Bischof & Anor v Werncog Pty Ltd - [2004] NSWADT 241

No judgment structure available for this case.

CITATION: Bischof & Anor v Werncog Pty Ltd [2004] NSWADT 241

DIVISION: Retail Leases Division

PARTIES: APPLICANT
Helen Bischof & Ross Melrose
RESPONDENT
Werncog Pty Ltd

FILE NUMBER: 035019

HEARING DATES: 31/08/2004, 1.09/2004-3/09/2004

SUBMISSIONS CLOSED: 09/07/2004

DATE OF DECISION:
10/26/2004

BEFORE: Chesterman M - ADCJ (Deputy President); Griffiths G - Non Judicial Member; Fagg N - Non Judicial Member

APPLICATION: Claim for compensation for pre lease misrepresentations - Claim for declaration of rights, obligations and liabilities under a lease - Claim for payment of money - Claim for relief from payment of money - Unconscionability

MATTER FOR DECISION: Principal matter

LEGISLATION CITED: Administrative Decisions Tribunal Act 1997
Conveyancing Act 1919

CASES CITED: B P Refinery (Westernport) Pty Ltd v Hastings Shire Council (1994) 180 CLR 266
Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64
Four Seasons International Agriculture Pty Ltd v Dominic Iacullo & Anor [2002] NSWADT 91
Golden Harvest (Aust) Pty Ltd v Paing Pty Ltd [2004] NSWCA 85
Hurley v McDonalds Australia Ltd (2000) ATPR 41-471
Khao Thai Pty Ltd v Coles Myer Properties Holdings Pty Ltd [2001] NSWADT 83
Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768
Prasad & Anor v Fairfield City Council [2001] NSWADT 28
Skiwing Pty Ltd v Trust Co of Australia Ltd (No 3) [2004] NSWADT 94
Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 386

REPRESENTATION: APPLICANT
F Lever SC, barrister
RESPONDENT
I Pike, barrister

ORDERS: 1. Subject to the outcome of any application made pursuant to Order 2, the Respondent is to pay to the Applicants the sum of $6,694.31, made up of $3,767.96 as principal and $2,926.35 as interest. Payment is to be made on the expiry of 28 days from the date of this decision or, if any such application is made, on the determination of the application.; 2. The Respondent has 28 days within which to file, with submissions, any application that it may wish to make under s 72A(5) of the Retail Leases Act 1994 for a reduction of the amount of interest awarded. ; 3. Both parties have 28 days to file submissions on costs. ; 4. Any submissions in reply on any of these matters must be filed within a further 28 days. ; 5. Unless the Tribunal determines otherwise, any application made under Order 2 or Order 3 will be resolved ‘on the papers’, under s 76 of the Administrative Decisions Tribunal Act 1997.

Outline of facts

1 In these proceedings, the Applicant Lessees claimed various forms of relief against the Respondent Lessor arising in connection with a retail shop lease dated 6 April 2000 (‘the Lease’). The premises leased (‘the premises’) were Shop 200 in Harbourside Shopping Centre (‘Harbourside’) at Darling Harbour.

2 The initial period of the Lease was from 1 April 1999 to 31 March 2004. It contained an option for renewal until 31 March 2007, which has been exercised. It is governed by the provisions of the Retail Leases Act 1994 (‘the Act’). The rent stipulated was $48,004 per annum, payable in advance in equal monthly instalments and subject to review.

3 The principal relief sought by the Applicants is an award of damages, coupled with an order relieving them from their obligation to pay rent, on account of failure by the Respondent to prevent a competing business at Harbourside from taking away their custom through trading in contravention of the permitted use stipulated in its lease from the Respondent. The Applicants also seek an order that the Respondent should enforce the clause in this lease requiring compliance with the permitted use.

4 Most of the facts giving rise to these proceedings were not disputed. A relatively short outline will therefore suffice.

5 The Applicants conduct a jewellery business in partnership in the premises, under the name Helena B Designs (hereafter ‘Helena B’). At all times, the business has conformed with the permitted use stipulated for it by the Respondent. This was set out in the following terms in a Disclosure Statement dated 24 February 1998, which is annotated with an acknowledgment of receipt signed by the Applicants. It also appears as Item 12 of the Reference Schedule to the Lease:-

Permitted Use

Retail sale of silver and gold jewellery and semi-precious stones. Opal jewellery not to exceed 10% of display merchandise.

6 The Disclosure Statement included the following further clauses:-

[Under a heading as follows: ‘Details of any agreements between Lessor and Lessee, or representations made by Lessor or Lessee including those relating to exclusivity or limitations on competing uses’]

1. No Lessee has any exclusivity concerning the use of their shop premises and/or products/services they sell.

2. No representations have been given by the Lessor regarding the profitability of the Lessee’s business, number of visitations to Harbourside or future policies of the Lessor or its agent.

7 The Applicants’ case is based on a representation made to the First Applicant, Ms Bischof, by Mr Rodrick Melville. Between May 1996 and November 1998, Mr Melville was employed by the Respondent as a retail manager at Harbourside. In the course of negotiations around the middle of 1997 which led to execution of the Lease, Mr Melville said words to the following effect to Ms Bischof:-

It is the aim of management and the centre owner not to duplicate usages where possible. Centre management is planning to have clearly defined shopping precincts in the new centre. We are looking at having ‘male’ precincts, ‘female’ precincts, ‘Australian’ precincts and ‘food and restaurant’ precincts. As the products you propose have a more feminine leaning, I can offer you a shop in our proposed ‘female’ precinct. This will allow one of our other existing tenants to establish a jewellery outlet in the ‘male’ precinct, planned to be on the second level. There will not be more than two stores selling silver jewellery.

8 This passage forms part of an affidavit sworn by Mr Melville, who was not required for cross-examination. In using the phrase ‘the new centre’, Mr Melville was referring to the fact that during the mid to late 1990s, Harbourside was extensively refurbished. A number of new or relocated shops, including Helena B, opened or reopened in 1999. Since the refurbishment was not completed by then, the Respondent granted to the Applicants a rental concession of $2,000.17 per month during the first year of their tenancy.

9 The name of the business established to sell jewellery in the ‘male’ precinct was Mascu. It occupied Shop 436. The permitted use stated in the lease, dated 31 October 1997, to its owners, JTH Pacific Trading Co, was as follows:-

Retail sale of men’s solid silver, sterling silver (unisex) and gold jewellery where appropriate, incorporating precious gemstones, magazite, opal and crystals. Including, but not limited to, rings, chains, bracelets, belt buckles, cuff links, tie bars, money clips, jewellery cases and boxes. Together with Australian designed and handmade male focused handicrafts, including but not limited to the use of watch faces and mechanisms.

10 In these proceedings, the crucial passage in Mr Melville’s affidavit is his statement, in the final sentence, that he said to Ms Bischof: ‘There will not be more than two stores selling silver jewellery.’ In Ms Bischof’s own affidavit, she described conversations with him around the middle of 1997 in the course of which he said that there would only be two shops at Harbourside, one ‘male’ and one ‘female’, where sterling silver jewellery would be sold, and she said that it was important to her that there should not be a third shop doing this.

11 In cross-examination, Ms Bischof said that Mr Melville’s account was accurate. She asserted that if he had not made this representation she would not have entered into the Lease. She said also (a) that she was aware at the time of the provisions in the Disclosure Statement and the Lease (see [6] above) regarding tenancy mix and exclusivity; (b) that she realised that she could have asked her solicitor to request the inclusion of a clause in the Lease granting her exclusivity; and (c) that she did not raise this matter with her solicitor.

12 According to Ms Bischof, the Applicants’ business of Helena B commenced operation in the premises on 15 March 1999. Before then, they spent about $60,000 on fitout and about $20,000 on stock.

13 The appearance of the shop is relatively formal, though it is not a large shop. A substantial proportion of the stock was and still is designer jewellery manufactured by Ms Bischof and sold only through Helena B. Her evidence was unclear as to what proportion of her total sales was represented by this jewellery. She gave different estimates of one-third and one-half, while stating also that it varied from time to time. Her oral evidence contained also a somewhat vague statement suggesting that the displayed jewellery not manufactured by her was all silver jewellery.

14 At about the same time, the Applicants also leased premises from the Respondent at Shop 328, Harbourside, where they conducted a business under the name of Helena Bischof Gallery. The permitted use, broadly described, was the sale of arts and crafts.

15 Also at about this time, a jewellery business commenced under the name of Arezo in a kiosk situated at Shop 469, Harbourside. Its first proprietors, Hooshang and Roya Malakooti (‘the Malakootis’), executed on 20 April 1999 a five-year lease (with a three-year option) from the Respondent, commencing on 1 April 1999.

16 The permitted use stated in Item 12 of the Reference Schedule of this lease to the Malakootis was as follows:-

sic

The retail sale of exclusive imported and Australian made hair accessories including clips, pins and bands to a maximum of 20% of the kiosk area.

