Harcool Pty Ltd v McFarlane and McFarlane

[1996] QCA 128

IN THE COURT OF APPEAL

SUPREME COURT OF QUEENSLAND	Appeal No. 148 of 1995
Brisbane
[Harcool P/L v. McFarlane]
BETWEEN:

HARCOOL PTY LTD

(Plaintiff) Respondent

AND:

HUNTER McFARLANE and COLIN RONALD

McFARLANE

(First and Second Defendants) Appellants

FITZGERALD P.

PINCUS J.A. DAVIES J.A.

Judgment delivered 10/05/1996

JOINT REASONS FOR JUDGMENT OF FITZGERALD P. AND DAVIES J.A., SEPARATE REASONS FOR JUDGMENT OF PINCUS J.A., CONCURRING AS TO THE ORDERS MADE.

1.          Appeal allowed with costs.

2.          With the exception of the order with respect to the costs of the issues raised in paras. 7 and 16 of the plaint, the judgment entered below is set aside.

3.          Judgment for the plaintiff for $1.

4.          No order as to the costs of the action, except as mentioned in order 2.

CATCHWORDS:	CONTRACT/NEGLIGENCE - sale by appellants (accountants) of the respondent’s business - alleged failure to act in accordance with client’s instructions - how should the respondent’s damages be calculated - over-payment of accountancy fees
Ted Brown Quarries Pty Ltd v. General Quarries (Gilston) Pty Ltd (1977) 16 A.L.R. 23 Ratcliffe v. Evans [1892] 2 Q.B. 524 Commonwealth v. Amann Aviation Pty Ltd (1991) 174 C.L.R. 64 Chaplin v. Hicks [1911] 2 K.B. 786
IN THE COURT OF APPEAL	[1996] QCA 128
SUPREME COURT OF QUEENSLAND	Appeal No. 148 of 1995
Brisbane
Before	Fitzgerald P. Pincus J.A. Davies J.A.

[Harcool P/L v. McFarlane]

BETWEEN:

HARCOOL PTY LTD

(Plaintiff) Respondent

AND:

HUNTER McFARLANE and COLIN RONALD

McFARLANE

(First and Second Defendants) Appellants

JOINT REASONS FOR JUDGMENT - FITZGERALD P. AND DAVIES J.A.

Judgment delivered 10/05/1996

This is an appeal from a judgment delivered in the District Court on 26 June 1995 awarding the

respondent damages against the appellants in the sum of $59,450.35, plus $10,000 in respect of

accountancy fees overpaid and interest on the total sum of $69,450.35 at the rate of 10% per annum

from 4 October 1991 to the date of judgment, assessed at $26,000. It is agreed between the parties

that there must be an adjustment in favour of the appellant in respect of the amount of the overpaid

accountancy fees and associated interest, but that can be left for the moment.

The first appellant was a firm of accountants which acted for the respondent, a manufacturing business, and the second appellant in particular attended to the respondent’s work. The respondent wished to

sell its business while its principal officer was absent from Australia, and the second appellant was

appointed the respondent’s attorney to effect a sale.

Clear instructions were given that the appellant would only sell if it received net proceeds of sale of

$300,000. The second appellant communicated an offer of that amount to the respondent but indicated

that there might be “a shortfall between debtors and creditors” which “could end up being twenty

thousand ($20,000) to twenty five thousand dollars ($25,000)”. The respondent indicated that it

definitely did not want to sell unless it received $300,000 net.

A contract was subsequently entered into in which the sale price was set at $320,000. The appellants

informed the respondent that the purchase price had been appropriated as to $200,000 for plant and

as to $120,000 for stock. Had the “shortfall between debtors and creditors” been as anticipated, the

appellants would have substantially complied with their instructions and, presumably, there would have

been no dispute.

However, when the principal of the respondent returned from overseas a little more than two months

later, it was ascertained, to quote the trial judge, “that there had in fact been found a shortfall as between

creditors and debtors of the business far in excess of that estimated by the second [appellant] so that

the [respondent’s] net proceeds of sale fell short of that which it had expected and indeed stipulated for.

An audit conducted subsequently revealed that a total sum of fifty nine thousand four hundred and fifty

dollars and thirty five cents ($59,450.35) was not accounted for in the second [appellant’s] estimate of the deficit between debtors and creditors of the [respondent’s] business as at the date of the

contract”. The trial judge awarded the respondent that amount as damages for breach of contract

and/or negligence. The amount the appellants were ordered to pay to the respondent in respect of

overpayment of accountancy fees related to various aspects of the transaction, including the audit.

