David Hurrell & Co Pty Ltd v Hardeake Pty Ltd No. Scciv-01-344

DAVID HURRELL & COMPANY PTY LTD v HARDEAKE PTY LTD
[2001] SASC 293
Magistrates Appeal

WICKS J This is an appeal from the judgment of a Magistrate given on 17 January 2001 in the Magistrates Court of South Australia, sitting at Adelaide. The learned Magistrate ordered that there be judgment on the counterclaim for the defendant for the difference between $30,000 (the limit of the jurisdiction of the Magistrates Court in cases of this kind) and $8,348.29 viz judgment in the defendant’s favour for $21,651.10. The judgment was to bear interest at 10% per annum from the date of filing of the counterclaim in the action.
A Notice of Appeal was filed on 14 February 2001 by the plaintiff, David Hurrell & Company Pty Ltd.
Grounds of Appeal
At the hearing of the appeal on 19 April 2001, the plaintiff confined its appeal to the matters arising under par 5.3 and par 5.4 of the grounds of appeal. These grounds read as follows:
"5.3The Learned Magistrate erred in accepting, as the measure of damage, the report of Mr Dominic Rinaldi based upon assumption when the actual trading figures were available.
5.4The Learned Magistrate erred in not allowing the plaintiff an opportunity to cross examine Mr Rinaldi upon a report of 12 December 2000 tendered and accepted into evidence by His Honour as a defendant’s exhibit."
The facts
The circumstances that led to this appeal concern a building contract dispute and can be summarised as follows. The defendant, Hardeake Pty Ltd, was the owner of a child care centre and wished to expand and renovate the premises of the centre with the intention of increasing the number of children for whom the premises were licensed from 50 children to 105 children after seeking approval from the Commonwealth Department of Health and Family Services (“CDHFS”). The defendant contracted the plaintiff, David Hurrell & Company Pty Ltd, under a cost plus contract to complete the expansion and renovations. For the licence approval to be given by the CDHFS the building works had to be completed by 30 September 1998. The defendant lodged an application for a variation of its licence with CDHFS on 18 February 1998. In that same month, a building designer drew the plans for the proposed expansion which was to be undertaken in two stages:
Stage 1 An addition to the existing facility, with the children to move into this new area upon completion.
Stage 2 A renovation of the existing facility which would commence when the children had moved into the new addition.
The building designer recommended the plaintiff to the defendant as a suitable builder and on 17 March 1998 the cost plus contract was signed between the parties and the building work commenced. On 13 May 1998, the defendant was informed that the application to CDHFS had been successful.
The plaintiff stopped work at the child care centre on 7 September 1998. By that date stage one was almost completed and stage two had not been commenced. At trial, the plaintiff maintained that the contract was discharged by mutual agreement. The defendant however, contended that the plaintiff had “walked off the job” and it was this version of events that the learned Magistrate accepted. The defendant engaged further building contractors to complete stage two of the building works. These works were however completed in accordance with plans which differed from the original plans presented to the plaintiff prior to signing the cost plus contract.
On 7 September 1998, the defendant wrote to the CDHFS requesting an extension beyond the required completion date of 30 September 1998. This extension was granted on condition that “the new places are complete and in use for child care by 28 February 1999”. The defendant later sought a further extension for completion by letter dated 13 January 1999. The CDHFS granted this extension on 22 February 1999 with the expectation that the centre would then be complete and in use for child care by 30 April 1999.
By letter dated 28 April 1999, the plaintiff was formally notified by CDHFS that their licence had been amended from 50 to 105 places, effective from 22 April 1999. Stage two of the building works was completed by that date.
Legal proceedings
The plaintiff issued proceedings on 18 November 1998 claiming $15,848.29 from the defendant in unpaid amounts relating to progress claims. The defendant filed a defence and counterclaim in the proceedings. It claimed $30,000 damages for work not carried out in a proper workmanlike manner, the use of unsuitable materials and improper supervision of work. Included in the above amount of $30,000 damages was a claim for damages in respect of profits which had been lost due to the plaintiff’s delay and failure to complete the work.
On 16 October 2000, the trial commenced before a Magistrate. After one day of evidence agreement was reached between the parties whereby the defendant agreed to acknowledge the plaintiff’s entitlement to the amounts outstanding in respect of progress claims - $15,848.29 on condition that the defendant set off the amount of $7,500 from this claim for faulty workmanship. In the result, the defendant would pay the plaintiff the amount of $8,348.29 in satisfaction of the claims to which I have just referred.
