant's submission, that the respondent bore the onus of proving its damages, was, of course, correct. However, the sufficiency of the evidence to substantiate a matter upon which a party bears an onus is a question for the trial judge. If the trial judge is satisfied that, on the whole of the evidence, there is sufficient evidence to establish the case upon which a party bears the onus, it does not matter that some of that party's evidence is rejected or is in some way unsatisfactory.

49 The trial judge awarded damages on the basis of forecast revenue less expenses incurred in performing the contract that in fact diminished as a result of the termination: see judgment at [41] and [58]-[60]. The forecast revenue aspect of the calculation was based upon the revenue earned by the security firm that had replaced the respondent.

50 The appellant contended that his Honour did not deduct any portion of overhead expenses in his assessment of damages. The appellant submitted this was an error and contended there was no evidence of any loss by way of overhead expenses, as the respondent had claimed. The appellant submitted that at most the evidence indicated that overhead expenses generally continued to be incurred in the post-breach period. However, it contended that the respondent had not quantified those expenses and had not specified any portion that had reduced as a result of the breach of contract. The appellant also submitted that the respondent's claim for damages had not been properly proved because it had not adduced any evidence of revenue it had earned in the period for which it claimed damages.

51 The appellant further submitted that the respondent should not have been permitted to rely upon the evidence it had adduced to quantify loss. This submission addressed the status of Exhs JM-1, JM-2 and JM-3 and the construction of the Evidence Act, s 146 and its application to that material. I propose to deal with that issue first as it involved a significant portion of the attack on the trial judge's assessment of damages. Before doing so, it is necessary to understand the source and derivation of Exhs JM-1 and JM-3.

52 Mr Merhi, the respondent's principal, gave evidence as to how the respondent maintained its records and how each of Exhs JM-1 and JM-3 was derived. Exhibit JM-2 comprised the respondent's primary accounting records for its entire business. Exhibits JM-1 and JM-3 were each derived by Mr Merhi from Exh JM-2. Exhibit JM-1 comprised the accounting data Mr Merhi contended was relevant to the performance of the contracts together with a summary of that material. Exhibit JM-3 was prepared by the respondent to relieve the appellant from undertaking the burdensome task of accessing the material in Exh JM-2.

53 Exhibit JM-3 in fact reflected a compromise reached by the parties at trial. This was explained to the trial judge by senior counsel for the appellant as follows:

"In the lead up to the case coming on for trial my instructing solicitors indicated to my learned friends that there was going to be an objection to JM2 being relied on because we didn't have any of the material underlying, we just had this compact disc ...

... in the result a motion was filed seeking an order under s 50 of the Evidence Act, allowing the summary [JM-1] to be relied upon. That motion was ultimately dismissed but then there was an accommodation reached that dealt with this and that resulted in a separate intermediate bundle of documents which became JM3 to a later affidavit.

...The compromise was to provide this JM3 which provided the intermediate report detail standing between JM1 and JM2, so that you had the raw data, a set of reports generated to a certain level of detail and then JM1 which was the greater degree of detail and it was JM3, this intermediate level of detail, that facilitated the cross-examination of Mr Merhi, because it was the means by which we had some capacity to test the data."

54 The appellant's argument as to the proper application of s 146(2) was advanced on the basis that the section applied to the material in Exhs JM-1 and JM-3.

55 The Evidence Act, s 146 provides:

"146Evidence produced by processes, machines and other devices

(1)This section applies to a document or thing:

(a)that is produced wholly or partly by a device or process, and

(b)that is tendered by a party who asserts that, in producing the document or thing, the device or process has produced a particular outcome.

(2)If it is reasonably open to find that the device or process is one that, or is of a kind that, if properly used, ordinarily produces that outcome, it is presumed (unless evidence sufficient to raise doubt about the presumption is adduced) that, in producing the document or thing on the occasion in question, the device or process produced that outcome."

56 The s 146 question was dealt with by the trial judge in his answer to the first of the separate questions answered in his judgment: [2010] NSWSC 52 (see at [12] above). His Honour concluded, at [48], that there had not been evidence sufficient to raise doubt about the presumption within the meaning of s 146(2), because the underlying evidence, that is, in JM-2, was reliable.

57 The appellant submitted that in reaching this conclusion, the trial judge failed to recognise the essential difference between Exh JM-2 on the one hand and Exhs JM-1 and JM-3 on the other. Exhibit JM-2 contained many thousands of contemporaneously recorded entries in the respondent's business records across the entirety of the respondent's business, which included business activities unassociated with the contracts with the appellant. The appellant accepted that the contents of Exh JM-2 thereby qualified as a business record.

