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 (12 February 2010)

Last Updated: 16 February 2010

NEW SOUTH WALES SUPREME COURT

CITATION:
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


JURISDICTION:
Equity Division
Commercial List

FILE NUMBER(S):
2006/00268578

HEARING DATE(S):
4/2/2010

JUDGMENT DATE:
12 February 2010

PARTIES:
North Sydney Leagues Club Ltd (Plaintiff)
Synergy Protection Agency Pty Ltd (formerly Joseph Merhi Industries Pty Ltd) t/as Synergy Protection Agency (Defendant)

JUDGMENT OF:
Einstein J

LOWER COURT JURISDICTION:
Not Applicable

LOWER COURT FILE NUMBER(S):
Not Applicable

LOWER COURT JUDICIAL OFFICER:
Not Applicable



COUNSEL:
Mr R J Bromwich SC (Plaintiff/Cross Defendant)
Mr KP Smark SC (Defendant/Cross Claimant)

SOLICITORS:
Lander & Rogers (Plaintiff/Cross Defendant)
Carroll O'Dea (Defendant/Cross Claimant)


CATCHWORDS:
Damages
Summary of principles in relation to damages generally and contract damages in particular
Separate question orders agreed by parties
Lost profits-competing contentions on treatment of overheads/fixed costs
Whether proper basis of assessment is to apply the ‘absorption method’ of cost accounting to allocate correctly all of the fixed costs across the whole of the relevant business
Alternatively whether the proper basis of assessment is that has defendant continued to incur the fixed costs in question, an apportionment of those costs using the ‘absorption method’ is inappropriate
Consideration of Dart Industries inc. v Decor Corporation [1993] HCA 54; (1993) 179 CLR 101-Evidence
Consideration of section 146 of Evidence Act 1995

LEGISLATION CITED:
Evidence Act 1995

CATEGORY:
Procedural and other rulings

CASES CITED:
Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64
Dart Industries Inc v Decor Corporation (1993) 179 CLR 101
Golden Strait Corporation v Nippon Yusen Kubishika Kaisha [2007] EWCA Civ 1211; [2007] 2 AC 353
Ho v Powell [2001] NSWCA 168; (2001) 51 NSWLR 572
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640
Kizbeau Pty Ltd v W G & B Pty Ltd [1995] HCA 4; (1995) 184 CLR 281
Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd [1938] HCA 66; (1938) 61 CLR 286
Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494
Odeon Associated Theatres Ltd v Jones (Inspector of Taxes) [1973] Ch 288
QBE Insurance Group Ltd v Australian Securities Commission (1992) 110 ALR 301
Robinson v Harman [1848] EngR 135; (1848) 1 Exch 850
Siddell v Vickers (1892) 9 RPC 152
Synergy Protection Agency Pty Ltd v North Sydney Leagues' Club Ltd [2009] NSWCA 140
Wenham v Ella (1972) 127 CLR 454

TEXTS CITED:
Advanced Management Accounting, Maurice L Hirsch, (1988), Brooks/Cole
Managerial Accounting, John G Helmkamp, (1997), Wiley Publication

DECISION:
Separate question 3 answered in the affirmative.
Separate question 1 answered in the negative.
Separate question 2 does not fall for consideration.



JUDGMENT:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST


Einstein J

Friday 12 February 2010

2006/00268578 North Sydney Leagues’ Club Ltd v Synergy Protection Agency Pty Ltd (formerly Joseph Merhi Industries Pty Ltd) t/as Synergy Protection Agency

JUDGMENT

The state of these proceedings

1 These proceedings have been remitted to this Court for the determination of damages following the decision of the Court of Appeal: Synergy Protection Agency Pty Ltd v North Sydney Leagues’ Club Ltd [2009] NSWCA 140.

2 By reason of the manner in which the proceedings were dealt with at first instance it was not necessary for the Court to treat with the extensive submissions which had been put in relation to damages. That exercise does now required to be carried out albeit aided by the separate question orders referred to below.

