Hill v Tooth & Co Ltd
[1998] FCA 653
•4 JUNE 1998
FEDERAL COURT OF AUSTRALIA
TRADE PRACTICES - misleading and deceptive conduct - sale of a hotel - valuation - valuation of a business by capitalisation of future maintainable earnings - whether provision of a literally accurate part of a valuation to a prospective purchaser can constitute misleading and deceptive conduct - whether failure on the part of a purchaser to take reasonable care of their own interests affects liability under section 52 - reasonableness of reliance on trading figures - whether a sufficient nexus between the conduct and the damage has been established - whether misleading and deceptive conduct induced entry into the contract - materiality of inaccuracy in trading figures supplied to prospective purchaser
NEGLIGENCE - duty of care - whether a valuer has a duty of care to a third party who relied on a valuation not addressed to that third party - reasonable forseeability - knowledge of the applicant as a member of a limited class
DAMAGES - where misleading and deceptive conduct induce entry into a contract, damage is calculated by subtracting the true value of the property at the time of sale from the contract price - calculation of true value - relevance of resale value to true value
Trade Practices Act 1972 (Cth) ss 52, 75B, 82
Fair Trading Act 1987 (NSW) ss 42, 68
Caltex Oil Australia Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529
Gould v Vaggelas [1985] 157 CLR 215
San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act (1986) 162 CLR 340
Kizbeau v W.G. & B. Pty Ltd (1995) 184 CLR 281
Argy v Blunts & Lane Cove Real Estate [1990] 26 FCR 112
Parkdale Custom Built Furniture Pty Limited v Puxu Pty Limited [1982] 42 ALR 1
Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] 42 ALR 177
Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (Reg) (1997) 71 ALR 448
Sutton v A J Thompson Pty Ltd (in liq) [1987] 73 ALR 233
Elders Trustee v Reeves [1987] 78 ALR 193
Henjo Investments Pty Ltd & Ors v Collins Marrickville Pty Ltd [1988] 79 ALR 83
Antoniou & Anor v Karedis Enterprises Pty Ltd & Anor (Einfeld J, unreported, 15 December 1994)
BT Australia Ltd v Raine & Horne Pty Ltd (1983) 3 NSWLR 221
Plowman v McCarney & Associates Pty Ltd (Kinchington DCJ, unreported, 17 December 1990)
Annechini & Anor v McDonald (Garling ADCJ, unreported, 23 December 1991)
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465
DENNIS RONALD HILL & ANOR v TOOTH & CO LTD & ORS
NG 554 OF 1994
EINFELD J
4 JUNE 1998
SYDNEY
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NG 554 of 1994
BETWEEN:
DENNIS RONALD HILL
FIRST APPLICANTJANICE BARBARA HILL
SECOND APPLICANTAND:
TOOTH & CO LTD
FIRST RESPONDENTB.Y.E.P. PTY LTD
SECOND RESPONDENTRON ROBERTS
THIRD RESPONDENTJUDGE:
EINFELD J
DATE OF ORDER:
4 JUNE 1998
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
Judgment be entered for the applicants in the sum of $400,000.
The first respondent pay the applicants’ costs arising from all claims made by the applicants.
The first respondent pay the third respondent’s costs arising out of his cross-claim and of the proceedings brought against him by the applicants.
Note:Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
NG 554 of 1994
BETWEEN:
DENNIS RONALD HILL
FIRST APPLICANTJANICE BARBARA HILL
SECOND APPLICANTAND:
TOOTH & CO LTD
FIRST RESPONDENTB.Y.E.P. PTY LTD
SECOND RESPONDENTRON ROBERTS
THIRD RESPONDENT
JUDGE:
EINFELD J
DATE:
4 JUNE 1998
PLACE:
SYDNEY
REASONS FOR JUDGMENT
INTRODUCTION
On 30 August 1991 the Orange Grove Hotel at Leichhardt was sold by the first respondent, Tooth & Co Limited (Tooth), to the applicants. Until just prior to that time, the hotel was leased by the second respondent, B.Y.E.P. Pty Limited (BYEP). Before the sale, the hotel was twice valued by the third respondent, Ron Roberts, a professional valuer. The applicants allege that Tooth, BYEP and Roberts engaged in misleading and deceptive conduct in respect of the sale by making misrepresentations about the value of the hotel, and that Roberts was negligent in the provision of his valuation.