58 However, the appellant submitted that Exhs JM-1 and JM-3 were not business records, as they had been prepared for the purposes of the litigation: see the Evidence Act, s 69(3)(a). The appellant accepted that these two exhibits could have been relied upon as secondary hearsay evidence had s 146 applied. It contended, however, that their content was sufficiently attended by doubt that the presumption in s 146(2) did not operate. This submission was directed to the unreliability of the underlying entries in Exh JM-2. As I explain below, s 146(2) is not directed to the content of the produced material. However, it is appropriate to deal with the appellant's submissions, should I be wrong in that construction of the section.

59 The appellant submitted that the evidence required to raise a doubt about a presumption fell well below the concept of "contrary proof" necessary to displace a presumption. The appellant referred to the following provisions of the Evidence Act as examples where contrary proof was required: see the Evidence Act, ss 13(6), 61(3), 148, 150(1)(f) and (2), 150(3), 152, 153, 154 and 156(1). These sections all contain a presumption, "unless the contrary is proved". For example, s 13(6) provides, "[i]t is presumed, unless the contrary is proved, that a person is not incompetent because of this section". Section 146(2) only requires the raising of a doubt. The appellant submitted that where there were clear indications that the input material was infected with error in a way which affected the output, sufficient doubt was raised to displace the presumption in s 146(2).

60 The language of a provision such as s 13(6) differs in a material way from the language of s 146(2). A provision such as s 13(6) requires the court to act on the basis that the presumption is the fact unless the contrary is proved. The 'contrary' fact must be proved on the appropriate civil standard. Section 146 operates differently. It does not declare the presumed fact to be the fact. Rather, the Court first needs to be satisfied, viz "[i]f it is reasonably open to find" that the device is of a certain kind and performs a certain function before the presumption operates. The presumption will not arise if there is evidence that raises a doubt about the presumption. Evidence that raises 'a doubt' does not need to be of the same quality or of the same probative strength as evidence that is required to satisfy the civil standard. See Deputy Commissioner of Taxation, in the matter of ABW Design & Construction Pty Ltd v ABW Design and Construction Pty Ltd [2012] FCA 346 where the application of the phrase "unless evidence sufficient to raise doubt about the presumption is adduced" in the Evidence Act 1995 (Cth), s 160 is discussed. See also Kyogle Shire Council v Muli Muli Local Aboriginal Land Council [2005] NSWCA 4; 62 NSWLR 361, where a similar phrase in the Interpretation Act 1987, s 76(1) was applied.

61 It follows that I agree with the appellant's submission that the evidence necessary to raise a doubt about the presumption in s 146(2) is of a different quality to that required for the purpose of a provision such as s 13(6). However, in my opinion, the appellant's challenge to his Honour's decision misapprehended the nature and application of s 146(2).

62 The appellant's submissions were directed to the accuracy of the underlying information in Exh JM-2, rather than to the mechanical process to which the s 146(2) presumption applies. The appellant acknowledged that if the "outcome" referred to in s 146 was confined to the production of a piece of paper, being a document summarising the underlying material, its submission failed.

63 Section 146 is directed to evidence produced by the application of a mechanical or technological process. Photocopied documents, computer generated material and material generated from data stored in a computer are typical examples. Section 146(2) is not directed to the underlying accuracy of the information contained in a document or record that is produced in this way. For example, s 146(2) has nothing to say about the accuracy of a statement in a photocopied document that $AUD100 was worth $US96. Rather, s 146(2) is a means whereby, on this example, a photocopy of a document containing such information may be received into evidence. It follows that, in my opinion, the appellant's s 146(2) submission fails.

64 His Honour found, alternatively, that the respondent had in any event discharged its onus of proving loss by adequate and reliable evidence. In making this finding, his Honour, at [71], gave weight to his findings in [2008] NSWSC 413, at [55]-[57], in which his Honour considered that Mr Merhi had presented as "a quiet and careful witness who had a reasonable recollection of the events which had occurred" and that the attack on Mr Merhi's credit had been "considerably overdone". See also [2008] NSWSC 413 at [49](i) and [49](vi). His Honour also found, in his judgment in [2010] NSWSC 52, at [44], that Mr Merhi's evidence, subject to certain qualifications made by him, "may be regarded as an accurate rendition of the manner in which [Exhs JM-1 and JM-3] came into existence". His Honour, at [45], observed that his evidence, particularly in re-examination, was "impressive in its detail" and "generally answered" and qualified the matters that had arisen in cross-examination.