3 Even before explaining that separate question regime it seems appropriate to repeat what was said in the first instance judgment at paragraph 60:

It would be wrong for the Court not to indicate that in major litigation of this type the Court is usually assisted by some form of expert evidence. A simple inspection of the vast number of charts and documents which the parties put forward from the bar table in an attempt to analyse the extensive materials adduced concerning loss and damage makes it very plain that this was a case where the Court was entitled to the party's assistance in terms of the mobilisation of expert evidence.

4 These observations need to be kept in mind as for example when the Court is required to deal with particularly intricate accounting concepts.

The separate question orders

5 During the course of the further hearing which took place on 4 February 2010 the parties by consent agreed to the following orders being made:

The Court orders, pursuant to UCPR 28.2, that the following questions be decided separately from, and prior to, any further question in the proceedings:-

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 cross-claimant (“Synergy”) 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 cross-defendant (“Norths”) by way of net profit that was lost Synergy 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.

Summary of principles in relation to damages generally and contract damages in particular

6 Before travelling into the minutia concerning the particular cross submissions and evidence before the Court it seems appropriate to shortly summarise the principles which inform awards of damages generally and contract damages in particular (confined to the circumstances of these proceedings so as to obviate the need to address principles which do not apply on the facts before the Court. These can be conveniently summarised as follows:

i. the onus of proving the existence and quantum of damage lies with the claimant and is to be objectively determined [Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54; (1991) 174 CLR 64 (Amann Aviation) at 80.7];

ii. damages for breach of contract are required to be awarded so that the injured party is placed in the same situation as if the contract had been performed, being expectation damages [Wenham v Ella [1972] HCA 43; (1972) 127 CLR 454 at 460 per Barwick CJ and at 471.1 per Gibbs J (the latter citing the well-known case of Robinson v Harman [1848] EngR 135; (1848) 1 Exch 850 at 855); Amann Aviation, Marks v GIO Australia Holdings Ltd [1998] HCA 69; (1998) 196 CLR 494 at 503 [14] (endorsing McGregor on Damages) and Luna Park (NSW) Ltd v Tramways Advertising Pty Ltd (1938) 61 CLR 286];

iii. the ordinary measure of expectation damages for breach of contract is the loss of the bargain had it been performed, namely the loss of net profit [Amann Aviation at 81.1];

iv. a claimant is not entitled to be in a superior position to that which it would have been in had the contracts been performed [Amann Aviation at 82.4];

v. mere difficulty in estimating damages does not mean that the task can be avoided – a Court is required to do the best that it can with evidence before it [Amann Aviation at 83.5];

vi. in calculating damages, a Court should use facts when they are available, rather than prophecies [Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281 at 293.8 – 295.2; see also HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 at 658-9 [39] and Golden Strait Corporation v Nippon Yusen Kubishika Kaisha [2007] EWCA Civ 1211; [2007] 2 AC 353 at 392-3 [65]- [66]];

vii. when damages are uncertain by reason of insufficient evidence, any difficulties in assessment should be resolved against the party with the capacity to call the necessary evidence, having regard also to the inference available to be drawn in relation to the failure to call such evidence, namely that it would not have assisted that party [Ho v Powell [2001] NSWCA 168; (2001) 51 NSWLR 572 at 576 [15]- [16]];

viii. if there are two or more ways in which a contract might have been performed, the Court adopts the mode of performance which is most beneficial to the party in breach [Amann Aviation at 92.8].

The way forward

7 To my mind the more profitable mode of moving forward is to directly treat with the third question for decision by way of separate questions.

8 Plainly what the parties [consistently with the authorities], have endeavoured to do concerned putting submissions to the Court in working out expectation damages. The task for the Court is to determine the amount of money that would put Synergy in the position it would have been in, had the contract being performed, namely the net profits it would have received.

