Club Hotels Operations Pty Limited v CHG Australia Pty Limited - [2005] NSWSC 998

No judgment structure available for this case.

CITATION:
Club Hotels Operations Pty Limited v CHG Australia Pty Limited [2005] NSWSC 998
This decision has been amended. Please see the end of the judgment for a list of the amendments.

HEARING DATE(S): 05/09/05, 06/09/05, 08/09/05, 12/09/05-15/09/05, 19/09/05-21/09/05

JUDGMENT DATE :

7 October 2005

JURISDICTION:
Equity Division
Commercial List

JUDGMENT OF:
Einstein J

DECISION:
Cross-claims fail. Short minutes of order to be brought in.

CATCHWORDS:
Contract - Purchase of hotels - Contractual warranty that information attached as annexure was true and correct, complete and accurate and not misleading in any respect for period specified - Proper construction of warranties - Interpretation of words "sales" and "gross profit percentage" - Principles of construction - Suggested inconsistency as between (1) United Kingdom and High Court of Australia decisions and (2) two particular High Court decisions, as to width of admissible background which would have been reasonably available to the parties - Constructive knowledge principle - Finding that subject information was being warranted as being accurate as information contained in particular document - Whether contractual warranties were breached - Finding that warranty was that information was accurate as a record of the key performance indicators produced within the system operated by vendors - Causation - Post hoc ergo procter hoc - Purchaser claims that purchase price was determined by a formula comprised of one variable and one constant [variable being EBITDA for the hotels, constant being an earnings multiplier] - Purchaser claims as damages the difference between the value of the hotels as warranted and their true value to the purchaser - Test said to include element of subjectivity - Principles applicable as to quantum of damage - Novation - Sale contracts identifying purchaser as Macquarie Bank as promoter of defendant - Defendant incorporated after date of sale contracts - Corporation unable by adoption or ratification to obtain benefit of a contract purporting to have been made on its behalf before it came into existence - Whether purchaser succeeded to novated rights and obligations - Proper construction of interrelated contractual documents

LEGISLATION CITED:
Corporations Act 2001 (Cth)
Local Government Act 1993 (NSW)
Trade Practices Act 1974 (Cth)

CASES CITED:
Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99
Bank of Credit and Commerce International SA v Ali [2001] 1 All ER 961
Bowtell v Goldsborough Mort & Co Ltd (1905) 3 CLR 444
Brambles Holdings Limited v Bathurst City Council (2001) 53 NSWLR 153
Burns Philp Hardware Pty Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642
Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337
Commonwealth v Amman Aviation Pty Ltd (1991) 174 CLR 64
Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] 132 CLR 373
Eastgate v Lindsay Morden [2001] Lloyd's Law Reports 511
EW Blanch Pty Ltd v Cooper [2005] NSWCA 217
Hadley v Baxendale (1854) 156 ER 145
Hide and Skin Trading v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310
Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896
Kelner v Baxter (1866) LR2CP174
L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235
Livingstone v Raywards Coal Co (1880) 5 App Cas 25
Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 76 ALJR 246
Manufacturers' Mutual Insurance Ltd v Withers (1988) 5 ANZ Ins Cas 60-853
McVeigh v National Australia Bank [2000] FCA 187
Minister for Immigration and Ethnic Affairs v Teoh (1995) 183 CLR 273
Natal Land and Colonisation Company Ltd v Pauline Colliery and Development Syndicates Ltd [1904] AC 120
North Sydney Investment and Tramway Company Ltd v Higgins [1899] AC 263
Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114
Prenn v Simmonds [1971] 1 WLR 1381, [1971] 3 All ER 237
Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, [1976] 3 All ER 570
Robinson v Harman (1848) 1 Exch 850
Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289
Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd's Law Reports 422
South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478
Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429
Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15
Wenham v Ella (1972) 127 CLR 454

PARTIES:
Club Hotels Operations Pty Limited (First Plaintiff)
Club Hotels Group Pty Limited (Second Plaintiff)
CHG Australia Pty Limited (Defendant)
Stokeston Projects Pty Limited (Third Cross Defendant)

FILE NUMBER(S):
SC 50091/05

COUNSEL:
Mr L Foster SC, Mr A Ogborne (Plaintiffs) (Third Cross Defendant)
Mr J Stevenson SC, Mr N Kidd (Defendant)

SOLICITORS:
Bruce Stewart Dimarco (Plaintiffs) (Third Cross Defendant)
Corrs Chambers Westgarth (Defendant)

LOWER COURT JURISDICTION:

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

Einstein J

Friday 7 October 2005

50091/05 Club Hotels Operations Pty Limited & Anor v CHG Australia Pty Limited

JUDGMENT

The proceedings

1 The proceedings are concerned with the rights of the respective parties concerning the purchase of four hotels situate at Campbelltown, Mt Annan, Leumeah and Wattle Grove in south-western Sydney. The sale contracts relating to the hotel businesses included a number of promises given by the vendors including a “promise, representation and warranty that the information attached as Annexure K (Weekly KPI Summaries) is true and correct, complete and accurate and not misleading in any respect for the period as specified in Annexure K”. The matters litigated concern whether or not the contractual warranties were breached.

2 Some significant threshold issues require determination including the entitlement of the plaintiffs to sue in circumstances in which they were not the purchasers as at the time of exchange of contracts. Another significant issue concerns whether even if the plaintiffs had such an entitlement, the damages claim is based upon a misconceived approach to principle. And even if the damages claim falls within accepted principle, there is a causation issue.

The purchaser

3 The original purchaser was described in each of the sale contracts as "Macquarie Bank Limited as promoter of the defendant, CHG Australia Pty Ltd [described in the sale contracts by its former name, “Leisure and Entertainment Acquisitions Pty Ltd”] a company to be incorporated".

Joint-venture arrangement

4 The evidence disclosed [transcript 231] that the transaction was in essence at its commencement, a joint-venture arrangement, initially between Macquarie Bank and a Westpac equity investment vehicle, ‘Quadrant’. The investment was to be fully funded by an external lender ultimately being National Australia Bank.

5 Each of the sale contracts was for material purposes in identical form although the particular clauses sometimes have different numbers. As a matter of convenience only this judgment examines the provisions with respect to the transaction relating to the Wattle Grove Hotel.

6 Likewise as a matter of convenience only, this judgment adopts the present name of companies where changes of name have taken place after entry into the sale contracts.

Group - the vendor

7 For overview purposes it suffices to describe CHG as having on 1 March 2004 purchased four hotels from Group.

8 Group and Stokeston gave certain warranties in the sale contracts relating to the hotel businesses and land.

9 Completion of the contracts took place on 5 April 2004 at 11.30am.

The guarantor

10 The first plaintiff, Club Hotels Operations Pty Limited (“Operations”) agreed to guarantee and indemnify CHG against any loss arising out of or in connection with any promise, representation or warranty made or regarded as made in connection with the sale contracts being or becoming false, misleading or incorrect.

11 Operations granted to CHG certain mortgages and charges ["the securities"] securing its obligations under that guarantee and indemnity.

CHG's claims

12 CHG claims:

(a) the warranties given in the sale contracts were breached;

(b) misrepresentations were made in connection with the sales

(ii) declarations and money orders arising out of those breaches and misrepresentations.

13 Ultimately the TPA causes of action were only pressed in relation to the costs of security expenses.

Operations' claims

14 Operations seeks relief in the form of permanent injunctions to restrain a CHG from enforcing the securities.

The novation provisions

15 The novation provision is to be found in the sale contracts [clause 57.1]. It reads inter alia as follows:

16 The parties are at issue in relation to whether or not the rights arising out of any breach of the promises, representations and warranties made by the second plaintiff, Club Hotels Group Pty Limited (“Group”) in the sale contracts were expressly retained by Macquarie and not novated to CHG under clause 2 (c) of the novation deeds entered on 5 April 2004. At the time of the sale contracts Group was known as Stokeston Hotels Pty Ltd.

The alleged warranties and representations

17 On an overview basis it is convenient to refer to two only of the claims made by CHG:

· sales and GP percentage figures

· costs of security expenses

18 In what follows, I proceed to set out the nature of the claims for present determination by this Court as outlined in CHG's outline submissions.

"The First Claim – Sales and GP% figures

(i) In the contracts relating to the hotel businesses, Group gave a “promise, representation and warranty that the information attached as Annexure K (Weekly KPI Summaries) is true and correct, complete and accurate and not misleading in any respect for the period as specified in Annexure K ”. [see clause 47.2 of the Purchase Contracts relating to Campbelltown Club Hotel and Mount Annan Club Hotel, and clause 45.2 of the Purchase Contracts relating to Leumeah Club Hotel and Wattle Grove Club Hotel] (the Warranty )].

(ii) Annexure K (the Weekly KPI Summaries) included figures said to be “Sales” for, inter alia, the Main Bar, Bottle Shop and Bistro and “GP%” for the Main Bar and Bottle Shop for each of the hotels for each week in the calendar year 2003.

(iii) That warranty was breached (and was false, misleading or incorrect for the purpose of the Guarantee) in two respects.

Sales

(i) First, the “Sales” figures for the Main Bar, Bottle Shop and Bistro for each of the hotels included amounts for the notional sale price of items for which no cash or other consideration was received or receivable. They included the notional sale price of items of stock that were in fact not sold at that price, but were sold at a reduced price or given away.

(ii) CHG contends that the ordinary meaning of the terms “sales” is the increase in an entity’s assets arising from the exchange of goods, property or services for an agreed sum of money or credit.

(iii) The quantum of the “notional” prices that has been included in “Sales” in the Weekly KPI Summaries for the Main Bar, Bottle Shop and Bistro has been calculated ($280,625).