Settlement of part of the action
The litigation continued on the defendant’s counterclaim for damages in respect of profits which had been lost due to the delay in completion of the child care centre. The claim for damages for lost profits is described as follows. The practical completion of stages one and two should have occurred by 31 August 1998. These stages were not fully complete until 22 April 1999. Following the completion of stage two, there were still various defects stated in the compliance inspection report that prevented the defendant from taking advantage of the new licence for 105 children.
Report of Mr Dominic Rinaldi
The defendant engaged Mr Dominic Rinaldi, a Chartered Accountant and a principal of Rinaldi & Co to prepare a report on the damages which might be assessed in respect of the loss of profits claim in relation to the child care centre. Mr Rinaldi was accepted by the learned Magistrate as an expert witness and gave evidence in explanation of his report. So far as is material, that report is in the following terms:
"RE: STURT CHILD CARE CENTRE
You have asked us to undertake an analysis of the economic loss sustained by your company, as a result of the failure of the builder selected by you to complete the building work relating to the extensions of the child care centre.
...
The figures used in the preparation of our analysis have been extracted from unaudited financial statements of the child care centre as prepared by Rinaldi & Co in relation to the years ended 30th June 1996 to 30th June 1998.
Our approach has been to identify the average gross contribution made on each child for three years to 30th June 1998. The gross contribution was calculated by subtracting from gross sales direct variable expenses. We then estimated increases in fixed overhead under the completed structure and estimated the increase in the number of placements for the period October 1998 to September 1999. Using average gross contribution figures together with an estimate of the number of placements we have been able to determine a reasonable estimate in the gross contribution that would have been earned for the twelve months to September 1999. After subtracting this figure from the adjusted fixed overheads we have determined our estimated profit for the year to September 1999.
The basis of the calculations are as follows:-
1.Calculation of Gross contribution for the three years to 30th June 1998.
1998  1997                    1996
  $   $                 $
Gross Sales  398,012                  408,306           399,127
Less Variable Costs
Art & Craft  244  510  0
Groceries  27,282  17,002             14,352
Laundry & Linen  716  817               1,015
Wages  145,672                  164,640           183,725
Superannuation  20,601  9,194               9,056
Workcover  4,601  5,261               5,312
  ______                   ______            ______
  199,116                  197,424           213,460
  ______                   ______            ______
Net Contribution                  198,896                  210,882           185,667
Before fixed  =====                   =====             =====
Overheads
Average Contribution = $198,482
On the basis that the centre had 50 placements throughout the three years to June 1998, the average contribution per child per week was $76-32.
2.     Calculation of fixed overhead costs
We have summarised fixed overheads for the three years to June 1998 and subtracted from the total management fees paid to the directors together with interest paid on borrowings. It is our view that management fees of $60,000 is an amount over and above a fair and reasonable salary for the proprietors.
This is summarised as follows:-
1998  1997               1996
  $  $  $
Fixed overheads per            151,931                  138,984           134,534
Financial Statement
Less management fees          60,000  60,000             60,000
Interest Paid  38,347  43,182             26,895
98,347                  103,182             86,895
Adjusted overheads               53,584  35,802             47,639
Based on an average of 50 placements per week the average fixed overheads for the three years to June 1998 were $17-59 per week.
The average profit of the centre before interest and management fees for the three years to June 1998 was $152,757.
On the basis that the building contract specified the building works to be completed by the 31st August 1998. We have calculated the anticipated placement numbers for the twelve months to September 1999.
3.     Anticipated Gross Contribution.
Using gross contribution figures calculated above we have calculated the anticipated gross contribution for the year to September 1999 (ie the gross contribution that would have been earned showed the building involves have been completed to schedule.