65 His Honour, at [46], found that Mr Merhi's evidence was sufficient to show that the records, that is, those comprised in Exh JM-2, were the respondent's business records. His Honour found that the effect of the cross-examination in respect of those records confirmed, rather than undermined, their general adequacy and reliability. His Honour considered that in those circumstances, there was no need for any reliance upon any presumption, whether pursuant to s 146 or otherwise. The respondent relied upon this finding in its notice of contention.

66 His Honour, at [47], then made the following specific findings:

"i.[The respondent] was clearly not a huge concern and Mr Merhi was its principal. His knowledge of its affairs was plainly extensive.

ii.To the extent to which he gave evidence (as he did in the various affidavit paragraphs referred to above) of the fact that various documents reflected the state of various aspects of the company's affairs, then that was direct evidence of those matters, not merely evidence that a computer had generated certain results, at least to the extent to which the Court infers [as I do from the materials before the Court] that he had knowledge of the facts in question.

iii.I further accept that it is not necessary to take matters that far. The simple finding is that it was generally appropriate to rely upon [the respondent's] records, as extracted by Mr Merhi, [except of course to the extent to which he qualified his evidence]."

67 These findings were imported into his Honour's judgment in the present matter: see at [71] viz:

"I also carefully considered the explanation given by Mr Merhi as to how these figures were derived. His explanation for these estimates was more than reasonable."

68 Although the appellant's challenge to his Honour's conclusion that the respondent had adduced evidence, or sufficient evidence, to prove its damages claim essentially focused upon the alleged unavailability of the s 146(2) presumption, I consider that the Court should determine the matter on the basis that there was a direct challenge to the sufficiency of the evidence. The appellant's submissions insofar as they challenge his Honour's findings as to the sufficiency of the evidence may be summarised as follows:

(1)Exhs JM-1 and JM-3 had been generated specifically for the purposes of the litigation. They related to the period in which the contracts were performed (the performance period). The appellant pointed out that the respondent had used a set of lay calculations (that is, Mr Merhi's calculations) to calculate the daily gross profit from that data. There was no expert evidence before his Honour as to the respondent's claimed loss.

(2)There was no evidence of any actual loss incurred in the post-termination period. The respondent had merely projected the calculation referred to in (1) into the post-termination period as though the contract had been performed. In doing so, the respondent failed to refer to any records of actual revenue or expenses for the post-termination period. At most, the evidence indicated that overheads generally continued to be incurred in the post-termination period.

(3)As to the performance period data generally:

(a)there were virtually no primary records;

(b)there was no independent or expert evidence in relation to such primary records as there was in evidence.

(4)The evidence at trial established that the electronic records had not been honestly or accurately kept. Accordingly, the reports generated for trial (Exhs JM-1 and JM-3) did not reflect expenses that had been omitted from the computer records or had been wrongly entered. Exhibits JM-1 and JM-3 could not, therefore, be relied upon as evidence of the appellant's loss. The following particular matters were emphasised as demonstrating the inaccuracy and falsity of the respondent's electronic records:

(a)in the case of security guards named Hamilton and Wright, work by one man was falsely ascribed to another;

(b)entries were recorded in the name of "Elite School of Singing" as general marketing expenses for the appellant when they were really security guard payments and thus were not recorded as a wages expense for a specific venue of the appellant;

(c)entries were not properly coded and therefore not reported upon as expenses directly incurred on the contract with the appellant. For example:

(i)Exh JM-1 showed that travel expenses for the Seagulls club at Tweed Heads incurred by Mr Merhi were left out, resulting in an understatement of those expenses by some 40 per cent;

(ii)Exh JM-2 showed that a bonus paid to the security guard Hamilton was recorded as a general expense and GST was charged, rather than as a wages expense.

69 The appellant submitted that the respondent had not adduced evidence that these examples of false and incorrect data entry and incorrect expense coding were isolated or unique occurrences. Notwithstanding the trial judge's finding as to Mr Merhi's evidence in re-examination, only some understatements of wages were explained. The appellant, in particular, contended that the discrepancies particularised above had not been explained. The appellant submitted that this gave rise to sufficient doubt as to the accuracy of the records, so that the onus remained upon the respondent to prove the accuracy of all of the financial material it relied upon to prove its damages claim. The appellant contended that the respondent had not done so.

70 The appellant then encapsulated its argument in two central propositions. First, that at all times, the respondent had the onus of establishing its damages claim. Secondly, that the appellant had sufficiently demonstrated that the respondent's underlying records were unreliable, and on occasions false. Although the second submission, as argued, was directed to the operation of the s 146(2) presumption, it was integral to the appellant's argument generally that the unreliability of its records was such that the respondent had not discharged its onus of proving its damages claim.