Unfortunately, the action commenced badly and never recovered. The respondent’s pleading assumed

that, in order to recover sufficient money to ensure that it received the damages needed to provide the

full purchase price of $300,000 which it required for its business, it had only to prove the lesser net

amount which it in fact received because the “shortfall between debtors and creditors” was much greater

than it had been informed and expected. Hence, the respondent’s principal claim, so far as presently

material, was simply pleaded as a claim for “net proceeds had instructions been followed” less “net

proceeds actually obtained”.

In the result, the value of the business (ignoring the shortfall as between creditors and debtors) was

largely ignored at the trial. Certainly, no attempt was made on either side to adduce formal proof on

that issue. Before this Court, references were made to a few passages in the transcript of evidence and

a few exhibits, including a valuation of the business by the appellants some time after the business had

been sold. Neither counsel at trial seemed to appreciate the potential significance of directly material

valuation evidence, and we intend no disrespect to his Honour when we say that it seems, quite likely

because of the form of the pleadings and an objection which had been taken by counsel for the

appellants early in the trial, that it was not until quite late in the trial that he realised the need to assess

the respondent’s damages “on the basis of the difference between the value of the [respondent’s] business and the net sale price”, at which point he was confronted with a submission that “since there

was no evidence of that value the [respondent] could not recover damages at all”.

His Honour then went on to refer to various aspects of the evidence which he said provided “some

evidence of value”, although he concluded that, on the evidence, he was “unable to form any firm

conclusion as to the value of the business of the [respondent]”. He referred to the apportionment of the

purchase price of $320,000 “as being two hundred thousand dollars ($200,000) for plant and one

hundred and twenty thousand dollars ($120,000) for stock” and an incomplete valuation of plant and

machinery which “assesses its value at one hundred and sixty-three thousand dollars ($163,000) which

appears to have been adopted entirely in the schedule to the business contract”. Reference was also

made to some evidence from a director of the respondent as to the cost of benches and other equipment

which had been installed in the business in the year before the sale and some earlier negotiations for a

sale at a higher figure which did not proceed. His Honour also noted that goodwill was included in the

contract of sale, although neither he nor counsel who represented the respondent before this Court was

able to point to any evidence valuing goodwill. Counsel for the respondent did emphasise that, after the

sale, the business had made profits: more telling, perhaps, is the circumstance that in the two years prior

to the sale it had made quite substantial losses.

In summing up this aspect of the case, the trial judge said:

“However, I can safely find that its value [i.e. of the business of the respondent] was sufficient to justify the [respondent’s] requirement that its sale should net it three hundred thousand dollars ($300,000).”

His Honour then went on to say that the conduct of the second appellant had:

“amounted to a promise on his part to effect a sale of the [respondent’s] business which would provide a net return to the [respondent] of three hundred thousand dollars ($300,000). In my opinion, the proper measure of damages for his negligence and breach of his contract should be the amount by which his performance fell short of that promise”.

That shortfall has been calculated ... at fifty nine thousand four hundred and fifty dollars and thirty five Cents ($59,450.35). ...”

It is plain that the latter sentence does not accurately represent the basis upon which the case was

conducted and was not sought to be supported in this Court. Further, neither the statements by the trial

judge nor such matters as were drawn to our attention by counsel for the respondent persuade us that

its case was established. There was insufficient evidence to establish that the net value of the

respondent’s business after deducting the “shortfall as between debtors and creditors of the business”

was any greater sum than the respondent in fact received. Indeed, no more emerges in favour of the

respondent on this aspect of the matter than that it was its belief that a net sum of $300,000 should

result after deducting the “shortfall as between creditors and debtors”, a belief which the appellants had

no doubt engendered and encouraged. The appellants themselves seem to have been unconcerned with

the true value of the business after deducting the “shortfall as between creditors and debtors of the

business”, instead being prepared to proceed on the assumption that it was, as they estimated and told

the respondent, about $20,000-$25,000. Their somewhat casual approach, which was plainly

erroneous, leads one to feel some sympathy for the respondent. However, it does not prove that it

suffered loss. On the material available, the best evidence of the value of what was sold is the price

which was in fact paid, $320,000. The respondent received less than it planned and bargained for from

that amount for the simple reason that the discrepancy between the debtors and creditors of its business

was much greater than it thought and had been encouraged to believe. It does not, by any means, follow that it did not receive the true value of its business, and certainly it was not proved otherwise.