THE CLAIMS
In the application and amended statement of claim, filed on 25 August 1994 and 16 March 1995 respectively, the applicants sought declarations that the alleged representations were in contravention of sections 52, 53, 53A and 59 of the Trade Practices Act 1974 (Cth) (TPA) and sections 42, 44, 45 and 54 of the Fair Trading Act 1987 (NSW) (FTA). As Roberts is an individual, any claim against him for misleading and deceptive conduct had to be brought under the FTA and not the TPA, which applies only to corporations engaged in trade or commerce. The applicants sought to recover the consequent loss pursuant to TPA sections 82 and 87 and/or FTA sections 68 and 72. In the alternative, they claimed that the alleged representations constituted a collateral contract with the respondents which was breached. In addition to these claims against all respondents, the applicants claimed that Roberts acted negligently and in breach of a duty of care owed to them, such that they suffered loss and damage.
Two cross-claims were also filed. The first was a cross-claim by Tooth against BYEP and Roberts, filed on 22 October 1996, which alleged that BYEP and Roberts had misled and deceived Tooth in contravention of the TPA/FTA, and alleging negligence against both BYEP and Roberts. Tooth claimed that should any verdict be returned against it, both BYEP and Roberts should make a contribution towards it or indemnify Tooth against it. In the second cross-claim, filed in Court on 3 June 1997, Roberts claimed that BYEP, and presumably Tooth, acted negligently and that should any verdict be returned against him, both BYEP and Tooth, as joint tortfeasors, should make a contribution towards it or indemnify him against it.
FACTUAL BACKGROUND
The facts which give rise to this dispute are largely uncontentious. In early 1990 Tooth owned some 214 hotels throughout New South Wales which it leased to individual operators who ran them as businesses. Pursuant to a decision made at about that time to sell all but 10 of these hotels, Tooth decided to give the current lessees the first option to purchase the freehold interest in the hotels which they operated, including the Orange Grove Hotel.
From July 1988 the Orange Grove Hotel was leased by BYEP. Alan Ruddock, one of the principals of BYEP, had held the hotelier’s licence for the premises and had operated the hotel since about July 1985. With a view to its sale to BYEP as current lessee, Tooth had the Orange Grove valued in March 1990 by a panel comprising Len Marjason, Bob Monaghittie and the third respondent. The valuation was $1,557,000. BYEP was unable to raise the necessary finance to purchase the freehold and so was not then in a position to exercise its option. However, it was not prepared to vacate the premises prior to the expiration of its lease.
During the course of the next year, BYEP continued to try to raise the required finance to purchase the hotel but was unable to do so. Tooth therefore determined to wait until the lease expired in order to sell the hotel on the open market with vacant possession. On 22 July 1991 BYEP’s lease expired. Rather than put the hotel formally on the market, John Bolas, then an employee of Tooth involved in the sale and leasing of hotels, simply advised various brokers that the hotel was for sale when they contacted him regarding other matters. Apparently news of a hotel’s imminent sale would be rapidly disseminated throughout the industry.
In the first week of June 1991, the first applicant, Mr Hill, an experienced hotelier (unless otherwise stated, I shall hereafter refer to the applicants by that description or simply as “Hill”) received a telephone call from Tony Carnovale of L J Hooker (NSW) Pty Ltd. During that conversation Hill was asked whether he would be interested in looking at the Orange Grove Hotel with a view to purchasing the freehold interest. At the time Hill was approached by Carnovale, he had been out of the hotel industry for about 18 months. For the eight years prior to that time, he and his wife (the second applicant) had owned the business and leasehold of the Grove Inn Hotel at Kingsgrove. When he contacted Hill, Carnovale was evidently aware that the Orange Grove Hotel was coming onto the market.
