Chilcotin Pty Ltd v Cenelage Pty Ltd
[1999] NSWCA 11
•8 April 1999
CITATION: Chilcotin Pty Ltd & Anor v Cenelage Pty Ltd & Ors [1999] NSWCA 11 revised - 29/04/99 FILE NUMBER(S): CA 40414/96 HEARING DATE(S): 4 & 5 February 1999 JUDGMENT DATE:
8 April 1999PARTIES :
Chilcotin Pty Ltd & Anor v Cenelage Pty Ltd & OrsJUDGMENT OF: Mason P at 1; Priestley JA at 2; Giles JA at 3
LOWER COURT JURISDICTION: Supreme Court - Equity Division LOWER COURT FILE NUMBER(S) : ED 1662/92 LOWER COURT JUDICIAL OFFICER: Brownie J
COUNSEL: Appellant - S J Burchett
Respondent - M R SpeakmanSOLICITORS: Appellant - John M Fitzgerald & Associates
Respondent - Halliday & Stainlay, MurwillumbahCATCHWORDS: APPEAL - rehearing - taking point not taken at trial - departing from course adopted at trial - when not permitted. DECISION: Dismissed with costs.
29THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEALCA 40414 of 1996
ED 1662 of 1992Mason P
Priestley JA
Giles JAThursday 8 April 1999
CHILCOTIN PTY LTD & ANOR v CENELAGE PTY LTD & ORS
JUDGMENT1 MASON P: I agree with Giles JA.
2 PRIESTLEY JA: I agree with Giles JA.
3 GILES JA: Cenelage Pty Ltd (“Cenelage”) conducted a business of providing training courses for persons wishing to enter the hospitality industry. Courses were provided in various country centres throughout eastern Australia, each occupying a week and being delivered by an instructor from hired premises. The business was administered by Mr Thomas Ganz and his wife Ms Natasha Lakaev, who were the shareholders and directors of Cenelage.
4 By two contracts dated 27 September 1991 Cenelage sold part of the business to Chilcotin Pty Ltd (“Chilcotin”) for $100,000 and the balance of the business to Gemeden Pty Ltd (“Gemeden”) for $35,000 plus an amount for stock in trade. Gemeden was a subsidiary of Chilcotin, and both Chilcotin and Gemeden were effectively controlled by Mr Johann Hoefl. The first of the contracts provided for adjustment of the purchase price by a formula related to the net earnings of the business for the year ended 30 June 1992. Mr Ganz and Ms Lakaev were parties to the contracts, described as “the Covenantors”.
5 Each contract contained a clause 20 and a special condition 7 in the terms:
“20. The Purchasers acknowledge that, in entering into this agreement they have not relied upon any statement, representation, warranty or condition made or given by the Vendors or anyone on their behalf in respect of the subject matter of this agreement, other than those that are expressly herein contained.”
“7. Notwithstanding the provisions of Clause 20 hereof the Vendor and the Covenantors hereby expressly acknowledge that the Purchasers have been induced to enter into this Agreement on the basis of the information contained in Annexures ‘A’ through ‘F’ hereof and the Vendor and Covenantors hereby warrant the reliability, accuracy, completeness and truthfulness of the information provided in those Annexures.
The Vendor further agrees, if requested by the Purchasers, to permit the Purchasers or their Accountants, at the Purchasers’ expense, to undertake an audit prior to completion of the records of the business for the period from 1 July 1989 to date of completion. The Vendor will, upon request, provide all such books of account and other financial statements as may be required by the Purchasers or their Accountants to undertake the audit provided that the Vendors shall not be obliged to produce its tax returns which relate not only to the business but also to other unrelated business ventures conducted by the Vendor.”
6 The Annexures to the contracts included as Annexure ‘D’ a compilation of trading and profit and loss statements for Cenelage for the years ended 30 June 1988 to 30 June 1991 and as Annexure ‘E’ two faxes setting out “Income from course fees” monthly for the years ended 30 June 1989, 30 June 1990 and 30 June 1991. Annexure ‘D’ included gross figures for course fees received by Cenelage and a figure for refunds allowed, so that net figures for income could be derived; the figures so derived were a little different from the figures for income from course fees in Annexure ‘E’. By deduction from the gross figures for course fees of the figures for refunds allowed and figures for purchases, Annexure ‘D’ arrived at figures for gross profits for the four years. Many items of expenses were then listed, and the totals of their figures were deducted to arrive at figures for net profits for the years.
7 The sale of the business was completed on 30 September 1991. Mr Hoefl conducted the business for over a year, but found it unprofitable. Chilcotin and Gemeden sued Cenelage, Mr Ganz and Ms Lakaev, alleging that the income and profitability of the business had not been as represented and warranted in the contracts. Originally they claimed rescission of the contracts and damages, alleging fraud, negligence, misleading conduct, and breach of the warranty in special condition 7. The claims for rescission and for damages for fraud and in negligence were abandoned in the course of the hearing. It was conceded that the income and expense figures in Annexures ‘D’ and ‘E’, and hence the net profit figures in Annexure ‘D’ were incorrect, and that Chilcotin and Gemeden were entitled to damages for breach of contract. The issues ultimately requiring decision were:
(a) the amount of the damages for breach of contract; and
(b) whether Chilcotin and Gemeden were also entitled to damages for misleading conduct, and if so the amount of the damages.8 Brownie J held that Chilcotin and Gemeden were entitled to damages for breach of contract in the amount of $22,722 plus interest, but that they were not entitled to damages for misleading conduct. Chilcotin and Gemeden appealed. The grounds of appeal included that his Honour was in error in holding that the appellants were not entitled to damages for misleading conduct, first because he was wrong in finding that Mr Hoefl had not relied on the accuracy of the figures in Annexures ‘D’ and ’E’ but rather had relied on the existence of the contractual promises as entitling the appellants to sue for breach of contract if he thought it advantageous, and secondly because in any event there was no relevant distinction between the two reliances and the reliance in fact found should have lead to damages for misleading conduct. The appeal in this respect was not pressed, and it is unnecessary to say anything about it. The other grounds of appeal were concerned with the assessment of the damages for breach of contract.
A preliminary question
9 Brownie J had accounting and valuation evidence from Mr Peter Graham, an accountant, and Mr Harry Le May, a business agent and valuer, called by the appellants, and from Mr Warwick Finney, an accountant with experience in the valuation of businesses, called by the respondents. He preferred the evidence of Mr Finney on both accounting and valuation matters, and accepted it.
10 The damages of $22,722 were in accordance with the evidence of Mr Finney. Relevantly, he valued the business on the basis of its actual income, expenses, and hence net profits, averaged over three and a quarter years prior to 30 September 1991, and valued the business on the basis of the warranted income, expenses, and hence net profits, over the same period but with some adjustments and an addition to the figures in Annexure ‘D’. The difference between the values was $22,722. As will be seen, the submissions on appeal as to his Honour’s acceptance of Mr Finney’s evidence included that Mr Finney had made errors whereby he had overstated the actual income, had understated the actual expenses, and (by the adjustments) had overstated the expenses and wrongly included a net profit figure for the three months to 30 September 1991 in the valuation on the basis of the warranted figures. According to the submissions, with the correction of all the errors the damages for breach of contract should have been $220,281 even on Mr Finney’s valuation method. Other grounds of appeal challenged the acceptance of Mr Finney’s valuation method.
