IN THE FEDERAL COURT OF AUSTRALIA)
)
NEW SOUTH WALES DISTRICT REGISTRY) No. NG419 of 1994
)
GENERAL DIVISION )
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: WOODCO PTY LIMITED
Appellant
AND: HOLLYBANK PTY LIMITED
MARGARET ANNE HOCHBERGER
STEPHEN ROBERT HOCHBERGER
Respondents
HOLLYBANK PTY LIMITED
MARGARET ANNE HOCHBERGER
STEPHEN ROBERT HOCHBERGER
Cross Appellants
WOODCO PTY LIMITED
Cross Respondent
COURT: LOCKHART, LEE and WHITLAM JJ.
DATE: 7 FEBRUARY 1995
PLACE: SYDNEY
MINUTE OF ORDER
THE COURT ORDERS THAT:
1. Order 1 made by Davies J. on 22 June 1994 be varied so that it reads as follows:
"1. The first applicant (Hollybank) be entitled to be paid damages by the respondent (Woodco) in the sum of $350,000 plus interest in the sum of $193,689.39 making a total of $543,689.39."
- 2 -
2. Order 2 of Davies J. be set aside.
3. Order 3 of Davies J. be confirmed.
4. Order 4 of Davies J. be confirmed but substituting the sum of $398,457.10 for $232,074.21.
5. Order 5 of Davies J. be confirmed.
6. Otherwise the appeal and cross-appeal be dismissed.
7. Woodco pay to the respondents two-thirds of their costs of the appeal and cross-appeal.
NOTE: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
CATCHWORDS
TRADE PRACTICES - whether misleading and deceptive conduct in the course of the sale of a leasehold business - whether statement of amount of wages was a misrepresentation - whether there was reliance upon the representation as to wages when same were submitted for analysis by consultants upon whose analysis reliance was placed.
TRADE PRACTICES - DAMAGES - assessment of damages - calculation of damages - whether trial Judge erred in his assessment of damages.
Trade Practices Act 1974, ss. 52, 82, 87.
Income Tax Assessment Act 1936, Part VI.
WOODCO PTY LIMITED v HOLLYBANK PTY LIMITED, MARGARET ANNE HOCHBERGER, STEPHEN ROBERT HOCHBERGER
NG419 of 1994
LOCKHART, LEE and WHITLAM JJ.
7 FEBRUARY 1995
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA)
)
NEW SOUTH WALES DISTRICT REGISTRY) No. NG419 of 1994
)
GENERAL DIVISION )
ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA
BETWEEN: WOODCO PTY LIMITED
Appellant
AND: HOLLYBANK PTY LIMITED
MARGARET ANNE HOCHBERGER
STEPHEN ROBERT HOCHBERGER
Respondents
HOLLYBANK PTY LIMITED
MARGARET ANNE HOCHBERGER
STEPHEN ROBERT HOCHBERGER
Cross Appellants
WOODCO PTY LIMITED
Cross Respondent
COURT: LOCKHART, LEE and WHITLAM JJ.
DATE: 7 FEBRUARY 1995
REASONS FOR JUDGMENT
THE COURT:
Introduction
This is an appeal from the judgment of a judge of the Court (Davies J.) ordering the appellant, Woodco Pty Limited (Woodco), to pay damages to the first respondent, Hollybank Pty Limited (Hollybank), in the sum of $250,000 plus $127,306.50 interest, a total of $377,306.50. Davies J. also ordered that the lease dated 17 August 1990 between Hollybank (as lessee) and Woodco (as lessor) (the lease) be varied
pursuant to s. 87 of the Trade Practices Act 1974 (the Act) by deleting clause 32 thereof. Clause 32 obliged Hollybank to pay Woodco an "additional" rental of $2,423 per week, payable in advance, and payable in years 6, 7, 8, 9 and 10 of the lease in addition to the rental for which clause 22 made provision of $2,423 per week payable in advance. His Honour allowed the cross-claim of Woodco in so far as it claimed rent, electricity charges and land tax in the sum of $135,087.67 plus interest in the sum of $10,144.63, a total of $145,232.29, but otherwise dismissed the cross-claim. His Honour ordered that the obligations of Woodco to pay damages and of Hollybank to pay rent be subject to set-off, resulting in judgment being entered for Hollybank in the sum of $232,074.21. Davies J. ordered Woodco to pay to Hollybank and to Margaret Anne Hochberger and Steven Robert Hochberger (the second and third respondents) their costs of the proceeding. Hollybank was trustee for trusts representing the interests of Mr and Mrs Hochberger and of a Mr and Mrs Leech.
Woodco appealed from the whole of the judgment of Davies J. Hollybank and Mr and Mrs Hochberger cross-appealed from part of his Honour's judgment, being the assessment of damages.
There are three issues in the
appeal: first, whether Woodco engaged in misleading and deceptive conduct
contrary to s. 52 of the Act concerning both the sale of the business of
the Clock Hotel and bottle shop in Crown Street, Surry Hills, Sydney to
Hollybank, and the lease of the premises of the hotel and bottle shop to
Hollybank; secondly, whether Hollybank was induced to purchase the business and
to become lessee of the premises of the Clock Hotel as a result of the
misleading and deceptive conduct by Woodco; and thirdly, whether his Honour
erred in his assessment of damages.
