ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

THE COURT ORDERS THAT:

1.                  The appeal by White Property Developments Ltd against Richmond Growth Pty Ltd be allowed in part.

2.                  The orders made by Madgwick J on 23 March 1998 be varied by substituting: 

(a)                in order 3 the figure “$1,010,000” for “$250,000”; and

(b)               in order 4 the figure “$340,466” for “$84,274”.

3.                  Otherwise the said appeal be dismissed.

4.                  All cross-appeals be dismissed.

5.                  White Property Developments Ltd pay to John Bernard O’Brien, Graham Allen Paull and Ken Bennett two-thirds of their costs of the appeal.

Note:   Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

ON APPEAL FROM A JUDGE OF THE FEDERAL COURT OF AUSTRALIA

EX TEMPORE REASONS FOR JUDGMENT

THE COURT:  We have had the benefit of comprehensive submissions from counsel concerning the issues raised by the appeal and four cross-appeals.  These issues have been discussed with counsel over the course of more than two days.  None involves any question of legal principle.  Having regard to the lengthy history of the case, we think it desirable to dispose of the matter immediately.

The appeal by White Property Developments Limited (“White”) raises three issues:

(i)                  the adequacy of the sum allowed by the trial judge in relation to project management fees;

(ii)                the adequacy of the damages assessed in respect of the breach by Richmond Growth Pty Ltd (“Richmond Growth”), the first respondent, of its contract to give White a right of first refusal  in relation to the property at Richmond; and

(iii)               the claim under s 52 of the Trade Practices Act 1974 by White against Richmond Growth  and (by virtue of s 75B of that Act), its directors, John Bernard O’Brien and Graham Allen Paull, the second and third respondents, and its agent, Ken Bennett, the fourth respondent.  The cross-appeals also raise the second issue and challenge the trial judge’s decision to deny the second, third and fourth respondents (to whom we refer collectively as the individual respondents) their costs of the hearing at first instance.

The section 52 claim

Over the course of the litigation, there has been some variation in White’s identification of  the allegedly misleading or deceptive conduct on the part of Richmond Growth and the individual respondents.  At one stage, it was suggested that the misleading conduct commenced before the making of the agreement for a right of first refusal on 22  November 1994; the proposition at that stage was that Richmond Growth never intended to accord to White the benefit of the right of first refusal but (through the individual respondents) led White to believe it did; and it was on the strength of that misrepresentation that White entered into the contract for a right of first refusal and agreed to act as project manager.  However, during the course of argument, counsel for White, Mr Burbidge QC, expressly abandoned that proposition.  He confined his s 52 case to a contention that, in about early February 1995, Richmond Growth, through the individual  respondents, changed its position regarding honouring the obligation to give a right of first refusal, but concealed that change of mind from White.  Mr Burbidge submitted that the individual respondents, having determined that they would cause Richmond Growth to breach its obligations under the agreement, granting White a right of first refusal, allowed White to proceed on the false assumption that Richmond Grove intended to honour its contractual commitment.

This formulation of the s 52 case has the advantage of consistency with the trial judge’s finding that, “initially, everyone acting on behalf of Richmond Growth understood that the granting of the first right of refusal would require some greater obligation on Richmond Growth’s behalf” than merely giving White an opportunity to make an offer along with other interested parties.  However, like his Honour, we think the claim untenable. 

The trial Judge specifically found that Richmond Growth made clear its change of position relating to the first refusal agreement immediately its position in fact changed.  The communication occurred on 27 February 1995, in a conversation between Messrs Bennett and O’Brien (from Richmond Growth) and Mr Jamieson (of White).

Mr Burbidge argued that his Honour’s finding of fact was wrong.  It should be inferred that the change of mind pre-dated 27 February 1995.  In support of this proposition, Mr Burbidge placed emphasis on the fact that, during January and early February, Richmond Growth engaged in negotiations with other prospective purchasers, notably Woolworths, the eventual purchaser.  There is no doubt this happened.  Richmond Growth’s representatives made a considerable effort to persuade other companies to become attracted to the project and keen to become the successful purchaser.  However, this course of action does not show an intention to deny White its right of first refusal.  It was no more than a commonsense business strategy for Richmond Growth to develop competition for the site.  It was in the interests of Richmond Growth to be able to show the highest possible price on the offer it presented to White, at the time of affording that company its right of first refusal.  Unless Richmond Growth obtained an offer from somebody else, it would have little option but to accept whatever offer White chose to make.  In short, careful examination of those dealings shows that they were not inconsistent with Richmond Growth and the individual respondents intending to adhere to the obligations imposed on the company by the agreement.