11 Mr Graham provided affidavit evidence, and was not cross-examined. Mr Finney provided a report, adopted by affidavit, and was cross-examined. Not one of the errors now said to have been made by Mr Finney, and therefore by Brownie J in accepting Mr Finney’s figures, was raised with Mr Finney. To the extent to which facts supporting the existence of the errors could have been elicited from other witnesses, for example Mr Ganz or Ms Lakaev (who provided evidence on affidavit and were cross-examined), not one question was put to them to that end. Mr Graham’s evidence did not address the errors. More than that, in the oral and written submissions to Brownie J it was not suggested that Mr Finney had made the errors now asserted. As was frankly acknowledged, the errors now asserted were not discovered by the appellants until, after Brownie J had given judgment, they gave detailed attention to Mr Finney’s report. Understandably, the respondents submitted that the appellants should not be permitted to assert the errors on appeal.
12 The appeal is by way of rehearing (Supreme Court Act 1970, s 75A(5)). Errors in findings of fact may be corrected, and subject to well known constraints (see Jones v Hyde (1989) 63 ALJR 349; Abalos v Australian Postal Commission (1990) 171 CLR 167; DeVries v Australian National Railways Commission (1993) 177 CLR 472) this Court may substitute its findings of fact for those of the trial judge. There is power to recognise and correct errors of the kind asserted in this appeal, if they are errors. Subject to what follows, in the exercise of its function as an appellate court conducting a rehearing this Court should correct errors so as to make the findings of fact which the trial judge should have made.
13 But the existence of the power does not mean that the appellants are entitled to have it exercised. Two principles, in addition to the constraints earlier mentioned, come into play.
14 First, where a point is not taken in the Court below and evidence could have been given there which by any possibility could have prevented the point from succeeding, it can not be taken afterwards (Suttor v Gundowda Pty Limited (1950) 81 CLR 418 at 438; see also Coulton v Holcombe (1986) 162 CLR 1 at 7-8 and Water Board v Moustakas (1988) 180 CLR 491 at 497). Similarly, the point can not afterwards be taken where, if the point had been raised, the respondent might have conducted the case differently at trial (Multicon Engineering Pty Limited v Federal Airports Corporation (NSWCA, 15 October 1997, unreported)). The strength of this principle is demonstrated by Suttor v Gundowda Pty Limited. It was accepted that the defence which the appellant sought to raise for the first time on the hearing of the appeal would not naturally have occurred to him before judgment, because it was grounded on a particular finding, but it was said that it had been open to the appellant to ask the trial judge to restore the proceedings to the list and hear argument on the effect of the finding, and if necessary to reopen the case and hear further evidence. It was held that it was “by no means clear that, if the defence had been raised in the court below, further relevant evidence might not have been tendered” (at 439), and that it was too late to raise the defence. There is no reason why this principle should not extend to points of the kind involved in the errors asserted by the appellants.
15 The second principle is that generally parties must be bound by the course they adopted at the trial (Browne v Dunn (1894) 6 R 67 at 75-76; Rowe v Australian United Steam Navigation Co Limited (1909) 9 CLR 1 at 24; University of Wollongong v Metwally(No 2) (1985) 59 ALJR 481 at 483; Multicon Engineering Pty Limited v Federal Airports Corporation). At least in part this principle is founded on public policy considerations favouring the finality of litigation (see Rowe v Australian United Steam Navigation Co Limited; Banque Commerciale SA (in Liq) v Akhil Holdings Limited (1990) 169 CLR 279 at 284), and it may be that the appellant will not be permitted to make a new case on appeal even if the point is unaffected by possible further evidence or the way the opposing party would have conducted the case at trial (as is illustrated by Multicon Engineering Pty Limited v Federal Airports Corporation). And this principle may come into play not only when the course taken at the trial was deliberate, but also if the appellant’s conduct of the trial was affected by inadvertence. The statement of the principle in University of Wollongong v Metwally (No 2) was in the terms -
“It is elementary that a party is bound by the conduct of his case. Except in the most exceptional circumstances, it would be contrary to all principle to allow a party, after a case had been decided against him, to raise a new argument which, whether deliberately or by inadvertence, he failed to put during the hearing when he had an opportunity to do so.” [emphasis added]
16 Although the case was not one of appeal by way of rehearing, in Coulton v Holcombe Gibbs CJ and Wilson, Brennan and Dawson JJ cited this passage for a principle operating in such a case (at 8; cf Deane J at 17).
17 The two principles, which I will call the further evidence principle and the course at trial principle, are founded on regard to the finality of litigation, the need for parties to fully present their cases without deliberately reserving points for appeal or by neglect failing to take them when they should, and avoidance of injustice to a party having to meet new points on appeal. The further evidence principle can be seen as a particular application of the course at trial principle, in that the party’s conduct of the trial left him exposed to the possibility of further evidence or different conduct of the trial by the other party. The underlying constraint was stated in the joint judgment in Coulton v Holcombe (at 7) in the words -
“To say that an appeal is by way of rehearing does not mean that the issues and the evidence to be considered are at large. It is fundamental to the due administration of justice that the substantial issues between the parties are ordinarily settled at the trial. If it were not so the main arena for the settlement of disputes would move from the court of first instance to the appellate court, tending to reduce the proceedings in the former court to little more than a preliminary skirmish.”
18 So in Multicon Engineering Pty Limited v Federal Airports Corporation it was said that a party does not have a right to insist that a new point be decided on appeal simply because all of the facts have been established beyond controversy or the point is one of construction or of law, event constitutional law, because it remains a question of whether the appellate court “may find it expedient and in the interests of justice to entertain the point” (citing from Water Board v Moustakas at 497). Earlier express applications of the test of it being expedient and in the interests of justice to entertain the point include O’Brien v Komesaroff (1982) 150 CLR 310 at 319; Banque Commerciale SA (in Liq) v Akhil Holdings Limited at 284; and Jones v Minister for Immigration (1995) 63 FCR 32 at 47. As always, the particular circumstances must be considered, with due recognition that mistakes occur, that second thoughts are sometimes good thoughts, and that the appellant is entitled to justice; but extending justice to an appellant who has failed to take a point at the trial may work an unacceptable injustice on the respondent.
19 Whether the appellants should be permitted to assert the errors on appeal therefore requires attention to the conduct of the proceedings below. What follows includes information provided during and, by leave, after the hearing of the appeal.
20 The statement of claim was filed on 23 February 1992. Notices for discovery were served. The respondents did not file their list of documents as required, but the appellants said that Mr Hoefl inspected Cenelage’s bank statements and deposit books for 1991 at the office of the respondents’ solicitors; the respondents’ records did not enable them to agree. In June or July 1994 affidavits sworn by Mr Graham were filed in which he deposed to actual income, expenses, and net profit for 1991, using income figures obtained not from bank statements, but from summary sheets prepared for each week for each course taught on which were entered the names of the students, amounts paid, and dates of payment. Affidavits of Mr Hoefl and a Ms Susan Philip in part underpinning Mr Graham’s affidavits were filed shortly before and shortly after these affidavits.
21 There was correspondence concerning the respondents’ list of documents, and in June 1995 the list was filed. It included “Folder containing Bank Statements”, a folder with Cenelage’s financial statements for the years ended 30 June 1988, 1989, and 1990, and “Various ANZ and Westpac Bank Statements, deposit books, cheque books …”. The appellants said that copies of the discovered documents were provided in September 1995; again the respondents’ records did not enable them to agree.
