Dalrymple Holdings P/L & Anor. v Gohl, M.A.

Re: DALRYMPLE HOLDINGS PTY LTD and MILGLADE PTY LTD
And: MARTIN ANDREW GOHL; WENDY GOHL; O'KELLY HOLDINGS PTY LTD; CLIVE VINCENT
O'KELLY and SANDRA O'KELLY
No. QG290 of 1988
FED No. 215
Number of pages - 8
Trade Practices - Evidence

COURT

IN THE FEDERAL COURT OF AUSTRALIA

QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
Spender J(1)

CATCHWORDS

Trade Practices - misleading and deceptive conduct - sale of boarding-house - representations as to income and expenses of boarding-house - figures supplied to purchasers prior to entering contract not accurate - representations intended to and did induce purchase - assessment and quantum of damages.

Evidence - function of expert witnesses - conflicting expert evidence - duty of Court to form and act on original opinion - Court to take assistance from expert witnesses.

Trade Practices Act 1974 ss. 52, 53A, 82, 87

Federal Court of Australia Act 1976 s. 51A

Abalos v. Australian Postal Commission (1990) 171 CLR 167

Gould v. Vaggelas (1984) 157 CLR 215

Ramsay v. Watson (1961) 108 CLR 642

Spencer v. Commonwealth of Australia (1907) 5 CLR 418

Sutton v. A. J. Thompson (1987) 73 ALR 233

Ellis v. Wallsend District Hospital (1989) 17 NSWLR 553

Thurston v. Todd (1966) 1 NSWLR 321

Hill v. Commissioner of Highways (1966) SASR 316

Holtman v. Sampson (1985) 2 Qd R 472

Davie v. Edinburgh Magistrates (1953) SC 34

Frederick Bloomenthal v. James Ford (1987) AC 156

HEARING

BRISBANE

#DATE 31:3:1993

Counsel for the applicants: Mr J. C. Sheahan

Instructed by: Feez Ruthning

Counsel for the second,
third and fourth respondents: Mr R. D. Cooper

Instructed by: Lees Marshall and Warnick

ORDER

THE COURT ORDERS THAT:

Judgment be given for the applicants against each of the second, third and fourth respondents in the sum of $55,200.

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

JUDGE1

SPENDER J The applicants in this matter allege that fraudulent or negligent misrepresentions, or conduct in breach of s. 52 of the Trade Practices Act 1974, concerning the income of a boarding-house, induced the first applicant to purchase that boarding-house "Linden Lodge".

The application seeks an order pursuant to s. 87 of the Trade Practices Act varying the contract between the parties in such manner as the Court thinks fit and declaring the said contract to have had effect as so varied on and after the date of execution of the said contract. Further, or in the alternative, the applicants seek damages pursuant to s. 82 of the Trade Practices Act for the loss or damage suffered by the applicants, or either of them, by reason of the first, second, third and fourth respondents' involvement in contraventions of ss. 52 and 53A of the Trade Practices Act, together with any interest thereon at such rate as the Court deems fit. Alternatively, the applicants seek the damages suffered by the applicants, or either of them, flowing from the fraudulent or negligent misrepresentations, or both, made by the first, second, third and fourth respondents, together with interest thereon at such rate as the Court may deem fit. Further, or in the alternative, the applicants seek the damages suffered by them for breach of warranty, together with any interest thereon. Finally, and in the alternative, the applicants also seek exemplary damages from the second, third and fourth respondents by reason of the facts and matters referred to in the statement of claim.
The facts and matters referred to in the statement of claim relate to a preliminary issue I tried and delivered judgment on on 22 November 1990.
The first applicant, Dalrymple Holdings Pty Ltd ('Dalrymple') claims that it was induced by oral and written misrepresentations made by Clive Vincent O'Kelly, the third respondent, and Sandra O'Kelly, the fourth respondent, concerning the income, expenses and profitability of the boarding-house, "Linden Lodge", to enter into a contract to purchase that boarding-house from the first respondents, Mr and Mrs Gohl for $170,000. Dalrymple retired as trustee managing "Linden Lodge" on 31 March 1988 and was replaced as trustee on that day by the second applicant, Milglade Pty Ltd.
The case for the applicants, set out in paragraph 11 of the amended statement of claim, was that prior to executing the contract for the purchase of the boarding-house, a document which became Exhibit 1 before me was delivered to the home of Mr Murphy, who is a director of the first applicant company, as is his wife. This document shows two tables with a breakdown of expenses both per month and per annum and underneath those tables, under the heading "Income", the following appears:

"16 ROOMS x $70.00 p.w. = $1106.00 p.w. - $4755.00 p.m. - $57069.60 P.A. BUDGET FOR 95% OCCUPANCY AND DISCOUNT 2 ROOMS FOR 4 WEEKS X'MAS PERIOD THEY PAY $45.00 P.W. WHILE ON HOLIDAY.

ROOM/BOARD RATE WILL NOW INCREASE TO $75.00 P.W. "

The applicants contended that they were induced to enter into the contract by the representations contained in that document which is Exhibit 1 in these proceedings.
The position of the second, third and fourth respondents was that any document given to Mr Murphy did not contain the information appearing under the heading "Income" as set out above and that that part of the document came into existence by the work of persons other than the respondents. At the hearing of the preliminary issues, Mr. G. Martin, counsel for the second, third and fourth respondents, indicated that leave would be sought further to amend the amended defence, to withdraw the denial of the allegation contained in paragraph 11 of the amended statement of claim and to substitute a non-admission of that allegation and indicated that further affidavits would be filed, the effect of which would be that where previously the respondents swore that the document handed over to Mr and Mrs Murphy was unlike Exhibit 1, they would say that, after considering the report of Mr Gregory Marheine, a forensic document examiner, they would no longer maintain that claim and would say that they were no longer sure. Further, the respondents asserted that any details of the income, costs or profitability of "Linden Lodge" were not communicated to anybody acting on behalf of the applicants until after the execution of the contract for the purchase of that boarding-house.
On that occasion I found, first, that the document communicated by the second, third and fourth respondents to the applicants was in the form of the document which was Exhibit 1 in these proceedings. On the question of whether Exhibit 1 was supplied before or after a binding contract was entered into, I further found that the contents of the document were communicated to the applicants prior to the execution of the contract of sale. Since that time and during the hearing of the principal proceedings, there has not been any evidence to suggest that those findings were erroneous.
Sandra O'Kelly, the fourth respondent, was quite certain under cross-examination that neither she nor Mr O'Kelly could have supplied the figures in Exhibit 1 because those figures must have been incorrect. In response to a series of questions put by Mr Sheahan, counsel for the applicants, Mrs O'Kelly maintained that the figures were incorrect:

" And it is obvious to you, is not it, that those figures could not accurately have represented the income of the Linden Lodge property in the year before March 1987, could they?---That's right, yes.

And it is clear to you, that it would not have been a reasonable expectation in March of 1987 that there would be a 95 per cent occupancy rate for that property?---That's right.

It is also clear to you that those figures suggest that a purchaser could reasonably expect a return on Linden Lodge of something in excess of $30,000 a year, is not it?--- Looking at those incomes, yes.

And anyone who had familiarised themselves with the figures for the property during the time the Gohls owned it, figures that you had, would have known that there was no chance of any such return?---That's right.

So if those figures were put there by someone who had access to the figures that you had access to, they could not have been put there as an honest statement of the past returns?--- That's right.

And they could not have been put there as an honest or reasonable prediction for future returns?---That's right. "

Mrs O'Kelly maintained that she was not the person responsible for the income figures on Exhibit 1. In response to a question whether she had concluded that her husband, Mr O'Kelly, must not have asked her to put the income figures down because, if he had, she would not have put those particular figures down, responded:

" Well, they're not the right figures, Mr. Sheahan. I wouldn't have put those figures down. "

On the evidence I have heard since that date, I remain satisfied that the findings I made on 22 November 1990 were correct. During the hearing of the principal proceedings, neither Mr nor Mrs O'Kelly asserted belief in the accuracy or the reasonableness of the figures in Exhibit 1 as to income.
The figures contained in Exhibit 1 must have been intended to induce the purchase of "Linden Lodge". In Gould v. Vaggelas (1984) 157 CLR 215, Wilson J at 236 restated the principles applicable to the issue of inducement as follows:

" 1. Notwithstanding that a representation is both false and fraudulent, if the representee does not rely upon it he has no case.

