Globe Motors Inc & Ors v TRW Lucas Varity Electric Steering Ltd& Anor

This judgment deals with the limited exercise required by paragraph 465 of the main judgment (“the Judgment”) (Footnote: ¹) handed down on 11 November 2014:

“465: Having regard to these considerations, the impressions gained from looking at the various ways the claim is put forward, and all the matters mentioned in this section of the judgment and bearing in mind that the exercise is full of imponderables I am inclined to see the best measure of Globe's loss as being Pinto B subject to any adjustments and a significant discount to take account of the uncertainties and contingencies. It would not be fair to either party for me simply to take the figures as they stand and to apply a fairly random discount. The parties need to be able to explain their cases on Pinto B more coherently and to make submissions on the application of this proposed approach. I have already mentioned the unsatisfactory way in which this aspect emerged at the trial.”

With my agreement the parties have filed written submissions and Globe has also put in a submission in reply. There has been no further evidence or application to admit it. I have been greatly assisted by a day of oral submissions. References below in bold are to paragraphs in the Judgment. This damages judgment must be read with the Judgment as, for the most part, I will not repeat what I have already said.

I remain of the view that Pinto B is the least unsatisfactory route to measure the damage suffered by Globe as a result of TRW’s breach of contract. Before turning to how that route is taken there are some preliminary matters to resolve.

TRW’s further written submissions challenge the fairness of the approach which Globe took to quantum towards the end of the trial:

“The Defendant takes a fundamental objection to the Claimants being allowed to change their case in the way that they are attempting to do: in the course of closing submissions, without the new case having been foreshadowed in an amended Statement of Case, or in the witness evidence and without a fair opportunity to consider it and explore it in cross- examination with the Claimants’ witnesses. This objection was taken in the course of closing argument.”

TRW says that this leads to unfairness in the following ways:

Globe rejects these arguments. It points out that assessment of damages is a hypothetical counter-factual exercise. I add that the Pinto B approach is not invalidated simply because it is not how the exercise would have been carried out had the contract been complied with. It is more reliable than the competing methods and is the one chosen by TRW’s own expert.

Globe says that, having decided these matters, this Court is now functus officio and so precluded from entertaining further argument on them. I disagree as I consider that the wording of the judgment left me free to revisit the issue if I thought, in the light of the further matters I wished to have dealt with, that allegations of unfairness were on reflection well founded.

Globe points out that TRW raised these objections on the last day of trial, (albeit having only received the final claim the night before). TRW then elected to proceed, having been given the opportunity by the Court to take another course if it preferred such as to address Globe’s case at a later time in writing or to take some other approach. Globe points to this exchange:

“So what he is saying is not we are not ambushing, not we haven't held this back, what he is saying is effectively implicitly, yes, we did, but this is the sort of game that is being played in this case and I deny.Anyway, let's look at the material and see where it gets them.

JUDGE MACKIE: I don't underestimate the strength of feeling between people at the end of a long case but my main concern is, not how it came about, but to ensure that to the extent to which you haven't had an opportunity to deal with it, you get that opportunity.

MR DOWNES: I will show ‐‐

JUDGE MACKIE: Are you able to deal with it, or do you want to deal with it in writing or what?

MR DOWNES: I am going to deal with it. I am going to say to your Lordship that it doesn't amount to a row of beans, particularly if one takes account of the way in which this has come in.”

Mr Downes points out correctly that this passage in the transcript has to be seen in the context of other passages but in substance it records the position. I accept to a degree Mr Downes’ point that it is no answer to suggest, as Mr Lowenstein does, that he had a chance to cross examine witnesses on the relevant material and did so. He could not do so effectively without knowing how the damages claim would later be formulated. However one reason for not seeking an adjournment or for not seeking to recall witnesses might have been an assessment that this was not going to advance TRW’s case given the provenance of the Pinto B approach and the lack of utility in cross examining further about matters of detail arising many years ago when the witnesses would be unlikely to have useful or reliable live recollection. There can be few points in this area of the case which, after more than thirty days of evidence, could not be as well made on the documents.