On 11 July 1991, in preparation for the sale, Bolas instructed the same panel of valuers who had valued the hotel in 1990 to up-date their earlier valuation. To facilitate that valuation, he
provided the panel with trading figures which had been supplied to him by BYEP’s accountant. Those trading figures subsequently appeared on page 5 of Roberts’ up-dated valuation (the 1991 valuation), which was provided to Bolas on about 23 July 1991, in which the panel valued the hotel at $1,288,000.
On about 25 July 1991, Hill inspected the Orange Grove Hotel with Carnovale. According to Hill, he and Carnovale then discussed the provision of ‘figures’ so that he might determine for himself the financial viability of the proposition. On 1 August 1991, Bolas provided Carnovale with page five of the 1991 valuation, showing the average weekly takings for the period 1 July 1990 to 31 May 1991. Bolas’ purpose in giving the figures to Carnovale was to enable him to pass them on to prospective purchasers.
When Hill met Carnovale to view the trading figures, he was shown the copy of page 5 of the 1991 valuation which had been provided by Bolas, and was told it was the ‘up-dated valuation sheet’. It was in the following form:
The Orange Grove
TRADING DETAILS
FOR PERIOD 1.7.90 to 31.5.91The following represents average weekly takings for the above period:
DEPARTMENT REVENUE Public Bar 7,630 Saloon Bar/Lounge 1,393 Bottle Department 5,845 Cigarettes & Sundries 392 Accommodation 406 Food 256 Amusement Machines 278 Draw Poker Machines 2,250 TOTAL REVENUE(WEEKLY) $18,450 License Fee (1991): $34,770.00 Council Rates: $4,633.74 Water Rates-Estimate: $14,600.00
Hill was also provided with a complete copy of the 1990 valuation.
At some point, either during or after his conversation with Carnovale, Hill claims that he had a telephone conversation with Roberts, in which Roberts stated:
I have done an up-dated valuation on the hotel. I have been faxed figures from Tooth & Co. The second valuation is done off those figures.
Roberts did not recall having this conversation but I believe that it took place. With a view to obtaining finance for a purchase, Hill also spoke with Louis Gonzales, the manager of commercial business at the branch of the Westpac Bank located on the corner of King and Castlereagh Streets, Sydney, and was informed that all relevant documents would be required if Westpac was to provide the finance for the purchase. Hill informed Gonzales that Roberts had done a valuation of the property. Gonzales then contacted Roberts and on 2 August 1991 Roberts sent him a confirmation of the 1991 valuation of the hotel at $1,288,000. At a subsequent meeting between Hill and Gonzales, the entire 1991 valuation, including page 5, was shown to Hill. The figures on page 5 of the complete valuation he saw at this meeting were identical to those he had been shown by Carnovale previously.
Hill subsequently decided to purchase the hotel and, together with his wife, he entered into an agreement with Westpac to borrow $1,190,000 to facilitate the purchase. On 30 August 1991 contracts were exchanged between Mr and Mrs Hill and Tooth and BYEP, in respect of the land and the business, for a total of $1,350,000. The sale was completed on 14 October 1991 and the applicants took possession of the hotel. There was no dispute that Hill had extensive experience in the hotel industry, and all parties agreed that he ran the Orange Grove Hotel competently and made a number of improvements, both to the premises itself and to the way in which the business was conducted. Nevertheless, by the middle of 1993 the applicants were unable to meet their repayments to Westpac because their trading figures were too low. The hotel was eventually sold on 28 October 1994 for $1,200,000, two months after this case was commenced.
THE HEARING
During the course of the hearing, it became apparent that the applicants’ claim had narrowed substantially from that pleaded to a claim against Tooth for misleading and deceptive conduct in contravention of TPA section 52 and claims against Roberts for misleading and deceptive conduct in contravention of FTA section 42, and for negligence. All other claims were abandoned. BYEP did not appear at the hearing and the case against it is not pressed.