71 To the extent that there was any argument remaining as to the admissibility of Exhs JM-1 and JM-3, the appellant did not press that argument in its oral reply. However, the basis of the admission of Exhs JM-1 and JM-3, over and above the compromise reached as to their use (see at [53] above), remained in issue in the argument on the appeal and thus needs to be understood. Notwithstanding the compromise, the appellant maintained an objection to Exhs JM-1 and JM-3 on the basis that the material in those exhibits was opinion evidence and therefore inadmissible as the exhibits were not expert reports. In response to that objection, the respondent informed the trial judge that it did not seek to rely upon the exhibits on the basis that they provided evidence in respect of applicable accounting standards or principles. Rather, they were relied upon as evidence of calculations that Mr Merhi had performed.

72 Given that explanation and undertaking upon which the trial then proceeded, the question for his Honour, therefore, was whether that evidence was sufficient to prove the respondent's damages, having regard to the principles that he had determined applied to the respondent's claim.

73 As I have indicated, there was a significant challenge in the cross-examination of Mr Merhi as to the accuracy of the material in Exhs JM-1 and JM-3. Not only did Mr Merhi reject those challenges, he was re-examined to confirm that expenses such as CEO expenses and rent did not result in any saving or reductions to the respondent, but continued after the contracts had been terminated. The cross-examination in relation to rent provides a neat example of the rationale behind the respondent's claim for the whole of these expenses:

"Q.You will see a little further down there is an item there of rent for $82,326.50?

A.Yes.

Q.Rent has not been brought into account at all in any of your expenses calculations?

A.That is correct.

Q.That's an overall expense for running your business?

A.Yes.

Q.And I suggest that should have been apportioned according to the share of the business that these two contracts represented?

A.And again I disagree on the basis that we continued to pay rent after the Norths business disappeared, so to speak and we weren't able to sever part of the office. We had a lease that we were bound by as a consequence of that."

74 The trial judge clearly accepted this evidence as he accepted the respondent's essential contention that overheads did not abate as a result of the loss of the appellant's business and therefore were not to be deducted.

75 The respondent acknowledged that some errors in the primary documents had been identified, but submitted that in the overall context they were de minimus and not sufficient to destroy the overall reliability of the accounting evidence. The respondent submitted that, save for the few minor exceptions exposed in the cross-examination, its records were detailed and meticulously kept.

76 In my opinion, the challenge based upon the unreliability and inaccuracy of the respondent's records should be rejected. Whilst some inaccuracies were identified in cross-examination, his Honour was entitled to conclude that they were not of sufficient size or volume to throw sufficient doubt upon the overall accuracy of the respondent's financial records, such that they were inadequate to prove the respondent's claim.

77 The appellant also complained that the respondent failed to adduce any expert evidence. This complaint was directed to the sufficiency of the respondent's evidence on the damages claim. In my opinion, it was not necessary for the respondent to adduce expert evidence to prove its loss. As I have said, the sufficiency of evidence is a matter for the trial judge. Although the appellant challenged his Honour's determination of the principles that applied to the assessment of damages in a case of breach of contract, it did not contend that his Honour required expert evidence to determine that question. Indeed, the appellant did not call expert evidence to support its contention as to the correct approach to the assessment of damages in a case such as this.

78 The respondent was required to do no more and no less than adduce evidence of its loss to be assessed in accordance with the applicable legal principles. This was an accounting exercise. His Honour was satisfied that Mr Merhi had a detailed understanding of the respondent's finances and that the data he had prepared sufficiently demonstrated its losses. That finding was open to his Honour. I would reject the complaint that there was a fatal deficiency in the respondent's evidence because the financial data had not been collated by an expert accountant.

79 The appellant also complained that the respondent had failed to adduce any evidence as to whether it had earned revenue in the post-termination period. In this regard, the appellant contended that it was not sufficient for the respondent to claim loss on the basis of the revenue it had lost in the post termination period as a result of the appellant's breach of contract, without bringing to account any replacement revenue it had earned in this period.

80 In my opinion, this submission failed to engage with the way the appellant had run its case at trial. If the appellant wished to contend that the respondent should have mitigated its damages by earning income in the post-termination period by way of replacement income for that lost as a result of the breach of the contracts, it should have pleaded that the respondent failed to mitigate its loss. It did not do so. Nor did the appellant challenge Mr Merhi in cross-examination that there had in fact been such replacement income, or that there had been any opportunity to earn such income. In the absence of any indication in the evidence that the respondent had earned such income and in the absence of any allegation of a failure to mitigate, I am of the opinion that this particular challenge must also fail.