The issues and details had been debated over a very long space of time and in truth each party knew exactly what the other was claiming and was able to deal with it. The trial was very long and there was a considerable break in the middle. Given the unsatisfactory situation set out in the Judgment to which both sides had contributed, I saw nothing unfair in the way the issue turned out. Furthermore there was no application, following the Judgment, for further evidence to be heard.

Although I reject the claim that there has been any relevant unfairness to TRW, the result of the tactical manoeuvring by both sides was that Pinto B did not receive the same evidential scrutiny which it would have attracted if pursued by Globe from the outset. While the component parts of Pinto B were often the subject of cross examination the claim was never examined head on. That necessarily adds to the caution I should apply when assessing damages on the Pinto B basis put forward by Globe late and without assistance from any expert, other than limited written validation of the underlying method by Mr Fisher. That caution will be reflected in the discount discussed below.

In their written submissions both sides have taken the opportunity to debate at greater length than they did in their closing trial submissions matters I have already taken into account in reaching the conclusions in the Judgment. In the interests of proportionality I will not try to summarise and decide the very detailed points now being made.

I remind the parties of the evidential difficulties and realities of a very old and very detailed case like this which I mentioned at the outset of the Judgment. As the parties have been regularly warned since the start of this case, there is necessarily imprecision and the making of broad assumptions in the damages exercise which must make the end result approximate. That is one of the many reasons this case should have settled long ago.

Assessing the amount of the damages involves considering price, volumes of Products sold and cost – see 424. Globe has gathered together its alternative claims and the figures they produce in Appendix Q.

The volumes are all TRW's DEAS Gen 2 purchases since June 2005 - see 425. TRW puts this at 3,036,843 motors over 10 years and Globe agrees.

The costs are those put forward by Mr Pinto in evidence which at 426 I said that I accepted “broadly”. Mr Downes says that this evidence was not unchallenged at trial in respects which his submission sets out. The objections to the evidence about costs, not part of general points addressed elsewhere, were claims that Mr Pinto had failed to take account of efficiency savings, that there were inexplicable differences in tooling and other aspects to the calculations, that he may have included in his costs calculations impermissible raw material cost movements, that he was heavily reliant on other people for his conclusions and that his assumption that he would make a profit assumed incorrectly that he could recover magnet cost increases. Mr Pinto himself suggested that the cost base might have to be further reduced if the selling price agreed had in fact been at the DEAS level. My acceptance being ‘broad’ means that I have borne these considerations in mind as part of recognising that the cost calculation is necessarily approximate and that the overall damages figure needs to be cautious to reflect this. The starting point is the estimate of costs at €83m.

TRW now questions the observation at 351 that while TRW points out that the rationale for the Gen 2 was to produce a motor which was cheaper than the Gen 1, Emerson did not produce a cheaper motor either but it still went ahead. TRW concedes that the matter was little, if at all, explored at the trial (although it was regularly referred to) and then challenges the finding with material not relied on at the trial. I decline to address that material. To the extent that the material was available at the trial it forms part of my decision in the Judgment. To the extent that it does not and the material is new it is irrelevant.

This is of course the issue on which assessment of damages turns. In addition to its general challenge TRW raises objections to particular aspects of Pinto B.

TRW argues that the equivalent exercise to Pinto using the Keegan Gen 1 and Gen 2 BOMs results in reductions in the sale price in various respects. Mr Downes says that the Judgment contains no analysis or rejection of the equivalent methodology using the Keegan Gen 1 and Gen 2 BOMs. The equivalent Keegan exercise was not crucial at trial because Mr Pinto’s approach in Pinto A was so obviously flawed. Now however there are two competing approaches to a recalculation of the Gen 2 BOM: Pinto B and the equivalent exercise based on the Keegan BOMs. They give rise to very different results.

TRW contends that the correct approach is to assess the price by reference to “the putative bargain that would have been struck between TLVES and Globe in the period 2002-2005” and says that requires comparison between available Gen 1 and Gen 2 BOMS produced by Mr Keegan. TRW further contends that it was not able to explore this point adequately at trial.