MISLEADING AND DECEPTIVE CONDUCT
The central question to be determined is whether, in all of the circumstances, the conduct of the remaining respondents was misleading and deceptive: Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] 42 ALR 177. The applicants claimed that the misleading conduct had two distinct elements. The first consisted of the provision of the 1991 trading figures. The applicants’ contention in this regard was that although the single sheet of trading figures was expressed to be a weekly average for the eleven month period to 31 May 1991, it could also be taken as representing the current position of the hotel in August 1991 and the likely future trading position of the hotel after that time. The applicants claimed that Tooth’s conduct was misleading because it caused these figures, which Bolas thought showed a current ‘picture’, to be provided to Hill, and that Bolas expected that Hill could rely on the figures in deciding whether to purchase the hotel in August 1991. The applicants claimed that Roberts’ conduct was misleading because, at the time his valuation was provided to Tooth in late July 1991, he set out trading figures on page 5 which he wrongly thought represented the current or maintainable weekly takings of the hotel when they did not.
The second element of misleading conduct alleged consisted of an express written representation (in the form of page 5 of the 1991 valuation) that the average weekly takings for the eleven month period ending on 31 May 1991 were $18,450 when they were in fact only $17,942.
The first element
The essence of the applicants’ claim is that the provision of page 5 of the 1991 valuation, in all of the surrounding circumstances, constituted misleading and deceptive conduct because Hill, on the basis of the figures and the circumstances, reasonably assumed that, as at August 1991, $18,450 represented the then current and future maintainable earnings of the hotel. There was no dispute that this belief was incorrect in that, at the time contracts were exchanged in August, the average weekly takings were in fact materially less than $18,450 and that subsequent takings, up to the time when the hotel was sold in 1994, were also substantially lower than $18,450. Similarly there is no dispute that Hill was actually misled, in that he did believe that $18,450 represented current and future maintainable earnings.
To determine whether the respondents have engaged in misleading or deceptive conduct in cases of this type, where an actual misconception has arisen, it is necessary to inquire why the misconception arose. The reason for this inquiry was outlined by Deane and Fitzgerald JJ in Taco Co of Australia Inc v Taco Bell Pty Ltd [1982] 42 ALR 177:
[It] is only by this investigation that the evidence of those who are shown to have been led into error can be evaluated and it can be determined whether they are confused because of misleading or deceptive conduct on the part of the respondent.
That is the analysis required in this case; namely, whether Hill’s belief in the currency of the figure on page 5 of the 1991 valuation was induced by misleading and deceptive conduct on the part of the respondents.
Page 5 itself
On its face, the page was clearly expressed to be an average of weekly takings for an eleven month period ending on 31 May 1991. There was no overt suggestion that the figures purported to take into account any trading details beyond that time or even that the takings at the end of the stated period were or were still at the level of the average for the period. Hill was questioned extensively about his understanding of page 5. He conceded that he was aware that it was only a single page from an entire valuation, that it was an average of weekly trading figures over an eleven month period, and that it was expressed to only take account of trading up to 31 May 1991. He admitted that he knew what an average meant, and that he understood that an average could not reveal a trend over a period. Thus he was aware that he could not ascertain, by looking at the page, whether the weekly takings had generally declined or fluctuated over the eleven month period, from an amount above $18,450 earlier in the eleven months to an amount below $18,450 by May 1991. He was also aware of the obvious fact that an average could not reveal the terms of trade immediately prior to the end of the period. Hill’s evidence highlighted that not only was the page of figures extremely clear in what it purported to represent on its face, but that he understood the limitations of those figures when he was first shown them by Carnovale. The figures in isolation were certainly not the cause of Hill’s misconception that $18,450 represented current and future maintainable earnings.
To substantiate their claim that the provision of the trading figures was nevertheless misleading and deceptive, the applicants therefore depended on Tooth’s attendant conduct. There were several factors which the applicants submitted contributed to Hill’s assumption that $18,450 represented current and future maintainable earnings.