No items of a souvenir nature are permitted. No items incorporating opals are permitted.

17 During December 1998, the Malakootis had unsuccessfully asked the Respondent for permission to sell a wider range of jewellery.

18 Clause 11.1 of the lease to the Malakootis stated: ‘The Lessee must use the Premises only for the Permitted Use’. Under clause 19, this obligation was an essential term of the lease. Clause 20.2 empowered the Respondent to terminate the lease in the event of non-compliance with an essential term.

19 In an affidavit dated 29 September 2003, Mr Ian Abeshouse, a jewellery valuer and auctioneer, stated that ‘costume jewellery consists of non-precious metals, which may be gold or silver plated, and imitation or synthetic stones’. Other evidence brought forward by the Applicants confirmed that costume jewellery was a category of jewellery quite distinct from the categories specified in the permitted use clause within the Lease granted to them, namely, gold and silver jewellery, semi-precious stones and opals. The Respondent did not dispute this proposition.

20 On a number of occasions between April 1999 and June 2000, Ms Bischof complained to representatives of the Respondent at Harbourside that the Malakootis were selling sterling silver jewellery and jewellery containing semi-precious stones from their business at Arezo. She spoke or wrote to Mr Peter Quinlivan, the then General Manager of Harbourside; to Ms Edwina Hundt, the personal assistant to Mr Quinlivan; and to Mr Henri Wolf, the Retail Manager at Harbourside. She indicated that she had been assured by Mr Melville, on behalf of the Respondent, that only two shops would be selling these categories of jewellery.

21 During this period, the Applicants indicated that they would not sign the Lease because of Arezo’s persistence in selling these categories of jewellery. Mr Wolf’s file note of a meeting between him and her on 6 July 1999 records a statement by him that the Lease documents were ‘not a bartering tool’. It also records him saying that there had been ‘much conferring with Arezo’, that they had made a lot of effort to adhere to their permitted use and that they were being ‘continually monitored’.

22 Ms Hundt’s file note of a telephone call from Ms Bischof on 11 August 1999 records a complaint by Ms Bischof that Arezo was selling solid silver and gold jewellery. In response to her question as to when Arezo ‘was going to stop selling opals’, Ms Hundt said that she believed it would be ‘by the end of this month’ and that Harbourside management had ‘allowed them leeway to “sell out” their remaining stocks’.

23 The Applicants maintained their refusal to sign the Lease until March 2000. Ms Bischof testified that the reason why they eventually signed it was their fear that if they did not the Respondent might lock them out of their shop. The date of execution is actually stated in the Lease to be 6 April 2000.

24 Ms Bischof estimated that during April 1999 about 20% of the stock displayed by Arezo was within the categories to which she objected and which fell outside Arezo’s permitted use (hereafter, ‘infringing product’), and that by June 2000 this proportion had increased to 40%.

25 During this period, the Respondent told the Malakootis on several occasions, both at meetings and in correspondence, that they were in breach of the Permitted Use clause in their lease by displaying infringing product, that the Respondent had received complaints about this, that they must assess carefully two detailed definitions of costume jewellery that the Respondent provided to them and that subject to some qualifications they would not be permitted to trade outside their permitted use clause, despite their making a number of requests for extension to the range of permitted categories of jewellery.

26 The qualifications were (a) that in a letter dated 30 August 1999 the Respondent gave them permission to display ‘selected jewellery pieces which have watch faces or watch movements within them’, up to a limit of 10% of the display, and (b) that in a letter dated 21 September 1999 it gave them ‘conditional approval’ to display ten pieces of costume jewellery which incorporated opals. But in a letter dated 25 February 2000 to the Malakootis, Mr Wolf wrote as follows:-

The writer and members of the Leasing Team at Harbourside have in the past shown greater flexibility than what is warranted for a costume jewellery kiosk. As at today’s date that flexibility and consideration has ceased. You will comply with your permitted use as per the lease and remove all stock that does not comply by close of business Sunday, 12 March 2000. The permitted use is not open for interpretation or discussion.

27 In a letter dated 17 April 2000 to the Respondent, the Malakootis indicated that they were communicating with prospective purchasers of their business and requested permission for Arezo to sell ‘more opal product’ and some ‘silver and gold lines’. In its reply dated 8 May 2000, the Respondent refused this request, but added that it would give consideration to a proposed permitted use which complemented the permitted uses of Helena B, Mascu and the two other jewellery stores in Harbourside, Sydney Jewellers and Opal Fields. (We note here that there was no evidence before us regarding these two other stores.)

28 By a letter dated 25 May 2000, the Respondent gave its consent to the assignment of the Malakootis’ lease to the purchasers of Arezo, Mr Zia Khorram and Ms Manija Khorram (‘the Khorrams’). The letter stated that the assignment must contain a term requiring strict compliance with the permitted use set out in Item 12 of the Reference Schedule. Mr Malakooti signed a copy of this letter.

29 In a letter dated 31 May 2000 to McCormacks Solicitors, who acted for the Khorrams on the assignment, Mr Wolf wrote that it was ‘essential that the existing quality and point of difference applicable to Arezo be maintained’ and that the Respondent would ‘carefully monitor the new owner’s business to ensure that the integrity of the business is maintained’.

30 The sale of Arezo and the assignment of its lease to the Khorrams took effect in June or July 2000. Shortly after, Ms Bischof complained to Ms Hundt that Arezo was selling sterling silver jewellery. She repeated this complaint to Ms Hundt on at least two occasions between June 2000 and January 2001.

31 By a letter dated 15 October 2001, Mr Steven Ellis, who had replaced Mr Wolf as Retail Manager, claimed that the Applicants themselves were in breach of their permitted use in relation to Shop 328, Helena Bischof Gallery, through incorporating jewellery in their display. In a letter of reply dated 18 October 2001, they alleged that in previous discussions with Mr Quinlivan and Ms Hundt, it had been agreed that they could do this. The Respondent appears not to have pursued this matter any further.

32 On 28 November 2001, Swaab Attorneys wrote to the General Manager, Harbourside, on behalf of the Applicants. After referring to the assurance given by Mr Melville to the Applicants, they alleged that Arezo had consistently been in breach of its permitted use, that the Respondent had not replied to the Applicants’ complaints on this matter and that the Respondent had failed to compel Arezo to adhere to its permitted use. They claimed that the Applicants were entitled to damages on account of this failure. Following negotiations, the Respondent commenced in March 2002 to give significant rental concessions to the Applicants. These continued until the expiry of the initial term of the Lease at the end of March 2004. The total value of the concessions granted was $79,876.44.

33 Ms Bischof testified that as soon as the Khorrams took over the business the quantity of infringing product in Arezo’s display ‘expanded significantly’. She estimated that within two years of their takeover of the business, the proportion of infringing product in the display increased to about 70%. She estimated that by December 2003, this proportion exceeded 70%. On the basis of four inspections of Arezo’s display during July 2004, she estimated this proportion at 70%, adding that the proportions of watches, costume jewellery and gold chains in the display were about 15%, 10% and 5% respectively.

34 On the basis of inspections of Arezo’s display conducted on 21 and 25 September 2003, Mr Abeshouse estimated these proportions as follows:-

Jewellery containing opals – about 13%

Costume jewellery – about 13%

Wrist watches – about 13%

Gold chains – about 4%.

35 On 16 January 2001, Mr Khorram wrote to the Respondent requesting permission for 25% of Arezo’s display to comprise ‘precious jewellery such as Australian opal and precious stones’. Following some discussions with the Khorrams, Mr Wolf wrote to them on 4 April 2001 refusing this request. He pointed out that to grant it might have a detrimental effect on other retailers who were specifically permitted to merchandise opals and precious stones. The letter then continued as follows:-

However, the Lessor is prepared to grant you permission to include a maximum of 10% of the kiosk area only for opals and precious stones which is offered conditionally on a trial basis of three months from the date of the correspondence.

36 In a letter to the Khorrams dated 19 September 2001, Mr Ellis refused a request by them for permission to display opals on a permanent basis. He stated however that they could incorporate a maximum of 10% of opals and precious stones ‘on a temporary arrangement only’, which was subject to termination by the Respondent on seven days’ notice.

37 The Respondent did not tell the Applicants about either of these two grants of permission to Arezo to display infringing product.

38 In a letter dated 26 February 2002 to the Khorrams, Ms Tricia Willis, Retail Administrator for Harbourside, withdrew the temporary permission to depart from the permitted use and claimed that they were currently in breach by displaying watches and jewellery made of precious metals including silver and gold and semi-precious stones. She said that their shop would be inspected after a period of fourteen days and that the Respondent reserved its rights to take any action in regard to this breach or any other breach of their lease.