22 The appellants were dissatisfied with the discovery, and in November 1995 served a notice to produce on the respondents requiring production of bank statements, deposit books, cheque book stubs, the refunds file for the business for the period 1 July 1990 to 30 June 1992, and the annual accounts and taxation returns for 1991 and 1992 (however, according to the appellants bank statements and deposit books for 1991 had been inspected in 1994).
23 The respondents seem to have been uncertain as to what damages the appellants claimed and how they arrived at their damages, such uncertainty being well justified on the affidavits of Mr Graham and such supporting affidavits as had been filed to that time. It seems that on 4 December 1995 the appellants were directed to provide particulars of loss and damage by 8 December 1995. Particulars were provided on 7 December 1995, the damages being claimed on a reliance basis rather than an expectation basis: the letter providing the particulars was not before us, but the appellants’ written submissions later provided to Brownie J were before us, and claimed $120,000 as the difference between the value of the goodwill of the business at the date of the contracts and the amount which was paid, trading losses of about $200,000 measured by advances from Mr Hoefl to the business and amounts owed to Mr Hoefl by way of directors’ fees, and interest. It is evident that, save as to the value of the business when purchased, the affidavits served on behalf of the appellants to this time would not make out the damages so claimed, and even as to the value of the business when purchased the affidavits were less than satisfactory.
24 The appellants provided a proposed amended statement of claim, which was in due course filed at the commencement of the hearing. Documents were produced in answer to the notice to produce on 6 December 1995, but not deposit slips, cheque stubs, bank statements from 1 July to 13 September 1991, or the refunds file or taxation returns. There was further correspondence concerning the respondents’ discovery. The appellants served a number of further affidavits of Ms Philip (9 January 1996), Mr Hoefl (12 January 1996, 24 January 1996, 7 February 1996) and Mr Graham (31 January 1996); these affidavits were voluminous, and it is plain enough that only in January and February 1996 did the appellants properly set about proof of their case. Mr Graham’s affidavit of 31 January 1996 did address actual income, expenses, and net profits for 1989 and 1990 as well as 1991. The affidavits were directed to damages on a reliance basis, not an expectation basis. There was more correspondence concerning the respondents’ discovery and the annexures to the recent affidavits. The respondents maintained that they could not provide their expert’s report until all the appellants’ affidavits had been received; the appellants took issue with that.
25 The affidavit containing Mr Finney’s report was served late on 9 February 1996, a Friday. Other affidavits of Mr Ganz and Ms Lakaev were also served, as were some further affidavits from the appellants’ side. To this time no valuation evidence had been served by the appellants, and Mr Le May’s affidavit dated 11 February 1996 was served on or shortly after the date it was sworn. The hearing began on 13 February 1996.
26 The most recent directions had required the appellants’ affidavits by 27 December 1995 and the respondents’ affidavits by 25 January 1996. As is apparent from the preceding paragraphs, both sides had recently served material outside those times. Notwithstanding the appellants’ invitation to conclude that they had been forced to cast their claim for damages on a reliance basis by the respondents’ failure to provide proper discovery, I do not see any reason so to conclude. When the appellants claimed rescission of the contracts and damages for misleading conduct, as they still did in the amended statement of claim, it is understandable that they should have directed their case to reliance on the represented income and profitability and the loss suffered from the reliance, and in my opinion they must be taken to have so decided because they considered that it was in their interests to do so.
27 As I have said, the appellants frankly acknowledged that the errors asserted on appeal were not discovered by them until, after Brownie J had given judgment, they gave detailed attention to Mr Finney’s report. They invited the conclusion that, in the circumstances I have recounted, the late provision of the report meant that they were unable to give it proper attention at the time. I do not agree. Mr Le May was obviously available to them, and his affidavit sworn on 11 February 1996 replied to that of Mr Finney, so they gave sufficient attention to the report to produce Mr Le May’s response. Mr Graham must have been available to them, because a short affidavit was sworn by him on 13 February 1996 and read at the hearing. I see no reason why Mr Graham could not have been provided with a copy of Mr Finney’s report and requested to review it, and if a brief additional time were required (for example, so that counsel could turn aside from his other conduct of the appellants’ case to confer with Mr Graham) Brownie J could have been asked for that time. No application was made for an adjournment at the commencement of the hearing, or for time to address Mr Finney’s report. Mr Finney’s affidavit was read without objection. The transcript records, after the reading of affidavits and tender of documents, “No case in reply subject to a response to Mr Finney’s report”, so the appellants must have proposed to give further attention to the report.
28 Mr Finney gave brief oral evidence, and was cross-examined, on 15 February 1996, without any indication to his Honour that the appellants had been placed in difficulty by the recent service of the report. At a time when it was thought the evidence had concluded (although there was some brief further cross-examination of Mr Hoefl thereafter), the appellants applied for an adjournment “for a period of days to a time convenient to his Honour”, but apparently only in aid of preparation of submissions. The application was refused, and oral submissions were taken on 16 February 1996, but his Honour gave leave for the parties to deliver written submissions in the following week, and they did so. The appellants’ written submissions were dated 22 February 1996. If the appellants had not been able adequately to consider Mr Finney’s report to that time, they could have done so during the time allowed for the preparation of written submissions.
29 The appellants’ written submissions specifically stated that they elected for reliance damages rather than expectation damages, and that the damages for breach of contract and for misleading conduct should be assessed on the same basis. The written submissions contended, with reasons, that the figures put forward through Mr Graham and Mr Hoefl were more accurate than Mr Finney’s figures. There must have been some consideration of the detail of Mr Finney’s figures, because the submissions included, “Analysis of the evidence demonstrates that Mr Finney’s figures are often materially wrong. For September 1991, for instance, Mr Finney’s income estimate is $18,676 above the income recorded on the enrolment forms and summary sheets”, and included a schedule taking issue with some of Mr Finney’s 1991 income figures. The schedule went to the detail that the bank deposits for the business showed four amounts which had not been excluded from Mr Finney’s income for May 1991.
30 Brownie J gave judgment on 25 June 1996. If they felt that there had been insufficient time properly to address Mr Finney’s report, the appellants had ample opportunity to give attention to it and apply to reopen or put further submissions.
31 On this material, the conclusion is open that the appellants deliberately did not challenge the figures in Mr Finney’s report for many of the errors now asserted. Their case was one of reliance damages. So far as proof of the damages concerned the value of the business at the time of purchase on the basis of its actual income, expenses, and hence net profits, in order to recover the $120,000, they contended through the evidence of Mr Graham, Mr Hoefl, and Mr Le May for a nil value based upon the results for the six months to 20 September 1991 or at most for 1991 (I will refer to the years ending 30 June in this way) and the three months to 30 September 1991. Mr Finney went further. He assessed damages on an expectation basis, and so addressed also the value of the business on the basis of the warranted income, expenses, and hence net profits; even in relation to the value of the business on the basis of actual figures, he went into the figures for 1989 and 1990 as well as for 1991 and the three months to 30 September 1991. I would draw that conclusion. Notwithstanding Mr Graham’s affidavit of 31 January 1996, the appellants put aside the 1989 and 1990 years, and the valuation of the business on the basis of the warranted figures, and sought to establish their case of reliance damages calculated from income figures from summary sheets (Graham and Hoefl) rather than the bank statements (Finney) and, as to the valuation, by regard to the six months or the one and a quarter years (Le May) rather than the three and a quarter years (Finney). They relevantly presented Brownie J with the choice between reliance damages and expectation damages and, so far as both bases of damages required a value of the business at the time of purchase, a choice between the two periods. If Brownie J chose against them, they did not contest Mr Finney’s figures for 1989 and 1990 or for the value of the business as warranted.