2. If a material representation is made which is calculated to induce the representee to enter into a contract and that person in fact enters into the contract there arises a fair inference of fact that he was induced to do so by the representation.

3. The inference may be rebutted, for example, by showing that the representee, before he entered into the contract, either was possessed of actual knowledge of the true facts and knew them to be true or alternatively made it plain that whether he knew the true facts or not he did not rely on the representation.

4. The representation need not be the sole inducement. It is sufficient so long as it plays some part even if only a minor part in contributing to the formation of the contract."

The Full Federal Court in Sutton v. A.J. Thompson (1987) 73 ALR 233 at 240 referred to that restatement by Wilson J in Gould v. Vaggelas (supra) and indicated that the principles were equally applicable to breaches of s. 52 of the Trade Practices Act.
Whether a person is induced to act in respect of a representation is always a question of fact, to be determined having regard to all the circumstances: Frederick Bloomenthal v. James Ford (1897) AC 156 at 162.
In all the circumstances of this case, I am satisfied that the representations contained in Exhibit 1 were both intended to and did induce the entry of the first applicant into the contract to purchase "Linden Lodge".
The first respondents made the representations, which were misleading or deceptive, through the second respondent, and the third and fourth respondents were knowingly concerned in that conduct. That conduct was in trade or commerce and induced the applicants to acquire the boarding-house.
I turn then to the assessment of the applicants' loss and damage as a result of the respondents' conduct in breach of s. 52 of the Trade Practices Act.
The applicants have since disposed of "Linden Lodge". Notwithstanding the claim for exemplary damages, the only relief appropriate in the circumstances, it seems to me, is an award of damages pursuant to s. 82 of the Trade Practices Act. Such damages are compensatory.
The principal difficulty in relation to this matter is as to the quantum of damages.
In Gould v. Vaggelas (supra), Gibbs CJ said at 220:

" It is well established that in an action of deceit where the plaintiff has been induced by the fraudulent misrepresentation of the defendant to enter into a contract of purchase, the measure of damages usually applicable is the difference between the real value of the property at the time of the purchase and what the plaintiff paid for it: Holmes v. Jones (1907) 4 CLR 1692, at pp 1702-1703; Toteff v. Antonas (1952) 87 CLR 647, at pp 650-651; Foster v. Public Trustee (1975) 1 NZLR 26, at p 28; Ted Brown Quarries Pty. Ltd. v. General Quarries (Gilston) Pty. Ltd. (1977) 16 ALR 23, at p 31. Events that happen after the time of the purchase may throw light on the real value of the property at that time: Potts v. Miller (1940) 64 CLR at pp 289-290, 299. Where the property has depreciated in value after the purchase, and the depreciation was due to some cause inherent in the property itself, the depreciation must be considered in determining the real value of the property at the relevant time, but where the cause of the depreciation was 'independent', 'extrinsic', 'supervening', or 'accidental', the additional loss is not the consequence of the inducement and it should not be taken into account in arriving at the value of the property at the time of the purchase: Potts v. Miller (1940) 64 CLR , at p 298. "