Takings after 31 May 1991
In his evidence Hill said that he expected that he would be informed if takings had fallen below $18,450 after 31 May 1991.The principal basis of this expectation was Hill’s alleged conversation with Roberts during his conversation with Gonzales of Westpac shortly after his meeting with Carnovale at which he was shown the figures. Based on these conversations, Hill believed that Roberts was going to look at the trading figures for the period between May 1991 and August 1991 before he reported to Westpac on the value of the hotel. Further, he presumed that Roberts would tell him if the trading figures had changed substantially from those in the valuation. He seemed to have assumed that Roberts had had, and could continue to have, access to BYEP’s trading figures although, according to the evidence, Roberts did not in fact see the base figures themselves.
Hill’s conclusions seem to have arisen because of the two valuations done by Roberts. Both Roberts and Bolas had referred to the valuation performed in 1991 as the ‘up-dated’ valuation because it superseded that done in 1990. In his conversations with both Westpac and Roberts, Hill assumed that when an ‘up-dated’ valuation was adverted to, it referred to a valuation yet to be performed by Roberts, which would take account of the trading figures after 31 May 1991.
Hill admitted never having asked Roberts, Bolas or anyone else to provide a report which took the latest figures into account, or provide a report on the current state of trading of the hotel as at August 1991. He further admitted that he had at no stage requested Roberts to perform a further valuation on his behalf that would take account of such trading, nor was he aware of anybody else making such a request to Roberts. The following extracts from Hill’s cross-examination clearly demonstrated this situation:
You are talking about the rest of the document in addition to page 5? -- Yes.
Pages 1 to 4 -- ? -- No, but also --
-- and 6 to whatever? -- Yes, but also I would have presumed - we presumed, my wife and I, and I also believe the bank presumed - that Mr Roberts was going to look at the figures from May, 1991 up until he was asked to give a report to my bank.
Yes, but that was only up until late July or early August? -- Yes, but that would have told Mr Roberts, the bank and myself and my wife, if there had been a decline from $18,450, if it had physically dropped, to any amount of money.
HIS HONOUR: Did that happen? Did Mr Roberts ever submit such a report? -- He submitted a report.
That took the May figures up to July? -- Well, I am presuming that that took that into account because --
But should you presume that Mr Hill? Should you not have seen it? -- Well, Mr Roberts was --
The purpose of it presumably was to tell you whether the business was still earning the $18,450? -- Exactly.
Well, did you not ever see them, these up-dated figures? -- I saw the document from Mr Roberts in my bank’s office.
That took the May figures up to July? -- Well, I am presuming that the figures - he took those figures into account before letting us presume that the Hotel was till (sic - presumably, still) taking $18,450.
...
MR FINCH: So far as you knew the bank was happy to rely on your expertise as a publican to satisfy yourself about how you were going to pay the loan back? -- Yes, but I mean, if Mr Roberts had come back to them and said in their report, this hotel is now not taking $18,450.
Who asked Mr Roberts to do any such thing? -- Well, I would presume that that’s what a valuer’s job was.
Who asked Mr Roberts to do any such thing? -- Well, I didn’t ask him, no.
You do not know that anyone did? -- Well, no, I don’t.
The only thing Mr Roberts did was produce two documents for Tooth, one of them in early 1990? -- Yes.
Which stated on page 4 exactly what the average was that had been calculated and over what period? -- Yes.
And another in 1991? -- Yes.
Which stated exactly what the average was and over what period? -- Yes.
It did not say anything about anything after that period? -- No, it didn’t.
No one asked him to do anything about anything after that period, is not that right? -- I didn’t ask him but he was asked either by his agent or my bank for an up-dated valuation in July or early August.
And the document he gave them had on its face what he said about the average takings. That is, how much they were and during what period he had analysed them? -- Yes.
And nobody said to him, “What about after May”, did they? -- Well, I didn’t.
You do not know anyone that did? -- Well of course I don’t, no.
And you did not hear anyone report back to you on what he had said about any such question? -- No.