32 The consequences of this will be better addressed with knowledge of the particular errors now said to have been made.
Actual figures
33 (a) Income
Brownie J considered that the bank statements should be regarded as the best record of what money was banked and therefore received. The appellants did not submit on appeal that he should have preferred the summary sheets as the best record of income, but submitted that there were errors in Mr Finney’s use of the bank statements which should be corrected. Three errors were put forward. The result, according to the appellants, was that Mr Finney had overstated the income from course fees for each of 1989, 1990 and 1991 -
YearFinney1989
Finney adjusted$633,463.001990
$613,504.00$818,812.001991
$808,356.00$686,855.00
$676,809.00(i) Coding
34 In taking the income from course fees from the bank statements, Mr Finney relied on a coding entered on the bank statements by Ms Lakaev and other Cenelage staff at the end of the financial year or from time to time in order to eliminate deposits other than income from course fees. The appellants said that the coding was incorrect, or was incorrectly read by Mr Finney, in a number of instances, so that some of the deposits included in Mr Finney’s totals should have been eliminated but were not, and that some of the amounts included in Mr Finney’s totals were noted in the bank statements not as income from course fees but as receipts of other kinds. The amounts involved were said to be $6,093 for 1989 and $9,180 for 1990, with particular deposits identified, and it was then said (rather inconsistently with the stance that Brownie J’s preference for the bank statements was not challenged) that the 1991 figure must be suspect, and that Mr Graham’s figure or a figure said by Mr Hoefl to have been derived by him from bank statements should have been taken to give a further “error” of $6,088 for 1991.
35 The respondents did not contest that there were apparent errors in relation to the particular deposits. Ms Lakaev gave evidence and was cross-examined, but nothing was put to her in relation to miscoding; nor was anything put to Mr Finney about misreading of the coding, or about the other notations on the bank statements. So the respondents said that there may have been explanations which Ms Lakaev could have given, for example a further code for income from course fees, or that Mr Finney might have given an explanation, for example, that the apparent error disclosed not through a tabulation of the amounts he had taken as fees for course income, but by a comparison between his totals and totals in the bank statements, were elsewhere accommodated in his workings. And they said that the translation of error to 1991 was speculation, and the alternatives were not necessarily more accurate than Mr Finney’s figure.
36 It is perhaps doubtful that Ms Lakaev or Mr Finney could have given evidence whereby the apparent errors were shown not to have been errors, although a possibility may be sufficient for the further evidence principle - maybe there was a further code. In my opinion, however, the course at trial principle precludes reliance on the asserted error. The appellants put aside the 1989 and 1990 years in the manner I have described, and having taken that course - including by not using, at the least, the opportunity afforded by the time for written submissions to give attention to Mr Finney’s report - they should be bound by that course. The translation to 1991 is speculation, and would require a wholesale revisiting of Brownie J’s preference for the bank statements over the summary sheets when no sufficient reason has been shown for error in that respect. I am of this opinion despite the appellants’ submission that it was not until Ms Lakaev’s affidavit of 13 February 1996 that they knew the codes. They must have known that there were codes, because they had seen the 1991 bank statements long before; they had not enquired; when they knew the codes, they could have done what they did after Brownie J had given judgment. In any event, the errors in coding asserted were for 1989 and 1990.
(ii) Dishonoured cheques
37 The bank statements included debits for a number of dishonoured cheques. The appellants said that, from a comparison between Mr Finney’s totals and the totals in the bank statements, it could be seen that Mr Finney had failed to deduct the amounts of the dishonoured cheques from the income from course fees. The amounts involved were said to be $1,620 for 1989, $1,276 for 1990, and $3,958 for 1991.
38 Again the respondents did not contest that there were apparent errors in relation to the particular cheques. They said, as before, that Mr Finney may have had an explanation had the alleged errors been put to him.
39 What I have said in relation to coding applies, save as to the 1991 error of $3,958, but as well the process of correlating cheques deposited and cheques dishonoured (where one cheque may or may not reappear in the bank statements) is not something which should be undertaken in this appeal when it was not raised for Mr Finney’s consideration. It is also possible that Mr Finney did not concern himself with dishonoured cheques because he sought to arrive at income on an accrual basis, and thought sufficient accuracy was achieved (despite minor doubling-up in the deferral next mentioned) by leaving the cheques in as earned fees. The point is that there may be an explanation, but Mr Finney was not given the opportunity to provide it. In my opinion the appellants should not be permitted to raise this error.
(iii) Deferral
40 The bank statements gave income from course fees on a cash basis. Both Mr Graham and Mr Finney considered it appropriate to take income, expenses and net profit on a accrual basis in order to value the business. Mr Finney sought to “get fairly close to the accrual basis” by deferring one quarter of each month’s income, treating it as being earned in the following month. The appellants said that he failed to do this for 1989, so that one quarter of the income from course fees for June 1989 was included twice, as part of the June 1989 income and again as part of the July 1989 income. Recognising that correction of this error would require inclusion in the July 1988 income of one quarter of the June 1988 income, they estimated the June 1988 income as 40 per cent of the June 1989 income on the basis of the percentage relationship for the respective Julys and the whole of the respective years. The result was that Mr Finney overstated the income for 1989, on the appellants’ calculation by $12,246.
41 The respondents accepted that Mr Finney had not carried out the deferral in relation to the income from course fees for 1989, but again said that he might have had an explanation if the error now asserted had been put to him. For example, it was said, Mr Finney might have considered that the income for 1989 was more correctly, or at least adequately, brought to account on a cash basis, and that the deferrals which might otherwise have been made affecting July 1988 and July 1989 would in substance cancel each other out; he might not have agreed that the 40 per cent was a fair estimate when carrying out the deferral in relation to July 1988, and if the matter had been put to him might have been able to go to the actual June 1988 income.
42 The error asserted was in relation to 1989. Again, it is perhaps doubtful that Mr Finney could have given evidence whereby the apparent error was shown not to have been an error. But as before, in my opinion the course at trial principle precludes reliance on the asserted error. Through Mr Finney, the respondents put forward a valuation of the business on the basis of its actual figures, including an income figure for 1989. The appellants did not contest the figure, either by contrary evidence from Mr Graham or Mr Hoefl, by challenging Mr Finney’s statement of the income, or by a submission to Brownie J. They confined their attention to 1991 and the three months to 30 September 1991, with tolerable clarity because they wanted his Honour to accept their case of reliance damages assessed, so far as it was necessary to value the business, by regard to at most the one and a quarter years prior to 30 September 1991 - that was Mr Le May’s approach. Having taken that course, and lost because his Honour preferred Mr Finney’s approach to the valuation and then took Mr Finney’s figures, they should not be permitted to have a second attempt to quantify their damages on a different basis.