The applicants in this case are entitled to recover the difference between the purchase price and the value of the property at the date of acquisition, together with any consequential losses. No such consequential losses have been claimed.
In 1984, Mr O'Kelly purchased LJ Hooker, West End, and changed its name to West End Real Estate. West End Real Estate acted as agents in the sale of "Linden Lodge" from Stanley Perrow to the first respondents, Mr and Mrs Gohl, as trustees of the Gohl Family Trust No. 1 in July 1985. The purchase price at that time was $155,000. After this purchase by the first respondents, West End Real Estate managed the property. On 3 April 1987, Dalrymple purchased "Linden Lodge" from the first respondents and the purchase price at that time was $170,000.
Dalrymple purchased as the trustee of the Cranfield Trust, carrying on the business of investment, including investment in property, in its capacity as trustee. On 31 March 1988, Dalrymple retired as trustee of the Cranfield Trust and Milglade Pty Ltd was appointed as the new trustee of the Cranfield Trust.
On 11 June 1987, Mr Murphy signed a form headed "Appointment to Act as Managing Agent", appointing West End Real Estate as the agents managing "Linden Lodge". On or about 1 December 1987 Mr and Mrs O'Kelly sold the real estate agency and the new owners, Port Ashley Pty Ltd, took over the management of the boarding-house. On 13 July 1988 these proceedings were commenced in the Federal Court.
Mr. Murphy swears in his affidavit that during the period of 'Expo' (30 April 1988 to 30 October 1988) the occupancy rate of "Linden Lodge" was considerably better than average. He further swears, however, that by Christmas 1988 the occupancy had gone down and monthly returns were beginning to "look low again".
On 1 April 1990, Milglade Pty Ltd, as trustee, sold the property "Linden Lodge" to P. N. Prior Pty Ltd, trustee for P.N. and L.D. Prior Unit Trust, for $410,000. Mr Murphy said in evidence that the purchasers' intentions for the property were to construct a block of low rise luxury units and the purchasers were intending to purchase the block next door to "Linden Lodge" for that purpose.
The value of "Linden Lodge" at the time of purchase is to be assessed according to the principles in Spencer v. Commonwealth of Australia (1907) 5 CLR 418, where the High Court considered that the basis of valuation should be the price that a willing purchaser would at the date in question have had to pay a vendor not unwilling but not anxious to sell.
The fact that Dalrymple acquired "Linden Lodge" for $170,000 at 3 April 1987 and its successor in title, Milglade Pty Ltd, disposed of it for $410,000 on 1 April 1990, is merely part of the evidence having a relevance to the value of the property at the relevant time.
Concerning the evidence put forward by the parties on the issue of the value of the property at the relevant time, I do not accept the evidence of Mr Walsh, a valuer called by the respondents. His method of valuation involved a degree of circularity. Mr Walsh rejected a number of sales in his comparison, on the basis that the "greater body of sales evidence would suggest that that wasn't the value, level of value, at that time". Mr Walsh's method involved a pre-existing assumption as to the value at that time and impliedly rejects those sales which do not fit into his view of the value. Mr Walsh relied very heavily on a previous report of Mr Wenck (who was not called), and relevant information on a number of comparable sales was not included. I found his evidence unconvincing and unimpressive.
On the other hand, I consider the approach of Mr Brett, a valuer called on behalf of the applicants, to be sound notwithstanding some difficulties with respect to a number of sales. However, my fundamental objection is to the multiplier he adopted.
Mr Brett's report included two approaches to the assessment of boarding-house values. The first was a direct comparison with the prices paid for other boarding-houses: the second was by capitalisation of the net income derived from the business. Mr Brett adopted a capitalisation rate of 20%, on the basis that the market during the period when "Linden Lodge" was sold expected a return on boarding-houses of between 20-25%. The first applicant paid $170,000 for the property in anticipation of a 21% return. Mr Brett calculated that the anticipated income based on the actual trading figures meant that the anticipated profit for the year subsequent to the purchase would be $24,533. When capitalised at 20%, this results in a figure of $122,665 which Mr Brett concludes in practicable terms results in a value of "Linden Lodge" at 3 April 1987 of $123,000.
I am of the opinion that the capitalisation rate adopted by Mr Brett was too generous. In preparing his report, Mr Brett relied on a draft report by Mr Calabro, an accountant, which contained a summary of the actual trading figures for the twelve months period from 1 April 1986 to 31 March 1987, together with a summary of later trading figures. From the actual trading figures for the twelve months preceding April 1987, Mr Brett also calculated a figure which was the profit anticipated for the year following April 1987, which figure was calculated at $24,533. I accept this figure as a relevant starting point.
I consider that significant assistance as to a reliable capitalisation rate on returns from boarding-houses came from Mr Brown, a property manager. His affidavit details substantial experience and interest in comparable properties and in practical terms I found his evidence to be both reliable and helpful. Mr Brown gave evidence in his affidavit that he is rarely able to make more than 14% on rental properties. Having regard to the evidence of Mr Brown, I think it right to apply a capitalisation rate of 17.5%.
The primary function of an expert witness is to assist the Court in the Court's function. Lord President Cooper said in Davie v. Edinburgh Magistrates (1953) SC 34 at 40:

" Their duty is to furnish the judge or jury with the necessary scientific criteria for testing the accuracy of their conclusions, so as to enable the judge or jury to form their own independent judgment by the application of these criteria to the facts proved in evidence. "