(iv) The result is that the information in the Weekly KPI Summaries is not “true and correct, complete and accurate and not misleading in any respect”. Accordingly, the promise, representation and warranty in the Contracts has been breached, and is false, misleading or incorrect.

GP%

(i) Second, the GP% figure for the Main Bar and Bottle Shop recorded in the Weekly KPI Summaries were overstated and inaccurate. The true GP% figures for the Main Bar and Bottle Shop are recorded in Group’s accounts. They are lower than those warranted in the Weekly KPI Summaries. The annual average overstatement is 2.25% and 1.39% respectively, as itemised in the report of GCA Gower dated 10 June 2005.

(ii) The result is that the information in the Weekly KPI Summaries is not “true and correct, complete and accurate and not misleading in any respect”. Accordingly, the promise, representation and warranty in the Contracts has been breached, and is false, misleading or incorrect.

(iii) The cause of the overstatement in the GP% does not matter. All that matters is that the GP% figures are overstated.

(iv) However, one probable explanation for at least part of the overstatement is that the Weekly KPI Summaries did not take into account stock adjustments in calculating GP%, whereas Group’s accounts did.

The Second Claim – Costs of Security Contract

(i) The Vendors disclosed to CHG prior to the Contracts the existence of a weekly security expense of $3,700 per week. In fact, the true security expense was $9,110 per week.

(ii) In the contracts relating to the hotel businesses, Group gave a “promise, representation and warranty” that the Vendor has disclosed to CHG the particulars of each contract material to the property and the business [clause 56.8 of the Purchase Contracts relating to Campbelltown Club Hotel and Mount Annan Club Hotel, and clause 53.8, 48.9 and 47.9 respectively of the Purchase Contracts relating to Leumeah Club Hotel and Wattle Grove Club Hotel] (the Ninth Warranty ).

(iii) The disclosure of a weekly security expense of $3,700, when the actual weekly expense was $9,110, constituted a breach of that warranty.

- conduct engaged in by Group in trade or commerce that was misleading or deceptive, or likely to mislead or deceive, in contravention of section 52 Trade Practices Act 1974; and

Reference Out

19 During the hearing a number of other claims dealing with sundry particular allegations of loss and damage by reason of breaches of warranties pleaded in nominate paragraphs of the statement of claim and amended cross-claim became the subject of an order for reference out pursuant to Division 3 of Part 20 of the Uniform Civil Procedure Rules 2005. These constituted a largely cut down version of the cross claimants originally pursued suite of claims concerning alleged fire safety defects, and one matter concerning a claim that the Campbelltown Hotel was used as “a place of public entertainment” without a licence from Council, in contravention of Section 68 Local Government Act 1993.

20 Shortly before the reference was due to commence, the parties settled these claims [cf Consent Orders 5 October 2005].

Overview of the issues

21 It will be apparent that the issues range across a number of areas of detail:

· In terms of the proper construction of warranties and the claimed damages, the central focus is on the communications which took place between the parties prior to the entry into of the contract;

· In terms of the alleged breaches of warranty a close examination of particular financial/business records fall for examination, generally concerning the above described focus on sales, GP percentage figures and costs of security expenses.

EBITDA

22 A deal of the evidence was concerned with CHG's claim that during the negotiations for the purchase it had been made clear by Macquarie Bank that the yield which it was prepared to accept was not less than a 14% return. The case as opened was that one could see from the negotiations anterior to the purchase that Macquarie Bank had made clear that it would not pay more than a capitalisation rate of 14% on the ‘EBITDA’ [earnings before interest, tax, depreciation and amortisation]. In fact the evidence showed that following a final negotiation, the hotels were purchased on the basis of a 13.65% yield on EBITDA (or 7.326 multiple) rather than the 14% yield (or 7.1428 multiple) originally sought.

23 CHG does not seek a curial determination as to what the 'true' EBITDA was. The proposition was that:

(i) had Ernst & Young [which had been retained by the purchaser to carry out a financial due diligence on the hotels], known the "true" position, they would have derived a lower EBITDA than was in fact derived;

24 The extensive evidence before the Court in relation to the EBITDA was accepted by both parties as relevant to the issues. It became reasonably plain that CHG sought to contend that the proper construction of the contractual warranty that [the information attached to the sales contracts as annexure K being the (Weekly KPI Summaries) was true, correct, complete, accurate and not misleading], was informed by the anterior negotiations. In short it was appropriate to construe the contractual warranties by reference to the matrix of fact known to all parties during the negotiations [as the judgment makes clear the parties were at issue as to the ambit of the italicized word].

The case put by CHG

25 CHG put its case as follows:

Sales

i. Its primary case was that there was no ambiguity in the use of the word “sales” as used in the weekly KPI figures. “Sales” meant transaction whereby money or money’s worth was received [and the term ‘sales’ did not include promotional and discount meals for which no payment was received from the customer].

ii. Its secondary case was that if the term “sales” was ambiguous then the context made clear that the parties had used the term with the meaning set out in i. In this regard the Court was entitled to take into account the surrounding circumstances in which the contracts were made to resolve the ambiguity: Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 at 350 per Mason J.

GP per cent

26 Mr Stevenson submitted that:

i. Notwithstanding the particular manner in which the vendors for internal purposes had set about creating the KPI figures, the relevant warranty had used the word “information”.

ii. The warranty had been that “the information attached as [weekly KPI summaries] was true and correct, complete and accurate and not misleading…”.

iii. As a matter of fact that was a promise that the figures for sales and GP percentage were in fact the correct figures.

Two questions which arise

27 At least two questions arise for consideration:

i. What does the warranty properly construed in context mean?

The case which was not pursued

28 During final address Mr Stevenson [transcript 645-646, 655] made clear that CHG did not pursue a case seeking to use the anterior negotiations in an attempt to establish that:

· a proper understanding of the warranty seen in context demonstrated that as a matter of the logic involved in the particular calculations, the warranty was no more and no less than a warranty as to the true EBITDA and/or that;

· that the parties had intended by the reference to the weekly KPI Summaries, that the Operations/Group warranty was a warranty as to the true EBITDA being 14% of the purchase price.

The Accountants

Ferrier Hodgson

29 Ferrier Hodgson, who had been the accountants for Group, provided abridged financial information to the Macquarie Bank. That abridged financial information ["the Ferrier's report"] had been prepared for the purpose of the sale process in December 2003.

Ernst & Young retainer and report

30 The retainer by Macquarie Bank of Ernst & Young [PX 3/741] and the consequential Ernst & Young 'limited scope' Financial Due Diligence report of 27th February 2004 [PX 770 et seq] are particularly important documents in terms of the evidence. The final letter of retainer was dated 9 February 2004 but represented the result of very many drafts.

31 Mr Murdoch was the then partner of Ernst & Young responsible for this client/project in terms of the provision of a “limited scope financial due diligence” concerning the proposed hotel purchase.

32 Mr McMorron was a senior consultant part of the Ernst and Young team headed by Mr Murdoch. His role within the team was as an on the ground project manager meaning that he had day-to-day supervision and responsibility for the work program under the overall supervision of Mr Murdoch.

33 The approach taken by Ernst & Young was carefully outlined in paragraphs 1.2 and 1.3 of the Due Diligence report in the following terms:

“ 1.2 Our Approach

Our approach has been in two key steps.

Firstly we have compared the abridged financial information prepared by Ferrier Hodgson for the year ended 31 December 2003 to various supporting documentation provided by the Vendor. At a summary level the Ferrier Hodgson information is also referred to as “Presented EBITDA”. This first step attempts, within the constraints of the due diligence process, to establish and “actual” 2003 result for the Club Hotels Group. At a summary level the derivation of an “actual” 2003 result is referred to as “Adjusted EBITDA”.

Secondly, we have normalised Adjusted EBITDA in an attempt to better reflect a maintainable position of the Club Hotels Group. The normalisations have been identified, discussed and agreed with MBI Management and are based on information provided by Vendor Management. As a summary level the results of this work is referred to as “Normalised EBITDA”.

We understand that the Ferrier Hodgson abridged financial information was prepared for the purposes of the sale process in December 2003. The Ferrier Hodgson abridged financial information does not represent the Club Hotels Group complete profit and loss statement but an estimate of results built up from an average week per hotel. The information does not include balance sheets or cash flow statements.

We have compared revenue, gross margin (excluding bistro) and gross salaries and wages) included in the Ferrier Hodgson abridged financial information to week-by-week KPI Reports (represented to be “actual” results for 2003) and where available certain underlying business systems and supporting information (internal and external). We have also carried out procedures on the key growth and profit drivers underlying EBITDA being revenue and gross margin, including Data Monitoring Service (“DMS”) gaming tax invoices, a limited review of bank statements, as well as undertaking further analysis and comparisons with the Jetz POS system (an internal business system covering bar and bottle shop). These comparisons and others identified a number of differences that have been included as adjustments to EBITDA and are discussed in Section 2 below.

It appears likely that the way in which the Ferrier Hodgson abridged financial information was prepared (eg before the end of the year, for the purposes of sale, with the inclusion of certain normalisations) has led to the differences identified when comparing the information to the various supporting documentation provided by Vendor Management. The nature and extent of these differences were discussed in detail with Ben Smith who while agreeing with them considers certain other factors need to be taken into account to fairly reflect the maintenance position of the Club Hotels Group.

Several normalisation adjustments have been prepared to remove the effect of abnormal or non-recurring events, to reflect improvements in the business that MBI Management consider to be ongoing, or to adjust for other matters considered relevant. Further explanations of significant identified adjustments by MBI Management and the results of our limited review of these normalisations are provided in Section 3 below. The normalisations should be considered judgmental.

