Was there any loss of profits for the business after the sale of the land?

The Court of Appeal consisting of Justices Holmes, Muir JJA and Atkinson J were asked to consider an Appeal by the Defendant from the primary Judgment of whether the loss of profits for a business post the sale of the farm land could be said to be caused by the fire. The second issue was whether the Second Respondent (Second Plaintiff) failed to mitigate its loss by not recommencing the tomato farming business.

The matter was originally heard by His Honour Justice Peter Lyons in the Brisbane Supreme Court1 where he found in favour of the Plaintiffs and ordered Judgment in the sum of $14,757,601.34 being as follows:-

  1. Property damage - $1,168,350.00
  2. Interest on property damages - $953,309.44
  3. Economic loss - $9,601,950.00
  4. Interest on economic loss - $3,033,991.90

The Appellants were ordered to pay indemnity costs of the trial.

The circumstances of the claim

The First Respondents, husband and wife, traded as a partnership conducting a tomato farming business near Bundaberg. Central to the operation was a packing shed and packing equipment. On 9 February 2004 an air conditioning unit on top of a recently purchased Winnebago motor home owned by the Second Respondent Company caught fire. The fire spread and destroyed the packing shed and its contents.

In 1984 the farming business was commenced by the First Respondents. It was eventually taken over by the Second Respondent Company in 1990 excluding the ownership of the land. Between 1994 and 2002 the First Respondents purchased additional properties and expanded their operations.

The tomato farming business was of a size that up to 200 employees were engaged in seasonal work. Some 30 to 40 of them worked in the packing shed. There were two full time employees that worked in the packing shed/office. The First Respondent female partner had primary responsibility for the packing shed, marketing and keeping records.

The First Respondent male partner had the responsibility for the general farming operations and maintenance.

Typically two tomato crops were growing every year and then the land was left to fallow for two years with a sugar cane crop grown for rotational cropping purposes.

The Second Respondents’ profit from the tomato farming business was:-  

  1. 2001 financial year ($11,687.00)
  2. 2002 financial year $983,022.00
  3. 2003 financial year $1,759,511.00
  4. 2004 financial year $2,048,088.00

A sole Forensic Accountant expert was appointed to assess the loss of profits from the tomato cropping to the Second Respondent from the date of the fire through to spring 2011. That was assessed at $8,998,181.00.

The First Respondents made a decision, due to the damage to its infrastructure, to sell the majority of the farm to Bundaberg Sugar Limited for $4,000,000.00 in February 2005.

The Respondents had obtained a quote for a new packing shed which was $799,590.00, but did not include wiring and transport costs. Also, the packing machine which was lost and had a replacement value of $700,000.00. That equipment could have been replaced with an inferior piece of equipment. That equipment had 20% less capacity and no facility for processing second or third grade fruit, meaning the packing operation would taking longer, double handling, and extra cost.

The other impediments to recommencement of the tomato farming were that the farming operation would not be fully operational for 18 months. It would also be two years before any cash flow would occur.

The Second Respondent had cash reserves of $115,000.00, but would have been required to borrow a large sum of money to recommence the trading operations. It was acknowledged the Respondents would have no difficulty borrowing the funds. They were apprehensive incurring substantial indebtedness. For 20 years they had been successful in avoiding substantial debts which could not be repaid from cash flow within a year or two. This was a big key in their financial success. The First Respondent acknowledged that in the past other tomato farmers had failed because of having excess debt when crops fail.

Causation issue

The Appellant relied upon the Common Law concept of causation discussed by Deane J in March v. Stramare (E & MH) Pty Ltd2 where it was said:-

“….whether an identified negligent act or omission of the defendant was so connected with the plaintiff’s loss or injury that, as a matter of ordinary common sense and experience, it should be regarded as a cause of it.”

It was acknowledged by the Court of Appeal that causal connection may exist if the Defendant’s contravention is not the sole cause of the loss or damage, but materially contributed to the result. The causal link maybe severed by novus actus interveniens. That is a severing the chain of causation.

The Court of Appeal also acknowledged the principal stated in Medlin v. State of Government Insurance Commission3:-

“The ultimate question must, however, always be whether, notwithstanding the intervention of the subsequent decision, the Defendant’s wrongful act or omission is, as between the plaintiff and the defendant and as a matter of commonsense and experience, properly to be seen as having caused the relevant loss or damage.”  

The Appellants’ argument

The Appellants maintain that the loss attributable to the Second Respondent should be limited to the period up to the Autumn and Spring crops of 2004 had the shed been rebuilt. The Appellants maintain the sale of the land by the First Respondents (the partnership) precluded the company from conducting its tomato business. The company’s inability to resume the tomato business was not caused by the fire but a commercial decision by the First Respondents to sell the land.

Mitigation of loss

The Court of Appeal acknowledged the Common Law authorities that a Plaintiff is under no duty to mitigate his loss. That party is completely free to act as he judges to be in his best interest. But the Defendant is not liable for all loss suffered by the Plaintiff as a consequence of his so acting. A Defendant is only liable for such part of the Plaintiff’s loss as is properly to be regarded and caused by the Defendants’ breach of duty. The Court of Appeal noted that this duty only is to act reasonably to mitigate the loss. It does not require that party to chance their arm further, to risk any capital they might borrow or take steps which would cause their financial ruin if it failed.

At the trial, the Respondents clearly identified, which was accepted, that there would be a need to borrow “a large sum of money” and there would be a risk of failure to recommence the business successfully.

The primary Judge found there was no failure to mitigate by the Respondents including the Company bearing in mind:-

  • A considerable sum of money would have to be borrowed and expended to start the business.
  • A delay of approximately two years before any new income would be obtained.
  • There was a risk the recommenced business might fail.
  • It would take time to re-establish a suitable team of employees.
  • There may be difficulty in re-establishing relationship with buyers.
  • There were doubts about the First Respondent’s female partner’s capacity to resume her former role in the business.

The cumulative effect of the above was held by the Primary Court and the Court of Appeal that the Second Respondent Company acted reasonable in the circumstances.

The windfall of the sale of the land

Because the Second Respondent was not the owner of the land and had no interest in the proceeds of the sale the monies, the First Respondents benefit from the sale of the land was not to be set off against the loss that the Company sustained.

The determination

The Court of Appeal did make one adjustment to the determination of loss attributable to the Second Respondent Company. The Forensic Accountant had included wrongly a loss of income from sugar cane of some $541,772.00. That loss of earnings had nothing to do with the destruction of the tomato packing shed and equipment.

Conclusion

The Court of Appeal has clearly confirmed the question of causal connection existing between the particular breach of duty and a particular loss or damage is one of fact. That is resolved on probabilities as a matter of commonsense and experience.

The causal connection can be complicated by intervention of some act or decision by the Plaintiff or third party which may constitute a more immediate cause of the loss or damage.

Whether the intrusion of that act or decision has an effect of breaking the chain of causation which would otherwise exist between the breach of duty and particular loss and damage is a question, again a matter of commonsense and experience.

Again, the Court of Appeal has identified on the issue of mitigation that a Plaintiff is not under any obligation to do anything other than what is required in the ordinary course of business. They are not required to sacrifice or risk any of their property or rights.

The small victory obtained by the Appellant would pale insignificance to the interest costs that have been incurred as well as the indemnity costs that were paid for the eleven day hearing.