Facts and Findings of the Trial Judge
The facts may be briefly stated; and our recitation of them is taken primarily from Davies J.'s reasons for judgment.
Woodco is one of a group of companies controlled and directed by Mr E A Jury. It is the owner and lessor of the hotel premises and was the vendor of the business. Hollybank is a company used for the purchase of the business. It was a trustee of trusts representing the interests of Mr and Mrs Hochberger and of their friends, Mr and Mrs L W Leech. In early 1991 Mr and Mrs Hochberger took over the interests of Mr and Mrs Leech who were dissatisfied with the transaction.
On about 27 May 1990 the business of the hotel was advertised for sale by R E Bussell Hotel Brokers Pty Limited. The advertisement stated that the takings were $55,000 per week and the price $750,000. Mr Bussell and his company were the brokers for Woodco and authorized by it to offer the hotel for sale.
Mrs Hochberger spoke to Mr Bussell on several occasions during June and July 1990 and viewed the hotel from time to time, though not at night. It was not until after possession had been taken that Mrs Hochberger realized there was a great difference between the day and the night operations of the hotel.
In early June 1990 Mr and Mrs Hochberger and Mr and Mrs Leech inspected the hotel and spoke to Mr Bussell who was informed of their need to obtain finance. On 27 June 1990 Mrs Hochberger and Mr and Mrs Leech attended the premises by arrangement. Also present were Mr Bussell, Mr Jury, Mr Bruce Shaw of Bruce A Shaw & Associates (a valuer) and Mr Brian Digby (the Manager of the Australia and New Zealand Banking Group Ltd (the ANZ Bank) at Bondi Junction). The attendance of Mr Shaw and of Mr Digby had been arranged by Mr Bussell. During the conversation it was orally represented that the gross takings of the hotel and bottle shop were in the order of $52,000 per week. A document on the letterhead of the hotel setting out expenses incurred in running the hotel and bottle shop was handed over for the assistance of the prospective purchasers. The document which is known as "the letterhead list" reads as follows:
"Council Rates $ 8,012.40 Hotel
5,108.06 Drive in
Water 18,588.50 Hotel
11,607.50 Drive in
Land Tax Good PA
Electricity 20,000.00 Hotel
Gas 5,000.00
Wages 220,252.00
Insurances 5,536.20 Hotel
1,427.60 Drive In
License Fee 151,094.00 Liquor
Postage 504.00 P.A.
Petty Cash 860.00 P.A.
Stock Taker 2,400.00 P.A.
Sky Channel 9,000.00 P.A.
Glasses 5,000.00 P.A.
Telephone 912.00 P.A.
Cleaning Materials 2,400.00 P.A.
473,702.26
+ D.P. Tax 9,109.65
1,000.00
10,109.65"
Figures which gave details of the takings from the various facilities at the hotel on a weekly basis from 26 June 1989 to 25 June 1990 were also handed over. It was Mr Bussell who handed Mrs Hochberger the letterhead list. Copies were made of the document for Mr and Mrs Leech as well as Mrs Hochberger. Other documents representing takings from the business were also provided to Mrs Hochberger at the same time.
Messrs George Warren, Crosby & Sinclair were accountants who were engaged by Mr and Mrs Hochberger and Mr and Mrs Leech to undertake a cashflow analysis and to advise on the purchase of the business. Mr Bryan Johnson of that firm was acting as a consultant in relation to the proposed purchase.
On 29 June 1990 a deed entitled "Heads of Agreement" was executed. The parties to it were Woodco of the one part and Mr and Mrs Hochberger and Mr and Mrs Leech of the other part. By their execution of the Heads of Agreement, Woodco, Mr and Mrs Hochberger and Mr and Mrs Leech committed themselves to proceed with the purchase. It was a condition of the agreement that it was subject to suitable finance being arranged through the ANZ Bank at its Bondi Junction branch within 30 days. The Heads of Agreement also provided for the payment of a deposit of $50,000 to Mr Bussell's company to be held as stakeholder pending completion (clause 2.1); for the grant of a lease of the premises for a term of ten years, rental being $8,000 per week payable weekly in advance with increases at 6% per year (clause 3.1); and for an agreement to be made whereby Woodco would sell to Hollybank the furniture and plant for the premium calculated in accordance with clause 3.2. The purchase price was expressed to be for the furniture and plant and to be constituted by $550,000 payable on the commencement date of the lease and a further sum of $630,000 payable as "premium rental" over the last five years of the lease by weekly payments of $2,423 each.
A formal lease incorporating these terms was executed on 17 August 1990. Hollybank replaced Mr and Mrs Hochberger and Mr and Mrs Leech as the lessee and purchaser. Mr and Mrs Hochberger and Mr and Mrs Leech guaranteed its obligations. Possession was taken on 17 September 1990.
The original of the letterhead list was given to Mr Shaw for the purposes of the valuation which he was to undertake. His valuation dated 5 July 1990 annexed a copy of that document. The valuation was made available to Mr Johnson who prepared a cashflow analysis. The valuation, and presumably also Mr Johnson's cashflow analysis, were sent to Mr Digby, the bank manager. His Honour found that the letterhead list had an influence on the formation of the opinions of Mr and Mrs Hochberger and of Mr and Mrs Leech that the hotel should be purchased, also on the views formed and actions taken by Mr Shaw, Mr Johnson and Mr Digby.