The above analysis has been supplemented by discussions with and enquiries of Ben Smith, the Vendor’s of the Club Hotel Group, Jason Buffier, Club Hotel Group General Manager and Greg Cruger, the Club Hotel Group Financial Controller and various members of the Consortium’s Management Buy In team (“MBI Management”), in particular, Mr Steve Bartlett.

1.3 Limitations in information Provided

We note that the Club Hotels Group is not subject to independent audit and is a “cash” business.

The Vendor has been very obliging and provided selected information during the due diligence process which we consider of a reasonable standard. Nevertheless, the due diligence procedures have been limited and we have not had full and free access to the books and records of Club Hotels Group as, we understand, activities outside the scope of this transaction are included in those books and records.

A summary of the selected information provided by the Vendor, if any, compared ‘to the abridged financial information provided by Ferrier Hodgson (gross profit and expenses) is set out below…

We understand that MBI Management has assessed the sundry revenue and other expense numbers where we did not receive any documentation (ie, shaded red and have provided relevant adjustments, if any, to the Consortium. This means that there is approximately $48K per week (ie, $2.5m per annum), or approximately 10%, of gross margin and overhead that were not subject to the due diligence procedures.

34 The key findings in paragraph 1.4 included inter alia:

“1.4 Key Findings

The Table below summarises the key results form our limited due diligence on the Club Hotels Group for the year ended 31 December 2003.

Comment

EBITDA
% of Revenue
Ref

Presented EBITDA $10,475K 37.5% Ferrier Hodgson

Adjusted EBITDA $9,398K 34.3% Section 2

Normalised EBITDA $9,965K 35.7% Section 3

Adjustments to Presented EBITDA are detailed in Section 2 of this report and related predominantly to differences between underlying business systems (eg Jetz, Wage Easy etc) and the information provided by Ferrier Hodgson (ie, Presented EBITDA). As noted above Presented EBITDA represents a mix of estimated and normalised numbers.

We have set out normalisation adjustments to provide further information on what may be a more appropriate maintainable EBITDA amount. The key normalisations reflect an improvement in business performance (specifically net gaming revenue) occurring during 2HFY03, the theoretical gaming return of 11% and an adjustment to remove the effect of the incident at the Campbelltown Hotel in September 2003.
Due to the input from MBI Management in determining these normalisations, their significance and the assumptions involved we recommend the normalisations are discussed in detail with MBI Management.”
[Paragraph 1.4 to be found in PX 3 at 778]

The evidence

35 As both parties adduced extensive evidence of what had been said in conversations and meetings leading up to the entry into of the purchase contracts it is necessary to summarise some, but not all, of that evidence.

36 It is easy to become confused as to what is the purpose of the extensive evidence adduced by the respective parties as to these conversations and meetings. To my mind that evidence goes to discerning that which constituted the background facts "known" to both parties consistently with the principles later set out in the judgment. One is looking for the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of contracting. This is because the interpretation of a written contract involves the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of contracting.

37 It has to be acknowledged that several of the persons who gave evidence had difficulties in recalling for certain what it was that had been said in a particular meeting or in a particular conversation on a particular date. Notwithstanding those difficulties evidence was given of the substance of the communication, especially in cross-examination.

38 The findings as to what occurred do not suggest that any particular witness whose recollection is not accepted as correct, did not genuinely believe at the time when the evidence was given that the version of facts was as given. It is a common finding in the Courts that over time witnesses tend sometimes to persuade themselves of a particular version of events [as for example that something had been said] which version of events is ultimately rejected by the Court. That form of rejection of evidence follows a careful examination of all the evidence before the Court, including contemporaneous written materials weighed on the balance of probabilities. This is what occurred in the present proceedings. No witness is found to have deliberately misled the Court.

39 Both senior counsel ultimately acknowledged in final address, that there were very few situations in respect of which critical challenges to the acceptance of particular evidence could be pinpointed. What one really has is versions of fact given on the one hand by the witnesses for CHG and given on the other hand by the witnesses for Group. Not every witness called by a particular party gave consistent evidence to that given by other witnesses called by that party. But the general picture involved a very substantial measure of agreement between witnesses called by CHG as between themselves and witnesses called by Group as between themselves.

40 The most convenient way forward would appear to be:

Step one

· To first, identify certain but not all of the witnesses who gave evidence and to initially introduced the witnesses and to outline some only of the evidence which they gave on nominate issues;

Step two

· then to proceed in chronological order to chronicle the wider evidentiary matrix, albeit that this may overlap what has already been covered in step 1. Findings as to reliability of certain evidence are given in this step;

Step three

· following that exercise to give more precise findings as to a number of particular matters.

Mr Bartlett

41 Mr Bartlett had been the Chief Executive Officer of CHG . Whilst involved in the acquisition of particular hotels in Adelaide, the funding for which was eventually provided by the Macquarie Bank, he received information that the hotels the subject of these proceedings may be available for sale.

No communicated warranty of accuracy of gross profits

42 Mr Bartlett accepted that Mr Smith could not and did not say to him that Mr Smith was willing to warrant that the gross profit in the weekly KPI summaries and the Ferrier accounts were accurate [transcript 196.10]. This evidence is accepted as reliable.

Understanding of Group position re Ferrier's Accounts

43 Mr Bartlett conceded that he had understood that the Club Group were not prepared to stand behind anything in the draft Ferrier Hodgson accounts under the heading of “expenses” this being a matter which the purchaser would have to work out for itself [transcript 174.5 set out in more detail below].

Mr Murdoch

Strictly limited retainer of Ernst and Young

44 It is patently clear from Mr Murdoch’s evidence and the documents that were created at that time that Ernst & Young was not engaged to perform a full audit of the four hotels. The reason why their due diligence was limited in nature importantly included the fact that they were not given full access to the books and records of the hotels.

45 The result of the due diligence was that Ernst & Young concluded that the “normalised EBITDA” [that is, the EBITDA which had been calculated in the Ferriers’ report adjusted by Ernst & Young’s due diligence activities] was $9,965,000 per annum. It was this “normalised EBITDA” which was used by Macquarie in determining how much it would be willing to pay for the hotels.

46 In normalising the EBITDA, Ernst & Young took as their starting position the Ferriers’ report. They then compared this report against the Weekly KPI Summaries, then the Jetz System Reports.

Evidence of Mr McMorron

47 Mr James McMorron was a senior consultant with Ernst & Young at the time when the due diligence of the four hotels was being carried out. He attended on site at the hotels and can be accurately described as the senior Ernst & Young person who so attended. Importantly, he was the primary conduit between the hotels and Mr Murdoch.

Ferrier report of doubtful validity

48 His evidence, by way of his statement, was that, at the commencement of the due diligence, he was provided with the Ferriers Report. In his evidence he states that he treated this Report as being of doubtful reliability, however, he used it as the starting point from which he would conduct the limited due diligence.

KPI, Jetz and Ferrier's report

49 Mr McMorron’s evidence was that sometime during the course of the due diligence project, he received weekly KPI summaries in respect of each hotel for the calendar year 2003.. His evidence is that he was told by Mr Smith or Mr Cruger that that the Jetz system contained the most accurate record of sales for the hotels. This is despite Mr McMorron not having been trained/shown how to use the Jetz system by the hotel managers; although he was provided with print-out reports from the Jetz system.

50 Accordingly, on Mr McMorron’s evidence, he was provided with three documents, the Ferriers Report, the Weekly KPI Summaries and a Jetz Report with which he was to conduct the limited due diligence exercise. Only limited access was given to the Jetz system, and Mr McMorron’s evidence was that it was represented to him that, outside of the general ledger, the KPI summaries gave the most accurate picture of the hotel business.

Promotional " Give-aways"

51 With regard to the issue concerning whether or not promotional give-aways were included in sales, Mr McMorron’s evidence is that it was not a part of the scope of work which Ernst & Young was engaged to perform to determine this issue one way or the other.

Stock Adjustments

52 With regard to the issue concerning whether or not stock adjustments were included in the gross profit percentages, Mr McMorron’s evidence is that he had requested information on the gross profit percentage of the hotels from Mr Cruger, and that in light of previous discussions regarding the treatment of stock adjustments in the JETZ system, he had assumed that the gross profit percentage took account of such adjustments. In other words, Mr McMorron’s evidence is that he was not told one way or the other as to whether or not the gross profit percentage included stock adjustments, although he assumed it to be the case in light of the previous discussion he had participated in.

Mr Russell

53 Mr David Russell was an associate director in Macquarie Bank at the time that the transaction, the subject of these proceedings, was being negotiated and completed. He worked in the investment banking division which was, for want of a better description, the division of the bank which was responsible for discovering new investment opportunities for the bank and performing the requisite work such that the bank could take advantage of those opportunities.

Lack of responsibility for drafting clauses in contracts

54 Mr Russell’s evidence disclosed that, on the Macquarie Bank side, no single person was responsible for approving its investment in the hotels; nor was any single person responsible for the drafting of the ultimate contract for sale entered into between it and the plaintiffs.

55 His evidence included:

…
A. I was involved in the negotiation with respect to the contracts.

Q. Insofar as the necessity, such as it was, to protect the purchaser by appropriate clauses in the contract, were you shown the clauses, did you discuss these matters with legal advisers or was it up to someone else to do that?
A. Some of the clauses I would have been shown but not all of them. I didn't read the documents in their entirety at all. There wasn't the time.