Globe disagrees. First it says that the Judgment sets out that Pinto B is the correct basis for quantification. Secondly it says that it is not clear how ascertaining a “putative bargain” entered into at some unspecified point in the three year period between 2002 and 2005 is either an application of Article 4 or possible in circumstances where TRW identifies no communications giving rise to such bargain between 2002 and 2005. Globe says that the Court has decided on the Pinto B methodology having taken into account TRW’s submissions as to the wisdom of relying on Keegan BOMs. The result is that the Pinto approach – adopting the Fisher framework – has been held to the approach to be adopted. Globe then repeats difficulties previously identified with the Keegan BOMs .

On this issue I reached a view in the Judgment as to the way to proceed subject to the qualifications I have mentioned above. There is no purpose in revisiting this dispute. Both approaches have flaws but as I see it Pinto B is the best of the guides put forward.

TRW says that the Pinto B methodology takes the 2003 Porto Gen 1 BOM as the basis for assessing the increase in price attributable to engineering changes under Article 4 of the Agreement. But this assumes that the 2003 Porto Gen 1 BOM is a fair base cost for assessing an adjustment based on hypothetical engineering changes. For this assumption to be sound it is vital that the Gen 1 and Gen 2 BOMs are prepared on precisely the same basis. Thus any cost movements may create a disparity between the Gen 1 BOM and the Gen 2 BOM which would in turn corrupt the process.

Globe responds that Mr Pinto was cross examined about the BOM and insisted that it was a comprehensive record of actual costs for the 4^th quarter of 2003. Mr Pinto said that the Gen 1 Porto BOM was a “comprehensive BOM” and that “[T]his is exactly the BOM as is set up in our ERP system. Yes, like I told you … it is where we can see what was the actual BOM cost for the Nissan motor in the fourth quarter of 2003.”Figures for 2005 have been added only for additional components not available in 2003. Mr Pinto accepted in evidence that he had not carried out a costing based on the Gen 1 Porto BOM. But Globe says that is irrelevant because Pinto B simply uses the method that Mr Pinto and Mr Fisher had both adopted and follows through the arithmetic exercise using the comparison that TRW itself suggested.

I remain of the view that Globe’s approach has limitations but is the fairest approach available.

TRW says that an analysis of the documents behind the BOM shows that they are anything but clear:

TRW objects that the Court is to make findings as to price adjustments based on these documents that were referred to by Mr Pinto but not for the purposes for which they are now relied upon. Had the Pinto B methodology been relied on at the trial, these ambiguities could have been explored in the course of cross-examination.

Globe responds that the underlying documents were in the trial bundle and Mr Pinto identified the 2003 Gen 1 Porto BOM in cross-examination. Had there been any concerns about ambiguities such as those now being raised, they should have been explored with Mr Pinto in cross-examination when TRW was focusing on relevant ways to cost engineering changes and he referred them to the 2003 Gen 1 Porto BOM. Globe says that there is nothing in the points about alleged ambiguities. The Gen 1 Porto BOM that Mr Pinto vouched for in his evidence reflects the standardised cost for components as at November 2003. That is what would have been used in practice at the time. The TRW comparison wrongly uses component costs over a wide range of periods between 2002-2013, does not use equivalent quantities (i.e. in places uses the cost of purchasing 1kg or 1000 units as opposed to the material cost of a component for a Gen 1 motor) and uses the wrong US$ exchange rates.

TRW also points out that Globe has used a different BOM as the basis for the calculation of the selling price (the 2003 Gen 1 BOM) from that used to calculate the costs associated with the selling price (a 2005 Gen 1 BOM). The result is that certain components have been included at one price in the calculation of the selling price, but at a different price when it comes to a calculation of the cost. In both situations it would be the same component that Globe was buying and then selling to TRW. TRW gives figures for the differences. TRW thus objects that Globe blends costs for components from 2003 and 2005 in a manner that does not take into account the possibility of fluctuations between the two years and is thus inconsistent and unreliable.