9 It has to be acknowledged that the parties furnished the Court with a number of detailed schedules, certain of which for one reason or another, were said to have been updated. Both counsel addressed from the schedules. Both also assisted the Court by briefly analysing one another's schedules. Synergy used the schedules marked MFI-D1. North Sydney used the schedules marked MFI P5 subject to the replacement documents numbered 3 and 4 respectively [being replacements for parts of MFI P-5]

10 It is inappropriate to append the schedules to these reasons but they have been left in the Court file. By reason of the separate question orders close comparisons between the respective schedules are effectively sidelined by the need with a Court in particular to determine the separate question 3. This was the preferred position put to the Court by the parties who indicated that following the Court answering the separate questions, there should be no difficulty in the parties agreeing upon the ultimate result.

11 It seems convenient to repeat so much of the submissions put by Synergy as first identify qua lost profits, matters of common ground as between the parties and then to go on to deal with points of differences.

12 However at the outset it needs to be understood that Synergy never sought to make a case of reliance loss this having been made explicit during the initial hearing. It was put as a case about the amount of money needed to make good their net profits.

Lost profits: common ground

13 As counsel for Synergy contended:

i. There is of course no doubt about the overarching principle of compensation, namely, that Synergy should receive an award of damages that would put it, so far as possible, in the position it would have been in had the relevant contracts had been performed – in short, Synergy sought to recover its expectation losses.

ii. Nor did the parties differ in their overall approach to the assessment of such damages, being to estimate the likely revenue stream which would have been received if the contracts had run their course (“revenue”) and to deduct the costs of earning that revenue (“costs”) to arrive at a figure for lost profit. So, lost profit = revenue - costs.

iii. Issues that did not arise were (on Synergy’s part), any claim for “loss of a chance”; or (on Norths’ part), any claim that there had been a failure to mitigate loss, or that there had been some successful mitigation which needed to be brought to account.

iv. The extent of agreement on the overall approach may be gauged from the fact that North took the step of setting out its position in schedules that followed the same structure, and had much of the same content, as schedules prepared by Synergy

Lost profits: point of difference

14 Again there were however some differences as to the way in which revenue ought to be estimated, and substantial differences as to the way in which costs (mostly of the kind referred to as “fixed costs” or “overheads”) ought to be taken into account. The differences were reflected in a variety of schedules put forward by the parties, culminating in the following material:

(a) Synergy’s contentions:

(i) JM1-A or Template 1 [These were, respectively the first two pages of MFI-D1, proffered by Synergy], leading to a result of $418,000 [For ease of reference, figures are rounded to the nearest $1,000] -$431,000;

(ii) Template 2 or 3 [These were, respectively the third and fourth pages of MFI-D1, proffered by Synergy] leading to a result of $349,000-$368,000;

(b) Norths’ contentions:

(i) Page 3 of MFI-P5, as replaced [Appended to North’s’ submissions of 7 May 2008], leading to a result of $43,000;

(ii) Page 5 of MFI-P5, as replaced [Appended to North’s’ submissions of 7 May 2008], leading to a result of $8,000.

15 Put simply:

(a) (a)(i) differed from a(ii), depending on what information was used to predict the work required for the unperformed balance of the contracts (i.e. a revenue issue);

(b) (a) differed from (b) depending on the treatment of overhead costs;

(c) (b)(i) differed from (b)(ii) depending on CPI indexation of future costs, including variable costs.

16 The results of these efforts by the parties should mean that the Court may proceed by deciding certain matters of principle, and that the arithmetical consequence will flow accordingly.

17 As the central issue left between the parties is the treatment of overhead costs, it is convenient to deal with that next.

The treatment of overheads/fixed costs

18 The competing contentions on this issue may be summarised in the following fashion.

i. Norths contends [North’s’ submissions of 6 May 2008, paras 97, 98(c), 103-105; North’s’ submissions of 7 May 2008, paras 128-135] that the proper basis of assessment is to apply the “absorption method of cost accounting to allocate correctly all the fixed costs across the whole business” [North’s’ submissions of 6 May 2008, para 98(c )];

ii. Synergy contends [Synergy’s submissions of 7 May 2008, paras 80-89, 104] that the proper basis of assessment is that as Synergy continue to incur the fixed costs in question, an apportionment of those costs using the “absorption method” is not appropriate in this case.