And as far as you knew nobody had looked at the figures after that time? -- Well, as far I know, no.
HIS HONOUR: ...But I am just a little troubled by this, why did you not say: Look, I cannot go ahead with this purchase until I have the updated figures. Why could you not do that? -- I tried that through Mr Carnovale, Your Honour, but as I have just explained what happened there. But you see I was relying totally on this updated valuation as I thought myself and Westpac were getting from Mr Roberts.
Which you never did get? -- I sighted a document in Westpac’s office --
Yes, but you just told Counsel that this was so far as figures were concerned, this was the same sheet? -- The same sheet, yes. So I presumed --
So you never in fact - you presumed there was going to be one but you never in fact saw one? -- No.
Hill’s confusion seems to have arisen despite being told by Carnovale, when he was originally shown the trading figures, that they were from the ‘up-dated’ valuation, and despite being told by Roberts, in his alleged conversation on 1 August 1991, that Roberts would supply to Westpac an ‘up-dated’ valuation which had already been done. Hill was therefore made aware on least two occasions that an ‘up-dated’ valuation had already been performed and that there was no further action required, at least as far as Bolas and Roberts were concerned.
This situation continued when Hill met with Gonzales to finalise the loan arrangement. He was shown a valuation and assumed that it had taken into account the trading figures between June and August 1991. The valuation at that meeting was in fact a copy of the entire 1991 valuation, unchanged since it was first provided to Bolas by Roberts. It is clear that Hill now realises this:
MR FINCH: Mr Hill, the document you saw, the full report from 1991, had the same page 5 in it that you had seen at the beginning of August did it not? -- Yes.
It had not changed at all? -- But --
Is that not right? It had not changed at all? -- No, it hadn’t changed.
The dates at the top of the page had not changed at all? -- No, but --
It was plainly the very same document? -- I would have presumed that the valuer would have at least sighted those figures and that’s what we relied on...
Hill’s misconception arose from his apparent assumption that because the figures in the valuation he saw at the meeting with Gonzales were the same as those he had been shown by Carnovale, there had not been any significant change in the trading figures during that period, and therefore that current weekly takings in August were still $18,450. The correct position was that the figures were the same because the 1991 valuation had not been up-dated further; Roberts had simply endorsed the valuation as it stood. The respondents submitted that, to the extent that this unfounded expectation that he would be informed of any change between June and August was the cause of Hill’s misconception about the current takings of the hotel, it was entirely his own fault. In words appropriate to the TPA, they said that he was induced to enter the Westpac loan and complete the purchase by his own misleading of himself, not by anything said or done by them.
The valuation method
Roberts gave detailed evidence of his method of valuation which began with the panel of three valuers attending the hotel together in order to inspect it and to gather the relevant information from the tenant. The valuers would then adjourn to Marjason’s office where each would undertake an independent assessment of the information received and each would arrive at an independent valuation of the hotel. An averaging mechanism was then used to achieve a final valuation which would be ratified by all three members of the panel.
According to the evidence, the method of valuation using ‘the capitalised assessed (hypothetical) net profit’ involved several steps. Firstly, the average weekly takings were calculated. A gross profit percentage was then derived, based on experience and knowledge of the industry, and then applied to the average weekly takings. The result was the weekly gross profit for the hotel. The weekly expenses were then deducted, which revealed the hotel’s weekly income or net profit. The next step was the derivation of an appropriate capitalisation rate, which was also based on experience and knowledge of the industry. That rate was applied to the weekly net profit figure. Any income from ‘draw poker’ machines was excluded from this process and calculated separately (in accordance with industry standards) using a capitalisation method based on 75% of the machines’ annual profits. The two capitalised amounts were then added to obtain the total value for the hotel. Roberts’ undisputed evidence was that this method was used to value the Orange Grove Hotel in 1990 and again in 1991. The relevant figures on which the 1991 valuation was based were provided by BYEP’s accountant to Bolas who then forwarded them to Roberts for distribution to the panel.