Mr Burbidge further relied on the absence of the individual respondents from the witness box.  He said the inference should be drawn, even if the objective material did not assist White’s case, that the respondents changed their mind well before 27 February 1995.  In our view, however, his Honour was not bound to come to the conclusion urged by Mr Burbidge.  The evidence was consistent with the individual respondents communicating their change of mind immediately it occurred and his Honour was entitled to come to that view.  The fact (as his Honour found) that the fourth respondent misled Mr Morcom on another matter on 10 March 1995 does not compel any contrary conclusion.

There are further difficulties with the appellant’s case.  It is by no means clear that representations as to future conduct as distinct from contractual promises were made prior to 27 February 1995.  Assuming they were made and assuming (contrary to the conclusions we have already reached) that they were false, there is no evidence that Richmond Growth changed its position in relation to the effect of the right of first refusal before 27 February 1995.  Mr Burbidge relied on certain brief evidence given by Mr Morcom, but this was directed to another issue. 

On 27 February 1995 Mr O’Brien and Mr Bennett met Mark Jamieson, then Financial Controller of White.  They showed him an offer of $8.8m from Consolidated Properties (Coles).  The offer was conditional on 30 days due diligence, as Mr Jamieson pointed out.  Mr Bennett agreed and told Mr Jamieson he should put in an offer by 2 March 1995.  This statement can be regarded as inconsistent with an obligation to give White a right of first refusal, although curiously Mr Jamieson did not take that point.  He said he could not speak for the directors but “may be able to give you an indication of the price we could proceed with”.  Three days later, on 2 March, Mr Jamieson gave Mr Bennett what he  called “an indicative offer” totalling $8.5m with a “success fee” of $100,000.  Later that same day, Mr O’Brien told Mr Jamieson that $8.6m was the minimum price Richmond Growth would accept.

On 3 March Mr O’Brien rejected Mr Jamieson’s offer of $8.5m and told him White’s “final offer” was required by 5pm that day.  He faxed a letter to that effect.  This letter sparked Mr Jamieson’s recollection of White’s right of first refusal; he responded that he did not believe the previous day’s discussion “constituted our first right of refusal”.  Mr O’Brien replied the same day with a letter in which he asserted that the rejected offer constituted White’s “first right of refusal”.

It is not necessary to detail the contacts that occurred over the ensuing week.  It is enough to say that, by 3 March at the latest, White was aware Richmond Growth took a position in relation to the right of first refusal different to that of White; White’s position was correct,  in the view of the trial judge.  As Mr Burbidge conceded, any misconception by White of Richmond Growth’s attitude to the right of first refusal ended by 3 March, at the latest.

If we are right in thinking there is no evidence of a changed position by Richmond Growth before 27 February, it is apparent any finding of misleading conduct must be limited to the period of one week from 27 February to 3 March.  But there is no evidence that any step was taken during that week that caused White to suffer damage.  Mr Burbidge argued that, if White had known earlier about Richmond Growth’s position on the right of first refusal, it would have competed actively for the property by putting forward an offer.  However, as we have seen, that is exactly what the company did during that week, through Mr Jamieson; apparently at a time when the full strength of his company’s position was not in the forefront of his mind.  But the offer was not sufficient to attract Richmond Growth.  That is not surprising.  Richmond Growth had refused an offer of $8.2m from Woolworths and been told on 2 March by that company’s agents “we are prepared to negotiate, on behalf of our client, a substantially better purchase offer than the one you currently have from  Consolidated Properties”; that is, substantially better than $8.8m.  Woolworths offered $9.1m on 4 March.  On 7 March this was increased to $9.55m.  On 8 March Richmond Growth informed White of that figure and invited it to submit its own final offer by 4pm the following day.  White did not do this, taking the view it was entitled to see the full terms of the Woolworths offer and have an opportunity to match it.  Ultimately, after obtaining legal advice on the point, Richmond Growth gave White a copy of Woolworths letter and provided it with an opportunity to match the offer.  White did not do so; it matched Woolworths price but stipulated this was in respect of a site that included a medical surgery Woolworths was prepared to omit.  There were other more minor variations.

In March Richmond Growth in substance accorded White the opportunity it was contractually obliged to give.  If the story had stopped at that point, there would have been no question of damages for breach of the contract to give a right of first refusal or  a fortiori misleading conduct in relation to that right.

The story did not stop there.  The contract ultimately made between Richmond Growth and Woolworths was on terms more favourable to Woolworths than those in the letter shown to White.  White was not told about this variation or given an opportunity to accept those more favourable terms.  It was for that reason that the trial judge held that Richmond Growth had breached its contract to give a right of first refusal and there is no challenge to that conclusion.  However, it is not suggested there was any misleading conduct (as distinct from breach of contract) at that later stage.  In our opinion the trial judge was correct in dismissing the s52 claim.