39 In response, McCormacks wrote to Ms Willis on behalf of the Khorrams on 7 March 2002. They alleged, amongst other things, (a) that a disclosure statement provided to the Khorrams included in the permitted use the sale of gold, white gold, silver, diamonds and rubies; (b) that at a meeting on 1 June 2000, Mr Wolf told Mr Khorram that the use could include the sale of precious and semi-precious metals and, up to 10%, opals, as had been the case with the Malakootis at the time of the assignment of the lease; (c) that Mr Wolf had made a similar statement to the Khorrams at the time of his letter of 4 April 2001; and (d) that approximately three months earlier, Mr Ellis had told the Khorrams that the Respondent was not objecting to their current display and that the permitted use might be changed at the expiry of their lease. On the basis of these allegations, McCormacks stated that there had been a waiver of the requirements of the permitted use, that the Khorrams would oppose any attempt to compel them to adhere to these requirements and that the Khorrams requested amendment of the terms of the permitted use.

40 This letter from McCormacks also contained the statement that ‘70% of the stock at that time [meaning three months earlier] and currently is in breach of the terms of the permitted use as stated in the lease’.

41 In a letter of reply dated 13 March 2002, Mr Ellis denied the allegations by McCormacks set out in [39] above. In relation to the disclosure statement referred to by McCormacks, Mr Ellis stated that it had been given to the Khorrams by the Malakootis and that the Respondent had not seen it and did not endorse it. He reaffirmed the Respondent’s position in the matter, including its warning that it would take action against the Khorrams if they not comply with its requirements.

42 In a letter dated 27 March 2002, McCormacks reiterated the substance of its earlier allegations.

43 Following a meeting between the Khorrams and representatives of the Respondent on 9 April 2002, Mr Khorram submitted a ‘compromise proposal’ for amendment of the permitted use. It involved restricting the display of silver jewellery to 25% and opal jewellery to 10%. Mr Ellis wrote in a memorandum dated 24 April 2002 to Mr Alan Riley, who was now the General Manager of Harbourside, that in the light of this compromise the Respondent might ‘find it hard to win a case under the circumstances’. But, in line with a handwritten endorsement by Mr Riley on this memorandum, Mr Ellis’s response to Mr Khorram, in a letter dated 29 April 2002, was to reject the compromise and insist on compliance with the permitted use.

44 On 21 May 2002, the Respondent applied to the Registrar of Retail Tenancy Disputes for mediation of the dispute between it and the Khorrams. The mediation, conducted on 12 July 2002, was unsuccessful.

45 On 3 September 2002, at a meeting between Mr Riley, Mr Ellis, Ms Willis and the Khorrams, the parties outlined their competing claims, as set out above. Additional matters of relevance were (a) a reference by Mr Riley to ‘Helena B’s claims of exclusivity’ and (b) a statement by Mr Khorram that ‘the core of their business’ was silver jewellery, since ‘people want silver containing precious and semi precious stones’.

46 A file note of the same date, made after this meeting, recorded statements made by Mr Wolf, whom Ms Willis called on the telephone to obtain his recollection of any permission granted to the Khorrams to sell silver. Mr Wolf is recorded as saying, amongst other things, (a) that Mr Quinlivan had liked what the Khorrams were doing, ‘as far as pushing the business was concerned’, (b) that they had been given permission to sell ‘dress watches with certain kinds of bands etc and from memory 15% silver jewellery’ and (c) that Mr Quinlivan ‘was not happy with Bischof and the way that they never pushed their business at all’.

47 In a letter dated 4 October 2002 to the Khorrams, Mr Riley advised that, after giving the matter full consideration, the Respondent would not accept their ‘unauthorised broadened offer’ and now required them, within fourteen days, to bring their display in line with their permitted use. He said that if they failed to do so, the Respondent would have to seek enforcement as allowed under the lease including, but not limited to, legal action. He maintained that the Respondent had only ever given temporary permission for limited departures from the permitted use, none of which included sterling silver, and that their claims of permission for more substantial departures were not supported by documentation. He said also that while he realised that the Respondent’s stance might harm the Khorram’s business, it had ‘planned the Harbourside offer to maximise the retail mix’. Any departure from their permitted use would ‘compromise the planned offer’ put in place by the Respondent and might well take business away from other retailers who already had that permitted use.

48 In memoranda dated 23 and 24 October 2002, Mr Ellis reported on Mr Khorram’s having said that he continued to ‘defend his position’ and that he was exploring the possibility of buying the business of Helena B, and on Mr Ellis’s own estimate that Arezo were selling watches and jewellery including gold, silver and precious stones, to the extent of 65% of their display.

49 On 12 December 2002, the Respondent served on the Khorrams a notice under s 129 of the Conveyancing Act 1919, requiring that they remedy their breaches of clause 11.1 of their lease by removing all items from their display that did not fall within the permitted use. In a covering letter, the Respondent indicated that it considered three months to be a reasonable time for compliance and that, if the Khorrams did not comply, it would be entitled to terminate the lease.

50 On 4 March 2003, the Applicants commenced the present proceedings.

51 The Khorrams did not comply with the requirements of the notice under the Conveyancing Act, either within the suggested period of three months or subsequently. Early in January 2004, they sought to exercise the option to renew their lease. By a letter dated 15 January 2004, the Respondent refused to renew the lease, on the ground that they had continued their breach of the permitted use.

52 In consequence, the Khorrams commenced proceedings in this Tribunal on 31March 2004, challenging the Respondent’s refusal to grant a new lease and seeking an amendment of the lease to permit the sale of sterling silver and opals. Those proceedings, which are defended, have not yet been heard. In the meantime, the Respondent has agreed not to seek possession of Shop 469 from the Khorrams.

Issues to be resolved

53 The matters that we must resolve are (a) whether, and if so on what ground or grounds, the Respondent is liable to the Applicants for its failure to prevent Arezo from selling infringing product in breach of the permitted use in its lease, and (b) if the Respondent is to be held liable, what damage, if any, have the Applicants suffered in consequence.

54 The grounds of liability put forward by the Applicants in its Further Amended Application were that the Respondent had caused damage to them by (i) breaching the ‘inducement’ or ‘assurance’ given by its agent (Mr Melville) that there would be not more than two stores selling silver jewellery in Harbourside; (ii) making through Mr Melville a false and misleading representation to this effect, falling within s 10 of the Act; (iii) unreasonably taking action, in its dealings with Arezo, that had a significant adverse effect on the Applicants’ business, within the meaning of s 34 (1)(c) of the Act; (iv) engaging, in its dealings with them and with Arezo, in unconscionable conduct under s 62 B of the Act; and (v) engaging in misleading and deceptive conduct.

55 At the hearing, the last of these grounds was not pressed. It is in fact clear from several recent decisions (see for example Skiwing Pty Ltd v Trust Co of Australia Ltd (No 3) [2004] NSWADT 94 at [5 – 19]) that the Tribunal, in exercising the powers conferred on it by the Act, does not have jurisdiction to award damages for misleading and deceptive conduct under the relevant legislation of either the Commonwealth or this State.

56 In relation to damages, the principal questions to be resolved (assuming liability to have been established) are (i) what principles should be applied in determining whether the Applicants have adduced sufficient evidence to support an award of damages against the Respondent, based on its failure to prevent Arezo from trading in breach of the permitted use in its lease, and (ii) in the light of those principles, what amount of damages, if any, should be awarded.

57 It was pointed out to us that any award made by us was subject to the monetary limit of $300,000 set out in s 73 of the Act.

58 It was also pointed out that any award made by us was potentially limited by s 71 and s 62A of the Act. Under s 71(2), no retail tenancy claim may be lodged more than three years after the liability or obligation that is the subject of the claim arose. Under s 62A(2), Part 7A of the Act, which establishes liability for unconscionable conduct, does not apply to conduct occurring before the commencement of s 62A. This section commenced on 12 October 2001.

59 We will now deal with each of these questions in turn.

Breach of the ‘inducement’ or ‘assurance’ given by Mr Melville

60 In his oral submissions to us, Mr Lever SC, counsel for the Applicants, argued that Mr Melville’s statement to Ms Bischof that there would only be two shops at Harbourside selling silver jewellery was ‘part of the deal’ between the Applicants and the Respondent. It operated, he said, as an ‘assurance’ binding the Respondent, even though it did not appear within the Disclosure Statement or the Lease. Its omission from these documents did not detract from its binding effect because the Applicants spent money on the fitout for Shop 200, took possession of it and commenced to pay rent during March-April 1999. In this way, they became committed to leasing the premises at a time when they had good reason to believe that the Respondent would honour this assurance. By virtue of s 8 of the Act, a retail shop lease was in fact created when they took possession, even though the formal Lease was not signed until about a year later.

61 In his written submission, Mr Lever cited the Tribunal’s decision in Prasad & Anor v Fairfield City Council [2001] NSWADT 28. In that case, the lessor Council allowed a tenant supermarket in Shop 1 of a suburban shopping centre to sell hot food even though this was not within the permitted use. The Tribunal decided that the applicant lessees, who had purchased a business selling hot chickens and coffee from nearby tenants and taken an assignment of their lease, were entitled to rely on representations made by the Council to tenants generally, and repeated through registration of the lease of Shop 1, that this Shop ‘would be used (and continue to be used) as a supermarket and only as a supermarket’ (para [23]).