Q. So who from the perspective of Macquarie Bank, if anyone, was the person with the responsibility of liaising with whomever was drawing the sale contracts to go through line by line and crossing Ts and dotting Is as it were?
A. To the best of my recollection, there was nobody that went through - we relied on Freehills is essentially the response. So there was nobody, to the best of my recollection, from Macquarie that went through each clause making sure with Freehills that we were happy with the wording in every clause of the contract. So given the time we had to rely on Freehills. We did, however, at some point, and I can't remember exactly when, have a couple of our people, our internal legal people, talk to Freehills and they would have been involved in reviewing, I am sure, some aspects of the contracts, but it wasn't their responsibility to sit down with Freehills and go through and make sure that the wording was appropriate. We really did rely on Freehills to represent the purchaser's interests in that sense…

[transcript 306-308]

56 In regard to obtaining approval for the investment, it appears that many people from different positions in Macquarie Bank were required to give their approval to the deal before it could proceed. Each was responsible for a different aspect of the project. This process by which Macquarie Bank would come to a position whereby it would either approve or reject an investment proposal was what Mr Russell described as happening generally, the current circumstance involving no significant departure from this template.

57 His evidence with respect to the decision-making process included:

Q. Was the real decision maker, if I can call it that, in relation to the investment Mr Moss having consulted the board members that you mentioned, after receiving all of the upward moving reports from people below?
A. When you say the real decision maker, what do you mean?

Q. Well, I'm looking to ascertain who it was that made the decision on behalf of Macquarie Bank to make this investment in the way that it was made?
A. Various groups and divisions, including the executive committee, have various roles of sign off. In terms of the decision to make the investment, the investment is proposed by the transaction team, which Mr Facioni lead, so he was responsible for putting the investment proposal up to the various groups within Macquarie and, for want of better words, championing the investment, so it would be inaccurate to say that Alan Moss is responsible for the investment. He is responsible for - he sits on the - his responsibilities extend to sitting on the investment - the executive committee and the executive committee's responsibilities relate to certain aspects of the transaction.

Q. Would this be fair that obviously it had to go through the transaction group that Mr Facioni headed up, and if it didn't get through that it wasn't going anywhere, is that right?
A. That's fair, that's a fair statement.

Q. But the fact it went through there wasn't the final tick on the investment?
A. Correct.

Q. It had to go up the line?
A. There had to be other people approve the investment, given their particular responsibilities.

Q. Including Mr Moss, the executive committee and his, as it were, informal discussion with two members of the board?
A. Including the executive committee, which Mr Moss sits on, so you are saying Mr Moss and the executive committee. It's the executive committee.

[transcript 230-231]

Knowledge that Ferrier's sheets could not be relied on as places for representations and warranties

58 Mr Russell also gave evidence as follows:

“Q. All right, and you were, when you sent this e-mail [ PX P11] , I suggest, well aware that you needed to get some warranties about the revenue in the light of the fact that Mr Campbell had told you on the 9th firstly that accounts or the sheets from Ferrier Hodgson were not the actuals, I suggest, and secondly that you had to - that the vendors would warrant the revenues?
..

Q. You were following up on the subject matter of the 9 February e-mail with a view to working out just what it was you can get by way of warranty?
A. Correct, this is what we were requesting in respect of reps and warranties.

Q. Knowing, I suggest, that the sheets in the Ferrier Hodgson had sent on the 9th could not be relied upon by you?
A. As the basis for the reps and warranties?

Yes?

I wasn't expecting that both sheet would form the rep and warranty document in the legal agreements

[transcript 316-317]

Evidence given by Mr Ben Smith

59 Mr Smith was a director of each of the plaintiffs throughout 2003. He oversaw the general operations, the general manager and the financial controller who looked after the matter on a day-to-day aspect. They reported to him on a regular basis. He had received on a weekly basis the weekly trading sheet issued by the Jetz system. He was aware in effect from time to time from looking at the KPI’s and the weekly trading sheets, of the operational performance of each of the hotels to which he pay close attention [transcript 484]. He was aware that the weekly KPI summary reflected accurately the figures that were produced on the weekly trading sheet [transcript 485].

Explanations given to CHG

60 The type of difficulty which arises for the Court where such a very close focus is placed upon communications becomes apparent when for example, Mr Smith was asked in chief, to explain what he did to make certain that the CHG representatives to whom he was speaking understood what he was saying. His answer included:

Experience with 'yield' parameter

61 Mr Smith had been involved in buying and selling hotels over a period of approximately 15 years [transcript 486]. It had been his experience when negotiating such purchases or sales that he and the persons with whom he had dealt tended to speak in terms of a yield that a hotel was said to give [transcript 487]. His experience had been that when persons would buy and sell hotels they tended to speak in terms of a percentage yield rather than in terms of a multiple [transcript 487].

62 His evidence included:

Idea of a yield

“Q. And just see if I understand this. The idea of a yield is to take the earnings of the hotel and divide it by the price?
A. Yes.

Q. Multiplied by a hundred?
A. Yes.

Q. To give a percentage yield?
A. Yes.

Q. And that is the yield that the purchaser expects to get from his or her investment in a hotel?
A. Yes.

Q. And it is right, isn't it, you understand this, that the idea of a multiple is really just the converse of that, that is you take the price and divide it by the earnings?
A. Yes.

Q. And you get the multiple?
A. Yes.

Q. The one idea, that is the yield, is a function of the other idea, that is the multiple?
A. Yes.

Discussion with Mr Bartlett

Q. So am I right in thinking that the very point you are making in paragraph 3(b) is that in the conversation that you are referring to, which is one with Mr Bartlett, the discussion was in terms of yield not multiple?
A. That's correct, yes…

Q. You don't dispute though, do you, that in the course of that conversation there was a discussion between you and Mr Bartlett concerning the possible purchase of a hotel by an interest associated with Mr Bartlett?
A. We had that discussion, yes…

Q. Do you accept that in the course of that conversation Mr Bartlett said something to you about either the yield that those for whom he was speaking were looking for or the multiple they were prepared to pay?
A. He did make mention of the yield.

Q. So your point is that you and he or he spoke of yield not multiple?
A. Yes.

Q. And what he said to you was, wasn't it, that he was speaking relevantly to achieve a yield of 14 per cent?
A. Words to that effect.

Q. And you said, didn't you, that yield - when I say you, I mean the suite of companies for whom you were speaking - were prepared to consider selling the hotels to those for whom Mr Bartlett was speaking on that basis, that is a 14 per cent yield?
A. No, I did not.

Q. You deny that?
A. I didn't say that we were prepared to sell them at 14 per cent yield, no.

Q. What is your recollection about what you did say, if anything, about the plaintiffs' attitude to a sale at that yield rate?
A. I said I felt it was probably a little off the mark, that we were interested in selling, we were interested in talking but--

Q. You said you were interested in selling?
A. We were interested, yes, and would be interested to talk to them but on our terms and conditions. That is generally what we said.

Q. Well, is this right, that Mr Bartlett said to you something like this, that "Macquarie Bank is aware of your hotels", did he say something about that?
A. Yes.

Q. Did he say something to the effect of "Macquarie Bank would like to talk to you about buying the hotels"?
A. Words to that effect, yes.

Q. And they were looking at a 14 per cent return?
A. That was their objective.

Q. So he said to you that is what they are looking to achieve?
A. Yes…

EBITDA discussion?

Q. What I am putting to you is this: That you said to Mr Bartlett that you would be prepared to, that is the plaintiff would be prepared, to sell the hotels to Macquarie on the basis of Macquarie achieving a 14 per cent return on EBITDA?
A. No, I didn't say that…

HIS HONOUR: Q. Can I just ask you, when you said a moment ago in answer to a previous question, "No, I didn't say that", are you quite certain of that?
A. I am, yes. My understanding is that the question I was asked was did I say that I was prepared to sell the hotels to Macquarie Bank at a 14 per cent yield and I said no, I did not say that.

Q. Mr Stevenson was putting to you a question which used EBITDA in the question?
A. I did not use the word EBITDA either, no…

STEVENSON: Q. Could I ask you this directly so we clear it up. What do you say about this proposition: Was EBITDA mentioned at all with the conversation you had with Mr Bartlett at the end of January 2004?
A. I don't believe it was, no.

Q. It may have been?
A. I couldn't say he didn't mention the word but there was no discussion of EBITDA during the conversation.

Q. So do you say that so far as this 14 per cent figure was referred to, it was referred to in the context of an expression 14 per cent yield?
A. The 14 per cent yield, yes.

Q. You understood that the 14 per cent yield was one referable to earnings?
A. To do with earnings, yes….

Common usage of EBITDA concept?

Q. And you know that when one is looking at assessing earnings of a business which generates its income primarily in cash, the notion of EBITDA is the one most commonly used to assess what the earnings are?
A. Hotels are slightly different to a traditional business on the way they have traditionally been sold on earnings. So EBITDA in the banking sense is not what a hotel broker would truly present to an incoming buyer.

Q. Well, what is the difference between EBITDA and what you and I are talking about as what is usually held?
A. The hotel broker, when they prepare accounts, if they were to prepare accounts for the sale of a hotel, would set the business on a single holding over operated basis to compare like with like and that's how they would be prepared.

Q. On a stand-alone basis do you mean?
A. Yes.

Q. So is the point you are making that the earnings figure would normally be prepared for each hotel as if it was a stand-alone hotel, not for a group of four hotels?
A. And operated by an individual as opposed to necessarily a company or their operating structure involvement.