Month            Number of Placements          Monthly Contribution based
   on [$76.32] per week per child
  $
October  60  19,843-20
November  65  21,496-80
December  70  23,150-04
January  75  24,804-00
February  80  26,457-60
March  83  27,449-76
April  86  28,441-92
May  89  29,434-08
June  92  30,426-24
July  95  31,418-40
August  100  33,072-00
September  105  34,725-60
330,719-64
========
In determining the projected profit for the year to September 1999 on the basis that the building works were complete we must adjust the fixed overheads of the centre to allow for increase attributable to the increase in size and capacity. We have undertaken this exercise as follows:-
$
Average fixed overheads for the three years
to June 1998  45,675
Add incremental increases in fixed overhead costs
Electricity  1,000
Depreciation  5,000
Rates & Taxes  1,000
Insurance  1,200
Sundry  1,000
  9,200
Anticipated fixed overhead for twelve months                  ______
to September 1999  $54,875
Based on the above analysis a summary of the economic loss sustained by the child care centre as a result of your inability to trade at anticipated capacity is as follows:-
Actual Results              Anticipated Results
  To September 1999            To September 1999
(based on average results for
3 years to June 1998)
$   $
Gross Contribution                 198,482  330,720
Less Fixed Overheads              45,675  [54,875]
  ______  _______
Net Profit  $152,807  [$275,845]
  ======  ======
It is our view that the failure of your centre to trade at full capacity for the twelve months to September 1999 has resulted in a loss of profits to the centre of [$123,038] (ie [$275,845] - $152,807)"
Item one of the calculations is to ascertain the gross profit on each child using the centre. In the year ended 30 June 1998, for example, the gross sales amounted to $398,012. From that figure, variable expenses are deducted. These expenses vary according to the number of placements. If there is an increase in the number of placements, there will be an increase in revenue and there will also be an increase in variable expenses.
In 1998, for example, after deducting variable expenses of $199,116, the gross profit amounted to $198,896. Similar calculations were made in relation to the 1996 and 1997 years. An average was taken in respect of the three years’ gross profit which amounted to $198,482. This is an annual figure. The weekly amount was ascertained by dividing that sum by 52. There being 50 placements, the amount per week per placement was $76.32.
Figures in respect of fixed overheads were compiled for each year and an average for the three years of $45,675 ascertained.
The average net profit for the three years was determined by subtracting $45,675 from $198,482, the difference being $152,807. The calculations in item three have been made on the assumption that the renovations and extensions in respect of the centre were complete on 31 August 1998, and on the basis that the extended premises would be ready for occupation on 1 October 1998.
Mr Rinaldi’s report proceeds on the assumption that there would be additional placements at the centre over and above the existing 50 placements, and that the additional numbers of children would occupy the centre progressively over the period from October 1998 to September 1999. The total number in any one month is shown in item three of the report under the heading “Number of Placements”.
In order to calculate the amount of $19,843.20, being the first item in the third column appearing at the top of item three, it is necessary to take the amount of $76.32 per week, convert it into a monthly figure and multiply by 60. This will produce the monthly gross profit for October.
These monthly amounts increase as the placements grow. Based on the monthly increases in total numbers of children over a 12 month period ended 30 September 1999, the total gross profit (gross revenue less expenses which vary according to gross revenue) was $330,719.64 in the period 1 October 1998 to 30 September 1999.
In order to calculate the fixed overheads, the average fixed overhead for the three year period is taken. As appears from the above figures, this amount is $45,675. There will be some additional amount in fixed costs. The anticipated fixed costs for the 12 months to 30 September 1999 has been taken as $54,875. This leaves a net profit of [$275,845] in respect of the further period ended 30 September 1999.
The actual net profit to September 1999 (based on the three year average) was $152,807. The results which would reflect the fact that the completion of the renovations and additions was a year later than it should have been was $275,845. The difference between the two amounts ($275,845 - $152,807) was [$123,038]. This is the loss of profit incurred in respect of the centre over the period 1 October 1998 to 30 September 1999 arising as a consequence of the failure of the child centre to carry on business at full capacity over the period referred to.
Magistrates Court Act s 8
So far as is material, s 8 of the Magistrates Court Act 1991 provides as follows:
"8(1) The court has jurisdiction –
(a) to hear and determine an action … for a sum of money where the amount claimed does not exceed … $30,000;
(b),(c),(d) …
(2)The parties to an action may waive any monetary limit on the civil jurisdiction of the court, and in that event, the court will have jurisdiction to determine the action without regard to that limitation." [My italics.]
In the Magistrates Court (Civil) Rules 1992 “action” or “claim” means an action or claim, defence or counterclaim … and any other originating application … In this action, the net claim was for an amount of $8,348.29 and the counterclaim was for damages not exceeding $30,000 to be assessed. In interpreting the provisions of s 8 of the Magistrates Court Act, regard should be had to the expression “the amount claimed does not exceed”.