62 The Tribunal held, at [27], that

Because the representation was at all times made with the intent that it be relied on by parties such as the Applicants, the Council is liable for losses which flow from the Council’s failure to force adherence to that representation.

63 At [34], the Tribunal directed the Council to ‘prevent’ the owner of Shop 1 from selling hot chickens or coffee and ‘to take all other action necessary to ensure that the occupant of shop 1 trades within the authorised use set forth in its Lease’. It also ordered that if the Council did not in fact prevent such sales within one month, the applicants should be relieved from their obligation to pay rent ‘until such time as the Council effects such compliance by the occupier of shop 1’.

64 In so ruling, the Tribunal relied on principles of estoppel as laid down by the High Court in Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 386: see its judgment at [21], [33].

65 Mr Pike, counsel for the Respondent, maintained that any such ‘assurance’ was overridden by the clauses in the Disclosure Statement and the Lease conferring on the Respondent the right to change the tenancy mix at any time at its sole discretion and denying to the Applicants ‘any exclusivity concerning the use of their shop premises and/or products/services they sell’. He relied also on acknowledgments by Ms Bischof in cross-examination (a) that she was aware of the existence of these provisions; (b) that she realised that she could have asked her solicitor to request the inclusion of a clause in the Lease granting her exclusivity; and (c) that she did not raise this matter with her solicitor. Referring to B P Refinery (Westernport) Pty Ltd v Hastings Shire Council (1994) 180 CLR 266, he submitted that there could be no implied term embodying Mr Melville’s statement in the agreement between the parties because it would be in conflict with the express term in the Disclosure Statement denying exclusivity to the Applicants.

66 Mr Lever’s principal responses to these contentions were (a) that Mr Melville’s statement did not purport to guarantee ‘exclusivity’ to the Applicants and therefore was not in conflict with the express term in the Disclosure Statement; and (b) that it would in any event be unconscionable for the Respondent to rely on this term, on account of its acknowledgment that Mr Melville had made the statement.

67 The arguments put to us on this quite difficult issue were comparatively brief. They provided a sufficient basis, however, for us to reach a conclusion, in which we take account of some further aspects of the dealings between the parties.

68 We accept Mr Lever’s contention that despite the clauses in the Disclosure Statement and the absence of any relevant provision in the Lease, the statement by Mr Melville must be treated as ‘part of the deal’ between the parties. A major reason for so ruling is that, in responding to Ms Bischof’s complaints between April 1999 (when Helena B commenced business) and March 2000 (when the Applicants signed the Lease) about Arezo’s breaches of its permitted use clause, the Respondent’s agents gave her good reason to believe that it considered itself to be bound by what Mr Melville had said. We refer here particularly to statements made to Ms Bischof by Mr Wolf and Ms Hundt (see [20 – 22] above). At no point did they suggest to her that, while the Respondent might want to compel Arezo to trade within its permitted use, it had no obligation to the Applicants to seek this outcome.

69 In addition, we agree with Mr Lever that the steps taken by the Applicants in March-April 1999 (see [12] above) to commit themselves to leasing the premises are of considerable significance in this context. They were taken in reliance on Mr Melville’s assurance, and at a time when the Applicants had no reason to believe that the Respondent would not honour this assurance.

70 In our opinion, the clause in the Disclosure Statement empowering the Respondent to change the tenancy mix at any time is not relevant in these proceedings. The claim brought by the Applicants is not that the Respondent has changed the tenancy mix, but that it has failed to abide by an assurance that the tenancy mix that it had itself prescribed would be maintained.

71 We also consider that the clause denying exclusivity to the Applicants should not be interpreted as overriding the specific assurance given by Mr Melville. This was not that the Applicants should have exclusivity, but that there should be only one other shop in Harbourside competing with them in the selling of silver jewellery. In so ruling, we are attributing a narrow scope to the restriction placed by the clause on the Applicants’ rights and expectations through giving a narrow interpretation to the term ‘exclusivity’. We believe that this is justified both by the contra proferentem rule and by our finding that between April 1999, when a lease arose under s 8 of the Act, and April 2000, when the Lease was signed, the parties both acted as if Mr Melville’s assurance, rather than a contrary indication from a clause in a Disclosure Statement delivered as early as February 1998, formed part of the agreement between them.

72 We accept also Mr Lever’s submission that, if this interpretation of the clause in the Disclosure Statement is incorrect, the Respondent should nonetheless be precluded from relying on in order to claim that it was not bound by the representation by Mr Melville. We base this ruling on the estoppel created by this representation and the Applicants’ reliance on it to their detriment. This approach is in line with the reasoning of the Tribunal in Prasad & Anor v Fairfield City Council.

73 A further matter, also not canvassed to any significant extent in the submissions, needs to be determined next under the present heading. This is the precise content of the ‘assurance’ by Mr Melville that we have found to form part of the agreement between the parties.

74 His statement to Ms Bischof, in the context of outlining the Respondent’s plans for Harbourside was that ‘there will not be more than two stores selling silver jewellery’. This clearly included an undertaking that the Respondent would not expressly authorise three or more stores to sell such jewellery. We do not think, however, that it should be interpreted as including an undertaking that if, in defiance of conditions stipulated in a lease from the Respondent, a third store should sell such jewellery – as Arezo has done – the Respondent should be liable to compensate the Applicants even if it had taken every step available to it to try to prevent this occurring.

75 The more natural interpretation is that Mr Melville undertook to the Applicants, on the Respondent’s behalf, that the Respondent would do all that it could reasonably be expected to do for the sake of tenants such as the Applicants to ensure that the number of stores actually selling silver jewellery did not exceed two. He did not give an absolute warranty that this limit would not be exceeded at any time.

76 In so ruling, we depart to some extent from the Tribunal’s decision in Prasad & Anor v Fairfield City Council. In that case, the Tribunal’s order that the Council should prevent the owner of Shop 1 from trading outside its permitted use (see [62] above) was cast in absolute terms. But in our judgment, the natural interpretation of a statement such as Mr Melville made is that all reasonable efforts would be made to ensure compliance.

77 The next issue to be determined in the present context is whether the Respondent did in fact do all that it could reasonably be expected to do to prevent Arezo selling infringing product.

78 Mr Lever submitted that the Respondent clearly failed to take all reasonable steps available to it. Such efforts as it did make were wholly ineffective.

79 The grounds for this submission can be summarised as follows. The Respondent’s managers at Harbourside – notably Mr Quinlivan, Mr Wolf, Mr Ellis and Mr Riley – knew from April 1999 onwards that Arezo selling infringing product and that this was the subject of consistent complaints by the Applicants. Yet for more than three and a half years, the only action that the Respondent took to compel adherence to the permitted use was to state firmly at meetings and in letters that it insisted on this. The impact of these statements was diluted by its also granting permission, in August and September 1999, then again in April and September 2001, for Arezo to display infringing product to a limited extent on a temporary basis.

80 Further, despite persistent breaches by Arezo, and an acknowledgment by Arezo’s solicitors that between December 2001 and March 2002 the display of infringing product constituted about 70% of the total display, it was not until 12 December 2002 that the Respondent took any legal action against Arezo to compel compliance with the permitted use. Having served the s 129 notice on that day, waited three months to give time for Arezo to comply and ascertained that there had been no compliance, the Respondent still failed to enforce its undoubted right under clause 20.2 to terminate Arezo’s lease for breach of an essential term. Instead, the only step that it took against Arezo was to refuse to renew its lease in January 2004 when Arezo purported to exercise its option of renewal.

81 On this issue, Mr Pike’s principal argument was that the Respondent, having been confronted in March 2002 by the Khorrams’ claim that it had waived compliance with the permitted use stated in the lease, acted reasonably in trying to settle this dispute by mediation, rather than engaging itself in what could well be costly and protracted litigation. It was also reasonable, he said, to refrain from any enforcement action against the Khorrams after the three-month period suggested in the s 129 notice had expired, because by that stage the Applicants had commenced these proceedings.

82 In our judgment, these considerations raised by Mr Pike are insufficient to counter the Applicants’ case on this matter. They do not address the Respondent’s failure to take any significant enforcement action against Arezo prior to March 2002, let alone its condoning (without notice to the Applicants) of limited departures from the permitted use. They do not answer the contention that after the Khorrams’ claim of waiver was formally communicated to the Respondent in March 2002, the Respondent made little attempt to investigate the strength of this claim. This appeared from statements made in cross-examination by Mr Riley, to the effect that he made no attempt to consult Mr Quinlivan or Mr Wolf about it. Also, we do not accept the Respondent’s argument that once the Applicants commenced the present proceedings, which was on 4 March 2003, it could no longer be reasonably expected to seek to terminate Arezo’s lease following the Khorram’s failure to comply with the s 129 notice.