An illustration of this is Thurston v. Todd (1966) 1 NSWR 321, where the Court of Appeal was concerned with a case where at the primary trial level there were differing medical opinions on the life expectancy of a quadriplegic and the trial judge had formed his own opinion on life expectancy. The Court of Appeal held that estimates of life expectancy in cases of this nature are imprecise and based on informed speculation, and it was therefore open to a trial judge to reject those opinions of medical experts and select his own estimate of life expectancy. At 331, Holmes JA said:

" It is clear that the medical experts are giving honest opinions but that those opinions have in them an element of speculation based upon the degree of optimism of the particular expert. This is a factor which the tribunal of fact can weigh and allow in full or discount. I do not think that the opinions are so essentially scientific that they must be wholly accepted or wholly rejected. "

Similarly, a trial judge is not obliged to accept the findings of expert witnesses: Abalos v. Australian Postal Commission (1990) 171 CLR 167. The present is not a case where the evidence of experts is uncontradicted, such as Anderson v. R (1972) AC 100; cf. Ellis v. Wallsend District Hospital (1989) 17 NSWLR 553.
In Hill v. Commissioner of Highways (1966) SASR 316, Mitchell J said at 325:

" I am in the position in the instant case where I have been supplied with a formula, and with considerable evidence as to capitalization rates and if I find (as in fact I do) that none of experts called has been placed in the position of having the whole of the material facts put before him, then I think I should consider the expert's evidence as to the rate of capitalization in the light of the facts which I find. "

In my opinion, the Court's duty is to form and act on its own original opinion, taking such assistance as it can from the opinion of experts, but it is not bound, nor should it defer, to the opinion of experts in the sense of permitting experts to hijack the fundamental fact finding obligation of the Court.
That view is consistent with the observations of the High Court in Ramsay v. Watson (1961) 108 CLR 642, where the Court (Dixon CJ, McTiernan, Kitto, Taylor and Windeyer JJ) said at 645:

" The jury were entitled...to give weight to the opinion of an experienced physician skilled in the relevant branch of medicine..."

And later:

" But it is for the jury to weigh and determine the probabilities. In doing so they may be assisted by the medical evidence but they are not simply to transfer their task to the witnesses. "

In Holtman v. Sampson (1985) 2 Qd R 472, the Full Court of the Supreme Court (D.M. Campbell, Macrossan and Thomas JJ) said at 474:

" In cases where the experts differ, the lay tribunal will apply logic and commonsense to the best of its ability in deciding which view is to be preferred or which parts of the evidence are to be accepted. "

In this case the Court has been supplied with considerable evidence as to comparable value and as to an acceptable methodology of assessing value. Some of the processes of reasoning in the various experts' contributions adopt a figure which is not to be preferred in the light of other evidence. In these circumstances the Court has to discharge its primary obligation of finding the facts and it does so in grateful reliance on the assistance provided by the opinions of experts but without a slavish and uncritical adoption of any particular part of any such opinion.
In these circumstances I would apply a capital-isation rate of 17.5% to an annual profit figure of $24,553, which gives approximately $140,000 as the valuation of "Linden Lodge" at 3 April 1987. This is some $30,000 less than the amount Dalrymple paid on 3 April 1987.
The applicants are entitled to this sum, together with interest pursuant to s. 51A of the Federal Court of Australia Act 1976. Such interest is to compensate the applicants for being 'out of pocket' by the excessive price paid for "Linden Lodge".
It was submitted by the applicants that the representations here were capable of amounting to warranties on the part of the second, third and fourth respondents and that therefore the applicants were entitled to be put in the same position as if the warranties had not been breached. In my view the applicants are not entitled to damages on that basis. The representations here were pre-contractual representations. They did not constitute warranties by the respondents.
As the evidence in this case illustrates, interest rates in the market have fluctuated considerably since Dalrymple purchased "Linden Lodge". I adopt 14% as a fair averaged rate for that period, making the (rounded) amount for interest $25,200.
The first respondents did not appear at the hearing. On the first day of the trial of the proceedings, consideration of their position was deferred.
I give judgment against each of the second, third and fourth respondents in the sum of $55,200.
I will hear the parties on costs, and as to any further orders I should make.

[1993] FCA 215

31 MARCH 1993