The quantum of damages for breach of contract

The notices of cross-appeal called into question the trial judge’s finding of breach of contract by Richmond Growth, in relation to the right of first refusal.  But these grounds were abandoned.  The remaining point is the quantum of the damages assessed by the trial judge.  White says the figure of $200,000 allowed by his Honour is manifestly inadequate and based on a misapprehension of the evidence, the respondents say it was wrong to allow more than a nominal sum.

The evidence on damages is unsatisfactory.  This was recognised by Mr Burbidge during the trial, when he sought an adjournment to enable him to supplement the evidence available to him.  This application was refused by the trial judge, for reasons he expressed, and that refusal is not challenged before us.

In the present case we are satisfied that the appellant has suffered loss as a consequence of the breach of contract.  It has lost the opportunity to acquire the property on the more favourable terms ultimately offered to Woolworths.  The trial judge found, on the balance of probabilities, that White would have exercised its right of first refusal to acquire the property.  The loss of this opportunity had commercial value.

The question for determination is the quantum of the loss sustained by White.  As the Full Federal Court pointed in Enzed Holdings Ltd v Wynthea Pty Limited (1984) 57 ALR 167 at 183, after referring to relevant authorities:

“The principle is clear.  If the Court finds damage has occurred it must do its best to quantify the loss even if a degree of speculation and guess work is involved….  We emphasise, however, that the principle applies only when the Court finds that loss or damage has occurred.”

This statement was approved and applied by Brennan J in Sellars v Adelaide Petroleum NL (1994) 179 CLR 332.

During the argument on the appeal there was a deal of confusion about the status of some of the material in the appeal books relating to damages.  It transpired that the tender of some of this material had been rejected at the trial.  Some material was admitted only as against some of the respondents.  We take the opportunity of saying it is a matter of cardinal importance that solicitors preparing appeal books ensure they contain only evidence that was admitted at trial.  If evidence was admitted only against some parties, this should be prominently indicated on the copies of the material reproduced in the appeal books.  Unless this is done, a Full Court may fall into the error of having regard to material that was rejected at the trial and whose admissibility has not been argued before the Full Court.

The trial judge felt he had no worthwhile evidence concerning the quantum of damage.  He said in his reasons:

“This case, in my opinion, is close to the borderline but I think that principle requires that I do my best to make some assessment.  In my opinion, one can make a judgment that White Property lost a significant chance to make some substantial profit.  That, however, imprecise it is, is nevertheless as precise as one can be.

I am conscious that such a finding is a vague one.  There was no evidence to establish an actual likely resale price.  As a real possibility, no profit might have been realised; I cannot say how great that possibility was.  When any profit might have been realised is problematic.  Whether any profit would actually have been large or small is unknown.  Nevertheless, the choice is between awarding a purely nominal amount which, despite the uncertainties and guesswork, I believe would certainly do an injustice to White Property, or making an assessment that can be little better than a stab in the dark and which might, because of that, do one of the parties an injustice.  In my view, the certainty of injustice should be avoided despite the great attendant difficulties in so doing.

In the circumstances, an assessment must be very much a subjective affair:  an award of $100,000 seems to me to be too little; anything over $500,000 seems too much.  Because of the uncertainty, conservatism seems prudent.  I think that an award of $200,000 is, but is all that is, warranted.”

We sympathise with this view.  However, having cut our way through the thicket of material in the appeal books, with some assistance from counsel, we think the situation was not quite as bleak as his Honour suggested.  The admitted evidence included the following:

(i)                  A feasibility study prepared by White in February 1995 estimating a development profit (on a development of 21,520 square metres) of $5,888,978.  This study assumed a land cost of $9.5m (very close to the actual cost) and a building construction cost (excluding consultants) of $26,713,000.

(ii)                A feasibility study of the Woolworths’ proposal prepared by consultants,dated 7 March 1995.  This study assumes a land price of $9.55m, construction costs of $21,255,550 and estimates a development profit of $4,125,000.

(iii)               Evidence from a property consultant, Mr Walker.  While most of his evidence was rejected, his evidence was that the appropriate capitalisation rate for the purpose of assessing the value of the development was 10.25 per cent to 10.5 per cent.

(iv)              A letter from Woolworths’ agents to Abrigroup Contractors Pty Limited, a company that was Woolworths’ principal contractor on the project, containing what was called “a Final Tender Assessment Schedule”.  This Schedule itemised construction costs totalling $22,260,547.  Although the situation is not totally clear, it seems likely that this was the price shown in the building contract. 

(v)                A brochure published by Woolworths offering the completed development for sale.  The brochure gives areas totalling 16,170 square metres (of which 10,503 square metres was leased to Woolworths under 20 year leases), a gross rent of $5,116,027 per annum and outgoings of $1,091,800.  The nett return  was stated to be $4,024,227.