19 In order to resolve this issue, it is necessary to identify:

i. What the absorption method is;

ii. When it will be applicable;

iii. What facts are relevant to whether it is applicable in this case.

What is the absorption method?

20 In Dart Industries Inc. v Decor Corporation Pty Ltd [1993] HCA 54; (1993) 179 CLR 101, the concept underlying the so-called absorption method was expressed as follows by Mason CJ, Deane, Dawson and Toohey JJ at 112.5-8:

Dart relies upon the same passage to support its submission that the correct accounting principle to employ in the taking of an account of profits is incremental costing rather than absorption costing. Incremental costing takes account only of the change in costs incurred by the manufacture or sale of a particular product and does not seek to apportion to the manufacture or sale of that product any part of general overheads, such as rent, light, heating or office expenses, which cannot be identified as a direct result of producing that product. Absorption costing on the other hand is 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.

21 It is common ground that albeit having delivered in a separate judgment, McHugh J carefully and thoroughly made a number of salient observations which bear repeating. Of particular relevance were the following:

13. In a litigious world of unlimited time and resources, the best approach for determining the profit derived from the infringement might be to estimate the profit of the product after allowing a proportion of the overheads and then deduct the opportunity cost of producing the infringing product. This would show the true gain of the infringer from producing or distributing the infringing product instead of the next best alternative. Another but less exact method of determining the profit and preventing the unjust enrichment of the infringer might be to determine what was the best alternative open to the infringer, determine what gross revenue would have been obtained from that alternative, and deduct that sum from the gross revenue obtained from the infringing product. Another suggested method is that there should be a deduction for that part of the overhead which would have been absorbed in producing or selling the alternative to the extent that it was used in producing or selling the infringing product. But to adopt any of these methods would make an often complex subject more complex than it already is. Very likely, it would increase the prospect of contested litigation over the taking of the account and the cost and length of the hearing while the parties and their witnesses investigated and debated the hypothetical. Depending on which method was used, the person taking the accounts would have to estimate one or more of the following figures: the gross revenue from the alternative, the direct costs of the alternative and the proportion of overhead attributable to the alternative. Lindley LJ, who knew more about accounts of profits than most lawyers, once said ((54) Siddell v Vickers (1892) 9 RPC 152, at p.162.)that he did "not know any form of account which (was) more difficult to work out, or may be more difficult to work out than an account of profits". The Court should be slow to adopt a rule which might increase that difficulty.

14. A more practical approach is to apply those commercial and accounting principles which are used in business to determine what profit has resulted from the manufacture or sale of a product. In QBE Insurance Group Ltd v Australian Securities Commission (1992) 110 ALR 301, at pp.319-320; see also Odeon Associated Theatres Pty Ltd v Jones (Inspector of Taxes) [1973] Ch 288, at p.299.), Lockhart J pointed out:

"The meaning of the word 'profits' is for the Courts to determine. But the identification of what in relation to the affairs of a particular company constitutes its profits is determined by the Courts with close regard to the views of the accountancy profession. The Courts are influenced strongly by the views adopted by professional accountancy bodies and men of business and the evidence of accountants is given great weight by the Courts".

15. Admittedly, the commercial or accounting approach may mean that, in the account of profits, the infringer is credited with an amount of overhead greater than would be the case if no infringement had taken place. But the converse may sometimes be true. Whatever the outcome in a particular case may be, the commercial or accounting approach has one clear advantage over other methods: it deals with historical facts and commercial reality and not hypotheses.