Q. So as opposed to being under one management?
A. Yes.

Level of due diligence required

63 Mr Smith's further evidence was that he was not aware to what level or extent Macquarie Bank required due diligence, that is to say whether they required it to be performed in a thorough or brief manner. In particular his evidence was:

“I presumed that they would do their normal legal process that is done in the purchase of a business like this, their usual legal checks, the usual solicitors and contracts. It says they need a bank valuation. Now, Macquarie are a bank and I wasn't sure whether that was an internal bank or whether they were a decision for certainly finance. That hadn't been discussed. Macquarie have a large number of, you know, private equity cash funds that don't require borrowing. They didn't just say they were going to put into that or they were going to put on their own books. [transcript 499]

Q. And you do agree, don't you, that Mr Russell said words to the effect that Macquarie Bank would like to pay a price based on the 14 per cent yield?
A. Yes, that was the ambition of the fund.

Q. Can I suggest to you that what he said was that Macquarie Bank would not pay a price which was more than a 14 per cent amortisation rate?
A. No, he didn't say that.

Denial of EBITDA sale basis

64 Mr Smith denied that the sale could have proceeded upon the basis that the Ernst & Young due diligence had to achieve a 14 per cent capitalisation of 2003 EBITDA:

“Q. Did Mr Russell say that Macquarie Bank was looking for 14 per cent return on its investment?
A. He indicated to me that they were trying to acquire a large portfolio of hotels of which this was the first group and that they were able to achieve across the group an average yield of 14 per cent.

Q. Well, I am asking you a slightly more precise question. Did he say to you that Macquarie Bank was looking for a 14 per cent return on its investment in these hotels?
A. That was their stated desire, yes.

Q. So they were saying more, weren't they, than - sorry - Mr Russell said more than that Macquarie Bank would like to pay a price based on the 14 per cent return? I will finish the proposition. You said that that's what they were looking to do.
A. I couldn't tell you exact words. They're splitting hairs between "looking to" and "liking to", but the understanding I got really in the meeting was that their desire was over a large portfolio to achieve 14 per cent yield.

Q. What I am suggesting to you is that Russell went further and made clear that Macquarie Bank would not want to pay more than an amount cap rated on a 14 per cent yield?
A. No, he did not .

Q. So you are quite clear, you say, about that?
A. I am, yes.

Q. What I suggest to you is that Mr Russell went further and mentioned that he understood that the 2003 EBITDA for the hotels was 10.43 million?
A. I don't recall that figure specifically being cited at that meeting.

Q. You do recall, don't you, that that particular figure was referred to later in the month by the Macquarie Bank?
A. There were a variety of fairly similar figures that were referred to on a number of occasions to do with profit and, as I said, to say that that one specifically was referred to by who on what day, I really couldn't tell you.

Q. I think you just said that you can't recall the figure of $10.43 million being mentioned at the 5 February 2004 meeting?
A. That's correct.

Q. You don't deny it, do you?
A. I really don't know if that figure specifically was mentioned. The meeting was a very broad bush negotiation. We weren't digging into detail, because no-one had detail there to discuss. So I think Mr Russell may have mentioned it. I don't know where he would have got the figure from or what he drew his conclusion to mention it but--

Q. He may have mentioned it?
A. He well could have, well could have.

Q. And can I suggest that further what Mr Russell said at that meeting was that if it turned out that, in Macquarie's view, the 2003 EBITDA was less than a figure of 10.43 million, then from Macquarie's point of view the price they were prepared to pay would have to be adjusted. He said that, didn't he?
A. We didn't discuss adjusting the price.

Q. And he said to you, didn't he, that if a 14 per cent capitalisation of 2003 EBITDA was satisfactory to you, then Macquarie would proceed with doing due diligence?
A. No, he didn't.

Q. And can I suggest to you that you understood that and that that's the basis upon which, as you understood it, the Ernst & Young due diligence did proceed?
A. It couldn't have proceeded on that basis.

it couldn't have proceeded on that basis

[transcript 502-503]

65 Later in his cross-examination he accepted that the desire of Macquarie Bank was to achieve a process of confirmatory due diligence which would test its non-binding indicative offer in the endeavour to confirm that the EBITDA was 10.43 [transcript 510]. However although Mr Smith understood that this was the desire of Macquarie Bank he was quite clear that there was no agreed precondition:

[transcript 506]

Warranties to be given

66 Mr Smith had given evidence in his affidavit of 1 April 2005 of recalling a conversation with Mr Russell and Mr Facioni in which he had said that the only financials Club would warrant were the wages and the takings. He had not been able to recall exactly in which conversation the weekly KPI Schedule document came to be agreed upon as the only document to be included as an annexure into the sale contract. Under cross-examination [transcript 512.7] it was put to him that ultimately he did agree to give the warranties which are to be seen in the contract.

67 The entirety of the evidence given by witnesses accepted as reliable supports the inference that the bald earlier communication that the only financials Club would warrant were the wages and the takings was overtaken by the references to the KPI Schedule and the acceptance that the material warranty was that to be found in the sales contracts.

Evidence of Mr Cruger

68 Mr Cruger was the Group Financial Controller for the Sahben Group of companies which included Club Hotels Operations Pty Ltd and Club Hotels Group Pty Ltd which he collectively referred to as “Club Hotels”. He had been the Group financial controller for Club Hotels since June 1998.

Systems/requests for information

69 During the course of the due diligence he received numerous requests for information from the due diligence team normally through Mr McMorron seeking the provision of particular reports or documents or information. He had actually personally been primarily responsible for designing and implementing the financial management systems and business records for Club Hotels. He gave very detailed evidence of those systems which included:

· detail of the process of recording financial data;

· detail of the manner in which the sales aspect of the business involved all sales being operated through the tills which were linked to a computer server within each hotel known as the Jetz server [a software package which operated such that no sales could be processed within any of the hotels unless entered into an electronic till, that is to say no sale could be processed unless recorded in the Jetz data base];

· a detailed description of the functions performed by the respective duty managers leading to the building up of the daily trading sheets;

· a detailed description of those daily trading sheets and of each item within the sheets;

· a detailed description of the phrases and figures to be found on the cash summary reports;

· a description of the data files which were the source of information contained in the weekly KPI figures.

The Ernst and Young testing

70 In his first statement he gave evidence that in February 2004 Ernst and Young performed sample testing of the daily and weekly trading sheets choosing the week ending 26 October 2000 for Wattle Grove and Leumeah and the week ending 24 August 2003 for Campbelltown and Mt Annan.

Trading sheets

71 He recalled providing to Mr McMorron the weekly trading sheets and related trading sheets and petty cash reports for those periods.

GP percent

72 He also gave evidence concerning the “GP percent” figures recorded in the daily trading sheets. He had understood ‘GP percent’ as meaning the gross profit percent, a term which he used to describe the gross profit of each sale by taking into account the price paid by Club Hotels for the item and the price the item was sold for to the customer. He had always known the phrase as referring to the gross margin per cent for each item sold. He also gave detailed evidence concerning the stock take process.

KPI figures

73 He also gave detailed evidence as to the KPI figures which were annexed to each of the sale contracts for the four hotels to compare them with the corresponding data in the Jetz system.

Provision of documents to Mr McMorron

74 In paragraph 4 (b) of his statement of 24 August 2005 he had given the following evidence:

75 Under cross-examination it eventuated that at the time he signed his statement he had not had the two volume exhibit GC1 in front of him at all. Nor had he himself put together the documents which now appear in those volumes. Nor had he looked through those volumes since that time. Nor was he even aware at the time he gave evidence, unless he would look through the documents, whether the two folders were or were not a complete set of the documents which he gave to Mr McMorron.

76 Whilst none of this appeared to augur well for the reliability of his evidence, the matter was satisfactorily clarified in re-examination when he identified three bundles of original material representing daily trading sheets to which were attached the particular vouchers which had been kept under his own supervision. His evidence was that when he provided materials to Mr McMorron for the weeks requested, he had handed over the original daily trading sheets. In the case of the weekly and petty cash summaries and bank statements he had opened up the relevant files on his computer and printed the documents off for Mr McMorron. Before he signed the statement he had sent in to Bruce and Stuart, all of the daily trading sheets and supporting vouchers as bundles. Although he did not have the folders at the time he signed the statement and gave evidence that he could not presently recall precisely for which weeks he had given to Mr McMorron the daily trading sheets and the supporting vouchers, he had no doubt at all that he had provided the daily trading sheets and the supporting vouchers to Mr McMorron for certain weeks. This evidence is accepted.

77 In those circumstances his evidence is regarded as reliable, the crucial parameter being what he had actually provided to Mr McMorron. The finding is that he had provided to Mr McMorron the weekly trading sheets and related daily trading sheets and petty cash reports for the weeks ending 26 October 2003 for Wattle Grove and Leumeah and the week ending 24 August 2003 for Campbelltown and Mt Annan. The end result is that the Court finds on the evidence, that it is more likely than not that Mr McMorron was provided with such documents.

Proceeding to endeavour to thumbnail sketch evidence given by witnesses against a general chronological background

78 The following chronicle of the evidence given [which includes sundry segments of witnesses written statements] always requires to be monitored in the light of the cross-examination: some of the witnesses evidence given in the written statements did not stand up to cross-examination. Where possible the judgment endeavours to identify these occurrences.

6 January 2004

Evidence of Mr Bartlett

79 Mr Bartlett gave evidence that on 6 January 2004 he met with Mr Ben Smith. On his evidence the conversation was as follows:

Mr Bartlett: "I am interested in purchasing your hotels at 7 times earnings."

Mr Smith: "I think that they are worth more than that."

Mr Bartlett: "On what basis?"