Hill said that he was fully aware of the valuation method used, as it was the same method that had been used when his Kingsgrove hotel had been valued some years previously. He was therefore aware of the central role played by the average weekly takings in the assessment of net profit and assumed that $18,450 was the figure that represented maintainable future earnings on which that calculation was based. However, Hill made this assumption having seen only one page of a valuation that was not commissioned by or for him. The respondents submitted that such an assumption was wholly unreasonable, given that the single page he saw was prima facie unambiguous and the use he made of it -- by assuming that it represented current or future maintainable earnings -- was unjustified.
Page 5 did not purport to carry out any calculations in respect of the valuation, nor does it set out any methodology -- it was simply the raw data that was included as part of the valuation document. Nor is this surprising seeing that it was merely a single extracted page. The respondents submitted that before any value was arrived at, several variables were applied to the average weekly takings, including the capitalisation rate and the gross profit percentage, both of which involved an individual valuer’s expert opinion. The conclusion the respondents asked the Court to draw was that having regard to the single page of figures, Hill could not reasonably have assumed, without further information, that the $18,450 represented the current or future maintainable earnings.
The evidence of Bolas and Roberts
Somewhat ironically, the strongest evidence put forward by the applicants was that both Roberts and Bolas agreed that the page of trading figures shown to Hill by Carnovale conveyed more than was expressly set out. This evidence arose in the cross-examination of Bolas:
And you passed on those trading figures to the agent because you, no doubt, honestly and genuinely believed that they would assist a prospective purchaser when considering the purchase of a hotel in early August when the figures were provided by you?---Well, it gave an indication of what the trade for the hotel was.
Thank you. And one of the reasons why you thought that they would assist the purchaser in giving an indication of what the trade of the hotel was is that those figures had formed part of a current valuation that you had commissioned?---Correct.
And no doubt you thought that the valuer had used those figures in making his assessment of the maintainable earnings for the business?---I assumed that, yes.
...
And that was your position in early August 1991, I take it?---Yes, it was.
...
You would not have knowingly passed on the trading figures utilised by the valuer if you had that knowledge of the current level of trading below the average figure set out in the valuer’s trading figures used in this valuation?---Correct.
Because that would give a misleading impression to a prospective purchaser of how the business was travelling at the date of the valuation?---Well, I assumed that those figures on evaluation reflected what the business was doing at the time and I was not aware of any other figures.
...
(Your purpose) was to give the prospective purchaser an indication of how the business was travelling at the date of providing the information? - Yes.
You took the view, as I think you have said earlier this morning, that although it was expressed to be an average for the 11 months ending 31 May it could be relied upon as representing what was thought by you to be the current position at the time you provided the information to your agent in early August?--- I assumed that to be the case, yes.
The cross examination of Roberts elicited this evidence:
The page of trading figures inserted in your valuation were (sic) there because you took the view that that was the figure which you could rely upon when you carried out your valuation?---That’s correct, yes.
You took the view that, for a variety of reasons, you thought it was an appropriate reflection of the turnover of the business at the date of the valuation?---That’s correct, yes.
After making the qualification that he thought only Tooth could rely on the valuation, Roberts’ evidence continued:
Was (he) expected by you to make the assumption, when he read your valuation, that a reasonable estimate of what the business was turning over at the date of your valuation was $18,450?---That’s correct, yes.
If it turned out to be the fact that that was not the case, then inadvertently you may have created the wrong impression?---In simple terms, yes.