Davies J. found that it followed (at 7):
"from the execution of the Heads of Agreement that, by 29 June 1990, Mr and Mrs Hochberger and Mr and Mrs Leech had been persuaded that the purchase of the hotel would be a profitable one and that the price which they agreed to pay was a reasonable one. However, the provision as to finance provided a safeguard. If Mr Shaw had not been satisfied as to the value, or if Mr Johnson had not been satisfied as to profitability and cash flow, then Mr Digby, the bank manager, would have been unlikely to provide finance, and the transaction would not have proceeded."
Mr Shaw prepared a report on the income, operating costs and expenses of the hotel and bottle shop and on the value of the leasehold business. He adopted $52,367 for weekly takings, a figure identical to that set out in the summary of takings which was handed over on 27 June 1990. Mr Shaw's report and valuation states that:
"From the books and records of the hotel I extracted details of takings for the 52 weeks."
His Honour found it was probable that the details of takings handed out at the meeting on 27 June 1990 were "written out" by Mr Shaw prior to that meeting.
In his report and valuation, Mr Shaw listed certain operating costs and expenses totalling $1,045,660. Mr Shaw assessed the net operating profit of the business as $415,000 which he capitalized at 40% for ten years and arrived at a figure of $1,001,632 which he rounded off to $1,000,000, being his view of the fair market value of the proposed lease.
In preparing his projected cashflow budget Mr Johnson adopted the income listed in Mr Shaw's valuation with one immaterial exception. Mr Johnson used the expenses set out in the letterhead list together with details shown in Mr Shaw's valuation, but made certain adjustments of his own. In the result, Mr Johnson's figures arrived at a net operating profit similar to that assessed by Mr Shaw.
Davies J. found that Mr Shaw was engaged as an independent registered valuer to make a report and valuation on behalf of the purchasers who were seeking finance from the ANZ Bank at Bondi Junction. He rejected the view, advanced by the respondents, that in making the report and valuation, Mr Shaw was acting as agent or servant of Woodco. Mr Shaw made the report and valuation in his capacity as a registered valuer, understanding it to be required for the purposes of the provision of finance to the purchasers of the Clock Hotel. His Honour found that Mr and Mrs Hochberger and Mr and Mrs Leech had committed themselves to the transaction before Mr Shaw produced his report and valuation, and that his calculation of net operating profit and value had no effect save that it encouraged the provision of finance by the ANZ Bank.
His Honour found that the letterhead list had a substantial influence upon the transaction because, shortly after receiving and considering it in relation to the represented takings, Mr and Mrs Hochberger and Mr and Mrs Leech formed the view that the rental sought and the asking price for the business were reasonable.
A registered valuer, Mr J D Robertson, said in evidence that the rental of $8,000 per week may have been justified if the outgoings were as set out in the letterhead list, but it was too high having regard to the actual outgoings of the Clock Hotel and the usual outgoings of such a hotel.
His Honour found that it was in reliance upon the representations as to takings and outgoings made in June 1990 by Mr Bussell and officers of Woodco that Mr and Mrs Hochberger and Mr and Mrs Leech agreed to the transaction and executed the Heads of Agreement on 29 June 1990. He found that the handing over of the letterhead list on 27 June 1990 in the context of discussions as to takings, outgoings and profitability, constituted conduct on the part of Woodco that was misleading and deceptive and, conduct that caused loss to the respondents. He said that some items in the letterhead list, particularly wages, seemed to have misled both Mr Shaw and Mr Johnson. The letterhead list calculated wages at $220,252. Mr Shaw took into account labour costs of $242,000 and this figure was adopted by Mr Johnson. His Honour said that it was not known how Mr Shaw arrived at the figure, but it may be that he simply added approximately 10% to the figures set out in the letterhead list.
Davies J. said that the actual expenditure of Woodco on wages was not clear. A wages book kept by Woodco recorded only the sums paid to persons who were treated as full time or permanent employees. Some of the recipients of wages were members of the Jury family; but whether they were employees of the hotel business is, his Honour said, a matter of doubt.
His Honour found that Woodco did not comply with its obligations under Division 2 of Part VI of the Income Tax Assessment Act 1936 in that no deductions were made of payroll tax or group tax in respect of those employees who were regarded as temporary and worked part-time. The part-time employees were paid their wages in cash at an agreed rate, about $8 per hour. Apparently no records were kept of the amount paid. An accountant, Mr Swan, calculated that the cash wages paid may have amounted to $75,000 per year. If group tax were added, the figure would come to approximately $100,000. His Honour said that Mr Swan calculated the actual wages for the 1989/90 year at $263,000, but that to arrive at that figure he must have reduced the wages recorded in the group tax certificates to $188,000 to represent his view of the wages paid to persons actually employed in the hotel. His Honour said that, as Mr Swan had no personal knowledge of the operation of Woodco and of the hotel, he would not accept such a reduction. He said that Mr Swan then added $75,000 which he calculated as the cash wages paid, and that Mr Swan did not add any sum in respect of group tax on these cash wages.
Mr Brian Goodacre, a chartered accountant experienced in the hotel industry, gave evidence that, having regard to the takings of the hotel of $2m and to the breakup of takings as between bars and restaurants, an experienced valuer would have taken into account wages of $403,000. His Honour said his own impression was that the use of industry averages was, as Mr Goodacre said, a useful check on any figures supplied by a vendor of a hotel business, particularly when, as in the present case, the records of the hotel were inadequate. His Honour said that Mr Robertson also said that the valuer should take industry averages into account.