Mr Smith: "Their performance. Plus we have a number of keen parties. At a price of 7 times earnings we would not be interested in selling the hotels."

Mr Bartlett: "Okay. Well there's no point in proceeding any further at this stage. However, we should stay in touch."

Evidence of Mr Smith

80 Mr Smith gave evidence that during a discussion with Mr Bartlett, he said:

81 Mr Smith's evidence is accepted as reliable on this issue.

Late January 2004

82 Mr Bartlett gave evidence that he had had a conversation with Mr Smith in which he had said that Macquarie Bank wished to talk to Mr Smith about the purchase being made with their funding and that the material amount was still “7 times earnings but that Macquarie may be prepared to negotiate”.

83 Mr Smith in his statement denied having had the telephone conversation and denied at any time having heard Mr Bartlett use the phrase "seven times earnings" or any similar phrase.

84 Mr Smith's evidence is accepted as reliable on this issue.

9 February 2004

85 On this date Mr Campbell, a director of Ferrier Hodgson, sent an e-mail to Mr Russell of Macquarie bank attaching draft accounts for the four hotels for the 12 months up to 31 December 2003. [PX 3/735]. The e-mail stated that the draft accounts had not been subject to audit and were provided for information purposes only, a matter noticed by Mr Bartlett when he read the e-mail [transcript 173]. In the same e-mail Mr Campbell made the point that the company was prepared to warrant its revenues and margins but that the purchaser would need to satisfy itself as to expense levels.

86 Under cross-examination already adverted to, Mr Bartlett conceded that he had understood when he received the e-mail that the Club Group were not prepared to stand behind anything in those accounts under the heading of "expenses" and that this was a matter which the purchaser would have to work out for itself [transcript 174.5]. His evidence included:

“Q. You no doubt felt as at 9 February when you read this e-mail that between you and Mr Hicks you could work out fairly well for your purposes what the expenses were likely to be in these hotels, isn't that right?
A. Yes.

Q. Based upon yours and his experience?
A. Yes.

Q. And in particular knowing how it would be that you and he would run them?
A. Yes.

Q. Because after all, expense levels are very heavily dictated by the way in which the hotels are run, aren't they?
A. They are.

Q. And you were told in this e-mail, I suggest, of course that the accounts attached exclude head office overheads, directors' drawings and depreciation with certain expenses allocated on a single holding basis?
A. That's right.

to work out for the purposes of any financial assessment of these hotels just what the expenses would be under the new management?

Yes.”

[transcript 174-175]

10 and 11 February 2004

87 Extensive evidence was given in relation to conversations said to have taken place at a meeting at Leumeah in relation to the due diligence process to be undertaken by Ernst & Young.

Evidence adduced by the plaintiff

88 The evidence adduced by the plaintiff included the following:

Mr Smith’s evidence

“Mr Smith did not review line items of the Ferriers accounts with Mr McMorron or anyone else.

[This evidence is accepted as reliable]

Discussion between either Mr McMorron and Mr Cruger or Mr Smith.

Mr Cruger’s evidence

Conversation as between Mr McMorron and Gregory Cruger to the effect of the following:

McMorron: We want to see some sample weekly and daily trading sheets so that we can reconcile them against the weekly KPI summaries.”

Cruger: Which weeks to you want? The trading sheets for the first half of the year have been moved to storage off site. It you want them from the first half of the year, I can get them for you, but if you want them for the second half of the year then I have them at my fingertips.”

[Statement of Gregory Cruger dated 24 August 2005 – para 4(a).]

Mr Cruger did not say anything to Mr McMorron to the effect that food is recorded in the Jetz system, the food is recorded in any summary report obtained from the Jetz system or the weekly figures in the weekly KPI summaries where adjusted to take account of the monthly stock adjustments.
[Statement of Gregory Cruger dated 24 August 2005 – para 8(b).]

Discussions between Mr Cruger and Mr McMorron during the due diligence process

Mr McMorron: Can you tell me how the Jetz system deals with sales?"
Mr Cruger: “ Sure. All of the sales in the hotels are rung up through electronic tills which are linked to the Jetz system. Everything has to go through the tills. The staff do not have high level access to the Jetz system so they cannot go back and subsequently change any entries. This means that every sale, whether cash or otherwise, is recorded in the Jetz system. At the end of each shift, the manager counts the cash in the tills and checks this against the sales recorded in the Jetz system. This information gets entered into a daily trading sheet. The hotel management can access the Jetz Manager module and check the sales figures for any day."…

Mr McMorron: "I would like to know more about how the daily and weekly trading sheets are prepared"
Mr Cruger: "At the end of each shift, the manager takes the cash draw from each till into the manager's office and counts the cash taken by the till during the shift. The manager records the cash count in the daily trading sheet. It will be easier if I show you on one of the daily trading sheets.”…

Mr Cruger: The manager enters the cash count figures for each till into the "Cash Count" column. Each of the tills has a separate row. The "AM" is the morning shift and "PM" is the evening shift. This daily trading sheet is a sheet I designed in Excel. The manager enters the figures directly into the sheet on the computer. The manager then looks up the "JETZ Theoretical" sales figures in the first column from the Jetz system and enters them in the daily trading sheet. These are the figures recorded in the Jetz system for all of the sales in the hotels. The manager then totals up any petty cash vouchers and enters the total in the "Petty Cash" column.

Mr McMorron: "What is covered by Petty Cash?"
Mr Cruger: "For the bars it might be some item needed by the staff; for the bistro it might include meal vouchers. The manager prepared a daily petty cash summary as part of the same Excel workbook listing all of the petty cash items and attaching all of the vouchers. This petty cash summary stays with the daily trading sheet. Here it is here, with the vouchers attached.

For the bottleshop tills, the manager also gets the EFTPOS and credit card payments from the Jetz system and enters them in the "Cards" column. The computer then calculates the total of the receipts and displays it in the "Actual" column and works out any difference between this and the figures recorded in the Jetz system and displays it in the "Var +/-" column. The manager also enters the gaming machine and TAB figures. The spreadsheet then adds up the sales and cash adjustments and the manager enters the final amount that is put into the Armaguard safe in the "Less cash to Armaguard" cell. This means that the daily trading sheet gives us a cradle to grave record of all the sales from the tills right through to the amount that gets banked. At the end of each day, the manager obtains the gross margin percentage figure for bar and bottle shop sales from the Jetz system and puts it into the daily trading sheet in the "GP%" column."

"Does the manager also make up the weekly trading sheets?"

The weekly trading sheets are actually part of the same Excel spreadsheet as the daily trading sheets. The weekly trading sheet was automatically generated by Excel from the information puts into each daily trading sheet. The manager would print out each daily trading sheet and the petty cash summary and attach the individual petty cash vouchers and EFTPOS and credit card receipts to the daily trading sheet. At the end of the week, the manager put together each of the daily sheets and these would be collected or sent to head office. On each Monday morning, the managers would also email the completed weekly workbook file in to head office."

89 Mr Smith also gave evidence which is accepted as reliable that the conversation which he had had with Mr Murdoch during the meeting of 11 February 2004 included:

“Mr Murdoch: We would like to see the books and records of the hotels.”

Statement of Ben Smith dated 19 August 2005 – para 23.”

Mr Buffier’s evidence

90 Mr Buffier was the General Manager for Club Hotels Group Pty Ltd for the whole of 2003, his responsibilities including the supervision of the trading activities of the Club Hotels Group hotels. He gave evidence of participating in a meeting of Tuesday 10 February 2004 at which he meant a number of representatives of the purchaser as including Mr Russell, Mr Hicks and others. His continuing evidence which is accepted as reliable included:

“Jason, can you show me how the JETZ system calculates the GP% figure noted in the KPI schedule?”

I said in response words to the following effect:

“I will show you.”

9. I then turned to my computer and Mr McMorron moved next to me to look at my computer screen.

“I will just enter into the JETZ manager, and see here, I click on the Product and Stock Control icon. Let’s now choose one of the hotels [I now cannot recall which hotel I chose] and click on one bottle shop product group. You see here that it lists all the product groups. Let’s choose one [I now do not recall which specific product group I chose]. You see that it lists the columns including “normal sale price” which includes GST, the “current cost” which excludes GST, and the “normal GP%” on that item.

Let’s pick one specific stock item. [I then picked one]. See how it lists the prices and the GP%. Let’s now check this on my calculator.”

12. On the calculator I then divided that number by the sale price figure which appeared on the computer screen and that gave a figure on my calculator which, when multiplied by 100, matched the GP% figure shown on the screen for that product.

198 This inference is drawn for two reasons. First, evidence accepted as reliable was given to the effect that the KPI figures were more reliable that the Ferrier Hodgson report, and/or that the KPI documents represented the information from which the continued business was run. Secondly, the due diligence report itself states that the process by which Ernst & Young conducted its due diligence was to “compar(e) revenue, gross margin (excluding bistro) and gross salaries and wages) [sic] included in the Ferrier Hodgson abridged financial information to week-by-week KPI Reports (represented to be “actual” results for 2003) and where available certain underlying business systems and supporting information”. These reasons strongly suggest that where the Ferrier Hodgson report and the KPI documents presented different results, Ernst & Young preferred the KPI documents.

199 The second step in treating with the causation issue is to discover whether a change in the EBITDA figure, as found by Ernst & Young, would on the balance of probabilities have resulted in a change to the purchase price ultimately agreed upon.

