BSM Marketing Ltd & Anor v Take Ltd

This is a defendant’s appeal on quantum of damages from a decision dated 30 October 2007 of His Honour Judge Toulmin CMG, QC, sitting as a Judge of the High Court. By that decision the claimant obtained judgment for £144,871.54 inclusive of interest. The judge had on 12 April 2006 found the defendant liable in damages for breach of fiduciary duty to the claimant and for breach of its duty not to misuse confidential information obtained during the period for which it acted as an agent for the claimant.

The claimant is a company which specialises in the importation, wholesaling and design of high and medium quality furniture, especially (though not exclusively) beds. It imports furniture from China and south east Asia and then supplies it to various retailers in this country. The judge had found that, as a result of the defendant’s breaches of duty, an existing customer of the claimant, Dreams, placed no order with the claimant from 30 June 2005. There was also a finding of liability in respect of a prospective customer, Argos, and part of the award of damages related to that.

On the face of it, it seemed that permission to appeal had been refused in respect of the damages awarded for potential loss of business from Argos, so limiting this appeal to issues arising in respect of the loss of business from Dreams. However, the appellant contends that one of the grounds for which permission to appeal has been granted does also contain an argument about the award to Argos. In fact, as I shall explain in due course, that particular argument has no merit, whether in respect of Dreams or of Argos, and so to all intents and purposes this appeal can be dealt with on the basis of the business lost from Dreams.

The legal basis on which the assessment of damages should be made was not in issue below, namely as the loss of a chance of further orders. That required not merely an assessment of the chance but also an assessment of the profit which the claimant would have made, had the chance materialised. In the case of the prospective orders from Dreams, this exercise was made up of two elements: first, loss of profits in respect of the existing range of products, and secondly, loss of profits in respect of a range of new products. It is necessary to deal with the issue under each of those two headings.

The judge noted that Dreams had been a longstanding and valuable customer of the claimant and that he had found in his judgment on liability that the volume of sales by the claimant to Dreams had remained at a constant level during the last few months before orders stopped as a result of the defendant’s breaches of duty. In his judgment on quantum, he found that there was a substantial chance that Dreams would have continued to purchase existing products from the claimant, a chance which he put at 80% for a 12 month period. There is no appeal against that figure. He also found that during that time a monthly average of 957 units would have been purchased by Dreams from the existing range. That too is not in issue in this appeal.

What is in issue, in respect of the existing range of products, is the gross profit percentage which would have been realised. The judge decided to take a figure of 20.68%. It is necessary to set out his reasoning on this aspect, and I do so in full.

“75.

It seems to me that Dreams may well have succeeded in reducing significantly the price which it paid and on which the profit margin of 37% contended for by Také is based.

76.

On the other hand, the prices would not have been reduced to the level to provide the profit margin of 5% to 10% contended for by Mr Morley, or the 15% which he was asking for to cover the commissions for himself and Mr Low.

77.

On the other hand, in my view, Dreams would have succeeded in reducing the profit margin well below the 37% contended for by Také.

78.

I prefer to take the more conservative figure of 20.68%.

79.

It so happens that this is the profit rate, taking the price of the Highgrove bed at the Defendants’ price rather than the price contended for by the Claimants, which would have produced an overall profit of 30.17%.

80.

On this issue Mr Sadaghiani says that the price in the one price list which I have seen was an exceptional one-off price, because Také had to pay for the mould cast of the product in the first container from Malaysia.

81.

It should not be taken that I disbelieve Mr Sadaghiani because, for other reasons, I take the lower monthly gross profit. I reach the figure because I am concerned to take a conservative view of the profit margin.”

The reference to the Highgrove bed is to one of the fourteen existing products shown in a schedule produced by the claimant’s expert witness, Ms Moira Hindson, an accountant, as sales to Dreams. As the judgment indicates, there was a dispute between the parties as to the price paid by the claimant to its overseas supplier for Highgrove beds. I shall return to this aspect in a moment. Mr Sadaghiani was the claimant’s managing director.

The defendant attacks the judge’s approach to gross profit margin. It is submitted by Mr Comiskey for the defendant that, since the judge was seeking to use the historic profit margin as a guide to future profit margins, he needed to do two things:

The crude average profit margin, taking no account of how many items at a particular profit margin were sold as compared to how many at a different margin, was the 37% figure. If one allowed for the differences in sales as between the various items, each of which produced a different profit margin, then one got a figure of 30.17%. That was what one might call the weighted average for historic profit margins.