43 In dealing with the three errors put forward, I have not overlooked that the appellants also asserted errors in relation to income and expenses for the period July - September 1991. I deal with that below in connection with valuation. A perspective on the operation of the course at trial principle in relation to the three errors is provided by comparing what the appellants now say comes from correction of the errors with what they put forward through Mr Graham’s affidavit of 31 January 1996 -
YearFinney adjusted1989
Graham$613,5041990
$638,991$808,3561991
$812,549$676,809
$661,779
To entertain correction of the errors on appeal would condone a taking advantage of Brownie J’s rejection of Mr Graham’s figures in favour of Mr Finney’s figures.(b) Expenses
44 Having accepted Mr Finney’s figures for income from course fees, Brownie J noted that the more significant dispute was as to the profit made and when it was made. It was common ground that the business was seasonal, and was more active during the summer months than the winter months. His Honour recorded that Mr Graham and Mr Finney assumed that the cost of teaching each course was approximately the same, so that Cenelage’s annual outgoings should be divided by the number of courses taught to arrive at a cost per course, and that the net profit for a given month should be found by deducting from the income from course fees for that month the cost of teaching the number of courses taught in the month. As to expenses, and hence net profit, his Honour said that, whilst remembering that Mr Graham was not cross-examined, he accepted the evidence of Mr Finney. His reasons did not disclose any differences between Mr Graham and Mr Finney as to the figures for expenses. The appellants submitted that there were errors in Mr Finney’s figures for expenses which should be corrected. Errors of three kinds were asserted. According to the appellants, correction of the errors would bring expenses -
YearFinney1989
Finney adjusted$433,4011990
$518,616$628,0121991
$677,289$555,065
$593.183(i) Additional expenses
45 In his report Mr Finney said that a number of figures for expenses had been determined by Hospitality Training Group (being the trading name of the business) and its accountants as not being costs applicable to the business under different ownership. He said that the costs were claimed to relate to an abortive Melbourne operation and to be other costs “considered by the directors to be of a personal nature”, and that for the purposes of his report he had not investigated the individual items. The evidence included a letter from the accountants, clearly enough part of the determination to which Mr Finney referred, setting out costs which had been excluded as being “unrelated to the Hospitality Training Group business contemplated for sale”. Mr Finney adopted these adjustments to the financial statements for the business. The appellants said that five of the figures, the expenses for advertising, filing fees, photographic expenses, plant repair, and uniforms should have been included in the expenses, $4,215 for 1989, $28,731 for 1990, and $1,304 for 1991.
46 Mr Ganz was not asked anything about these items or the expenses to which they related. He might have been able to give evidence from which it could be seen why the accountants had taken the view they did. In the absence of any other evidence, the respondents had the advantage of the apparent professional opinion of Cenelage’s accountants that the expenses were not expenses to be taken into account in arriving at the net profit of the business when considering its value on sale. No evidence was led from Mr Graham, or anyone else, to challenge this apparent opinion. The appellants did not explore through Mr Finney whether the opinion was well founded; had they raised it with Mr Finney, it may be that although he had not investigated the items, he would have supported the relevant adjustments in principle. If the appellants wished to contend that the figures should have been taken into account as expenses in arriving at net profit, it was incumbent on them to provide the factual and/or professional foundation for doing so in order to displace the prima facie position to the contrary via the accountants’ letter. I do not think it can be said that the adjustments were adopted by Mr Finney, and erroneously accepted by Brownie J, without justification, as the appellants submitted, when the appellants did not take issue with them, and it must not be overlooked that the appellants were the claimants, bore the burden of proof, and so had to establish the net profit and the value of the business. In my opinion, the further evidence principle precludes the submission, quite apart from the course at trial principle in relation to 1989 and 1990.
47 Even so, said the appellants, the adjustment of $43,000, part of the advertising expenses for 1989, was a hypothetical figure, described in the accountant’s letter as the result of an adjustment “to give meaningful ongoing comparison”. The appellants took the accountants to mean that there had been a saving in advertising costs since 1989 and that the 1989 figure should therefore be assumed to have been less. It may or may not have been what they meant, but it is far from clear, and that is all the more reason why the appellants should have raised the matter in the course of the hearing. They also said that some of the adjustments were in round thousands of dollars, and so unlikely to have been or resulted in actual figures. The same can be said, and it may have been that an adjustment was appropriate and the only contest could be over the precise amount: the appellants did not explore this, or any appropriate amount.
48 In my opinion, the appellants should not be permitted to assert error in relation to these additional expenses.
(ii) Franchise Consultant’s Fee
49 Cenelage granted a franchise in respect of an area of Queensland and was entitled to part of the course fees received by the franchisee. The franchise was in force from September 1990 to May 1991, and the course fees were included in Cenelage’s income. The appellants said that the expenses should have included a franchising consultant’s fee of $20,546, written off over the duration of the franchise agreement and so included in full as an expense for 1991.
50 The fee was another adjustment in the accountants’ letter earlier mentioned, and so its treatment had the prima facie support of the apparent professional opinion of Cenelage’s accountants. Mr Finney adopted it as before. In this case, however, there was more. Mr Ganz gave evidence that the fee was paid to a franchising consultant “to examine the franchisability of HTG”. He was not asked anything more about it, or about intentions in relation to franchising or other steps towards franchising. From Mr Ganz’s evidence it would seem that the expense was a non-recurring expense, and in the absence of evidence to support it the appellants’ submission that further franchising could again require the services of the consultant and that the fee should be regarded as a normal operating cost incurred in deriving the franchise income for 1991 can not be accepted. Further, there was no evidence from Mr Graham in support of the treatment of the fee for which the appellants now contend, nor was its proper treatment raised with Mr Finney.
51 On such evidence as there was, I am not persuaded that there was an error, but in any event I do not think that the appellants should be permitted to assert the error. The fee had to be accounted for in some way, but the question was how. Had Mr Ganz been asked about it, he may have given evidence making plain that the fee was not to be treated as an operating cost to be written off in full in 1991; had Mr Finney been asked about it, he may have supported the treatment it received. The further evidence principle stands in the appellants’ way.
(iii) Accrual of expenses52 Mr Finney took the expenses from Annexure ‘D’. The appellants said that the figures in the Annexure were on a cash basis, and that they needed adjustment to an accrual basis in order properly to match the figures for income. They were not adjusted (the respondents did not contest this). To correct this error for the three year period, the appellants said, unpaid trade creditors should be added as at 30 June 1991 and unpaid trade creditors should be deducted as at 30 June 1988. From the balance sheets, the respective figures were $58,340 and $21,526. This brought an overall increase in the expenses for the three years of $36,814. Attributing the increase in trade creditors to recent poor trading, the appellants then said that the whole of that amount should be taken to increase the expenses for 1991.
53 Assuming that an adjustment was called for, I do not see why the increase in trade creditors should be attributed to recent poor trading and so taken to increase the expenses for 1991. Any adjustment should have been annual, as Mr Finney took the annual net profits and used them in an averaging when making his valuation. That involved the complication of an extraordinary event, an abortive Melbourne operation in 1990 and 1991. Had this adjustment been raised through Mr Graham or with Mr Finney, it may be that further evidence would have been given, either as to the underlying figures or as to their treatment, leading to an adjustment different from the adjustment suggested for the first time in submissions on appeal. For that reason alone there is an obstacle to raising the suggested error.
54 But the respondents pointed to a more fundamental obstacle. One of Mr Graham’s affidavits filed in June 1994 had arrived at profit figures for 1991 based on Annexures ‘D’ and ‘E’. In his affidavit served during the hearing he said that the “Income and Profit Data” in the tables in the earlier affidavit were “presented on an accrual basis, and not on a cash flow basis of accounting”. Did he mean that he regarded the expenses in Annexure ‘D’ as prepared on an accrual basis? The respondents suggested that the figure of $555,065 for expenses from Annexure ‘D’ could be derived from Mr Graham’s tables, and that Mr Graham did see the figures for expenses in Annexure ‘D’ as figures on an accrual basis. The appellants seemed to agree that Mr Graham meant this. If so, there was no error in failing to adjust the figures. That would be an unusual way of seeing the trading and profit and loss statement, and Mr Finney’s report included the general statement that “HTG appears to have accounted for its trading operations on a cash basis rather than use the accrual basis of accounting”. But he did not say how he regarded the figures for expenses in Annexure ‘D’, and because the appellants did not raise the point below it was not investigated.