200 Several hurdles stand in the way of CHG establishing an answer to this question in its favour. First, although the purchase price negotiations took account of the past EBITDA of the hotels, it also took projected EBITDA into account (as demonstrated by the several Macquarie Bank internal reports). Moreover, it appears that whilst the EBITDA figures changed in the Macquarie Bank internal reports, the purchase price did not. That is, the purchase price was not a function of an independent yield multiplier. [See Ex P17 and 21]. Indeed, some of the multiples disclosed in the different proposition summaries disclose that the earnings multiplier would be greater than that which was ultimately adopted.

201 Macquarie Bank did not treat the EBITDA as a defining factor in negotiating the purchase price, although it did clearly treat the EBITDA as a measure of the appropriateness of its investment. What this evidence suggests is that the earnings multiple/yield was only used as a measure of the appropriateness of the purchase price.

202 Importantly, no objection was taken to the purchase price in any of the proposition summaries on the basis of the EBITDA. Moreover, the final earnings multiple [and the one which results when CHG’s true EBITDA is used], falls within the range of earnings multiples disclosed in the numerous proposition summaries.

203 Further evidence, by way of an email, [Ex P18] strongly suggests that Macquarie Bank was using the Ernst & Young due diligence report (and importantly its EBITDA conclusion) to justify to external parties the price it was paying for the hotels. It would indeed be curious to find the purchaser being willing to drag the purchase price upwards: however this is explicable if reference is made to external third parties.

204 In addition to all of this, the result of the parties actual negotiations was a purchase price which represented a yield to Macquarie Bank which was less than the 14% yield.

205 These factors justify a finding that whilst the EBITDA played some role in the parties determining what the purchase price would be, it was not the only factor which was taken into account. I reject CHG’s submission that it was the only variable in a formula which determined the ultimate purchase price.

206 The causation issue resembles the question “which came first the chicken or the egg?” However the evidence suggests that the purchase price was determined, and that only then was the multiple determined [as opposed to the converse]. Of course if the multiple were a number that Macquarie Bank considered was too high, it would revisit the purchase price. However, what the proposition summaries show is that what Macquarie Bank had in mind was not any precise multiple figure, but rather a range in which the multiple could fall and still be seen as appropriate. The ultimate multiple fell within this range, and the multiple calculated by reference to the EBITDA propounded by CHG also falls within that range.

207 Accordingly, CHG fails to establish that it has suffered any loss which can be legally attributed to a misstatement in the KPI/EBITDA figures.

Actual Market Value

208 Finally it is pertinent to note that CHG‘s proposition can only have validity if the process of applying a multiple to the 2003 EBITDA figure is a legitimate way of determining the true value of these businesses, yet there was simply no evidence that this process is an appropriate way to determine their true value.

209 Even if it be accepted that the method has some validity, there is no evidence that 7.326 was an appropriate multiple to apply to the 2003 EBITDA so as to arrive at a true valuation of the business. Mr Gower expresses no opinion on the appropriateness of the multiple (Ex. D7 para 49).

210 No evidence was led as to what the actual market value of the hotels was.

Security expenses

211 There is no substance to CHG’s case in this regard.

CHG’s submissions

212 CHG’s submissions in relation to this issue were as follows:

· “The Vendors disclosed to CHG prior to the Contracts the existence of a weekly security expense of $3,700 per week. In fact, the true security expense was $9,110 per week.

· In the contracts relating to the hotel businesses, Group gave a “promise, representation and warranty” that the Vendor has disclosed to CHG the particulars of each contract material to the property and the business [clause 56.8 of the Purchase Contracts relating to Campbelltown Club Hotel and Mount Annan Club Hotel, and clause 53.8, 48.9 and 47.9 respectively of the Purchase Contracts relating to Leumeah Club Hotel and Wattle Grove Club Hotel].

· The disclosure of a weekly security expense of $3,700, when the actual weekly expense was $9,110 (see Mr Gower’s report of 10 June 2005 Ex D7 para 31) constituted a breach of that warranty.”

Decision

213 The starting point in terms of this question is the actual words of the contract. The relevant term states:

214 In Annexure E of the Mt Annan hotel and Campbelltown hotel contracts, and Annexure D of the Leumeah Hotel and Wattle Grove hotel contracts, the security contracts were disclosed the fee arrangement between those relevant hotels and the third-party security provider, “Australian Venue Security”. This fee arrangement was that there would be payable a flat rate of $27 per guard per hour, there being no fixed term price set.

215 CHG’s submission is not that there was some other security contract which bound the hotels, nor that this $27 fee rate was incorrect. Rather, its submission is that Group failed to disclose what the actual security expenses incurred were.

216 The clear words of the contract state that what is being guaranteed is that Group would disclose to CHG all the terms of the contracts which bound the hotels. Annexure D/E of the relevant contracts met this obligation in regard to security contracts. There are no terms in the contract that require Group to warrant the historical security expenses of the hotels. These figures do not form apart of the KPI schedules, nor does the assertion that such a guarantee exists find comfort in the pre-contractual discussions between the parties.

217 CHG’s submissions regarding security expenses are rejected.

The novation issue

Relevant Contractual Provisions

218 Each of the Sale Contracts for the hotels was dated 1 March 2004. In each case, the purchaser was stated to be “Macquarie Bank Limited as promoter of Leisure and Entertainment Acquisitions Pty Limited a company to be incorporated”. [CHG (formerly Leisure and Entertainment Acquisitions Pty Limited) was incorporated on 12 March 2004]

219 Pursuant to section 131 Corporations Act, a promoter of a company can enter into a contract on behalf of a company before it is registered and the contract will become binding on the company if the company becomes registered and ratifies the contract within a reasonable time. However a company cannot by adoption or ratification obtain the benefit of contract purporting to have been made on its behalf before the company came into existence: in order to do so a new contract must be made with it after its incorporation on the terms of the old one: Natal Land and Colonisation Company Ltd v Pauline Colliery and Development Syndicates Ltd [1904] AC 120 approving Kelner v Baxter (1866) LR2CP174, North Sydney Investment and Tramway Company Ltd v Higgins [1899] AC 263.

220 Each of the sale contracts contains a special condition relating to novation (see special condition headed “Deposit and Novation”, being special condition 57 in some contracts and special condition 60 in other contracts).

221 Relevantly, the special condition 57 provides:

(a) Macquarie may at any time prior to completion require Group to novate the contract [clause 57.1(c)];

(b) If Macquarie elects to novate the contract prior to completion, Macquarie shall prepare and deliver to Group for execution the deed of novation in substantially similar terms as the deed of novation annexed to the contract, and Group shall execute the deed and deliver the executed document to Macquarie [clause 57.2(a)];

each promise, representation, warranty, covenant and other benefit of the purchaser [Macquarie] under and in connection with this contract is deemed to be for the benefit of Macquarie Bank Limited as promoter of Leisure and Entertainment Acquisitions Pty Limited, a company to be incorporated and the entity to which this contract has been novated as purchaser

222 The form of the novation deed annexed to the contracts is in relevantly identical terms to the six novation deeds (one for each sale contract) that were in fact executed immediately prior to completion.

223 The next special condition (special condition 58 in some of the contracts and special condition 61 in others of the contracts) specifies conditions precedent to the purchaser’s obligation to complete the contract. The conditions precedent include Group delivering on completion to the purchaser the deed of novation in substantially similar terms as the deed annexed to the contract duly executed by the vendor, a guarantee deed in substantially similar terms as contained in an annexure to the contract, and specified mortgages and charges executed by Operations in favour of the purchaser.

224 The executed novation deeds are dated 5 April 2004. The novation deeds provide that on and from the Effective Time, which is defined to mean 9.00 a.m. on 5 April 2004, the sale contract is novated to Leisure and Entertainment Acquisitions Pty Limited (which subsequently changed its name to CHG). However, clause 2(c) of the novation deed provides that the Incoming Party “does not obtain any right or assume any obligation or liability under the Contract or otherwise, which accrued or arose before the Effective Time or relates to any act or omission before the Effective Time.”

225 The parties to the novation deeds are Group (as the vendor) (or Stokeston in the case of two contracts), Macquarie and CHG (then known as Leisure and Entertainment Acquisitions Pty Limited).

226 Also on 5 April 2004, the deed of guarantee and charges and mortgages were executed and delivered by Operations in favour of CHG.

227 Also on 5 April 2004, at about 11.30am (after the Effective Time of the Novation Deeds), CHG completed the sale contracts by paying the purchase price to Group (and Stokeston) in return for Group (and Stokeston) delivering to CHG executed transfers of the hotels to CHG.

228 Of the contractual warranties currently relied upon, all but one are expressed in the sale contracts to be warranties made both at the date of the sale contract and at completion. The other warranty is silent as to the time at which it is made, with the result that the warranty is made at the date of the contract. That warranty, which is contained in special condition 47.2 (in some contracts) and special condition 45.2 (in other contracts), is the warranty that the sales and profit margin information contained in Annexure K to the contracts (being documents described as “Weekly KPI Summaries”) is true and correct.

229 The terms of the guarantee and indemnity given by Operations to CHG need to be kept in mind. The “guaranteed monies” is defined as meaning all amounts which CHG pays, suffers or incurs or becomes liable for arising out of or in connection with any promise, representation or warranty made or regarded as made in connection with a sale contract being or becoming false, misleading or incorrect.

230 Further, under clause 11.11 of the guarantee, it is stated, inter alia, that CHG cannot make a demand on Operations under the deed;

(i) in respect of a breach by any vendor under any of the sale contracts of a promise, representation or warranty contained in clause 47.2 or clause 45.2 (as the case may be) of the sale contract (being the clause warranting the accuracy of the weekly KPI summaries) after the date that is 183 days after the date of the deed; and

Group’s contention

231 Group alleges that the rights arising out of any breach of the promises, representations and warranties made by it in the sale contracts were expressly retained by Macquarie Bank and were not novated to CHG under clause 2 (c) of the novation deeds.