(vi)              The documentary and oral evidence indicated there was fierce competition for Richmond Growth’s land.  At least three substantial companies (White, Woolworths and Coles) made offers to purchase the land for sums in the order of $8 to $9.5m.  It is a reasonable inference that experienced shopping centre developers would not have been ready to make offers of that magnitude without believing the land provided the opportunity to make a development profit that would be measured in several millions of dollars.  Indeed it is clear that White, after considering the matter, had formed and acted on that view.

We agree with counsel for the respondents that the evidence presented to the Court by White was incomplete and, in many respects, unsatisfactory.  Nonetheless, there was evidence relevant to the value of White’s loss of opportunity.  Mr Burbidge submitted that Richmond Growth would have had a 100 per cent chance of achieving a profit of between $3.2 million and $4.5 million and that damages should be assessed on this basis.  With proper evidence, White may have been able to establish a claim of this magnitude.  Because of the gaps in the evidence, and the uncertainties they necessarily engender, we must heavily discount the figures we have mentioned.  Additionally, as the trial judge observed, the evidence although again incomplete, suggested that there were differences between the  Woolworths development, and Woolworths’ commercial objectives, and those of White.   Nonetheless, the Woolworths figures provide some evidence, albeit of limited probative value, tending to reinforce White’s contemporaneous assessment that it would have derived substantial profits from the development had Richmond Growth honoured the right of first refusal.

We agree with counsel for the respondents that we would not be justified in simply substituting our assessment for that of the trial judge.  We should interfere with his award only if we reach the conclusion that he made some error of principle or law, or overlooked material evidence.  However, we think his Honour fell into this last error.  In his understandable concern about  the quality of the material that had been adduced in evidence,  he seems to have overlooked the material we have summarised.  With all its deficiencies, it indicates that White’s loss, assessed in accordance with the relevant principles, was substantially greater than $200,000.

We accept that this is not a case in which a precise figure can be reached by mathematical calculations.  However, it is not quite a case in which we are restricted to a “stab in the dark”.  Due consideration must be given to the unsatisfactory nature of the evidence.  For this reason, we start with the lower end of Mr Burbidge’s range, namely a profit of $3.2 million (although the evidence suggests that White would have contemplated and aimed for a considerably higher profit).  We would rate White’s chance of achieving this profit, having regard to all the circumstances and uncertainties, as in the order of 30 per cent.  This produces a figure of $960,000.  We think the appropriate course, therefore, is to substitute a figure of $960,000 for the $200,000 adopted by the trial judge.

Project management fees

The third matter can be dealt with shortly.  It involves two elements:  project management fees up to the date of sale of the property and compensation for project management fees foregone because of the sale.  As to the latter, if damages are awarded for loss of the right of first refusal, there can be no claim.  White would not have earned project management fees from Richmond Growth after it had purchased the property.  Anyway we agree with his Honour that, upon its proper construction, the agreement between the parties did not contemplate the payment of project management fees after any sale by Richmond Growth.

The trial judge awarded $50,000 for pre-sale project management fees.  Mr Burbidge contends there was an arithmetical error; his Honour intended to award one-third of $180,000; that would be $60,000.  We are not persuaded.  It is true his Honour spoke of allowing one-third (rather than one-half as claimed) of the salary and on costs alleged by White.  But he was clearly of the opinion that all the project management fee claims were exaggerated.  He said that, “applying the conclusions set out above in a broad brush way”, it seemed to him “an allowance of $50,000 would be appropriate”.  We do not think there was an arithmetical error. 

Trial costs

Notwithstanding the submissions put to us by counsel for the cross appellants, we do not think it is appropriate for us to interfere with the trial judge’s exercise of discretion regarding the costs of the trial. 

Orders

We allow the appeal by White against Richmond Growth in part.  We vary order 3 made by the trial judge by substituting for the figure “$250,000” the figure “$1,010,000”.  We make a consequential variation of the amount of interest set out in order 4, changing $84,274 to $340,466.  Otherwise the appeal will be dismissed.  All cross-appeals will be dismissed.

As to costs, we think there should be no order for the costs of the appeal or cross-appeal as between White and Richmond Growth.  Although White has succeeded in increasing the quantum of damages, it fails on the s52 claim.  That claim occupied more hearing time than the damages  claim.  As between White and the second, third and fourth respondents, the balance of success favours the latter.  They should only have two-thirds of their costs because the second and third respondents raised grounds on the cross-appeals relating to breach of contract and the fourth respondent failed to make good a number of his grounds of appeal.

Associate:

Dated:              4 November 1998