Davies J. found that, when Mrs Hochberger became involved in the running of the business, she insisted that proper wages records be kept and that payroll tax or group tax should be deducted from all wages. As a result, many of the part-time employees resigned, which had important consequences. First, Mr and Mrs Hochberger and Mr and Mrs Leech had to work much harder in the business than they wished. Secondly, such "replacement employees" as Hollybank could afford were paid at a higher rate of remuneration; thirdly, when the employees left, some of the patrons also left. The drop in takings together with the increase in wages, which by 1993 had reached approximately $480,000, led to financial problems for Hollybank. His Honour said that the figure of $220,252 in the letterhead list was communicated to Mr and Mrs Hochberger, to Mr and Mrs Leech, to Mr Shaw and to Mr Johnson. This figure or a figure close to it was taken into account in Mr Shaw's report and valuation and in Mr Johnson's cashflow report, and presumably was also taken into account by the bank manager. The discussion with Mr and Mrs Hochberger and Mr and Mrs Leech on 27 June 1990 concerned takings, expenses and profits. Mr and Mrs Hochberger and Mr and Mrs Leech must have been left with the impression that, with wages at a level of only $220,252, the profits would be substantial. His Honour found that they were influenced by what they were informed at the time. They agreed upon a price and signed the Heads of Agreement only two days later on 29 June.
Davies J. said he was satisfied that, had the respondents been informed that the wages for the hotel should be calculated at a realistic level rather than at $220,252, they would not have been prepared to enter into the transaction on the terms on which they did.
His Honour dealt with the respondents' claim that the relevant agreement be rescinded. He said that it was based principally on three circumstances alleged to have occurred. The first was an incident in respect of which Mr M C Simpson gave evidence. Mr Simpson had at one time done some work at the Clock Hotel. The evidence related to a conversation which Mr Simpson said he overheard between certain persons in which money was offered to two persons to physically harm Mrs Hochberger. His Honour found that, as the allegation was very serious, involving a criminal conspiracy to harm Mrs Hochberger, the standard of proof required was a high one and that in his opinion the allegation had not been proved to that standard. The next two events referred to by his Honour fell into the same category. His Honour held that the requisite standard of proof was not satisfied.
His Honour found the case was not one in which rescission was appropriate. He based his finding on the changes which Hollybank had made to the nature of the hotel business since it took it over and on his finding that Hollybank and Mr and Mrs Hochberger affirmed the lease in early 1991 when they took over the interests of Mr and Mrs Leech and persuaded Woodco and the ANZ Bank at Bondi to accept their guarantees in substitution for those of Mr and Mrs Leech.
As to damages, his Honour found that the starting point was the difference in value between that which the deceived purchaser paid or agreed to pay and the value of what was received. He referred to Gould v Vaggelas (1985) 157 CLR 215; Henjo Investments Pty Limited v Collins Marrickville Pty Limited (No 2) (1989) 40 FCR 76 and Wardley Australia Limited v State of Western Australia (1992) 175 CLR 514 at 530. He said that Hollybank agreed to purchase the business of the hotel and bottle shop for a price, made up of a deposit of $50,000, the payment of $550,000 on taking possession and $630,000 being the premium payable over the last five years of the lease. Mr Robertson attributed a value to the leasehold business as at 29 June 1990 of $200,000. No expert except Mr Robertson gave evidence on the point. In general, his Honour accepted his evidence. Mr Robertson calculated the net annual profits at $200,000 and valued the leasehold business at that figure, not the 2½ times adopted by Mr Shaw. Mr Robertson said that, even at that figure, the business would be difficult to sell. He said that the rent was too high. He considered $5,000 per week to be appropriate, whereas the rental agreed was $8,000 per week. Mr Robertson said that a rent such as that would be appropriate to a hotel with a turnover of $130,000 per week. His Honour adopted Mr Robertson's approach, but said that his valuation appeared to be conservative. His Honour adopted the sum of $300,000 as the value of the leasehold business as at September 1990. In the circumstances he said that the premium should be struck from the lease by an order under s. 87 of the Act.
Davies J. said that Woodco should pay to Hollybank $300,000 by way of damages plus interest calculated in accordance with Schedule J to the Rules of the Supreme Court of New South Wales. He arrived at that figure by deducting from $600,000 (the sum paid by Hollybank to Woodco on or before taking possession) the sum of $300,000 (His Honour's assessment of the value of the business).
His Honour directed the parties to bring in short minutes. He later heard further argument on the question of damages and accepted that the amount paid by Hollybank to Woodco was not $600,000 but $550,000 and therefore reduced the amount to be repaid by Woodco from $300,000 to $250,000, plus interest. He found that the orders sufficiently compensated the respondents for the conduct which breached s. 52 of the Act and that no further sum should be added for consequential or incidental loss. It would not, he said, be appropriate to adjust the rent. Mr Robertson considered the rent to be too high having regard, inter alia, to the turnover of the hotel. But his Honour said the turnover was not misrepresented. Neither Mr Shaw nor Mr Johnson queried it. Hollybank and Mr and Mrs Hochberger agreed to the rent, knowing the turnover.