16. To determine the cost of a particular product, cost accountants use the incremental method of accounting and the absorption method of accounting. "Incremental (or marginal) cost" has been defined as "the change in aggregate cost that accompanies the addition or subtraction of a unit of output" ((56) Kohler, op. cit., p.257.). The incremental method is generally used for setting short term prices and for one-time tactical decisions (Hirsch, Advanced Management Accounting, (1988), pp.50-51.). It focuses on the marginal difference in costs (or revenues) as a result of adding a unit of production. In contrast, the "absorption (or average or full costing)" method allocates all fixed costs between the products of the business (Helmkamp, Managerial Accounting, (1987), pp.165, 239, 550; Hirsch, op. cit., p.51.).

17. Standard accounting text books recognise that, in calculating the cost of a product for the purpose of identifying its profitability, all costs which contribute to the ultimate sale of the product must be included (i.e, the absorption method should be used) (Helmkamp, op cit., p.239; Hirsch, op. cit., p.51.).

The submissions put by Synergy

22 Synergy's submissions endeavouring to explain when the absorption method will be applicable were generally as follows:

i. One can readily see why the absorption method would often be considered appropriate in circumstances where the revenue stream is not hypothetical, but real [It is tempting to cast this proposition in terms of past and future revenue, but that would not be right – such considerations are just a consequence of the time of hearing. The real distinction is between revenue (and/or profit – it matters not which) forgone, and revenue actually earned and sought to be recouped, as in an account of profits case], for example in a case of account of profits, where the defendant has actually received the relevant revenue, and actually incurred the relevant costs. The distinction is not between remedies (account of profits vs damages) but between:

a) revenue never earned, because of the defendant’s breach (of contract, or duty of confidence or otherwise);

b) revenue earned by the defendant in breach (of contract, or duty of confidence or otherwise).

ii. In a case of account of profits, the Court is astute to avoid any element of punishment of the defendant, but at the same time to prevent his unjust enrichment: see Dart, at 111.3. In a case of damages for breach of contract, the Court is astute to avoid any over-compensation of the plaintiff. Where, it may be asked would such over-compensation arise in a case such as the present, if Synergy’s submissions were accepted?

The example put forward by Synergy

23 Synergy put forward what it contended to be a simplified illustration. This took the following form: Assume

i. X Pty Ltd charged $30 per hour for hiring out its workers;

ii. X had to pay its workers $20 per hour for each hour they worked.

iii. X had a leased office, with an annual rent of $100,000 and the lease had 10 years to run.

iv. X had one permanent employee (a CEO) contracted at $100,000 per annum.

v. X had 2 customers (A and B), each of whom had contracted to receive 20, 000 hours of labour from X per annum for 3 years.

vi. One customer (B), wrongfully terminated its contract after 1 year, and X accepted the termination, suing for damages.

vii. No other costs are involved, nor any question of mitigation.

24 In such a (simple) case, expectation damages would be the amount of money reflecting the difference between the position the plaintiff actually finds himself in, and the position he would have been in if the contract had been performed. On these simplified facts, this is easily shown:

i. Actual (contract broken): X actually received net revenue [i.e. net of wages paid to employees ] for years 2&3 of $400,000 from its contract with A and nothing from its contract with B. Its costs were $400,000 for those years. Therefore its actual profit was nil.

ii. Hypothetical (contract performed): X would have made net revenue of $800,000 ($400,000 from A and $400,000 from B). Its costs would still have been $400,000. Therefore its hypothetical profit would have been $400,000.

iii. The difference between these two is the measure of damages: $400,000.

25 However if the absorption method were to be applied, this approach would not be followed. Despite the fact that X’s actual (i.e. in fact incurred) costs remained $400,000, and its actual (i.e. in the hand) profits were nil, it would be required to treat its costs as if they were really $200,000, and so its profits as if they were $200,000. A moment’s reflection will show that X would thereby in fact be under-compensated by $200,000.

26 This simplified example will hold good for any set of starting values.

27 It can be made more complex (right up to the point where it is the same as the present case, or even substantially more complex), without altering the point of principle. It shows that there is really only one enquiry involved, and it is a factual one -- which costs would X (or Synergy) had to have incurred in any event (that is, regardless of B’s – or Norths – contractual performance or lack thereof).