83 We accordingly find that, as submitted by the Applicants, the Respondent did not throughout the relevant period take all reasonable steps to compel compliance by Arezo with the permitted use stated in its lease. It failed to do this even though it was bound by Mr Melville’s assurance to the Applicants, forming part of the agreement between the parties, that there would be only two stores selling silver jewellery at Harbourside. It must accordingly be held liable to the Applicants for breaches of this agreement.

84 The final matter to be determined under the present heading is the period or periods during which the Respondent should be held liable for these breaches, having regard amongst other things to the effect of s 71(2) of the Act. As indicated earlier, this provision states that a retail tenancy claim may not be lodged more than three years after ‘the liability or obligation that is the subject of the claim arose’.

85 With reference to the claim brought under s 10 of the Act (with which we shall deal under the next heading), Mr Pike submitted that because Mr Melville made his statement in mid-1997, more than three years before the commencement of these proceedings, the Applicants are barred by s 71(2) from relying on it. Potentially, the same argument may be made with regard to the ground of recovery that we are presently discussing.

86 Evidently, the ‘obligation’ that we have found to arise from Mr Melville’s statement arose more than three years before 4 March 2003, the day on which the Applicants instituted these proceedings. It arose either when he made the statement or, more probably, when the Applicants, in reliance on it, took possession of the premises in March or April 1999. It follows that if under s 71(2) the three-year period could only be measured from the date of the relevant obligation, the Applicants’ claim would be out of time.

87 As we read s 71(2), however, it provides also that a claim may be lodged within a period of three years after the relevant ‘liability’ arose. In our judgment, the Respondent’s liability for breach of the obligation arising out of Mr Melville’s statement must be taken to have arisen on a continuing basis during the whole period in which it failed to take reasonable steps to compel Arezo to adhere to its permitted use. Accordingly, any damage, falling within the scope of this liability, that was suffered by the Applicants since 4 March 2000 should be recoverable by them.

88 During the period between 4 March 2000 and the end of June 2000, however, the evidence available to us shows that the Respondent was in fact doing all that it reasonably could to prevent the sale of infringing product by Arezo. During this period the sale and assignment by the Malakootis to the Khorrams were negotiated and concluded and the attitude of the Khorrams to the permitted use clause was becoming apparent. Although the Khorrams assert otherwise, the correspondence put before us shows that the Respondent insisted that the permitted use stated in the lease to the Malakootis should not be amended and that the Khorrams must comply with it. It was not until some time in June or July 2000 that Ms Bischof complained to the Respondent that the Khorrams were not in fact complying.

89 For these reasons, we conclude that the Applicants have not established breaches of the agreement with them during the period between 4 March 2000 and 30 June 2000. The date from which their claim for damages should be taken to commence is 1 July 2000.

90 We consider also that the Applicants have not established any breach after 31 March 2004, the date on which the Khorrams commenced Tribunal proceedings against the Respondent alleging that their permitted use was not as stated in their lease. Once those proceedings were on foot, any attempt by the Respondent to secure possession from the Khorrams was likely to be met by an application for an order restraining it. This ruling does not exclude the possibility that the conduct of the Respondent at some future time, following the resolution of those proceedings, may once again constitute breach of its continuing obligation to the Applicants.

91 For these reasons, the period during which the Respondent should be held to have been in breach of this obligation, and on that account liable in damages to the Applicants, is from 1 July 2000 to 31 March 2004.

Making a false and misleading representation

92 This ground of recovery put forward by the Applicants was based on s 10(1) of the Act, which states as follows:-

10 Right to compensation for pre-lease misrepresentations

(1) A party to a retail shop lease is liable to pay another party to the lease (the injured party) reasonable compensation for damage suffered by the injured party that is attributable to the injured party’s entering into the lease as a result of a false or misleading statement or representation made by the party, or any person acting under the party’s authority, with knowledge that it was false or misleading.

93 The Further Amended Application made it clear that the ‘false or misleading statement’ relied upon was that of Mr Melville. Mr Lever referred to s 10 in his written submission, but not in his oral submissions.

94 Citing Golden Harvest (Aust) Pty Ltd v Paing Pty Ltd [2004] NSWCA 85 at [32], Mr Pike submitted that there was nothing in the evidence to suggest that Mr Melville’s statement was false at the time when it was made (it being insufficient to show that its prediction of future events turned out to be incorrect), or that he knew it was false. On either of these grounds, the Applicants’ claim based on s 10 was misconceived.

95 We agree with Mr Pike that for these reasons this section does not assist the Applicants. They have failed to establish liability under s 10(1).

96 We therefore strictly do not need to rule on Mr Pike’s further submission that because Mr Melville made his statement in mid-1997, more than three years before the Applicants instituted these proceedings, they are barred by s 71(2) of the Act (see [58] above) from relying on it in a claim based on s 10(1).

97 We are inclined to think, however, that it is not correct. The reasoning set out above at [86 – 87] is again applicable. Any liability to pay compensation under s 10(1) does not arise until damage is suffered. The damage claimed by the Applicants did not arise on the day when Mr Melville made his statement, but on each day following the commencement of the Lease when they lost custom to Arezo on account of the Respondent’s failure to compel Arezo to desist from selling infringing product.

Engaging in conduct having a significant adverse effect on the Applicants’ business

98 This ground of recovery put forward by the Applicants was based on s 34(1)(d) of the Act. Section 34 is located in Part 4 of the Act, which is headed ‘Alterations and other interference with the shop’. Subsections (1) and (2) of s 34 state as follows:-

34 Lessee to be compensated for disturbance

(1) A retail shop lease is taken to provide that if the lessor:

(a) inhibits access of the lessee to the shop in any substantial manner, or

(b) takes any action that would inhibit or alter, to a substantial extent, the flow of customers to the shop, or

(c) unreasonably takes any action that causes significant disruption of, or has a significant adverse effect on, trading of the lessee in the shop, or

(d) fails to take all reasonable steps to prevent or put a stop to anything that causes significant disruption of, or which has a significant adverse effect on, trading of the lessee in the shop and that is attributable to causes within the lessor’s control, or

(e) fails to rectify any breakdown of plant or equipment under the lessor’s care or maintenance, or

(f) in the case of a shop within a retail shopping centre, fails to adequately clean, maintain or repair the retail shopping centre (including common areas),

and the lessor does not rectify the matter as soon as reasonably practicable after being requested in writing by the lessee to do so, the lessor is liable to pay the lessee reasonable compensation for any loss or damage (other than nominal damage) suffered by the lessee as a consequence.

(2) In determining whether a lessor has acted unreasonably for the purposes of subsection (1) (c), due consideration is to be given to whether the lessor has acted in accordance with recognised shopping centre management practices.

99 Mr Lever relied also on clause 16.6 of the Lease, which replicated the terms of s 34(1). He submitted that s 34(1)(d) was applicable according to its terms. Arezo’s selling of infringing product had, he said, a ‘significant adverse effect’ on the trading of the Applicants in Shop 200. This effect was attributable to causes within the Respondent’s control. The Respondent’s failure to prevent or put a stop to it was unreasonable, on grounds already outlined (see [78 – 80] above).

100 Mr Lever also referred us to the Second Reading Speeches given in Parliament when the Retail Leases Bill was enacted. In a brief reference to Part 4 of the Act, in which s 34 is situated, the Hon B H Vaughan, Deputy Leader of the Opposition described this Part to the Legislative Council as concerned with ‘renovations, relocation, alteration and other interference with the normal trading of a commercial premises’. He said nothing to suggest that the section was confined to physical interference.

101 Mr Pike relied on the Tribunal’s decision in Khao Thai Pty Ltd v Coles Myer Properties Holdings Pty Ltd [2001] NSWADT 83 at [69 – 73]. Here, in considering the operation of s 34(1) in circumstances very similar to those which we are considering, Judicial Member Donald held as follows at [72]:-

As to s.34, I am of the view that it does not provide a basis for claim by a lessee asserting that the grant of trading rights to, or the failure to enforce trading restrictions upon, other shops in a shopping Centre, have damaged its business. As noted during the hearing, I consider the section applies to disturbances of a physical or management nature that are related to a particular shop and does not extend to the conduct of the Lessor in this case relating to rights granted to other premises which, from a commercial point of view, have a trading impact upon a shop.

102 We accept Mr Pike’s submission. The terms of the heading to Part 4, the use of the word ‘disturbance’ in the heading to s 34, the use of the word ‘disruption’ in subparagraphs (1)(c) and (d) and the context in which the section appears all support the reasoning advanced by the Tribunal in the Khao Thai decision. If the section were not limited to physical disturbance, these subparagraphs would confer on lessees an unmanageably broad right of action encompassing any ‘unreasonable’ action by a lessor that adversely affected the lessee’s trading. Since clause 16.6 of the Lease reproduced verbatim the operative parts of s 34(1), it must be interpreted along the same lines as this subsection.