His Honour held that the cross-claim should be allowed in so far as it claimed rent plus interest calculated in accordance with his reasons for judgment, but he dismissed the cross-claim for possession. He found that the obligations of Woodco to pay damages and of Hollybank to pay rent would be subject to set off, to the extent to which they were equal. As the respondents had substantially succeeded they should have the costs of the proceeding. His Honour then made the orders mentioned earlier.
Submissions on the Appeal and Findings
Woodco appealed from the whole of Davies J.'s judgment. The respondents filed their notice of cross appeal against the assessment of damages of his Honour on the ground that he erred in adopting the sum of $300,000 as the value of the leasehold business of the Clock Hotel as at September 1990 and thereby increased the value attributed to the lease by Mr Robertson, his Honour having earlier accepted his evidence.
During the hearing of the appeal counsel for the respondents sought to file an amended notice of cross appeal raising certain additional matters to those raised in the notice of cross appeal relating to the assessment of damages by his Honour. They sought to reverse certain of his Honour's findings including his finding that rescission was not an appropriate remedy. The respondents also sought to propound a claim against Woodco for additional damages. The application to amend was opposed by Woodco. We refused leave to amend for the reasons which we then gave and need not repeat.
As mentioned earlier, three principal matters were argued on the hearing of the appeal and cross appeal: first, whether there was misleading or deceptive conduct by the appellant; secondly, if there was, whether reliance was placed upon it by the respondents; and thirdly, whether his Honour correctly assessed damages.
The first two matters can be disposed of briefly. The question of substance in the appeal relates to damages.
We turn to the first question whether, based on his Honour's findings, there was any relevant misleading or deceptive conduct within the meaning of s. 52 of the Act.
Counsel for Woodco argued that the only representation found by the learned primary Judge to be misleading or deceptive was the item of "Wages $220,252" in the letterhead list, and that this was the only basis upon which his Honour based his orders against Woodco. But, so it was argued, his Honour made no finding that the letterhead list did not accurately state the actual expenditure for wages. This was sufficient, it was said, to disturb his Honour's finding of misleading or deceptive conduct.
Further, it was submitted that his Honour erred because he held that an experienced valuer would have taken into account a greater figure in respect of wages, namely, that which reflected the industry averages. It was said that his Honour appears to have concluded that the respondents were misled because they were not informed that industry average wages were higher than those stated in the letterhead list. But the representation did not purport to be any more than a statement of the actual wages incurred; there was no case propounded by the respondents based on a representation of what was the industry average or what was a realistic level of wages. The fact that the amount of wages stated to be actually incurred was less than the industry average did not suggest that the statement of what was incurred was false; nor did the primary Judge suggest that to be so, because such a difference was explicable by reference to the role of the family as employees, that is, members of Mr Jury's family who worked for less wages than other persons would have who were not members of the family. This sufficiently summarizes the submissions.
It is true that his Honour did not find in express terms that the statement of "Wages $220,252" in the letterhead list did not accurately state the actual expenditure for wages. But it is plain from reading his Honour's reasons for judgment as a whole that this was his Honour's view, a view which underpinned his finding that Woodco engaged in misleading or deceptive conduct in that the statement of wages in the letterhead list was substantially below what the real figure for wages must have been. His Honour said in essence that the statement of $220,252 for wages was wrong. This is the only reasonable construction that can be placed upon his Honour's findings, and there is a substantial body of evidence to support the finding. It was conceded by Woodco that the amount of $220,252 related to wages paid to a number of employees of Woodco, only some of whom were involved in the actual running of the Clock Hotel, whilst others were involved in entirely unrelated activities. It was also conceded by Woodco that there were other employees involved in the running of the hotel and bottle shop who were not shown in the records of the hotel business as receiving wages and giving rise to the total of $220,252. There is persuasive evidence that the figure of $220,252 was unrelated to the actual or proper expenditure involved in running the hotel and bottle shop, notwithstanding that members of the Jury family were employed in that activity.
His Honour's statement as to the industry averages and evidence of Mr Goodacre is as his Honour said:
"a useful check on any figures supplied by a vendor of an hotel business, particularly when, as in this case, the records of the hotel were inadequate".
Davies J. plainly relied on this evidence, in the absence of adequate wage records of the hotel business itself, to confirm his view that the figure of $220,252 was more likely than not inaccurate because the evidence of industry averages demonstrated that the figure mentioned in the letterhead list was not a true and accurate statement of the likely or probable cost of wages. This attack on his Honour's judgment fails.
The second argument advanced by counsel for Woodco was that,
even if the representation as to wages constituted misleading or deceptive
conduct for the purposes of s. 52 of the Act, it was not a representation that
was relied upon by the respondents. It
was submitted that the respondents at all times intended that the figures in
the letterhead list would be analyzed by their consultant, Mr Bryan
Johnson. This
analysis was carried out and it was on the basis of the cashflows and advice of
Mr Johnson that the respondents bought the lease. Mr Johnson's work was in turn based on the
valuation of Mr Shaw. Mr Shaw recorded
in his report that he took the details of costs and expenses, including wages,
"from the records of trading at the hotel", subject to an adjustment
for inflation. It was argued that this
did not suggest any reliance having been placed by Mr Shaw on the letterhead
list; and Mr Shaw (who was found by his Honour to have been engaged on behalf
of the respondents) was not called to say otherwise. Though the respondents signed the Heads of
Agreement before obtaining the advice of Mr Shaw and Mr Johnson, they did not
intend to proceed with the purchase unless the advice of Mr Johnson at least
was positive. They protected their
position by having inserted in the Heads of Agreement a provision making their
commitment subject to approval of finance.