Globe responds that costing by reference to the actual and hypothetical BOMs from Porto represents the best evidence available to the Court where the Court is obliged to assess damages in a hypothetical situation, years after the event, and where TRW failed to provide the relevant Gen 2 specifications prior to this action. Globe says that in order to calculate the incremental cost used to determine the price of the hypothetical Globe Gen 2 motor, it has, where possible, used the actual 2003 costs incurred for the Globe Gen 1. All the components common to both the Gen 1 and hypothetical Gen 2 motor are costed by reference to actual 2003 Gen 1 component costs. Where a Gen 1 component was modified for the hypothetical Gen 2 motor, the cost of that modified component was estimated by reference to actual 2003 Gen 1 costs for the underlying component. Where a new component was required for the hypothetical Globe Gen 2 motor costs were estimated by reference to invoices for equivalent components for the B2E motor as at 2005. The incremental costs from 2003 calculated in this way are then added to the Gen 1 motor price as at 2005. That is because the production of the Globe Gen 2 motor would have begun in 2005, by which date a price would have had to be finalised further to the Agreement. The alternative would be to add the incremental cost to the Gen 1 motor price which was being charged at some point in 2003 – but Globe says that that is inappropriate because a date in 2003 would not be consonant with the production date.

When one looks at the detail both sides have a point but overall the Globe approach is a sound one when one bears in mind that its inevitable deficiencies are reflected albeit broadly in the discount I shall apply. However much the detail is examined inconsistency and uncertainty is inevitable. The exercise is necessarily broad and approximate and not assisted by a search for ever more detail which as I see it would give a spurious corroboration to what has to be a broad exercise. On this sort of exercise there is no “correct” answer. I warned both sides about this from the start and their lawyers will no doubt have warned them too.

TRW points out that Mr Fisher is an accountant and neither an engineer nor a witness of fact. His evidence was served in response to the Claimants’ original case (based at that stage on the evidence of Mr Keegan) to show that it was wrong. TRW say that “It is now apparent that Mr Fisher’s methodology was seriously flawed” and “could never have formed a reliable basis for assessing the Claimants’ losses”. Globe responds that TRW instructed Mr Fisher to assess Mr Pinto’s methodology and relied upon aspects of his report to cross-examine Mr Pinto before withdrawing Mr Fisher as an expert.

For the reasons given in the Judgment I found that Pinto B based on Mr Fisher’s model had fewer flaws than the other approaches to damages. I do not change that view.

There is a dispute as to whether the provision of $1.82 for amortisation included in the 2005 Gen 1 price should be part of the price for the Globe Gen 2 motor. This is primarily a question of construing the contract. Globe’s position is that $1.82 should properly be included, because that value is built into the price of each motor under the terms of the contract.

Globe says this. The Court has held in relation to trial Issue 7 that the changes Globe would have made to manufacture the Globe Gen 2 were “Engineering Changes” to the Globe Gen 1 motor 369-372. By Article 4.3, the Buyer is to reimburse the Supplier for all reasonable costs associated with each Engineering Change. The Globe Gen 2 motor price is determined by adding the incremental costs of the Gen 2 motor to the existing Gen 1 motor price. The existing Gen 1 motor price was set out in Appendix D to the Agreement and it included amortisation – see in particular the Nissan P1 motor price which reads “includes amortisation @ $1.82”. Therefore, when pricing the change, the principled and reasoned approach should be to start from the point which pertained as a matter of fact: this is to include the $1.82 amortisation figure and then to add on the incremental costs for the Gen 2 motor. There is no contractual basis under Article 4.3 for leaving out the $1.82 per motor which was expressly built in to the Gen 1 unit price.

TRW responds that the amortisation uplift of $1.82 in the Gen 1 price was specifically allocated to allow for the recovery by Globe of its capital and tooling costs associated with the Gen 1 motor (see Article 2.6 of the Agreement). This is clear from the pre-contractual price communications and the way in which the price was set out in Appendix D of the Agreement. For example the 3% productivity saving was not applied to the amortisation element. Indeed amortisation was treated as a disbursement in much the same way as the cost of the leadframe. TRW cites a series of emails sent between January and May 2001 to submit that it is clear that the price for the Gen 1 had two distinct components: (i) a price for the motor itself; and (ii) a separate element to allow Globe to recoup its costs of capital and tooling.

TRW points out that Globe did not incur any capital and tooling costs for the Gen 2 motor. It was never built. It would therefore be perverse to allow Globe to recover an amortisation element of the price for capital and tooling costs that were never incurred. It is trite that damages are to place the Claimant in the position it would have been, had the contract been performed. Had the contract been performed in this case Globe would have received orders for the Globe Gen 2 motor, and would have incurred additional capital and tooling costs. The Court must further have regard to the fact that TRW paid Globe a sum to compensate it for a shortfall in orders, in the sum of US$6,803,529 in respect of Globe’s under recovery of capital and tooling though its sales of Gen 1 motors under the Agreement. Had Globe been provided with orders for 3,036,843 additional Gen 2 motors, all including amortisation at US$1.82 per motor, then this sum would have been reduced by US$5,527,054.26 (ie 3,036,843 x US$1.82).