103 For these reasons, we reject this ground of recovery put forward by the Applicants.

104 Once again, we therefore strictly do not need to rule on Mr Pike’s submission that s 71(2) of the Act would bar any recovery by the Applicants under s 34. We will say only that, for reasons already given (see [86 – 87] above), we are not inclined to agree with it.

Engaging in unconscionable conduct

105 In this connection, Mr Lever relied on the following provisions within s 62B of the Act:-

62B Unconscionable conduct in retail shop lease transactions

(1) A lessor must not, in connection with a retail shop lease, engage in conduct that is, in all the circumstances, unconscionable….

(3) Without in any way limiting the matters to which the Tribunal may have regard for the purpose of determining whether a lessor has contravened subsection (1) in connection with a retail shop lease, the Tribunal may have regard to:

(a) the relative strengths of the bargaining positions of the lessor and the lessee, and …

(d) whether any undue influence or pressure was exerted on, or any unfair tactics were used against, the lessee or a person acting on behalf of the lessee by the lessor or a person acting on behalf of the lessor in relation to the lease, and …

(i) the extent to which the lessor unreasonably failed to disclose to the lessee:

(ii) any risks to the lessee arising from the lessor’s intended conduct (being risks that the lessor should have foreseen would not be apparent to the lessee), and …

106 Mr Lever did not advance any detailed submissions as to how these provisions might be relevant to the present case.

107 Mr Pike drew our attention to statements by the Federal Court that unconscionable conduct means ‘serious misconduct or something clearly unfair or unreasonable’ and that ‘a pejorative moral judgment’ is involved (Hurley v McDonalds Australia Ltd (2000) ATPR 41-471). He reminded us also of the Tribunal’s insistence in Four Seasons International Agriculture Pty Ltd v Dominic Iacullo & Anor [2002] NSWADT 91, at [23], that any decision made in the exercise of its jurisdiction to hear unconscionable conduct claims must be

… a principled decision having regard to a body of precedent established with respect to unconscionability claims, supplemented, as it is, by those specific matters catalogued in s 62B(3) and (4) to which the Tribunal may pay regard.

108 In our judgment, only two minor aspects of the Respondent’s conduct might be said to have involved ‘unfair tactics’ (see s 62B(3)(d)), an unreasonable failure to disclose conduct affecting the Applicants’ interests (s 62B(3)(i)) and/or a lack of good faith (s 62B(3)(k)). These are (a) its failure to notify the Applicants of the temporary permissions it gave to Arezo to depart to a limited extent from its permitted use and (b) the expression by Mr Quinlivan of a preference for the business practices of the Khorrams over those of the Applicants. Even allowing for the fact that the Respondent’s bargaining position was stronger than that of the Applicants (see s 62B(3)(a)), these instances, in our view, fall well short of unconscionable conduct. They could not be said to amount to ‘serious misconduct or something clearly unfair or unreasonable’.

109 For these reasons, we dismiss the Applicants’ claim in so far as it is based on unconscionable conduct.

110 We note in addition that by virtue of s 62A(2) of the Act (see [58] above), any recovery on this ground could only have been on the ground of conduct occurring since 12 October 2001. As it happens, virtually all the conduct that we have just identified as possibly attracting the label ‘unconscionable’ occurred before this date.

Principles determining whether damages should be awarded

111 We have held that the Respondent is liable to the Applicants for any damage suffered by them between 1 July 2000 and 31 March 2004 by virtue of the Respondent’s continuing breach of its obligation to take all reasonable steps available to it compel Arezo to refrain from selling infringing product.

112 It was common ground that the Applicants were not in a position to prove with precision the amount of profits that they had lost on account of this conduct by Arezo. An estimate of this loss was the most that the evidence adduced by the Applicants could be expected to provide. There was some debate, however, as to the principles that were applicable in determining whether such evidence was sufficiently cogent to establish the threshold proposition that some damage at least had been suffered, or should be deemed inadequate to prove this issue.

113 Mr Lever relied on the relatively familiar proposition, stated by Toohey J in Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 135, that ‘mere difficulty in assessing damages does not relieve a court from the responsibility of estimating them as accurately possible’. A similar observation appears in the judgment of Mason CJ and Dawson J at 83.

114 Mr Pike drew our attention to the following passage in the judgment of Hayne J (with whom Gleeson CJ and McHugh and Kirby JJ agreed) in Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768 at 774 (para [38]):-

cannot

has not

115 In his written submission, Mr Pike relied on this passage for the proposition that ‘estimation, speculation and guesswork cannot be used on the question of whether there was a loss suffered in the first place’, but ‘only on its calculation’.

116 We do not think that the passage bears this meaning. It seems to us that if, from the nature of the case, a plaintiff or applicant cannot ‘adduce precise evidence of what has been lost’, the court’s acceptance of ‘estimation’ as the foundation for its decision on damages should, if necessary, extend to the issue of whether any loss at all was suffered. Hayne J did not deny this. He was drawing a different distinction: namely, between a plaintiff who cannot adduce precise evidence of loss and a plaintiff who, despite being able to do so, has not in fact adduced such evidence.

117 There was no suggestion in the present case that the Applicants failed to adduce any evidence of a ‘precise’ nature that they could have adduced. It was, as we have said, common ground that the most compelling evidence available to them would inevitably include estimates by appropriately qualified experts as to what their profits would have been if Arezo had not been selling infringing product in a shop not far distant from theirs. This is not to say, however, that the Respondent left unchallenged the expert evidence of this type that the Applicants put before us. The general nature of the disputes between the opposing experts is outlined below.

What damages, if any, should be awarded

118 The evidence regarding the loss (if any) suffered by the Applicants included some lay evidence regarding the floor plans of Harbourside; the positions of the three relevant shops (Helena B, Arezo and Mascu); the nature, quantity and patterns of movement of potential buyers visiting Harbourside; and the value of sales made by the three shops since 1999. We will outline this evidence before describing the expert evidence.

119 At all relevant times, the shopping precinct at Harbourside has had three levels. The ground floor, into which there are entries on the western side from a promenade alongside Darling Harbour, contains a large food court. Behind it, near the centre of the building, is the Helena B shop. The Arezo shop, which is a kiosk, is on the first floor, slightly to the north of Helena B. There is a substantial viewing opening, or ‘void’, between the ground and first floors, close to both Helena B and Arezo. The Mascu shop is situated near the northern end of the first floor, a fair distance from Helena B and Arezo. Escalators and a lift connect the ground and first floors. There are also escalators between the first and second floors, situated near Arezo. Doors on the second floor lead out to a car park. There are other significant entrances, notably an entrance at the north end of the first floor leading to the pedestrianised Pyrmont Bridge and the monorail station.

120 Harbourside has been primarily dependent on tourist and visitor shoppers, not on regular or repeat resident shoppers. Pedestrian traffic counts since 1999 have been remarkably consistent, totalling about 7.1 million per annum. Due to the Olympic Games, September 2000 was an exceptional month, in which the traffic count trebled.

121 The door count percentages have also remained consistent. Since 1999, about 25% of those visiting Harbourside have entered on the ground floor from the promenade beside Darling Harbour. About 11% have entered on the second floor, using the door leading from the car park.

122 These figures are compatible with a statement made by Mr Ellis in a submission dated 24 March 2004 to Rawlinsons, Valuers, for the purposes of the rent review for the Lease to the Applicants. He wrote that the Helena B shop was situated in ‘the busiest precinct of the shopping centre, with exposure to… the highest area of traffic’.

123 Tables and graphs outlining the value of sales made by the three shops between March 1999 and May 2004 were also put before us. The figures were compiled by the Respondent from information on turnover that they submitted to it each month, pursuant to an obligation imposed by their leases.

124 The patterns established by these were consistent, in the sense that when one shop’s sales went up or down the sales of the other two shops also went up or down. The general picture presented was that of a slow rise between May 1999 and May 2000, then a sharp rise from moderate levels in May 2000 to a high point in September 2000, the month of the Olympic Games, then a slow decline in the value of sales.

125 This decline may have been attributable in part to a decline in the number of overseas tourists visiting Sydney. Figures put before us suggest that overseas tourists made up about one-third of the visitors to Harbourside. But the numbers of Sydney residents visiting Harbourside (constituting about one half of Harbourside visitors) and the numbers of visitors to Sydney from within Australia (making up the remaining sixth) did not, it appears, decline.

126 Between May and September 2000, the rate of increase achieved by Arezo was significantly larger than that of Helena B. In May, the figures were $12,371 (Helena B) and $15,000 (Arezo). In September, the figures were $29,691 (Helena B) and $59,266 (Arezo). Thereafter, as already indicated, the overall trend for both was one of decline. But they remained roughly in parallel, which meant that Arezo maintained its record of attracting a significantly higher turnover than Helena B. In May 2003, for instance, Helena B achieved only $6,939, its lowest figure since March 1999, the month in which it commenced operations. Arezo’s turnover in May 2003 was $26,380.