55 Mr Graham used the same figure as the appellants now say Mr Finney should not have used. In all the circumstances, in my opinion, the further evidence principle precludes the appellants from asserting this error on appeal.
56 Again, I have not overlooked that the appellants asserted error in relation to the expenses for the three months to 30 September 1991. I deal with that when addressing valuation. Again, a perspective on the operation of the principles is provided by comparing what the appellants now say comes from correction of the errors with what they put forward through Mr Graham’s affidavit of 31 January 1996 -
YearFinney adjusted1989
Graham$518,6161990
$447,401$677,2891991
$628,012$593,183
$555,066
That entertaining correction of the errors on appeal would condone a taking advantage of Brownie J’s rejection of Mr Graham’s figures in favour of Mr Finney’s figures is even more marked.Warranted figures
57 As earlier noted, Mr Le May did not value the business on the basis of the warranted income, expenses, and hence net profit. The only evidence was that of Mr Finney, which Brownie J accepted. The appellants asserted errors in the adjustments and the addition which Mr Finney made, for the purposes of his valuation, to the warranted figures. One error was to do with expenses for 1991 and the other was to do with net profit for the three months to 30 September 1991.
(a) Expenses for 1991
58 Mr Finney undertook what he described as “a valuation assuming the figures referred to in Annexure ‘D’ to the contracts are correct”. As I have said, the figures in Annexure ‘D’ and Annexure ‘E’ were a little different. No point was taken, at the trial or on appeal, that Mr Finney should have taken in figures from Annexure ‘E’ rather than Annexure ‘D”.
59 Annexure ‘D’ arrived at net profits for 1989 ($191,483.86), 1990 ($183,606.80), and 1991 ($187,921.43) in a compilation of trading and profit and loss statements. At the foot of the statements it was recorded that they excluded depreciation, interest, leasing charges and payments to working proprietors. Mr Finney said that he did not agree with the exclusion of those costs to the extent that they related to the business operations, except for interest which related to the way in which the business was financed. He added back amounts for depreciation and payments to working proprietors, leaving interest as an excluded item and also leaving leasing charges as an excluded item on the assumption that the charges related to the leasing of vehicles not used in the business. He made other adjustments by adding back fees payable to a franchisee and trade creditors, stating that the figures for the fees and the additional trade creditors were not available when the Annexure was prepared. The result was the adjusted net profits -
YearAnnexure ‘D’1989
Adjusted Annexure ‘D’$191,4841990
$138,813$183,6071991
$121,774$187,921
$109,62660 The appellants conceded that it was apparent from Annexure ‘D’ that no depreciation or payments to working proprietors had been included, and did not contest the adjustments in these respects. They submitted, however, that the other adjustments, all for 1991, for franchising costs ($25,059), advertising ($7,547), and purchases ($6,950) were impermissible. They said that the warranted figures were the pre-adjustment figures, and that it was irrelevant to the valuation of the business on the basis of the warranted figures that additional expenses or liabilities were discovered or were thought by Mr Finney to be properly included in arriving at the 1991 net profit. In the result, they said that the 1991 net profit should be not $109,626 but $149,182, and that the value of the business on the basis of the warranted figures should be assessed accordingly.
61 The respondents warranted “the reliability, accuracy, completeness and truthfulness of the information” in Annexure ‘D’. The task was to arrive at the value of the business on the assumption that the information was, in short form, complete and accurate. It does not follow that Mr Finney was limited to the information in Annexure ‘D’. The trading and profit and loss statements recorded that they excluded depreciation, for example, but even if they had not a valuer would have seen that no allowance was made for depreciation and, in the proper exercise of his art, would have made what he considered was a proper allowance for depreciation in order to arrive at the true value of the business. That would be consistent with the warranty, because it would not compromise the completeness or accuracy of the specific information given. But it would be otherwise if the valuer adjusted a figure for which specific information was given, for example, by adjusting a particular expense item to a different figure in order to reflect the actual expense. To do so would destroy the value of the warranty.
62 Mr Finney said in his report that he assumed that the income for 1991 included fees from courses conducted on behalf of the Queensland franchisee, and that of the fees collected $25,059 was payable to the franchisee as his entitlement or share of the income collected. He continued, “Accordingly I have reduced the profit for that year by $25,029 [sic; $25,059] as this item does not appear as a cost in the financial statements attached as Annexure ‘F’”. (Annexure ‘F” was Mr Finney’s annexure, being Annexure ‘D’ to the contracts.) Annexure ‘D’ did not include an expense item for, or encompassing, this amount, but it purported to state “Income” of two kinds, “Course fees - Office” and “Course fees - Instructors”, and after deductions for purchases and refunds to arrive at a gross profit from trading. If, as Mr Finney assumed, the income included fees from courses conducted on behalf of the Queensland franchisee, but the $25,059 was payable to the franchisee, the financial statement for 1991 was not complete or accurate because it failed to reflect that part of the income was not income to which Cenelage was entitled. The adjustment made by Mr Finney was equivalent to adjusting a figure for which specific information was given, and in my view Mr Finney was in error in making it.
63 So also in relation to the adjustment adding back trade creditors. The financial statement included figures for purchases and for the expense item of advertising, and where they were warranted to be complete and accurate the valuation must leave them unchanged. That the figures for the additional trade creditors were not available when the Annexure was prepared only underlines the status of the figures in the Annexure. In my view Mr Finney was in error in making this adjustment also.
64 I do not think that the further evidence principle applies, as it can not reasonably be said that further evidence or different conduct of the case might have followed if the appellants had raised this error before Brownie J. Does the course at trial principle apply? That Mr Finney made the adjustments was plain from his report, and if the appellants had been interested in expectation damages one would expect them to have seen such a fundamental matter, one turning on the effect of the warranty, and raised it, if not with Mr Finney then for his Honour’s consideration. They did not, but as I have described devoted their attention to reliance damages. In my opinion, the circumstances are not such that the appellants should be permitted now to raise the error. It was a fundamental matter, there was ample opportunity to raise it if desired, and in my assessment the reason why it was not raised was not misadventure but because the appellants put their case, for good or ill, as one of reliance damages. As I have said, I do not accept that they were forced to do so by the respondents’ default in giving discovery. The appellants lost the battle on the field of their choosing, and finality of litigation and the injustice to the respondents if the appellants be allowed to regroup and attack on another front outweigh any injustice the appellants may suffer if their rights are not fully enforced by appellate intervention.
(b) Net profit for the three months to 30 September 1991
65 In arriving at the net profit Mr Finney included, in addition to the $109,626 for 1991 to which I have referred, $2,513 as the net profit for the following three months. He did not explain why, and was not asked about it in his evidence. The appellant submitted that this was erroneous, because the warranted figures did not include any figure for the three month period - they stopped at 30 June 1991. Rather, it was submitted, if any regard were to be paid to the three months then the regard should be not to what Mr Finney considered was the actual profit figure for the period, but to a figure derived from the treatment of the three months in accordance with the contractual formula related to the net earnings of the business for the year ended 30 June 1992.