Dealing with the issue

232 I am in a position to deal with the issue fairly shortly.

233 The sale contracts specifically contemplated a novation in the terms that in fact took place, and specifically provided that in the event of such a novation, the warranties in the sale contracts are deemed to be for the benefit of Macquarie as promoter of CHG (not for the benefit of Macquarie in its own right).

234 While the novation deed is a separate document from the sale contracts and was executed at a later time than the sale contracts, it is nonetheless apparent that the deed of novation in a form including clause 2(c) was contemplated in the sale contracts as being the form of agreement that would be entered into prior to completion. Accordingly, it is a proper approach to construing the novation deed to have regard to the terms of the sale contract and in particular the terms in the sale contract relating to the novation: see, for example, McVeigh v National Australia Bank [2000] FCA 187.

235 Group’s construction of clause 2(c) of the novation deeds produces the commercially absurd result that a condition precedent to the purchaser being required to complete the contract was that Operations deliver a guarantee to the purchaser containing guarantee obligations that (if Group is correct) cease to have any effect upon execution of the deeds of novation.

236 The subject warranty was a continuing warranty. It continued up to completion. It continued thereafter. For that reason it cannot be said that:

(a) CHG had no locus to pursue its claims for breach of warranty;

(i) only accrued or arose before the Effective Time or

before the Effective Time

237 It is appropriate to note that Group:

· whilst contending that notwithstanding that the words used in clause 57.2 (c) of the sale contracts plainly represent an endeavour by the parties to produce a deeming provision [deeming each promise, representation, warranty, covenant and other benefit of the purchaser under and in connection with the contract to be for the benefit of Macquarie Bank as promoter of the company to be incorporated];

· also contended that the deeming provision was as a matter of law ineffective.

238 Group relied upon the principle that:

Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd

239 However there is always a particular context against which each document or set of documents requires to be construed. Very special regard does have to be paid to the particular context in which that particular contract was entered into.

240 Reference has already been made earlier in this judgment to the authorities which support the proposition that when the Court is dealing with commercial documents, the contracts should be construed so as to be given a commercial, reasonable and rational operation.

241 The present context concerning a group of interrelated contractual documents obliges the Court to inquire beyond the language and to

Prenn v Simmonds

Rejection of Group’s foundational submission

242 That exercise results in the rejection of Group’s foundational submission that the rights arising out of any breach of the subject warranties given by it in the sale contracts were expressly retained by Macquarie Bank and were not novated to CHG under clause 2 (c) of the novation deeds.

CHG’s rights against Operations

243 In any event and even if the above approach be incorrect, there is an alternative analysis of substance which however would deal only with CHG’s rights against Operations under the guarantee (which in turn is secured by the charge and mortgage). The analysis is as follows:

· even if the deed of novation has the meaning contended for by Group and Operations, the deed of guarantee is not dependent upon the warranties being novated to CHG, and so long as CHG paid money or suffered a loss “arising out of or in connection with” any warranty being or becoming false, those monies and/or losses fall within the definition of guaranteed monies in the guarantee.

· There is no requirement under the terms of the guarantee that the warranties in the sale contracts be made to CHG, only a requirement that CHG suffers a loss arising out of or in connection with a warranty being or becoming false.

· Given that CHG paid the purchase price which had been negotiated based upon the warranties set out in the contract, then CHG would, and warranties been false, have suffered a loss arising out of or in connection with that falsity.

· Further, clause 11.11 of the guarantee, which imposes time limits on CHG making a demand on Operations in respect of a breach by Group of the contractual warranties, similarly makes it plain that CHG is entitled to make a demand on Operations under the guarantee in respect of a breach by Group of the warranties in the sale contracts.

Conduct of hearing

244 At the commencement of the hearing leading counsel for both groups of parties agreed that in substance the cross claimant was conveniently to be regarded as the moving party to present its cross claim case. No submissions were addressed to the Court by the defendant/cross claimant to the effect that in the event of the cross claim failing, the plaintiff was not entitled to the relief it sought.

Short minutes of order

245 The parties are to bring in short minutes of order on which occasion costs may be argued.

I certify that paragraphs 1 - 245
are a true copy of the reasons
for judgment herein of
the Hon. Justice Einstein
given on 7 October 2005
___________________

Susan Piggott
Associate
7 October 2005

10/10/2005 - Replaced the first two words of paragraph 63 from "Mr Russell's" to the words "Mr Smith's" - Paragraph(s) 63

11/10/2005 - spelling mistake in heading of judgment CGH instead of CHG - Paragraph(s) heading

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Citations

Club Hotels Operations Pty Limited v CHG Australia Pty Limited [2005] NSWSC 998

Most Recent Citation

Campbell v BackOffice Investments Pty Ltd [2008] NSWCA 95

Cases Citing This Decision

1

Campbell v BackOffice Investments Pty Ltd [2008] NSWCA 95

Cases Cited

19

Statutory Material Cited

3

EW Blanch Pty Ltd v Cooper [2005] NSWCA 217

McVeigh v National Australia Bank Ltd [2000] FCA 187

Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114

CITATION:	Club Hotels Operations Pty Limited v CHG Australia Pty Limited [2005] NSWSC 998 This decision has been amended. Please see the end of the judgment for a list of the amendments.
HEARING DATE(S):	05/09/05, 06/09/05, 08/09/05, 12/09/05-15/09/05, 19/09/05-21/09/05
JUDGMENT DATE :	7 October 2005
JURISDICTION:	Equity Division Commercial List
JUDGMENT OF:	Einstein J
DECISION:	Cross-claims fail. Short minutes of order to be brought in.

CATCHWORDS:	Contract - Purchase of hotels - Contractual warranty that information attached as annexure was true and correct, complete and accurate and not misleading in any respect for period specified - Proper construction of warranties - Interpretation of words "sales" and "gross profit percentage" - Principles of construction - Suggested inconsistency as between (1) United Kingdom and High Court of Australia decisions and (2) two particular High Court decisions, as to width of admissible background which would have been reasonably available to the parties - Constructive knowledge principle - Finding that subject information was being warranted as being accurate as information contained in particular document - Whether contractual warranties were breached - Finding that warranty was that information was accurate as a record of the key performance indicators produced within the system operated by vendors - Causation - Post hoc ergo procter hoc - Purchaser claims that purchase price was determined by a formula comprised of one variable and one constant [variable being EBITDA for the hotels, constant being an earnings multiplier] - Purchaser claims as damages the difference between the value of the hotels as warranted and their true value to the purchaser - Test said to include element of subjectivity - Principles applicable as to quantum of damage - Novation - Sale contracts identifying purchaser as Macquarie Bank as promoter of defendant - Defendant incorporated after date of sale contracts - Corporation unable by adoption or ratification to obtain benefit of a contract purporting to have been made on its behalf before it came into existence - Whether purchaser succeeded to novated rights and obligations - Proper construction of interrelated contractual documents
LEGISLATION CITED:	Corporations Act 2001 (Cth) Local Government Act 1993 (NSW) Trade Practices Act 1974 (Cth)
CASES CITED:	Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 Bank of Credit and Commerce International SA v Ali [2001] 1 All ER 961 Bowtell v Goldsborough Mort & Co Ltd (1905) 3 CLR 444 Brambles Holdings Limited v Bathurst City Council (2001) 53 NSWLR 153 Burns Philp Hardware Pty Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 Commonwealth v Amman Aviation Pty Ltd (1991) 174 CLR 64 Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] 132 CLR 373 Eastgate v Lindsay Morden [2001] Lloyd's Law Reports 511 EW Blanch Pty Ltd v Cooper [2005] NSWCA 217 Hadley v Baxendale (1854) 156 ER 145 Hide and Skin Trading v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 Kelner v Baxter (1866) LR2CP174 L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 Livingstone v Raywards Coal Co (1880) 5 App Cas 25 Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 76 ALJR 246 Manufacturers' Mutual Insurance Ltd v Withers (1988) 5 ANZ Ins Cas 60-853 McVeigh v National Australia Bank [2000] FCA 187 Minister for Immigration and Ethnic Affairs v Teoh (1995) 183 CLR 273 Natal Land and Colonisation Company Ltd v Pauline Colliery and Development Syndicates Ltd [1904] AC 120 North Sydney Investment and Tramway Company Ltd v Higgins [1899] AC 263 Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114 Prenn v Simmonds [1971] 1 WLR 1381, [1971] 3 All ER 237 Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, [1976] 3 All ER 570 Robinson v Harman (1848) 1 Exch 850 Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd's Law Reports 422 South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478 Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 Wenham v Ella (1972) 127 CLR 454
PARTIES:	Club Hotels Operations Pty Limited (First Plaintiff) Club Hotels Group Pty Limited (Second Plaintiff) CHG Australia Pty Limited (Defendant) Stokeston Projects Pty Limited (Third Cross Defendant)
FILE NUMBER(S):	SC 50091/05
COUNSEL:	Mr L Foster SC, Mr A Ogborne (Plaintiffs) (Third Cross Defendant) Mr J Stevenson SC, Mr N Kidd (Defendant)
SOLICITORS:	Bruce Stewart Dimarco (Plaintiffs) (Third Cross Defendant) Corrs Chambers Westgarth (Defendant)

Comment	EBITDA	% of Revenue	Ref
Presented EBITDA	$10,475K	37.5%	Ferrier Hodgson
Adjusted EBITDA	$9,398K	34.3%	Section 2
Normalised EBITDA	$9,965K	35.7%	Section 3