"That, it seems to me, is a fatal error with the way in which the plaintiffs put their damages claim."
Litigation is often a long and expensive process. So when they win, plaintiffs reasonably expect the financial outcomes are worth it.
Unfortunately, winning with respect to liability doesn't necessarily translate to an award of damages. A number of high-profile judgments in the last 18 months have shown that sometimes gaps between the expert evidence used to quantify losses, and the case put for liability, has turned a win for the plaintiffs on liability into a loss, in terms of financial benefit.
In particular, a recent judgment in the long-running litigation involving Dick Smith Holdings Limited ('DSH') 1 has emphasised that:
- if liability is established, imprecision in the quantification of loss is not itself a reason to refuse to award damages; and
- if the factual findings in a case, such as the date of the offending conduct, are inconsistent with the expert's assumptions, it would be reasonable to allow them the opportunity to amend their quantification by adopting the Court's finding on those matters; but
- "fundamental flaws" or "fatal errors" in the way damages claims are quantified can lead to no award of damages, even if liability is established.
DSHE Holdings v Abboud; National Australia Bank Limited v Abboud
Following the collapse and receivership of the electronics retailer Dick Smith ('DSH'), there were numerous legal proceedings2. This article looks at just one aspect3 of one of those proceedings, referred to as "the bad stock case". In respect of liability, Justice Ball ultimately found that one of the directors (Mr Potts) had breached his duties under the Corporations Act by failing to address concerns that "DSH had placed too much emphasis on the collection of O&A rebates and that had caused DSH to make the wrong pricing and purchase decisions, including buying too much stock" . However, notwithstanding this finding on liability, no damages were awarded in respect of the breach.
So how did the plaintiffs 'win' on liability but 'lose' on damages? Let's first look at the methodology adopted by the experts engaged by the plaintiffs, before considering how that methodology aligned with the plaintiffs' case.
The damages case - the experts' methodology
Justice Ball identified the plaintiffs' damages case had two components: "The first is Ms [E's] analysis which identifies Bad Stock. The second is Ms [O's] analysis of the loss said to arise from the Bad Stock identified by Ms [E]."
The plaintiff's expert on inventory, Ms E, identified that DSH had purchased Bad Stock, being inventory purchased for which (according to her) DSH already held excessive amounts of that product. The plaintiffs then submitted that these purchases would not have occurred if DSH had acted appropriately.
The plaintiff's expert accountant, Ms O, calculated losses arising from this Bad Stock. In simple terms, this involved deducting the costs of purchasing the Bad Stock from the revenues made from selling it.
Justice Ball noted that Ms O's approach did not look at what DSH would have done instead of purchasing the 'bad stock' and did not include the impact of rebates received by DSH. Justice Ball also found that the plaintiffs' approach only sought to include losses from buying excess inventory, and didn't consider the profits resulting from those same purchases.
The damages case - the plaintiffs' methodology
Justice Ball found that there were two "obvious losses" arising from the plaintiffs' case that DSH bought too much stock, and which they sought to make out, namely:
- "that an excessive amount of capital was tied up in stock"; and
- "DSH was exposed to an increased risk that the stock would become obsolete."
However, this is where Justice Ball was critical of the plaintiffs' case. He found that the evidence "makes no attempt to quantify those losses. Plainly, it makes no attempt to quantify the losses arising from the fact that too much capital was tied up in stock. Nor does it seek to value the risk associated with obsolescence."
Justice Ball found that the expert evidence from the defendants showed that taking into account the profits made on sales of all Bad Stock meant DSH actually earnt an overall profit, not an overall loss, from purchasing Bad Stock. In other words, not all Bad Stock was necessarily incapable of being sold at a profit.
The plaintiffs' expert disagreed that their methodology was deficient, and argued that it was "the best that could be done with the imperfect information available" .
The judge's view - problems in the plaintiffs' case
Justice Ball identified at least four primary difficulties in the plaintiffs' damages quantification:
- The approach "assumes that DSH would have bought other stock if it had not bought Bad Stock. But that assumption is inconsistent with the plaintiffs' case [ ... ] That, it seems to me, is a fatal error with the way in which the plaintiffs put their damages claim."
- The calculation assumes losses started in 1 May 2014, however Justice Ball found no breach until the end of January 2015. Justice Ball noted that if this had been the only difficulty "it would have been appropriate to give [the plaintiffs'] an opportunity to calculate damages from the correct date. However, that would be pointless given the conclusion I have reached".
- The calculation gives no credit for rebates, however Ms O "accepts that in principle credit should be given". Ms O defended this in saying that it was not possible on the available evidence. Justice Ball found difficulties with Ms O's position since, inter alia, even in the absence of specific evidence the Court "need[ed] to do the best that it could to make an allowance for them". He noted that the approach taken by the defendant's expert "at least provides a starting point".
- the approach relied on assumptions Justice Ball found were unproven by the plaintiffs' evidence.
Justice Ball also identified other minor criticisms, but found that "none of these points is of itself fatal to the plaintiffs' damages claim". Justice Ball expressly noted that just because they may not be "capable of precise calculation either because of the inadequacy of the data or the nature of the issue is not itself a reason for refusing to award damages".
Ultimately Justice Ball concluded the plaintiffs' damages quantification had "fundamental flaws" which meant no damages should be awarded despite the finding of liability in favour of the plaintiffs.
The DSH judgment shows that establishing a robust foundation for the assumptions and methodology adopted in the damages assessment is at least as important as the strength of the legal argument on liability.
Inconsistencies between the inputs into the quantification and the Court's factual findings are not fatal to the assessment of damages, and the Court will generally seek to overcome limitations in the evidence to provide a workable outcome on quantum for successful plaintiffs. However, the Court will not correct for fundamental or fatal flaws in the methodology or assumptions adopted by an expert, even if those flaws are argued to be the consequence of limitations in information.
Our experience suggests that briefing an expert with statements of both claim and defence, and providing relevant information in a letter of instruction is not only useful, but is often critical. It is often also helpful to engage with an expert as to an appropriate method for estimating damages based on the legal position, and the available information, prior to finalising the questions put to them. Otherwise, you might find yourself winning a case on liability, but receiving no award of damages from the Court.
1DSHE Holdings (Receivers & Managers Appointed)(In Liquidation) v Nicholas Abboud (No 3); National Australia Bank Limited v Nicholas Abboud (No 4)  NSWSC 673
2KordaMentha was involved in class action proceedings related to DSH, which were settled prior to this judgment being released.
3 For completeness we note that in the same judgment it was also found that Mr Potts separately misled NAB and they were entitled to approximately $43 million in damages.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Mr Ben Mahler
Level 5, 2 Chifley Square
Tel: 38623 3333
Fax: 38623 3399
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