Pausing there, both the 37% and the 30.17% figures assume a cost price for the Highgrove bed of £28.28, as shown in the accountant’s Appendix 3. If one takes, however, the cost price for the Highgrove bed as the price shown in a purchase order put before the judge, a cost of US $62.60 plus shipping costs, then the weighted average comes down to 20.68%. The arithmetic leading to those figures is not in dispute.

Although at one stage it seemed to be submitted to us on behalf of the defendant that the judge had made no clear finding as to the historic profit margin on sales to Dreams, Mr Comiskey ultimately accepted and indeed asserted that the judge had made a finding that the historic profit margin was 30.17%. If so, it follows that he was using a weighted average rather than the crude average, and in my view that was in principle the proper approach to the historic profit margin.

But that finding is criticised on the basis that it involved accepting the claimant’s figure for the purchase cost of the Highgrove bed. If the judge had taken the defendant’s figure for that bed and hence used 20.68% as the historic profit margin, a further reduction would, it is said, be necessary to allow for the factor noted by the judge at paragraph 75 of his judgment, namely the prospect of Dreams successfully reducing the prices which it paid in future. On that basis, Mr Comiskey contends that the 20.68% should be reduced by about one-third.

This clearly turns on whether the judge was entitled to accept the claimant’s evidence about the cost of the Highgrove bed. He seems to have done so. The defendant argues that there was no evidential basis for the claimant’s figure, whereas the defendant’s figure of $62.60 derives from the only purchase order exhibited. However, that latter figure is correctly described in the accountant’s Appendix 3 as implying that the Highgrove bed was then sold to Dreams at a loss. That is not disputed, in that it would imply a cost (allowing for shipping charges) to the claimant of around £47, whereas the claimant was selling this type of bed to Dreams at £39. The defendant now argues that this may have been a loss-leader to promote other sales, but this argument does not seem to have been advanced below and in any event the Highgrove bed was the biggest selling type of bed sold by the claimant to Dreams. It seems inherently unlikely that it would have been selling to Dreams at a loss.

So the judge was entitled to reject that figure favoured by the defendant for that bed. As paragraph 80 of the judgment records, Mr Sadaghiani gave an explanation for the $62.60 figure which appears in the purchase order, in essence that it contained an exceptional element. That would seem to make sense. Mr Comiskey argues that that purchase order, with a delivery date anticipated as 27 July 2005, cannot have related to the first container, because the first delivery of Highgrove beds took place on 2 June 2005. That may be, but the cost figure in that order cannot have been the “normal” cost figure for the reasons I have already indicated. The defendant accepts that Mr Sadaghiani gave oral evidence that the cost figure used in the accountant’s Appendix 3 for the Highgrove bed was correct, and the judge regarded him, both at the liability hearing and at the quantum hearing, as “doing his best to give truthful evidence”. That contrasted with the judge’s view of Mr Morley, the defendant’s sole director. In that situation, it was open to the judge to accept Mr Sadaghiani’s evidence about the cost of the Highgrove bed. It follows that he was entitled to find that the historic profit margin overall was 30.17%.

I can see that the reduction then applied by the judge to allow for Dreams succeeding in reducing future price levels, a reduction to 20.68%, has a strange appearance of precision. No-one could have quarrelled with a figure for future profit margins of 20%, given a starting point of 30.17% for historic margins. But we have seen an agreed schedule put before the judge setting out various calculations, one of those being based on 20.68%. It seems to me that he found it helpful to adopt that figure to reflect the scale of reduction he had in mind, because the arithmetical calculations were then available. Given that the scale of reduction was bound to be estimated, there cannot be any valid ground of appeal based on the use of 20.68% as opposed to 20%.

I would therefore reject the defendant’s case in respect of the loss from sales of existing products to Dreams.

The defendant’s first point under this heading is the same one about profit margins as has been raised in respect of existing products. It has no separate force, and I would reject it for the same reasons as I have given for rejecting it in that earlier context.

The other argument advanced in this connection concerns not so much the percentage profit but the price to which the percentage would be applied. In the case of Dreams, that represented the profit expressed as a percentage of the price at which the units were sold to Dreams. Evidence of those selling prices in respect of these new products was put before the judge. Thus the calculation of lost profit could be made, once the volume of likely sales was estimated. But the defendant complains that the allegedly agreed prices which the claimant was going to have to pay its suppliers was not put before the judge. Mr Sadaghiani apparently said in evidence that he kept those in his head. Mr Comiskey argues that that is inconceivable.