The converse of this is that if Globe is to recover an amortisation element on the lost volumes at $1.82 per motor for capital and tooling costs it did not incur, it gives rise to a windfall for Globe of around US$5.5m.

Globe responds that on the basic principles of construction cited in the Judgment, the analysis cannot be affected by reference to expressions of intent or otherwise derived from other pre- or post-contractual documents. In his oral closing submissions Mr Lowenstein pointed out that the flaw in TRW’s construction is that if amortisation drops out as a matter of construction then a tiny engineering change would, absurdly, have the same effect.

I agree with Mr Lowenstein on the disputed approach to construction of 4.3. But it needs to be remembered that Article 4 awards Globe “all reasonable costs” in a context where the parties are obliged to “negotiate in good faith”. In practice of course Gen 2 would not have been a minor engineering change but a major one involving considerable negotiation. Whatever happened in those negotiations they would not have led to Globe recovering amortisation twice. That exercise would “in good faith” have resulted in no amortisation windfall. This is an assessment of damages designed to compensate Globe for what it lost. The process involves the “broad sweep”-see 416 and 417. That exercise cannot in justice leave out of account the payments for under recovery of costs which Globe received but which would not have been payable had TRW complied with its contractual obligations over the Gen 2. Mr Lowenstein’s written and oral submissions do not appear to deal with this point. It follows that while in principle the amortisation cost is within the price the damages will be adjusted to reflect the relevant proportion of the shortfall payments made by TRW to Globe.

Globe says that on the balance of probabilities there would have been agreement between the parties to vary the Gen 2 motor price to reflect the significant rise in rare earth magnet prices that happened in 2011. This is because when the price of magnets rose steeply in 2011 Renault made a large payment to TRW which was passed on to Emerson to ameliorate its position. The Court should assume (because there is no reason to believe otherwise) that had Globe been the motor supplier Renault would have made payments in 2011 to ameliorate the actual effect of the increase in magnet prices on them, and that TRW would have passed on that benefit to Globe.

At 443 I said:

“Globe would, under the Agreement, be landed with the consequences of the rise in earth magnet costs. TRW received relief from Renault presumably on the basis that this would be used to relieve DEAS. In the hypothesis I have to consider this may in practice have been repeated depending on whether a grudging TRW wanted to ensure that things went smoothly, for the sake of its duties to Renault, in its relationship with Globe or chose to stand on its rights and perhaps see this cost issue as a chance to renegotiate.”

Globe now invites the Court to hold in its assessment of “the broad sweep” that Renault would have made the same payment in respect of the rise in rare earth magnet price and that the value of that payment would have been passed on to Globe and fed into the prices of the Globe Gen 2 motors. The Court should be guided by what actually happened and may well have happened. Globe says that its position is in line with how the “minimum compliance” principle as set out at 416 works. Globe saysthatthe Court must take into account the fact that it would have been in TRW’s commercial interests to pass on a supplement from the money it would have received from Renault in relation to this uplift, as that is the only action that reflects the finding in the Judgment that “TRW was locked into Globe and had to keep Renault happy” - see350 and would, in those circumstances, have benefited both TRW and its supplier of motors, Globe so as to maintain a commercially harmonious relationship.

TRW says that it should be assumed that it would agree to pay no more than it was obliged to do under the Agreement (see Judgment at 350 and 427). Thus TRW would not have agreed to a selling price higher than the contract compelled. As Mr Downes put it in his oral closing submissions:

“It's very important that we understand that is not a case that is based on any negotiation that took place in 2003 or 2005, it's a case based on a subsequent hypothetical concession that TLVES would have given to Globe. It's not based on the contract, it is just simply based on keep the wheels moving. That case has not been pleaded at all. It is not in the pleadings. Nowhere in these pleadings does it say the price would have increased in 2011, 2012 because TLVES would have given such a concession. It is not pleaded. Secondly, that case was not put to any of my witnesses. It wasn't put to Mr Schmitz who would have been the obvious witness. …if your Lordship does entertain the argument, the rule of minimum compliance is a complete answer and your Lordship has already decided in our favour that we did not have to do any more than we were required to do under the contract.”