66 I do not think that Mr Finney was in error. To return to the warranty in special condition 7, it was a warranty as to the information in Annexure ‘D’, that is, as to various figures for 1989, 1990, and 1991. The special condition said nothing about the three months to 30 September 1991. Although valuing the business on assumed figures, those in Annexure ‘D’, Mr Finney was nonetheless valuing it as at 30 September 1991, and it was open to him (indeed, he may have been required) to consider the fortunes of the business in the period after 30 June 1991. That did not run counter to an assumption that the figures in Annexure ‘D’ were complete and accurate, which was all the warranty required of him. In particular, the warranty as to completeness did not mean that trading results for earlier or later periods, if thought appropriate, could not be taken into account in the valuation.
67 The figure of $2,513 was the result of Mr Finney’s profit and loss figures for July, August, and September 1991. As I have said, the appellants asserted error in relation to income and expenses for the three months, but when I deal with that when addressing valuation I do not disturb it. The suggestion of using some other figure can not be accepted. For his valuation, Mr Finney considered it appropriate to use the actual profit figure, and nothing shows that he was incorrect. Indeed, the appellants would have it both that the business consistently lost money in the three months (see later in these reasons) and that, by an exercise to arrive at a figure derived from treatment in accordance with the contractual formula, it made a substantial profit. There was no error in taking the $2,513.
Valuation
68 Brownie J recorded that Mr Le May was of the view that the business had made a loss in the six months prior to the sale and therefore had no goodwill value at all. Mr Le May acted on the evidence of Mr Graham that losses had been made in each of April ($6,845), May ($2,240), and June ($15,310) 1991 and of Mr Hoefl that losses had been made in each of July ($13,329), August ($13,455) and September ($7,376) 1991. In Mr Le May’s opinion, that meant that the business had no goodwill left in it, but even if the whole year prior to the sale were considered Mr Le May thought that the business was unprofitable upon allowance being made for directors’ drawings and depreciation.
69 In contrast, as recorded by his Honour, Mr Finney arrived at losses for the months of April ($14,495), June ($11,286) and July ($17,961) 1991, but profits for the months of May ($2,926), August ($384) and September ($20,090) 1991, and since these were the winter months when historically profitability was low Mr Finney thought it appropriate to consider the business on a continuing basis and average the results out. He took the period of three and a quarter years to 30 September 1991, and concluded that the business was a profitable one and there was goodwill.
70 His Honour said:
“I prefer Mr Finney’s figures to those assumed by Mr Le May; and I prefer Mr Finney’s method of valuation to that of Mr Le May. Mr Le May’s opinion struck me as wholly unattractive, and his explanations made things worse. Further, he presented as a particularly unattractive expert witness. I note that his company was formally Mr Hoefl’s employer, and that he was at one stage Mr Hoefl’s creditor, but independently of those matters he seemed to me to enthusiastically adopt the role of advocate and to change course from time to time in the course of cross-examination.
In contrast, so far as the evidence goes, Mr Finney’s method of valuation was conventional, and seemed to reflect a common sense view of the matter. If a business is seasonal, as this one was, averaging the profits out over a period appears to reflect a reasonable approach to the question of valuation.
Much was made of the fact that the business lost more in the winter months of 1991 than in the previous two years, and no witness essayed a precise opinion as to why this was so, perhaps because nobody was qualified to give such an opinion. On the other hand, a number of witnesses, including Mr Hoefl himself, referred to the recession and its effects, and to the youth unemployment situation, and the business moved premises at that time; and in all the circumstances I do not think that the increased loss of the winter months of 1991 is a sufficient reason for not accepting the opinion of Mr Finney.”
71 After referring to Mr Le May’s views Brownie J had said, “I do not accept that the business had made a loss during the six months period in question, and I do not accept his conclusion that if it had made that loss, the goodwill value would have been nil”. The appellants submitted that this revealed an error which coloured what followed, because even on Mr Finney’s figures the business made an overall loss during the six months to 30 September 1991. It is plain, however, that his Honour intended to reject the foundation for Mr Le May’s views, expressed by Mr Le May in terms that the business had made a loss in each month of the six months period, and was not saying that it had made a profit over the whole of that period.
72 Important to the difference between Mr Le May and Mr Finney were two matters, first, whether there were consistent losses for the six months prior to the sale or a mixture of losses and profits, and secondly, the appropriate period over which the profitability or otherwise of the business should be viewed. The appellants said that Brownie J was in error in preferring Mr Finney’s figures to those assumed by Mr Le May, and the question of the further evidence principle and the course at trial principle came up again. They said that his Honour was in error in preferring Mr Finney’s method of valuation, essentially that he had regard to the period of three and a quarter years prior to 30 September 1991, to that of Mr Le May, who took the six months or at most the one and a quarter years prior to 30 September 1991. There was no question of the further evidence principle or the course at trial principle in this respect, but the appellants had to face the well known constraints earlier mentioned as material also to the evidence of expert witnesses (Ahmedi v Ahmedi (1990) 23 NSWLR 288).
(a) Losses and Profits?
(i) Income
73 Errors of two kinds were put forward. According to the submission, correction of the errors would mean -
MonthFinneyJuly 1991
Adjusted Finney$34,132August 1991
$32,195$29,260September 1991
$30,478$42,869
$39,467
74 Mr Finney’s report included a table headed “Bank Statements July 1991 to Sept. 1991”, setting out a number of figures for July with a total for that month, a number of figures for August with a total for that month, and a number of figures for September with a total for that month. From this it would seem that Mr Finney derived the income from course fees in the same manner as he had derived the income from course fees for the previous whole years. For their first error the appellants said that Mr Finney “did not bring any bank statements into evidence” to support these figures, and that without the bank statements it was impossible to say what might have been incorrectly treated as income from course fees or whether the figures included amounts for dishonoured cheques. So, it was said, the income should be taken from the summary sheets used by Mr Graham.75 Mr Finney exhibited to his report the bank statements for 1989, 1990, and 1991, and it seems that the bank statements for the three months to 30 September 1991 were not in evidence. But when Mr Finney apparently derived his figures from the bank statements it was open to the appellants to verify or contest what he did, and in the absence of more specific reason to conclude that Mr Finney’s figures were inaccurate or less accurate than figures taken from the summary sheets I see no reason why Brownie J should not have adopted Mr Finney’s figures, or why this Court should hold that he was in error in doing so.
76 The other error asserted was in relation to the deferral earlier described. The appellants said that when Mr Finney calculated the deferral he made no deferral of one quarter of the income for course fees for September 1991, a figure of $42,869, so that the income for the three months was overstated by $10,717. That appears to be correct, and the respondents did not contend otherwise. But it seems that Mr Finney also did not include in the income for July 1991 one quarter of the income for June 1991, and the appellants’ recalculation recognised this: the net overstatement of income, according to the calculation, was $4,121.
77 The income for June 1991 was $26,382, a markedly lower figure than for most other months. Neither Mr Graham nor anyone else gave evidence on the matter, and it was not raised with Mr Finney. Had it been raised with Mr Finney, it may well be that he would have said that he considered that the three months could be treated on a cash basis without relevant distortion of the valuation to which they were relevant, particularly because of the rather aberrant figure for June 1991. The respondents submitted that, even if there were an error, it did not matter, because it was common to both the valuation on the basis of actual income, expenses, and net profits, and the valuation on the basis of the warranted figures. So, it was said, the effect on both values would be the same, and the damages would be unchanged. I do not think that can be fully accepted. Mr Finney averaged the net profits, and depending on the other figures there could be different effects. Given the magnitude of the other figures, however, the difference would be small. Perhaps in his valuation judgment Mr Finney considered that it would be so small that he would not trouble to make the deferral. We do not know - it was not raised with him, and the error was not raised at all at the trial.