28 This example also shows why Dart (and any case dealing with profits actually made, rather than those foregone), is the mirror image of the present – it will generally be appropriate to apply the absorption method regardless of whether the costs would have been incurred or not.

29 In my view these submissions, which came forward from Synergy, were of substance. Clearly enough Synergy was not surprisingly, a company which had certain fixed costs [for example rent of its headquarters and the salary of its CEO]. These types of costs were going to be incurred in any event. On the evidence Synergy was set up with its premises, with its CEO, with its other fixed costs and that structure continued up to the end of the relevant time. The relevant question has always been what was the consequence for Synergy of not receiving the revenue stream in terms of its profits. In the present proceedings the breach was the failure to take the services being provided out of the business structure where the plaintiff had paid the overheads.

Decision on separate question 3

30 Separate question 3 should be answered in the affirmative:

That is to say in determining the quantum of expectation damages attributable to breach of contract by the cross-defendant (“Norths”) by way of net profit that was lost Synergy 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.

Separate questions 1 and 2

31 This parameter of the separate questions can be dealt with fairly shortly.

32 North’s primary position put presently to the Court was that the evidence relied upon by Synergy is attended by sufficient doubt by reason of unreliability and error as to disentitle it to any damages whatsoever by reason of failing to discharge its onus of proving damage, particularly when it was the repository of original records and chose not to prove its case on damages properly.

33 Synergy rejects any such approach out of hand. Furthermore it draws close attention to the manner in which the Court treated with evidentiary issues and in particular identifies a compromise reached by the parties during the previous hearing.

Section 146 of the Evidence Act

34 Before travelling further it is useful to set out the terms of section 146 of the Evidence Act.

35 Section 146 of the Evidence Act is in the following terms:

146 Evidence 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.

36 The evidence adduced by Synergy in relation to damages comprised three affidavits, and exhibits thereto, as follows:

i. Affidavit of Mr Merhi, sworn 11 December 2007 (“First Merhi affidavit”):

a) paras 35-38, which set out Mr Merhi’s calculations of loss of profit;

b) paras 39-40: identification and description of Exhibit JM1;

c) para 42: identification of Exhibit JM 2 (compact disc);

d) paras 43-68: further description of Exhibit JM1 and further explanation of basis of Mr Merhi’s calculation of loss of profit.

ii. Affidavit of Mr Merhi, sworn 20 March 2008 (“Second Merhi affidavit”) [It was the first of two affidavits sworn on this date (see para 3) and had 38 substantive paragraphs: see T33.40-34.20. The other affidavit of that date (“Third Merhi Affidavit”) did not relate to damages issues], paras 5-35 [These parts of the affidavit were read; other parts going only to costs were not: see T38.11-38.35], describing in detail the process whereby Exhibit JM1 was created and correlating it to the documents forming part of JM2 (the compact disc);

iii. Affidavit of Mr Merhi, sworn 15 April 2008 (“Fourth Merhi affidavit”):

a) paragraphs 4-5: identification and description of Exhibit JM3;

b) paras 6-34: further description of Exhibit JM3 and its relation to Exhibit JM1;

c) paras 35-42: further description of Exhibit JM1;

d) paras 43-45: evidence relating to damages in response to North’s’ affidavit evidence.

37 The material in the affidavits themselves was received into evidence by the Court, on the basis that it was not of an expert character (T34.23-41). Objections as to relevance were taken but disallowed generally: see T35.19-.29. However the right of either side to object to material in the tender bundle (PX) which included Exhibits JM1 and JM3 was preserved (T2.36-.52; 3.42-.45).

38 The course described above might be regarded as fairly conventional in a commercial case. Counsel for North Sydney did ultimately object to the material which was said to be Synergy’s accounting material (JM2) and the documents said to be derived from that (JM1 and JM3). JM2 was ultimately received in evidence (first judgment, para 61); it appears that no ruling was ultimately made in relation to JM1 or JM3 because the damages case did not need to be considered in light of the outcome on liability.