Unless agreement is reached under sub-s 8(2) of the Magistrates Court Act, the defendant cannot make a claim for an amount greater than $30,000. It follows that any damages recovered in excess of that amount are to be ignored so far as s 8 of the Magistrates Court Act is concerned. In the present case, the claim of the plaintiff has been reduced to an amount of $8,348.29 by the agreement made between the parties and referred to above. That amount must be set off against the amount of the counterclaim which in the Magistrates Court cannot exceed $30,000. The net judgment was for $21,651.71 being the difference between $30,000 and $8,348.29.
In the present case, the defendant’s loss of profits based on Mr Rinaldi’s report dated 29 February 2000 was an amount of $123,038. In my opinion it is contrary to the correct interpretation of s 8 of the Magistrates Court Act that one could simply set off the amount of $8,348.29 against the amount of $123,038, being the amount owing by the defendant to the plaintiff, and enter judgment for $30,000 as the net amount owing to the defendant is in excess of $30,000.
Section 8 referred to above has application to ensure not only that a claim must not exceed $30,000 but also to ensure that the limit of the possible spread of claim and counterclaim also does not exceed that amount in total. If that were not so, the court would have a jurisdiction in respect of a spread of claims generally totalling $60,000 being a claim up to $30,000 and a counterclaim for a similar amount. In the case of damages arising from injury or loss in a claim involving a motor vehicle, the spread could be as much as $120,000. The section has been drafted to ensure that the aggregate of claim and counterclaim in this case does not exceed $30,000. It should be borne in mind that the expression “claim” also includes a “counterclaim”.
It is the claim which must not exceed $30,000. If it does, it must be reduced to $30,000 and then any amount owing by the plaintiff in the judgment must be set off against the $30,000.
Ground of appeal 5.3
In the report dated 29 February 2000, Mr Rinaldi used as his base an average in respect of the trading figures for the fiancial years ended 30 June 1996, 1997 and 1998. At the trial, counsel for the plaintiff urged that the figures in respect of a period of 12 months ended on 30 September 1999 be used as a basis of calculation to derive an amount for loss of profit in respect of the child care centre as these figures were available. In view of the fact that the figures for the years ended 30 June 1996, 1998 and 1999 are reasonably constant and display only modest variations in gross sales and variable expenses, it is unlikely the figures for the period of 12 months ended 30 September 1999 would be materially different. If there had been significant fluctuations in the figures, it may well be that such figures should not be used for purposes of calculating loss of profit of the centre. However, in the present circumstances, the average for the years ended 30 June 1996, 1997 and 1998 should be sufficient for present purposes, particularly in view of what I have to say about the matter later in these reasons.
The above report sets out calculations as to the loss of profit sustained in this matter on the assumption that it would take 12 months to have the centre full occupied by 105 children. In fact there was evidence from the defendant’s witnesses to the effect that the centre would reach full occupancy in six rather than 12 months.
Mr Rinaldi’s report dated 29 February 2000, derived a loss of profit in respect of the child care centre of $123,038. If a period of six instead of 12 months is considered, the loss of profit would have been of the order of $58,000.
In view of the cost and expense incurred in this matter to date, and the further cost likely to be incurred, I would not be disposed to refer the matter back to the Magistrate for further hearing with all the time, trouble and expense that that entails.

The loss of profit would have to reduce to a figure below $30,000 before there would be any reduction to the counterclaim which currently stands at that amount, in view of the way in which s 8 of the Magistrates Court Act operates. In the circumstances, it would be highly unlikely that any re-opening of the matter for the purpose of making calculations based on the actual figures in 1999 would make any difference to the ultimate result as it is extremely unlikely that the figures for gross profit and net profit would be materially different from the average of the previous three years. In any event, it is highly unlikely that the yearly loss of profit figure would reduce to less than $30,000.
Ground of appeal 5.4
Further, the plaintiff complains that the learned Magistrate erred in not allowing the plaintiff the opportunity to cross-examine Mr Rinaldi upon a report of 12 December 2000 tendered and accepted into evidence by his Honour as a defendant’s exhibit. As I have already said, this document adds nothing in the way of facts or data. It contains a number of calculations. The same result could be achieved by following the methodology of Mr Rinaldi’s report dated 29 February 2000 being Exhibit D7.
For my part, I put the document dated 12 December 2000 to one side and make no use of it.
I can see that no good purpose would be served by going to all the trouble and expense of having the case re-opened before the Magistrate in the court below to admit cross-examination on the document dated 12 December 2000.
In the present case, $8,348.29 must be set off against $30,000 leaving a judgment in favour of the defendant on the counterclaim of $21,651.71.
For these reasons I dismiss this appeal.

[2001] SASC 293

23 August 2001