78 In my opinion, the appellants should not be permitted to assert this error: the further evidence principle stands in their way.
(ii) Expenses
79 The appellants said that the expenses for the three months were greater than those taken by Mr Finney. Mr Finney arrived at expenses of $110,352. The appellants said that the correct figure was $166,315, a difference of $55,963.
80 Mr Finney took a cost per course from the 1991 year, saying that no other figures were available for the three month period and that he thought the costs applicable to the preceding financial year would represent a fair assessment of the costs applicable to it. The appellants said that figures were in fact available in respect of the three month period, from Cenelage’s financial statements for 1992. The appellants took these figures, made various adjustments, and reached the figure of $166,315. They said that since Cenelege ceased trading as Hospitality Trading Group upon the sale of the business, this must represent the expenses for the relevant three months.
81 There was no evidence from Mr Graham, or anyone else, to support this exercise. It was not put to Mr Finney that he could have used the figures from Cenelage’s financial statements for 1992 and, of course, the adjustments to be made to those figures were not ventilated before Brownie J. Nor was any trading by Cenelage after 30 September 1991 investigated - it sold the business, and no longer traded as Hospitality Training Group, but that did not mean that there was no other activity which might have generated expenses. Further, there were indications in the evidence that Cenelage did have another activity or other activities which generated expenses. Special condition 7 itself so suggested by its reference to other unrelated business ventures conducted by Cenelage. The figure for sales for 1992 was nearly twice the income from course fees for the three months to 30 September 1992, indicating that there was some other activity, and in saying that no figures were available in respect of the three month period Mr Finney may have meant that no figures referable to that period, as distinct from the 1992 year, were available to him.
82 The same submission that any error did not matter was made by the respondents. When none of this was raised before Brownie J, in my opinion the appellants can not now assert the error, and again the further evidence principle stands in their way.
(b) Method of valuation
83 It was common ground that the valuation of the business should be on the basis of future maintainable earnings. It was also common ground that the valuation of a business on that basis should pay regard to at least one full business cycle, in the circumstances of this business at least a one year cycle with the summer and winter seasons. The appellants’ submission was, in substance, that there was no justification for the three and a quarter year period taken by Mr Finney, that a one (or one and a quarter) year period was appropriate, and that on a one (or one and a quarter) year period the business had no goodwill.
84 Mr Finney’s reasoning was that the business had functioned in its form as sold over the years 1989, 1990 and 1991; that while there was a downturn in profitability in 1991, it could be attributed to the then recession, the abortive attempt to open a Melbourne branch of the business, and the disruption of an office move; and that an average over the period of three and a quarter years was the best indicator of the future maintainable earnings for the business despite the recent downturn. In the passage earlier set out Brownie J accepted Mr Finney’s method as conventional and common sense, referred to averaging in the case of a seasonal business as a reasonable approach, and accepted Mr Finney’s method despite the recent downturn.
85 The appellants submitted that there was no evidence of accepted accounting or valuation practice supporting Mr Finney’s method (other than Mr Finney’s opinion), and that Mr Finney himself recognised that a change in trading conditions forced a valuer to disregard earlier years and rely on one year only: so, the appellants said, in a recession the results most indicative of the current value of the business were those from the current period rather than those from a rosier period which might never return. So far as Brownie J accepted that the seasonality of the business called for averaging the profits out over a period, they said that seasonality affected only results within any one year and did not warrant looking beyond a year. On the contrary, they said, looking beyond a year involved identifying a trend, and if a business were subject to a trend again the future maintainable earnings were to be found in the more current results rather than the past results. Here the trend was one of decline, and averaging was inappropriate because it eliminated the trend and so distorted the valuation.
86 I do not think that there was any error in his Honour’s reference to seasonality in conjunction with averaging the profits out over a period. Mr Le May’s principal position had been that the business had no goodwill value because it had made a loss in the six months prior to the sale. The six months were largely winter months, and at this point in the judgment his Honour was indicating the difficulty in Mr Le May’s principal position, a difficulty which could not be gainsaid.
87 And, contrary to the submission, there was support in the evidence (quite apart from common sense) for taking a period of years rather than the most recent year only. The appellants had put to Mr Finney some passages from a book on auditing by Sir Ronald Irish, and had obtained his agreement with the passages -
“Q. You see the next paragraph, ‘It is generally conceded that the revenue accounts for the immediately preceding three or five years should be examined.’ Do you agree with that?
A. If the business has been going for three or five years, yes.
Q. The next sentence, ‘Some writers suggest that up to ten years figures should be studied, but the consensus is this period is too long.’ Do you agree with that?
A. Yes.
Q. The period of three to five years, unless it includes abnormal periods, gets closer to the current position and to the trend of future earnings; that’s correct, isn’t it?
A. Yes. I notice you didn’t continue that paragraph, sir.
Q. Well, I will continue it then: ‘Of course there may be times when circumstances such as change in business or a change in trading conditions force the valuer to disregard earlier years and to rely upon one year only or to select certain years and exclude others.’ Do you agree with that?
A. Yes.”88 Mr Finney’s view was that there had not been such a change in trading conditions as to force him to disregard earlier years and to rely upon the most recent year only. In his report he noted the decrease in profitability for 1991, and said that he had formed the opinion that the reasons were such that it would not be permanent. In his oral evidence he said that he had “selected three years because the business was operating at a similar level of turnover in each of those years and I have made inquiries as to why the results have differed, particularly in the third year, to form a view as to whether the downturn in that year is likely to be permanent”. He said that he considered that the reasons for the downturn in the 1991 year would not cease to exist over just one year, and that he was taking “a much longer view”, but pointed to the profitability of the three most recent months and affirmed that he considered that the downturn was not permanent.
89 Mr Finney was exercising the judgment required of a valuer, standing in the shoes of the willing but not anxious vendor and purchaser, and his qualifications and experience amply equipped him to do so. There was nothing inherently improbable or unsoundly based in what he said, and in my opinion it was open to Brownie J to accept Mr Finney’s method of valuation. I do not think any error in doing so has been shown, quite apart from the constraints flowing from Ahmedi v Ahmedi.
The result
90 The assessment of the damages for breach of contract, in reliance on the evidence of Mr Finney, should not be disturbed. In the circumstances revealed in this appeal, that should not be seen as surprising. The appellants submitted that Brownie J was obliged to “look beyond the mere opinion of the expert and really investigate what the basis is”; taxed with the example of the coding, they said that he should have “undertaken some investigation”, perhaps “randomly check the codes”. Certainly a trial judge does not blindly adopt a witness’s words. But where there was no contest over the matters now asserted as errors, and his Honour was presented with the choices to which I have referred, he was not obliged to discover for himself, as possible errors, the errors now asserted. More to the point, the conduct of the trial by a party may be such that he can not seek to improve his position on appeal by contentions of fact or law which properly should have been raised at the trial, and this Court’s appellate rehearing will be denied to him. Unfortunately for the appellants, that is this case.
91 I propose that the appeal be dismissed with costs.____________
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