They realized that this would require the submission to their bank of a
valuation to be prepared by Mr Shaw. It
was submitted that in these circumstances the respondents did not rely upon any
of the representations.
It is true that the respondents intended that the figures in the letterhead list, including the figure for wages, would be examined by their consultant Mr Johnson. It is true also that Mr Johnson's calculations were based on the figures contained in the valuation of Mr Shaw, who in turn took the details of costs and expenses, including wages, "from the records of trading of the hotel" (subject to an adjustment for inflation). Mr Shaw, in his report and valuation of the leasehold interest in the Clock Hotel, set out what he perceived to be the operating costs and expenses of the hotel and bottle shop business, including a figure for "Labour Costs" of $242,000. He attached to his report a list of outgoings of the hotel for 12 months which included the letterhead list showing wages of $220,252. The difference between the two figures appears, plainly enough, to have been Mr Shaw's adjustment for inflation by 10%. Thus, both Mr Shaw and Mr Johnson (whose work was based on Mr Shaw's valuation) approached the question of operating costs, including wages, on the basis of the accuracy of the letterhead list. In any case, Mr and Mrs Hochberger and Mr and Mrs Leech signed the Heads of Agreement before obtaining the advice of Mr Shaw or Mr Johnson. The respondents relied upon the accuracy of the figures presented to them in the letterhead list, and they were entitled to do so. They proceeded with the purchase only after receiving an assurance from Mr Johnson that the net profit cashflow would make the business a viable one. They relied on the representation made to them with respect to the wages being the figure as set out in the letterhead list. Woodco fails in this argument.
We turn to the question, which raises the only substantial point on the appeal, namely, whether his Honour erred in his assessment of damages.
We have already referred to the approach which Davies J. took in assessing damages, so shall not repeat it.
Section 82 of the Act is silent as to how damages are to be calculated. It has been held by the High Court that the tortious measure of damages will be appropriate in most, if not all cases, involving misleading or deceptive conduct: Gates v City Mutual Life Assurance Society Limited (1986) 160 CLR 1; see also Wardley. However, the High Court has not held that other measures of damages may not be appropriate in an appropriate case: see Elna Australia Pty Limited v International Computers Pty Limited (Australia) (1987) 75 ALR 271; and Report of the Australian Law Reform Commission on "Compliance with the Trade Practices Act 1974" (Report No 68) 1994, p 68 where the Commission recommended that the Act be amended to provide that, in assessing damages under s. 82, a court shall not be restrained by common law principles. See also D Price "Opening Gates: The Measure of Damages Under the Trade Practices Act" (1994) 1 CCLJ 257 and the paper by Professor David Harland on "The Impact of the Statutory Prohibition of Misleading or Deceptive Conduct on the Law of Contract" 1994 at 19-21 (presented at the University of Sydney 18 August and 26 September 1994). Whatever may be said as to whether the adoption of the measure of damages based on tort is or is not appropriate in all cases of claims for damages pursuant to s. 87 of the Act, this is not the case in which the question should be decided, because in our view the tortious measure of damages plainly is the correct approach to be adopted in this case, and was the approach adopted by the primary Judge.
Counsel for Woodco based his attack upon the primary Judge's calculation of damages principally upon the fact that he ordered (Order 2) that the lease dated 17 August 1990 between Hollybank and Woodco be varied pursuant to s. 87 of the Act by deleting clause 32 thereof. By clause 32 Hollybank is obliged to pay Woodco "an additional rental" payable in years 6, 7, 8, 9 and 10 (the last 5 years of the lease) by way of a further payment of $2,423 per week, payable in advance. It is agreed by the parties that the premium was an amount of $630,000 to be paid by weekly payments made over the last five years of the lease and that the value as at June 1990 of this amount payable in the future was $243,623.
Counsel for Woodco submitted that his Honour overlooked the fact that the valuation of Mr Robertson assumed that the terms of the lease were as stated in the formal lease document itself, that is, as including the premium of $630,000, an issue specifically addressed in Mr Robertson's oral evidence. He argued that Mr Robertson made it clear that his valuation of the leasehold business, as equivalent to one year's profits, namely, $200,000, was dictated by the presence in the lease of the premium provision. Mr Robertson said that if that premium provision had not been present, he would have valued the leasehold business at the equivalent of 2-2½ years of net operating profit. Taking the figure of $300,000 found by his Honour to be the correct approach (because of his Honour's finding that Mr Robertson's valuation of $200,000 was conservative), this is equivalent to the leasehold business having a value of $600,000-$750,000. Hence it was argued that his Honour erred in limiting the value of the business to one year's profits and at the same time deleting the premium. Consistently with Mr Robertson's evidence it was argued that his Honour should either have taken the value of the leasehold business at 2½ years' profits ($750,000) with the premium deleted or declined to delete the premium from the lease and adhered to one year's profits.