39 The ruling in relation to JM2 was not the subject of cross-appeal or notice of contention; in any event, the focus of North’s objection was on the documents derived from that material. In substance, this was put on a reliability basis, directed at ss.48 and especially 146 of the Evidence Act.

The central compromise reached at the bar table

40 Senior counsel appearing for North Sydney took the Court back to parameters of the problems which had required to be addressed at the original hearing. He submitted inter alia as follows:

Your Honour, perhaps I can assist in this way, the way in which the evidentiary case brought by Synergy was put forward was that what was served on those instructing me and therefore on me, were two effective sources of damages calculations. One of those was the disc, JM2, but that was supplied only as a compact disc and it consisted, as we understood it, the electronic copy of the accounting records effectively of Synergy. And then JM1 was the final stage product of reports generated, ordered and generated specifically for the litigation from that data.

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, and I can indicate, because I don’t think there’s a controversy about this, that when my instructing solicitors sought in paper form, the data, they were advised through correspondence and the precise amount doesn’t matter your Honour, but what matters is that the indication was given that JM2 had something like 15,000 entries on it, that it would take about 125 hours to print out and accordingly that it wasn’t practicable. My instructing solicitors maintain that it wasn’t sufficient for us to simply got the end product of the reporting process because there was no way in which we could test it.

[W]hat we arrived at was a compromise and in the result a motion was filed seeking an order under s 50 of the Evidence Act, allowing the summary 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.

So that what we had was JM2 which was this massive data which no one ever looked at in the trial, your Honour didn’t look at it, my opponent at that time didn’t look at it and I didn’t look at it, perhaps other than just in a cursory sort of way and it used different software and so on. 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.

41 With regard to one of the submissions addressed to the Court by North it seems to me that there is substance in the defendant’s submissions. In this regard Synergy contended that a construction issue is raised relating to the words “it is presumed (unless evidence sufficient to raise doubt about the presumption is adduced)”.

42 It does seem to me that the notion of “sufficiency” here (in the context of a facultative provision) appears relatively straight forward, and appears to operate like a common law evidential presumption – the presumption applies unless the evidence leads to the conclusion that the presumption is not warranted.

43 I accept that implicit in the credit findings made in the first judgment (see at paras [55]-[58]) is a conclusion that the attempt to impeach the reliability of Synergy’s business records had not got very far.

44 Furthermore the instant hearing provides a proper occasion to find, as the Court does, that in the somewhat unusual manner in which the original hearing went forward in terms of the evidentiary matrix [and the accommodation earlier referred to], the evidence given by Mr Merhi by way of the reports produced [subject to the extent to which he qualified his evidence], may be regarded as an accurate rendition of the manner in which the documents in question came into existence.

45 In particular the re-examination of Mr Merhi [commencing at transcript 252 and ending at transcript 265] carefully conducted by Mr Forster SC was impressive in its detail and generally answered and qualified certain matters which did require to be explained following the cross-examination. That had been an occasion when overnight Mr Merhi in a businesslike fashion, had spent some hours in addressing the various concerns which had been raised with him.

46 Further and as Synergy has contended, in a sense, s.146 (and s.48) of the Act may be beside the point. To my mind Mr Merhi’s evidence is sufficient to show that the records in question (in effect, those comprised by JM2) were Synergy’s business records and the effect of the cross-examination in respect of those records confirms, rather than undermines, their general adequacy and reliability. I accept that in those circumstances, there would seem to be no need for a presumption (whether under s.146 or otherwise).

47 As Synergy has further submitted, there is a further aspect to admissibility and/or weight. That matter may be put as follows:

i. Synergy 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 Synergy’s records, as extracted by Mr Merhi, [except of course to the extent to which he qualified his evidence].

48 Returning to section 146 (2) the Court’s finding is that there has not been evidence sufficient to raise doubt about the material presumption

49 For those reasons separate question one is appropriately answered in the negative.

50 It follows that separate question two does not fall for consideration

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LAST UPDATED:
16 February 2010