I do not accept this submission. It really goes to Mr Sadaghiani’s credibility. But the judge regarded him as a reliable witness, having heard him give evidence and be cross-examined, and as Mr Comiskey accepts, the defendant has in effect to show that that finding was perverse, at least on this issue. That is a very high hurdle to surmount and I cannot see that the defendant has managed to do so. A similar point is made by the defendant in respect of Argos, this being the only aspect of the Argos award that arises on this appeal. I would reject it in that context for the same reasons.

Finally, there is an issue raised as ground 3 in the appeal, concerning the likely volume of sales by the claimant of these new products to Dreams. On this aspect the judge said this at paragraph 88 of his judgment:

“As far as the volume of orders is concerned, I accept the figure of 850 units per month, as set out in appendix (iv) of the expert’s report.”

That is a reference to the accountant’s report. The figure of 850 units per month is indeed set out there, but she makes it clear that that is a figure supplied to her by the claimant, not one which she is in any position to justify.

Mr Comiskey points out that such a volume of sales represents a very large increase over the sales of existing products to Dreams, which were running at about 236 per month. It is submitted that there was no evidence, or no sufficient evidence, to support the figure of 850 units, and that in one of his witness statements Mr Sadaghiani had expressed the view that there was no reason to believe that the level of business with Dreams would have altered. On the other hand, the defendant accepts that Mr Sadaghiani gave oral evidence at the hearing that he believed that his company would have achieved the level of sales to Dreams of these new products shown in the accountant’s Appendix (iv).

For the claimant, Mr Sinai emphasises that the judge had already found earlier in his judgment that there had been a strong trading relationship between the claimant and Dreams, that there was a substantial chance that the claimant would have received orders for new products and that these would not have been only in replacement of orders for older products. No material was put forward by the defendant to support any lower figure than that supplied to the accountant as an estimate.

With some hesitation, I have concluded that the judge was entitled to accept this estimate, supported as it was by the claimant’s managing director, Mr Sadaghiani. It is an estimate which has to be seen in the context of the judge’s assessment of the chance of the claimant having sold these new products to Dreams, had it not been for the defendant’s breaches of duty. The judge expressly took a cautious figure for the chance of new orders, putting it at only 25%, as compared to 80% in respect of orders for existing products. One suspects that that figure of 25% was relatively low because the judge was prepared to take the claimant’s relatively high figure for the volume of such sales. In any event, he had no other estimate put before him. I therefore would reject this ground of appeal.

For these reasons, I for my part would dismiss this appeal.

I agree.

I agree and add words of my own because of the forceful submissions of Mr Comiskey, for the defendant, in relation to the learned judge’s reasoning. Keene LJ has set out that reasoning, in relation to existing products, in paragraph 6 of his judgment. I would commend counsel on the care and attention to detail they have shown in this case.

This is an appeal in which neither party seeks a re-trial. If we do not uphold the judge’s award of damages, we are requested by the parties to make our own assessment on the basis of the judge’s findings of fact, in so far as they may be upheld.

It is common ground that it was the weighted average, as defined by Keene LJ at paragraph 9, which was appropriate for assessing historic profit margins. That was agreed at 30.17% and the judge adopted, when awarding damages, a figure of 20.68%, that is a deduction of about one-third. Mr Comiskey submits that, on the evidence, the deduction of one-third should be applied to a starting point of 20.68%, giving a figure of about 13.5%. The judge had been supplied with a table showing agreed figures at various rates, 37%, 30.17%, 20.68% and 7.5%, that is, the figure for which the defendant contended.

Mr Comiskey submits:

I accept submissions (a) and (b). I reject submission (c), for the reasons given by Keene LJ at paragraphs 13 and 14 of his judgment.

With respect, I have had difficulty in following the learned judge’s reasoning in paragraphs 75 to 82. I am, however, prepared to hold that what he intended to do was to accept Mr Sadaghiani’s evidence, which gave a starting point of 30.17% but to take a conservative view of the profit margin by deducting about one-third from it. To reduce it to 20.68% was not appropriate because that figure is the starting point, prior to deductions, for a calculation based on a disbelief of Mr Sadaghiani. I am prepared to accept that what the judge had in mind, however, was a deduction from 30.17% to about 20%. I would uphold the judge’s award under this head on that basis, the difference between 20% and 20.68% being, in context, de minimis.

As to new products, I agree with Keene LJ on both points raised. The judge had to predict what sales of new products would be achieved by the claimant. He based his calculation on a figure of 212½ units, taking a potential market of 850 units (paragraph 88) and a chance of new orders of 25% (paragraph 87). The figure is a high one on the basis of existing sales but, on the evidence, the judge was entitled to reach it.