Counsel for the respondents disagreed with this criticism of his Honour's judgment. He argued that his Honour considered both matters (i.e. deleting the premium and limiting the value of the leasehold business to one year's profits) in the one paragraph of his judgment where he said (at 24):
"I adopt Mr Robertson's approach. However, Mr Robertson's valuation appears to be a conservative one. I would adopt the sum of $300,000 as the value of the lease as at September 1990. In the circumstances, I am of the view that the premium should be struck from the lease by an order under s. 87 of the TPA. The sum paid on or before possession was $600,000. I would order, by way of an award of damages, that the respondent pay to Hollybank $300,000 plus interest calculated, in accordance with usual practice, by reference to Schedule J to the Rules of the Supreme Court of New South Wales."
It was submitted by counsel for the respondents that it was far from clear that Mr Robertson's valuation of the leasehold business as equivalent to one year's profits was dictated by the presence in the lease of the premium provision. In reaching his conclusion as to the basis of valuation Mr Robertson said of the fair market value of $200,000:
"Even at this figure it is our opinion that a sale would be extremely difficult to achieve because of the additional premium inherent in the lease."
In giving evidence as to his approach to valuation if the premium provision had not been there, Mr Robertson had suggested "a range of, say, two to two-and-a-half", that is to say, taking his valuation of $200,000, the equivalent to a value of the leasehold business of $400,000.
As mentioned earlier, subsequent to publication of his Honour's reasons for judgment he accepted that the amount paid by Hollybank was in fact $550,000, not $600,000, and that the amount to be repaid by Woodco consistently with his Honour's reasons for judgment should be, not $300,000, but $250,000. The difference of $50,000 arose because of some confusion in the evidence over the payment of a deposit of $50,000 to Mr Bussell, the hotel broker. Mr Bussell was given a cheque for $50,000 by Mrs Hochberger as a deposit. He was asked not to present the cheque without further instructions. He was later told by Mrs Hochberger that Westpac, the drawer's (Mr Hochberger's) bank would not honour the cheque. It seems clear that he did not present the cheque for payment, so that the $50,000 was not in fact paid to Mr Bussell, nor was it paid to Woodco. It is not in dispute that, assuming his Honour's assessment of the value of the leasehold business as $300,000 rather than $200,000 was correct, the true figure which would form the base for damages of the respondents should be $250,000.
In our opinion, counsel for Woodco is correct in his argument that Mr Robertson's valuation of the leasehold business assumed that the terms of the lease included the obligation (clause 32) to pay a premium of $630,000; and that when he valued the leasehold business as equivalent to one year's profit, he did so on the assumption that the obligation to pay the premium remained in the lease. Mr Robertson said that, if the premium provision had not been there, he would have valued the leasehold business assessed with reference to 2 to 2½ years of net operating profit. In our opinion, this emerges plainly from the evidence, and this point does not appear to have been drawn to his Honour's attention.
The question remains as to what is the proper course to take in these circumstances. Alternative courses have been suggested by counsel for the parties. Counsel for Woodco argued that the Court should accept that the value of the leasehold business as at September 1990 should be calculated on the basis of 2½ times his Honour's figure of $300,000 giving a total of $750,000; and that from this should be deducted the amount paid by Hollybank of $550,000 with the result that the value of the leasehold business exceeded the amount paid, so that the award of damages should be set aside and the order deleting the premium confirmed. In the result, by reason of the set-off ordered by his Honour, there would be judgment not for the respondents, but for Woodco, in the sum of $145,000 (as there would be no obligation to pay interest on the part of the respondents).
The alternative course suggested by counsel for Woodco was to adopt, as the value of the leasehold business, the $300,000 figure which appealed to his Honour, but retain clause 32 relating to premium. As the amount paid by Hollybank was $550,000, there remains $250,000 (plus interest) after deducting the $300,000. In the result, Order 2 made by his Honour would be set aside, but the other orders would remain.
Counsel for the respondents preferred the course of retaining clause 32 in the lease and therefore setting aside his Honour's order deleting it. Adopting as the value of the leasehold business the sum of $200,000, being the more conservative figure preferred by Mr Robertson and deducting that sum from $550,000 (being the amount paid by Hollybank), there would be judgment for the respondents in the sum of $350,000 (plus interest).
The alternative course suggested by counsel for the respondents was to take the value of the leasehold business as being twice the sum of $200,000 (on the basis that the premium clause is removed from the lease), a total of $400,000, which, if deducted from $550,000, would leave $150,000 as the appropriate figure for which judgment should be entered (plus interest).
The assessment of damages must be approached on the basis that the amount paid by Hollybank to Woodco was $550,000 not $600,000. We must confess to having difficulty with interfering with Mr Robertson's calculation of the net annual profits of the leasehold business as being $200,000. His Honour adopted Mr Robertson's approach; but said that his valuation appeared to be a conservative one, and then substituted $300,000 for $200,000. Having examined the evidence, in particular Mr Robertson's evidence, we are persuaded that Mr Robertson's figure of $200,000 should stand and that the evidence does not support the figure of $300,000. In concluding that Mr Robertson's valuation was conservative, his Honour appears to have treated the premium payable in the last five years of the lease (cl. 32) as a deferred payment of part of the purchase price and to have regarded it as inappropriate to take that deferred obligation into account in valuing the worth of the business. His Honour did not suggest that he had any difficulty in accepting the method Mr Robertson adopted for calculating the net profit of the business, namely, by including a number of outgoings that had been omitted from the letterhead list.