The damages awarded below included $10,000 in accountancy fees; the basis on which that was

claimed does not appear from the pleading, but in this Court the respondent’s counsel described the

fees as relating to reconstituting the creditors’ accounts and attempting to collect the debtors. Counsel

did not contend that this work was made necessary because of the price obtained and one would

expect that it would have been necessary, whatever the price. The argument for the respondent was

that under their retainer the appellants should have done that work.

The plaint makes no mention of this contention, nor was there any evidence directed to the subject of

what should reasonably have been done under the appellants’ retainer.

It should be added that we were told after the hearing that the $10,000 should have been $5,000; but

there appears to be no foundation on which it could be held that accountancy fees paid by the

respondent are recoverable, whatever their amount.

The result is that the respondent should have been held not entitled to any substantial damages. There

was on the unchallenged findings a breach of the appellants’ obligations to the respondent; but the

damages assessed by the judge were not proved to have been recoverable as a result of the breach.

Nevertheless, the case seems one in which it is appropriate to recognise the justice of the respondent’s

case to the extent of awarding nominal damages of $1 and ordering that the parties bear their own costs

below.
The orders will therefore be:

1.          Appeal allowed with costs.

2.          With the exception of the order with respect to the costs of the issues raised

in paras. 7 and 16 of the plaint, the judgment entered below is set aside.

3.          Judgment for the plaintiff for $1.

4.          No order as to the costs of the action, except as mentioned in order 2.

Counsel:	A. Crowe for the Appellants J. Douglas with him M. Taylor for the Respondent
Solicitors:	Phillips Fox for the Appellants Rogers Zapulla & Co for the Respondent
Date(s) of Hearing:	6 March 1996

REASONS FOR JUDGMENT - PINCUS J.A.

Judgment delivered 10/05/1996

The nature of these proceedings appears from the joint reasons of the President and Davies JA

which I have had the advantage of reading. I agree with their Honours’ conclusions and, in general, with

the reasons given for them.

The critical document in the case is, as it seems to me, Exhibit 15, a fax sent by a director of

the plaintiff company, Mr Scherrer, to the second defendant Mr McFarlane. This was sent in response

to a fax referring to the shortfall between debtors and creditors. Mr Scherrer’s fax concluded "I repeat,

I definitely do not want to sell unless A$300,000 - are paid nett".

In its context this sentence meant that Mr Scherrer insisted that the price had to be such as to

produce $300,000 after provision had been made for the difference between the amount due to

creditors and the amount recoverable from debtors of the business to be sold; Mr McFarlane had

estimated that to be $20,000-$25,000. In fact the difference I have mentioned was $59,450.35. The

business was sold for $320,000 so that the nett price of $300,000 was not achievable. The plaintiff

was entitled to damages, if any were proved, and the first question is the measure of damages.

On one view, the plaintiff was entitled to be put in the same position as it would have enjoyed

if the property had been sold on the basis indicated by Mr Scherrer - i.e. sold so as to produce a "nett"

$300,000; in fact it was sold for $320,000, so that the nett amount received was $39,450.35 short.

The argument supporting that measure of damages is that one should treat the dealings between the

parties as including an implicit promise by the defendants that if the business were sold, the sale would

produce $300,000 nett.

But that is not a reasonable implication, for the dealings between the parties were not such as

positively to bind the defendants to achieve such a price; what the defendants were bound to do was

something different, namely not to sell for less than the desired price. The agent for sale, in breach of

instructions, has simply sold for less than the price required by those instructions. If an auctioneer were

to sell for less than the reserve fixed by the vendor, a similar problem would arise.

Approaching the matter, then, in accordance with the ordinary principles of contract damages,

the plaintiff was entitled to such sum as would place it in the position it would have enjoyed if the

contract had been carried out: Greig and Davis "The Law of Contract" p. 1351. If that had occurred,

then there would not have been a sale at $320,000, which was a price, as I have explained, too low to

accord with the plaintiff’s instructions. But would the defendants’ declining to sell at $320,000 have

advantaged the plaintiff? That would have been so only if a sale at a figure greater than $320,000 could

have been effected; to establish that, the plaintiff had to show that the business was worth more than

$320,000 and, indeed, how much more.

If one approaches the case from the point of view of the law of negligence the same result

happens to ensue; the plaintiff was entitled to such damages as flowed from the defendants’ having sold,

negligently, at $320,000 and the loss flowing from that would be the same figure - the difference

between $320,000 and the true value of the business.

Businesses are valued, ordinarily, either on a break-up basis or a going concern basis; in the

present case it appears that the latter would have been the correct method of valuation. But valuing on

a going concern basis usually involves fastening on a figure of annual maintainable profit and a multiplier.