127 It may be noted that this period between May and September 2000, in which the rate of increase in Arezo’s sales was significantly higher than that experienced by Helena B, was the period during which the Khorrams took over Arezo from the Malakootis. According to Ms Bischof, it was also the period when the Khorrams embarked upon their policy of increasing the proportion of their display that both infringed their permitted use and had the potential to attract customers away from Helena B.

128 We turn now to the expert evidence. The Applicants tendered four reports prepared by Dr Rodney Ferrier, a forensic and corporate accountant, and a report by Mr Terence Davis, a real estate valuer and consultant. The Respondent tendered two reports by Mr Lawrence Brown, a retail consultant, and a report by Dr Margaret Craig-Lees, a Senior Lecturer in Marketing at the University of New South Wales. All of these expert witnesses were cross-examined. Mr Davis and Mr Brown said that they had close familiarity with Harbourside, having visited it on many occasions.

129 At one point in his oral submissions, Mr Pike conceded that Arezo’s sales of infringing product ‘may have’ deprived Helena B of sales of such product. But, he submitted, these sales ‘may have increased the pie’. That is, the existence of infringing product in Arezo’s display may have attracted more potential buyers to Harbourside than would have come there otherwise, to the benefit of both Arezo and Helena B.

130 For this reason, Mr Pike argued, the Applicants had gone no further than to prove a ‘possibility’ of economic loss, which was insufficient to sustain their case. They had not proved any loss to a sufficient degree of probability.

131 In so arguing, Mr Pike relied on opinions expressed by Dr Craig-Lees and Mr Brown, to the effect that the presence of the three shops (Helena B, Arezo and Mascu) selling the same product in relatively close proximity within the one retail centre would produce, through ‘agglomeration’ or ‘synergy’, a larger number of potential buyers than if only one or two of such shops existed. Customers would be attracted by the prospect of choice, enabling them to engage, as Mr Brown put it, in ‘comparison shopping’. Dr Craig-Lees suggested that the more or less parallel rises in sales of the three shops between May 1999, when Arezo entered the market, and September 2000 could be explained in this way.

132 Doubts about this opinion were expressed by Mr Davis. He said that while he recognised the potential for a number of shops selling similar products to benefit each other through agglomeration, he did not believe that this would occur in a centre such as Harbourside simply because a third shop started selling jewellery in competition with two existing shops. Because they included a high proportion of tourists (international and domestic), visitors to the centre were likely to be treating their shopping as a relatively short-term leisure activity, rather than orientated towards planned purchases, and to engage in impulse buying. A centre of this nature would therefore seek to attract visitors, as Harbourside had in fact done, through maintaining an eclectic tenancy mix. In such circumstances, given the profile of the centre, it would in any event require more than three jewellery shops to attract a significant number of people to go there for the purpose of ‘comparison shopping’.

133 Mr Davis also placed significant weight, as did Mr Lever in his submissions, on the fact that the management of Harbourside, being experienced in their job and especially well placed to understand the particular characteristics of the centre, had decided that there should be not more than two shops selling silver and gold jewellery and jewellery with semi-precious stones. They must have rejected the possibility that a third shop would attract more trade of this nature to the centre by virtue of ‘agglomeration’ or ‘synergy’.

134 On this issue, we prefer the position advanced by the Applicants. We think it relevant that Harbourside has limited jewellery offerings, comprising only three relatively small shops. Having regard to the overall character of the centre and the characteristics of the visitors that it attracts, it seems improbable to us that there would be much comparison shopping between these three outlets. For these reasons, the agglomeration theory has limited, if any, application in this case.

135 A further issue of dispute between the expert witnesses concerned traffic flows into and out of Harbourside and between the areas where Helena B and Arezo were situated.

136 Mr Brown described Arezo as being in a more favourable location than Helena B, particularly because of its closer proximity to the entrance near the car park. He in fact described the car park as ‘an anchor for the centre’. This meant that Arezo had greater potential than Helena B to convert passing customers into sale. He believed that if customers were unable to find jewellery that they wanted at Arezo, they were unlikely to go downstairs to look for it at Helena B. A reason for this was that Helena B did not have retailers near it such as would attract customers seeking jewellery. He considered also that visitors who entered the centre at ground floor level and went into the food court were also unlikely to visit Helena B, because ‘people who go to a food court generally leave the area immediately after they have eaten’. If after visiting the food court they wanted to buy fashion items such as jewellery they would most likely go up to the first floor, where Arezo was situated.

137 Mr Davis, on the other hand, considered Helena B to have the better location. He said that due to the existence of lifts and escalators linking the ground and first floors, coupled with the viewing area or ‘void’, he would ‘expect some movement of customers’ between the two floors. He saw no reason to think that the majority of people visiting the ground floor would eat at the food court, then either leave or proceed to the first floor to engage in shopping.

138 Mr Davis’s opinion that Helena B had the better location from the point of view of passing trade was, as mentioned above at [122], in line with the submission prepared by Mr Ellis for the review of the Applicants’ rent in March 2004. It is also consistent with the door count percentages, viz, 25% of visitors entering at ground floor level and 11% through the door near the car park. This figure makes Mr Brown’s statement that the car park was ‘an anchor for the centre’ somewhat puzzling. On the whole, we are inclined to doubt also his suggestions that customers who did not purchase jewellery from Arezo would be unlikely to look for it on the ground floor and that people eating at the food court would then go upstairs for shopping. These opinions appear at odds with Mr Ellis’s characterisation of Helena B’s location as in ‘the busiest precinct of the shopping centre, with exposure to… the highest area of traffic’.

139 The outcome of these considerations is that we agree with the submission put by Mr Lever that visitors entering the second floor from the car park would be likely to see Arezo’s kiosk once they reached the first floor. If they noticed and then bought infringing product from Arezo, they would most likely not buy any such product from Helena B, even though they might well notice Helena B’s shop after they went down to the ground floor. Mr Riley in fact agreed in cross-examination that this train of events was quite plausible.

140 The fact is, however, that the entrance near the car park caters for only 11% of entrants to the centre. This indicates that the proportion of buyers of jewellery who have been prompted in this way to buy infringing product from Arezo instead of Helena B might not be very significant.

141 There was also some dispute regarding the significance of the substantial differences in style, ‘image’ and pricing policies between Helena B and Arezo. As outlined above at [13], a significant proportion of Helena B’s stock was designer jewellery manufactured by Ms Bischof. Arezo had no stock of this nature. In addition, Helena B occupied a shop of a relatively formal nature, whereas Arezo’s outlet was a kiosk. It is clear also, notably from figures contained in Dr Ferrier’s evidence, that Helena B’s pricing levels and degree of markup were higher than those of Arezo.

142 In view of these matters, Mr Brown and Dr Craig-Lees claimed that people who bought infringing product from Arezo might well have refrained from buying the same product from Helena B if it had not been available from Arezo. They might have been deterred by the more formal appearance of Helena B and/or its higher prices.

143 While Mr Davis did not dispute these possibilities, he maintained that they did not in any way render untenable the claim that a significant proportion of the sales of infringing product made by Arezo would be sales lost to Helena B.

144 The Applicants’ evidence as to what this proportion might be and what loss therefore resulted was contained in the evidence of Dr Ferrier. The starting-point for his calculations was the assumption that 25% of the sales of infringing product made by Arezo, measured in terms of the costs of those sales, would have been made by the Applicants if Arezo had not sold these items.

145 Dr Ferrier made no claim to have the expertise in retailing or real estate management to support this figure of 25%. It was however supported by Mr Davis, who stated that in his opinion the range of acceptable estimates of the sales lost was 20% to 40 %.

146 These opinions were challenged by Mr Brown and Dr Craig-Lees. Mr Brown’s reports contain the assertion that no sales whatsoever would have been lost by Helena B. Elsewhere in his evidence he modified this to a claim that it was impossible to estimate the number of sales lost. Dr Craig-Lees stated that the reasons underpinning Dr Ferrier’s assumption were ‘not based on any business principles’ of which she was aware and that she therefore had ‘serious doubts’ about its validity.

147 In our opinion, taking account of the principle that where precise evidence of loss cannot be adduced we must rely on ‘estimation’ rather than declaring the task of assessment to be impossible (see [116 – 117] above), the probable extent of the Applicants’ loss, measured by reference to the percentage of the cost of Arezo’s sales of infringing product that would have been made by Helena B if Arezo had adhered to its permitted use, is capable of assessment.

148 We consider however that Dr Ferrier’s assumption of 25 % is too high. Taking account of the various matters that we have reviewed above at [118 – 143] and of two further considerations that we will outline shortly, we believe that the appropriate percentage is 10%.

149 The matters mentioned above include the following: (1) the differences in style, ‘image’ and pricing policies between the two shops; (2) the better location, seen overall, of Helena B, from the point of view of attracting customers; (3) the evidence that only 11% of potential customers entered from the car park and for this reason would come across Arezo before Helena B.