I accept that the rule of minimum compliance goes only as far as is identified by Patten LJ in BMI Baby cited at 416. The hypothetical position is that described at 438 to 443 of the Judgment. TRW did not have to agree to this increase under the contract. In the unusual circumstances of 2011 it obtained a rebate from Renault and appears to have passed most if not all of it on in a contractual and commercial context different from that of its relationship with Globe. What would it have done with Globe?My best and necessarily rough estimate of what would have happened in that stand off is that, on balance, after hard bargaining, TRW would have gone half way and accommodated Globe to the extent of half the rare earth magnet costs. The damages will be adjusted accordingly.

My reference at 465 to “significant discount to take account of the uncertainties and contingencies” should have been expressed better and has led the parties to a debate about loss of a chance. TRW say that this is loss of a chance territory and the discount is mandatory, Globe disagrees. I am sorry if my choice of words has caused confusion. I was seeking to explain that in the course of conducting the exercise I was following the approach of BMI Baby, see 416, and seeking to “reach a conclusion by reference to the broad sweep of evidence before it and taking all significant factors into account.” For the reasons I gave it seemed to me that the Pinto B approach would need to be discounted to have regard amongst other things to the imprecision and uncertainty I identified in the Judgment. That is not loss of a chance but my judgment that caution needs to be applied to superficially plausible figures. That imprecision also includes issues raised at the damages hearing such as the uncertainty inherent in the way the Pinto B came to be presented without as much scrutiny as it would otherwise have received, to the fact that some of the figures may well in the real world have proved optimistic and to the regular contingency in complex manufacturing contracts of something completely unexpected coming to pass. Further when carrying out the hypothetical exercise it has to be remembered that it is for Globe to prove its case not for TRW to disprove it. Moreover it was Globe’s choice to attempt to do that many years after the events in question.

This involves some of the factors which Mr Downes emphasises in his further oral and written submissions. He says that there are uncertainties in how the negotiations would have gone. They would have involved concessions from TRW for which a price would have been expected on inductance and perhaps other areas of the specifications which Globe could not meet. There was a risk that TRW might ultimately have decided that it was simply not worth supplying Renault any more. TRW might also have stuck with Gen 1. While in seeking damages Globe is seeking to make the price as high as possible there would in reality have been a concern by it to keep it low. Mr Downes says that there was general pressure on price. Mr Keegan had been keen to produce a BOM which came up with savings. Further there was a target price that the parties were keenly working towards of 21 euros for the Gen 2 type 1 and 25 euros for the type 2.

I repeat that I do not consider that it is useful to try to eliminate the uncertainties and imprecision in the assessment exercise by drilling down into the detail item by item to produce what as I see it would still be a spurious evaluation. That is particularly the case where the parties have chosen unusually, in Globe’s case from the outset, and in TRW’s during the trial, to conduct this exercise without expert evidence. Having regard to all the matters set out above and in the Judgment and in the further submissions of both sides it seems to me that the “broad sweep” is best reflected in a discount of twenty two and a half per cent (22.5%) from the Pinto B figures adjusted to reflect my conclusions about amortisation and rare earth magnet prices. That seems to me to be broadly where the parties would have ended up. There is no mystery in this figure - twenty per cent seemed to me too low and twenty five per cent too high. It may be said that some of the underlying figures are quite strong and reliable and should not be subject to a discount. Others however are potentially weak. Fairness requires an overall reduction.

The damages will therefore be as set out in Appendix Q but with only 50% of the material cost adjustments and with the amortisation adjustment reduced to take account of the payments received in 2006 and 2007. The resulting total will then be reduced by 22.5%. I therefore invite the parties to seek to agree the figures based on this assessment.

I shall be grateful if the parties will, not less than 72 hours before hand down of this judgment, submit suggested corrections of the usual kind and a draft order, both preferably agreed, and notes of any matters which they wish to raise at the next hearing.