As the President and Davies JA have pointed out, there were losses in the last two financial years

before sale and it might have been difficult to estimate, even with the benefit of hindsight, a proper figure

of maintainable profit. That was not attempted; no valuer was called to give an opinion about either

figure - i.e. either the maintainable profit or the multiplier. What the judge did was to attempt to estimate

value himself, in the absence of a valuer’s opinion, by various means. It is not a case, in my opinion, in

which one can say there is no evidence of value; but the question is whether there was sufficient

evidence to enable the Court properly to arrive at the conclusion reached, which was that the value of

the business was at least $359,450.35 - or roughly $40,000 more than the sale price.

It is sometimes said that if a plaintiff establishes an entitlement to substantial damages, then the

Court must assess the proper amount as well as it can, but that is plainly not always so: Ted Brown

Quarries Pty Ltd v. General Quarries (Gilston) Pty Ltd (1977) 16 A.L.R. 23, Ratcliffe v. Evans [1892]

2 Q.B. 524 at 532-533. In the latter case, Bowen L.J. said for the Court of Appeal that in proof of damages "as much certainty and particularity must be insisted on . . . as is reasonable". As to the

degree of certainty of proof necessary in a particular context, I mention Commonwealth v. Amann

Aviation Pty Ltd (1991) 174 C.L.R. 64 at 82-85. Sometimes the circumstances are such that the

plaintiff’s loss cannot, whatever evidence is adduced, be assessed with any pretence to certainty, e.g.

Chaplin v. Hicks [1911] 2 K.B. 786. But that was not so here, where the judge’s approach to

assessing damages consisted principally in putting a figure on the value of physical assets, chattels and

fixtures.

The evidence of value on which the judge relied included the apportionment of the purchase

price in the contract of sale at $320,000, which contract was entered into in breach of the defendants’

obligations; that contract put $120,000 on the stock and $200,000 on plant, furniture, chattels and

fixtures. But adopting the apportionment in the contract which was alleged (and held) to have been

entered into at too low a figure cannot assist the plaintiff, whose fundamental difficulty is that prima facie

the value of the business would be taken to be $320,000, being the figure actually obtained. Apart from

that, an apportionment in a contract of this sort is not ordinarily intended to reflect the parties’ view of

the true value of the items of property in question; its principal significance, and purpose, relates to

income tax.

Then, according to the judge’s findings, there was uncontradicted evidence that Mr Scherrer

had "installed benches and other equipment at a cost of $100,000 in the year before the sale". The

evidence referred to was as follows:

" Inventories? -- Yes. We never even touched all the benches. I spent probably about
$100,000 that year on working benches. "

Evidence of this kind illustrates the difficulty in upholding the judgment. It must surely have been

ascertainable, with a fair degree of precision, how much was spent on working benches in that year;

a round figure without any details or any suggestion that the amount had been checked could not

reasonably have been acted upon. Of course, apart from the vagueness of the evidence about the

$100,000, the plaintiff’s difficulty is that the value of the benches was presumably taken into account

in fixing the purchase price at $320,000; that price was known to the director of the plaintiff, Mr

Scherrer, and he acquiesced in it. Mr Scherrer said in effect that he was not anxious to sell.

Next, the primary judge took into account as a "further indication, though clearly not amounting

to evidence of value" what his Honour described as "evidence relating to the abortive sale of the

business to Henri Baumann at a price of $350,000 which, incidently, was nett to the vendor. (See

Exhibit 5, cl. 4.1)". Exhibit 5 is in fact an unexecuted contract for $300,000 "clear", not $350,000. The

latter figure appears in an exhibit other than the one to which his Honour referred; it consists in a copy

of minutes of a meeting held relating to a then proposed sale to H & C Baumann. There was no

evidence that a sale at that figure was unconditionally agreed and Baumann, one of the prospective

purchasers mentioned in the minute, was described as one of the principals of the company which later

purchased at $320,000; according to Mr Scherrer’s evidence, Baumann was unable to obtain finance

to effect the projected $350,000 sale. The judge and counsel for the plaintiff both assured counsel for

the defendants, when evidence about this $350,000 sale was advanced, that it was not evidence of

value; but it was in the end used by the judge in that way.

It does not seem necessary to analyse further the route the judge took towards the conclusion

that the business was worth at least about $40,000 more than the agreed contract price. It seems clear,

with respect, that the case was one in which the plaintiff’s attempted proof of that proposition did not

measure up; there was evidence suggesting that the price of $320,000 was less than the value of the

business, but it went no further.

I agree with the orders proposed by the President and Davies JA.