150 Dr Ferrier’s methodology involved the following steps: (a) relying on the evidence of rough percentages of infringing stock within Arezo’s display to calculate, for each fiscal year since 2000, the amount within Arezo’s takings for the year that should be attributed to sales of infringing product; (b) using Arezo’s financial records, to the extent possible, to calculate the percentage markup adopted each year by Arezo; (c) deducting the amounts indicated by this markup from the takings each year on the sales of infringing product, in order to arrive at Arezo’s cost of sales of the infringing product each year; (d) applying to 25% of these figures for Arezo’s cost of sales the average percentage markup employed by Helena B for each year; (e) treating the resulting yearly figures as the profits lost by Helena B.

151 For the purposes of step (a), Dr Ferrier took it that the ratios between infringing product sold by Arezo and its total product sold during each year were as follows: 2000 – 30%; 2001 – 50%; 2002, 2003 and 2004 – 70%. This is more or less in line with the evidence. Where in steps (b) and (d) he did not have the data to calculate markup percentages for Arezo or Helena B for a particular year (this was the case for Arezo in 2001 and for both of them in 2004), he used the average markup over the other years. He made the assumption that the extra sales hypothetically achieved by Helena B would not have incurred any extra cost apart from the cost of the stock itself.

152 The data contained in these calculations by Dr Ferrier include two sets of figures which in our judgment provide support for our conclusion that the proportion of Arezo’s sales lost to Helena B should be estimated at 10% instead of his figure of 25%.

153 One of these is the relative percentages of markup applied by the two stores. Without setting out all the figures for each of the relevant years, it is sufficient to say that the markup applied by Helena B consistently exceeded that of Arezo by a substantial proportion. This provides support for our belief, outlined earlier, that due to differences in pricing policies customers who bought infringing product from Arezo might not have bought from Helena B if it had not been available at Arezo.

154 The other set of figures is Helena B’s own sales figures during the relevant years. If Dr Ferrier was correct in assuming that 25% of Arezo’s sales of infringing product (measured in terms of the cost of those sales) would have been picked up by Helena B if Arezo had complied with its permitted use, the result is that in three of the four tax years involved (2002, 2003 and 2004) the additional sales made by Helena B would have been around 50% of the sales it actually achieved. In 2002, for instance, Dr Ferrier calculated Helena B’s lost sales at $106,726. Its actual sales were $216,137. We believe that this projected 50% increase in Helena B’s sales is unreasonably large.

155 While we cannot for all these reasons accept Dr Ferrier’s figure of 25%, we endorse his methodology. As a means of proceeding from an assumption as to the proportion of Arezo’s sales of infringing product (expressed in terms of costs of sale) that would otherwise have been made by Helena B to an estimated figure for Helena B’s loss of profits, it was not seriously challenged by Mr Pike.

156 In the final calculations put before us, the total amount for lost profits for the years 2000 – 2004 came to $237,471, without any addition for interest. But because no damages are to be awarded for losses incurred before 1 July 2000 or after 31 March 2004, this figure must initially be adjusted downwards to $209,161. The components of this sum are the lost profits of Helena B, as estimated by Dr Ferrier, for these three periods:-

1 July 2001 to 30 June 2002 $67,775

1 July 2002 to 30 June 2003 $54,044

1 July 2003 to 31 March 2004 $41,443

157 A further more substantial reduction must be made because we are substituting 10% for 25 % as the estimated proportion of Arezo sales of infringing product lost to Helena B. The resulting figure, 40% of $209,161, is $83,644.40.

158 Against this, as Mr Pike submitted, the value of the rent relief granted to the Applicants between 1 March 2002 and 31 March 2004 (see [32] above) must be set off. The total of the relief granted was $79,876.44. The net amount due to the Applicants, leaving aside interest, is therefore $3,767.96.

159 The Applicants’ claim for interest is subject to the provisions of s 72A of the Act. This empowers the Tribunal to award interest, at a rate not exceeding that payable on a judgment debt of the District Court (currently 9%). Under s 72A(5) and (6), interest must not be awarded, save in exceptional circumstances, for any period after any ‘appropriate settlement sum’ has been offered.

160 In our opinion, it is appropriate to award interest for the periods between 1 July 2000 and 28 February 2002, and between 1 April 2004 and the date of this judgment. We exclude the intervening period, because throughout it the Respondent was granting rent relief to the Applicants, at a rate greater than the rate of accrual of its liability.

161 During the first of these periods, the accumulated loss of profits, as assessed by us, rose from zero (at 1 July 2000) to $36,428.93. We obtain this figure by calculating 40 % of $91,072.33, which is the sum of $45,899 (Dr Ferrier’s figure for the tax year 2001) and $45,183.33 (eight months’ worth of his figure for 2002).

162 With respect to this period, the appropriate amount for interest is one half of the interest that would be payable over 20 months on $36,428.93, calculated at 9% per annum. That figure is $2,732.17. We take one half of the amount produced by applying a rate of 9% per annum because we will assume for these purposes that the estimated losses of profits suffered by the Applicants occurred continuously and at a steady rate. We recognise that the calculation is for this reason approximate only. But since the figures for loss of profits themselves are estimates only, this is not a cause of concern.

163 As to the second period over which we are awarding interest, 1 April 2004 to the date of judgment, the appropriate amount is the interest payable at 9% per annum over 209 days on $3,767.96 (this being the net amount due, excluding interest, as at 1 April 2004). This figure for interest comes to $194.18.

164 Our award therefore is in the sum of $6,694.31, made up of $3,767.96 as principal and $2,926.35 as interest. The award for interest is subject to any reduction that may arise under s 72A(5) of the Act.

165 The Respondent has 28 days within which to file any application that it may wish to make, with submissions, for a reduction of the interest awarded on this ground. Both parties have 28 days to file submissions on costs. Any submissions in reply must be filed within a further 28 days. Unless, on application, the Tribunal determines otherwise, these matters will be resolved ‘on the papers’, under s 76 of the Administrative Decisions Tribunal Act 1997.

166 We dismiss the Applicants’ claims for orders that (a) they should be relieved of their obligation to pay rent and (b) that the Respondent should enforce the clause in Arezo’s lease requiring compliance with the permitted use. Since, as we held above at [90], it is not presently in breach of its obligation to the Applicants to seek compliance by Arezo, orders to this effect would be inappropriate.

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Citations

Bischof & Anor v Werncog Pty Ltd [2004] NSWADT 241

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CITATION:	Bischof & Anor v Werncog Pty Ltd [2004] NSWADT 241
DIVISION:	Retail Leases Division
PARTIES:	APPLICANT Helen Bischof & Ross Melrose RESPONDENT Werncog Pty Ltd
FILE NUMBER:	035019
HEARING DATES:	31/08/2004, 1.09/2004-3/09/2004
SUBMISSIONS CLOSED:	09/07/2004
DATE OF DECISION:	10/26/2004
BEFORE:	Chesterman M - ADCJ (Deputy President); Griffiths G - Non Judicial Member; Fagg N - Non Judicial Member
APPLICATION:	Claim for compensation for pre lease misrepresentations - Claim for declaration of rights, obligations and liabilities under a lease - Claim for payment of money - Claim for relief from payment of money - Unconscionability
MATTER FOR DECISION:	Principal matter
LEGISLATION CITED:	Administrative Decisions Tribunal Act 1997 Conveyancing Act 1919
CASES CITED:	B P Refinery (Westernport) Pty Ltd v Hastings Shire Council (1994) 180 CLR 266 Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 Four Seasons International Agriculture Pty Ltd v Dominic Iacullo & Anor [2002] NSWADT 91 Golden Harvest (Aust) Pty Ltd v Paing Pty Ltd [2004] NSWCA 85 Hurley v McDonalds Australia Ltd (2000) ATPR 41-471 Khao Thai Pty Ltd v Coles Myer Properties Holdings Pty Ltd [2001] NSWADT 83 Placer (Granny Smith) Pty Ltd v Thiess Contractors Pty Ltd (2003) 77 ALJR 768 Prasad & Anor v Fairfield City Council [2001] NSWADT 28 Skiwing Pty Ltd v Trust Co of Australia Ltd (No 3) [2004] NSWADT 94 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 386
REPRESENTATION:	APPLICANT F Lever SC, barrister RESPONDENT I Pike, barrister
ORDERS:	1. Subject to the outcome of any application made pursuant to Order 2, the Respondent is to pay to the Applicants the sum of $6,694.31, made up of $3,767.96 as principal and $2,926.35 as interest. Payment is to be made on the expiry of 28 days from the date of this decision or, if any such application is made, on the determination of the application.; 2. The Respondent has 28 days within which to file, with submissions, any application that it may wish to make under s 72A(5) of the Retail Leases Act 1994 for a reduction of the amount of interest awarded. ; 3. Both parties have 28 days to file submissions on costs. ; 4. Any submissions in reply on any of these matters must be filed within a further 28 days. ; 5. Unless the Tribunal determines otherwise, any application made under Order 2 or Order 3 will be resolved ‘on the papers’, under s 76 of the Administrative Decisions Tribunal Act 1997.