FEDERAL COURT OF AUSTRALIA

Hermitage Motel Pty Ltd v P. E. Kafka Pty Ltd [2008] FCA 483

Hermitage Motel Pty Ltd v P. E. Kafka Pty Ltd [2008] FCA 442 related

THE HERMITAGE MOTEL PTY LTD ACN 113 674 990 and JOHN ALEXANDER DRAPER v P. E. KAFKA PTY LTD ACN 000 075 758, WARWICK DOWLING NOTT, MEGAN JANE NOTT, GUISEPPE DI FRANCESCO, LILLA DI FRANCESCO, TONI GILCHRIST, DILWYNIA ESTATE PTY LTD ACN 000 262 537, MONICA GARDINER and SOVEREIGN INNS PTY LTD ACN 001 226 937

NSD 1760 OF 2005

GYLES J

9 APRIL 2008

SYDNEY

THE COURT:

1.         ENTERS judgment in favour of the first applicant against the first, second, third, sixth, seventh, eighth and ninth respondents jointly and severally in the sum of $621,588.18.

2.         DISMISSES the application against the fourth and fifth respondents.

3.         ORDERS that the applicants pay the costs of the fourth and fifth respondents.

4.         ORDERS that the second applicant pay the respondents’ costs of the application in regards to the second applicant’s application.

5.         ORDERS that the costs of the first applicant be paid by the first, second, third, sixth, seventh, eighth and ninth respondents jointly and severally.

6.         GRANTS leave to the respondents to apply for security for the costs of any appeal or otherwise on three days’ notice.

7.         NOTES:

(a)       that there is to be no order as to the costs of the second applicant;

(b)      that the costs occasioned by the adjournment on 27 November 2006 be costs in the application.

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

REASONS FOR JUDGMENT

1                     On 4 April 2008 I delivered reasons for judgment (Hermitage Motel Pty Ltd v P. E. Kafka Pty Ltd [2008] FCA 442) and stood the matter over in order to enable the first applicant to bring in minutes of order to give effect to those reasons.  Some issues need to be determined.

2                     In principle, the respondents are entitled to costs occasioned by the claim of the second applicant which was not proceeded with.  It seems to me that that is likely to be a very slim amount, but that is a matter for agreement, taxation or assessment. 

3                     The intertwined issues of costs of the adjournment, which took place on 27 November 2006, and the impact upon the running of interest are rather more difficult questions.  The case as pleaded and represented by the evidence was a conventional purchase of a business induced by misleading representations, with the evidence on both sides valuing the property purchased at the time of completion.  As with other cases in this Court, it is a case-managed proceeding.  On the Friday before the hearing, counsel for the respondents raised the spectre of an argument that the proper measure of damage was the difference between the amount paid and the value of the motel at the time of trial, certainly not being the value of the motel at the time of completion.  If correct, that would have meant that the applicants had no evidence as to the value at the time contended for.  In those circumstances, the applicants sought an adjournment of the proceeding in order that they could meet that potential argument. 

4                     I have no doubt that the applicants were taken by surprise.  I have no doubt that, bearing in mind the fact that the case is a case-managed case and that evidence had been filed by the respondents, the applicants were entitled to believe that the matter would proceed on what I would call a conventional Potts v Miller basis.  When the contrary was referred to, the applicants had a weekend to consider their position and then the matter was debated before me.  As I pointed out to the applicants at the time, they had prepared the case on a particular basis – it was what was regarded as a conventional basis – and I queried the necessity for an adjournment in those circumstances if they were going to pursue their main case.  There was some exploration of a separate question being raised, but that was not pursued.  There was an adjournment during the course of the morning to enable counsel to consult with the second applicant and those involved with the first applicant and, for reasons which I can understand, what I might call a conservative or safe position was taken.  That is, rather than to stand or fall on their view of the law, albeit a view which they had at least some comfort in thinking I was likely perhaps to find because of what I had said, they took the position that it was unsafe to rely upon that view and sought the adjournment.  Overall, bearing in mind the very late notice which was given of the point, I think that that position was appropriate. 

5                     In the events which have happened, the manner in which they prepared the case in the first place was vindicated by my decision.  Of course, the fact remains that the respondents may appeal and they have implicitly indicated that they will, so it is not yet certain that the correct measure of damage was pursued.  I have no doubt that the proper order about costs is that those costs simply be costs in the cause.  The question of interest is more difficult.  The adjournment ultimately turned into an adjournment of some months, but I do not think that there can be any criticism of the applicants for that – that circumstance depended upon the availability of the Court.  I do not believe that they should be penalised.  Interest should continue to run for the full period.

6                     The remaining question is the application that is made for a stay of proceeding.  The principles are well-known.  The starting point is that a successful party is entitled to the fruits of its victory and, particularly in a money case, they are entitled to be paid the money.  On the other hand, if there is what I would call a real risk of the party not being able to repay that money in the event of a successful appeal, then that is a matter to be taken into account and may often be the foundation for the grant of a stay.  In the present case, this application is taking place prior to the filing of a notice of appeal and so, to an extent, it is partly academic.  However, I am anxious to avoid the necessity for further costs to be expended if possible in a matter of this kind and I propose to deal with the application for a stay today.  The parties have very sensibly cooperated in that endeavour and each has filed evidence.

7                     I am satisfied that the position of the first applicant, the successful applicant, is such that there is a risk that if the verdict, interest and costs are paid, they may not be repaid.  The company is a single purpose company formed or obtained for the purpose of acquisition of this motel.  The evidence is that the whole of the purchase money was borrowed.  At the trial there was competing evidence as to the value of the motel, admittedly now some time ago, but well after the date of purchase and the valuation tendered on behalf of the first applicant showed a value below the purchase price.  Of course, the valuer for the respondents had a much more optimistic view of the value.  I did not, for the purposes of the case, have to consider that question of value, but it is fair to say that my impression was that it is unlikely that the motel would have been worth less than the purchase price by the time of trial.  That, however, is of no great comfort to the respondents in this case because we simply do not know the position of the secured creditor who holds security over the whole of the motel and, thus, it seems to me there is a risk involved in the payment of money over to the company.  However, it is only a risk.  This is not the case of an impecunious plaintiff by any means.  The motel, on all the evidence, has been trading successfully.  It is a good motel with good business and I would not rate the risk of failure to repay very highly.

8                     In my view, the risk is alleviated by the provision of personal guarantees on the part of Mr Draper, the second applicant, and his wife, to secure the repayment.  They have substantial external assets, though the extent to which those assets are effectively tied up by reason of the guarantees provided to a secured creditor is not clear.  However, the existence of a personal guarantee is a very powerful incentive to people to ensure that an obligation is paid.  Bearing in mind what I have said about the motel and its likely value and the fact that it is a successful business, I am led to believe that the risk of non-repayment is very slight indeed and not such as would be the basis for a stay.  I have raised with the parties the possibility that the guarantee may not be sufficient to deal with the repayment of costs once they are to be paid.  That matter can be given closer attention and application made either to me or to the Full Court if that be necessary.

9                     I have taken into account, but only to a very slight extent, the fact that I applied what I held to be a conventional measure of damages in this case.  It may be that the Full Court or the High Court may take the view that that conventional measure ought be revised in circumstances such as the present, but, in my view, that will require a revision of the law as presently understood. 

Associate:

Dated:         14 April 2008