As we have said, in this matter the appropriate assessment of the loss recoverable under s. 82 of the Act is the amount by which the price paid for the leasehold business exceeded the worth of the business at the time of purchase. That assessment must have regard to any depreciatory effect on value caused by the content of the terms of the lease. In effect Robertson valued the business as at September 1990 as the sum of the current worth of the premium payable under the lease, ($243,000) and the prospective annual net profit of the business, ($200,000). That valuation, incidentally, was the equivalent to 2-2½ times the net profit, a multiplier which, according to the evidence, was used in the industry as a guide for the valuation of such businesses. The higher value for the business applied by his Honour was intended to reflect the effect of the order his Honour proposed to make that the lessee's obligation to pay the premium be removed from the lease. However, there was no evidence before his Honour of what the value of the business would have been if the lessee's obligation to pay the premium had been struck from the lease and the course taken by his Honour introduced a possibility that Hollybank would be over-compensated.
We are of the view that Mr Robertson's valuation of the leasehold business of $200,000, which had regard to the effect on value of the lessee's obligation to pay the premium, provided the proper foundation on which to calculate the base figure for the respondent's damages being the difference between that value and the amount paid by Hollybank, namely, $350,000. If the loss suffered is calculated in that manner no further order is required to vary the terms of the lease.
The orders made by Davies J. were as follows:
"1. The first applicant ('Hollybank') be entitled to be paid damages by the respondent ('Woodco') in the sum of $250,000 plus interest in the sum of $127,306.50, making a total of $377,306.50.
2. The lease dated 17 August 1990 between Hollybank and Woodco ('the Lease') be varied pursuant to section 87 of the Trade Practices Act, 1974 by deleting clause 32 thereof.
3. The cross claim be allowed in so far as it claims rent, electricity charges and land tax in the sum of $135,087.66, plus interest in the sum of $10,144.63, making a total of $145,232.29 but otherwise the cross claim be dismissed.
4. The obligations of Woodco to pay damages and of Hollybank to pay rent will be subject to set-off, resulting in judgment being entered for the first applicant in the sum of $232,074.21.
5. Woodco pay to Hollybank, the second applicant and the third applicant their costs of the proceedings."
In our opinion the orders made by his Honour must be varied to reflect the proper measure of the loss to be recovered. Hollybank is entitled to be paid damages by Woodco in the sum of $350,000 plus interest, the interest to be calculated as determined by his Honour, namely, "calculated in accordance with usual practice, by reference to Schedule J to the Rules of the Supreme Court of New South Wales". This approach of Davies J. was explained by him in his earlier judgment in Namol Pty Ltd v A W Baulderstone Pty Ltd (1993) 119 ALR 187 at 188 in these terms:
"Interest should be added in accordance with s. 51A of the Federal Court of Australia Act 1976 (Cth). It is the usual practice of the court when sitting in New South Wales to adopt the rates set out in Sch J to the rules of the Supreme Court of New South Wales. This is because those rates reflect commercial rates of interest, which is not the case for the rates prescribed in O 35, r 8 of the Federal Court Rules. The practice has the policy advantage of ensuring that damages are awarded on the same basis whether a matter be instituted in this court or in the Supreme Court of New South Wales."
No challenge was made in argument to this approach to calculation of interest by his Honour, so we too shall apply it. Order 1 which we propose below adopts this approach.
Interest has been calculated for the period from the day on which the cause of action arose until the day of judgment (excluding the day on which the cause of action arose: see e.g. Re Serafino; ex parte Classic Manufacturing Pty Ltd (1989) 86 ALR 283) and includes a consideration of the fact that 1992 was a leap year (a complicated procedure, whereby the leap year period for the purposes of the calculation begins on the anniversary date on which the cause of action arose: see e.g. discussion in Re Clubb; ex parte Clubb v Westpac Banking Corporation (1990) 93 ALR 123 per Burchett J.).
His Honour's order no. 2 deleting clause 32 should be set aside. Order 3 made by his Honour relating to the cross-claim should remain; as should order 4, subject to varying the amount for which judgment will be entered for Hollybank following set-off. The order for costs (no. 5) made by his Honour should remain undisturbed.
We would therefore make the following orders:-
1. Order 1 made by Davies J. on 22 June 1994 be varied so that it reads as follows:
"1. The first applicant (Hollybank) be entitled to be paid damages by the respondent (Woodco) in the sum of $350,000 plus interest in the sum of $193,689.39 making a total of $543,689.39."
2. Order 2 of Davies J. be set aside.
3. Order 3 of Davies J. be confirmed.
4. Order 4 of Davies J. be confirmed but substituting the sum of $398,457.10 for $232,074.21.
5. Order 5 of Davies J. be confirmed.
6. Otherwise the appeal and cross-appeal be dismissed.
7. Woodco pay to the respondents two-thirds of their costs of the appeal and cross-appeal.
I certify that this and the preceding thirty-three (33) pages are a true copy of the reasons for judgment herein of the Court.
Associate
Dated: 7 February 1995
Counsel for the Appellants : Mr R Macfarlan QC
Mr W Hodgekiss
Solicitors for the Appellants :Whitfields
Counsel for the Respondents : Mr N F Francey
Mr D Garnsey
Solicitors for the Respondents: Minter Ellison Morris Fletcher
Date of Hearing : 29, 30 September 1994
Date of Judgment : 7 February 1995