81 In my opinion, the appellant's submissions also failed to engage with the essential nature and extent of the claim the respondent made. This was recorded by his Honour, at [58], but bears repeating by way of conclusion. The respondent "looked at each expense individually, irrespective of whether it [was] a direct cost or overhead and determined what cost was saved as a result of the loss of the [contracts with the appellant]". The appellant failed to demonstrate in its argument on the appeal that the respondent had not in fact undertaken that task in a sufficiently adequate way. In seeking to attack the judgment on the basis that his Honour should have, but failed to deduct overhead expenses in the post-termination period, the appellant did not have regard to what the respondent in fact claimed and what it had not. The appellant has not established any error in his Honour's acceptance of the respondent's evidence in relation to its loss arising from the appellant's breach of contract.

82 There was a further criticism of his Honour's reasons to which I should refer. The appellant submitted that his Honour's statement, at [60], that "fixed costs should not be factored in at all" and that "variable costs ... should be included only to the extent they are saved by the breach of contract" also revealed error in his Honour's reasoning process. A statement in such apparently bald terms might seem to conflict with his Honour's earlier resolution of the principle that applied in assessing the respondent's loss. However, read in the context of the judgment as a whole, his Honour was saying no more than that costs were only to be deducted to the extent they were saved, and were not to be deducted if they were not saved. That is confirmed by his Honour's acceptance of the respondent's submissions as to the calculation of its damages (see at [58]) and his Honour's earlier reasoning at [41] and [42].

83 It follows, in my opinion, that the appellant has not established error in his Honour's judgment, for the reasons I have given. Accordingly, the appeal should be dismissed with costs.

84 MACFARLAN JA: I agree with the judgment of Beazley JA and add the following observations.

85 The distinction between variable and fixed costs, often made in accounting contexts, is not useful in the present case where the relevant question is what costs (whether variable or fixed) were able to be saved once the innocent party (here the respondent) knew of the other party's breach. These costs could be expected to have been largely variable costs in conventional accounting terms, but may also have included some fixed costs.

86 The affidavit of Mr Joseph Merhi, the respondent's Chief Executive Officer, indicated that he turned his mind to this question and gave credit in his calculations of the respondent's damages for what the respondent was able to save. He initially gave credit for some overhead expenses, such as part of his salary as CEO. However, as explained by the respondent's counsel at the hearing in this Court, Mr Merhi ultimately did not do so because it was pointed out to him that his wages still had to be paid as the respondent could not, in practical terms, have reduced his pay following the loss of the contract with the appellant. There does not appear to have been any real challenge in cross-examination to this aspect of Mr Merhi's evidence.

87 If the appellant had sought to contend that the respondent could have avoided various expenses after the loss of the contract with the appellant but failed to do so, it was incumbent upon the appellant to raise and prove a defence that the respondent failed to mitigate its damages. It did not squarely raise such a defence and did not in any event establish any failure to mitigate.

88 As Beazley JA has pointed out, the judgment of McHugh J in Dart Industries Inc v Décor Corporation Pty Ltd is not presently relevant. The issue in that case was what expenses were in fact incurred, looking at the position in retrospect. There was no question there, as there is in the present case, of what expenses were (or could have been) avoided following another party's breach of contract.

89 As Beazley JA has also concluded, s 146 of the Evidence Act is similarly irrelevant. That section concerns the mechanical reproduction of information. Here the issue was not whether the electronic copies of the underlying records contained in Exhibit JM-2 were accurately reproduced in the summary exhibits, JM-1 and JM-3. The appellant's examples of discrepancies and anomalies in the respondent's documentary evidence were ones found in the underlying business records copied in Exhibit JM-2. For these discrepancies and anomalies to bear significance, the appellant would need to persuade the Court that they were sufficiently extensive or important to require a conclusion that the business records of the respondent were unreliable, leaving the respondent without sufficient evidence of its loss.

90 When considered in the context of the voluminous transactions recorded in the business records in Exhibit JM-2, the discrepancies and anomalies were, in my view, insignificant. The appellant did not contend that it took a random (or other) sample of the business records and therein found all the identified discrepancies and anomalies. Rather, the inference should be drawn that the appellant conducted a wide-ranging examination of the respondent's extensive records and identified only the very limited number of discrepancies and anomalies referred to in Beazley JA's judgment. In these circumstances I reject the appellant's contention that the respondent's business records were shown to be unreliable and that the respondent did not prove its loss.

91 WHEALY JA: I agree with Beazley JA and the orders proposed by her Honour.

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Decision last updated: 08 June 2012