While this evidence was not directly relevant to a determination of whether the conduct was misleading or deceptive to Hill, it certainly indicated that both Bolas and Roberts were under the same misapprehension as Hill as to the utility of the trading figures in the valuation. The fact that all three of them shared a virtually common view as to the import of the trading figures adds considerable weight to Hill’s submission that in the particular circumstances the provision of figures to 31 May 1991 was misleading. In summary, those circumstances were that Hill was interested in purchasing the hotel and requested the trading figures to see ‘how the business was travelling’. In response to his request, at a meeting designed for the purpose of providing the information, he was provided with page 5 of the 1991 valuation containing trading figures. Although they were limited in terms to the eleven months up to 31 May 1991, he believed that these figures could be relied on as providing the trading position in August 1991 when he completed the purchase. He was aware that the figures had been taken from a valuation done by Roberts and he was aware that the method used in the valuation was to capitalise hypothetical net profits. He was therefore aware of the central significance of the trading figures to the ultimate value and his assessment of the hotel’s viability. Both Bolas and Roberts shared Hill’s view as to the utility of the trading figures with regard to the current and future state of the hotel’s earnings. In one way or another they conveyed these opinions, directly or indirectly, expressly or by silence, to Hill. Despite the obvious deficiencies in his own approach to the trading figures he was given, Hill was misled and deceived because he reasonably assumed, from what he had been told and not told, that they represented the current and future maintainable earnings of the hotel at the time of purchase. He had asked for the trading figures to assess the viability of the purchase. Bolas knew that what was important were the figures at the time of the purchase, not some other time. He thus allowed Hill to assume, in addition to his own knowledge of how hotels were valued, that what he was given represented the current and expected future position.
I hold that, through Bolas, Tooth’s actions, words and attitudes in relation to page 5 amounted to misleading and deceptive conduct in trade and commerce in representing that they continued to apply after 31 May 1991 up to the point of the applicants’ taking of the loan from Westpac and entry into the contract, or was conduct likely to mislead or deceive. I shall deal with Roberts’ conduct separately.
RELIANCE
Hill gave the following evidence:
I believed that the figure of $18,450 per week represented the average takings then being achieved by the hotel. I assumed that the figure could be relied on at the time when it was provided to me...I believed that the figure of $18,450 could continue to be relied upon by me up to the date of exchange of contracts on 30 August 1991. I assumed that Tooth & Co, or the licensee, or the agent, would inform me if there were any substantial or material difference to the figure of $18,450 prior to the exchange of contracts on 30 August 1991. I made this assumption because I believed that I had made known to Mr Carnovale the importance which I placed on the trading figures in weighing up my decision to purchase the hotel.
Thus one of Hill’s prime motivations for entering into the contract was the fact that he believed the average weekly takings at the time of purchase were $18,450. On this basis he made calculations about net income and profitability and assessed the viability of the purchase in terms of his proposed loan arrangements with Westpac. The belief as to the utility of the trading figures was certainly at least one factor in the formation of the applicant’s decision to purchase the hotel and Hill was clearly influenced by it in making his decision. In any event, an inference to this effect is supported by Gould v Vaggelas [1985] 157 CLR 215 in which Wilson J stated at 236 that where a misleading representation is made which is likely or calculated to induce entry into a contract, and the plaintiff has subsequently entered into the contract, an inference of reliance is likely to be drawn unless the defendant shows otherwise. In this case the figures were provided to a prospective purchaser by a real estate agent on behalf of the owner and were obviously calculated to induce entry into the contract.
There is no doubt that Hill’s belief in the extended significance of the trading figures was at least one factor which induced him to enter the contracts. I am therefore satisfied that he relied on the misleading and deceptive conduct proved.
REASONABLENESS
The respondents’ real or major submission in the whole case was that the use made of the page of trading figures by Hill was not reasonable. They submitted that it was in fact Hill’s own assumptions that led him into error and that there was no causal nexus between the provision of the figures and the losses incurred by Hill. This approach to liability under TPA section 52 is supported by Parkdale Custom Built Furniture Pty Limited v Puxu Pty Limited [1982] 42 ALR 1, in which Gibbs CJ stated that section 52:
...must, in my opinion be regarded as contemplating the effect of the conduct on reasonable members of the class [likely to be affected]. The heavy burdens which the section creates cannot have been intended to be imposed for the benefit of persons who fail to take reasonable care of their own interests. What is reasonable will of course depend on all the circumstances.
In Elders Trustee v Reeves [1987] 78 ALR 193, Justice Gummow stated:
It is, of course, fundamental that s.52 is not designed for the benefit of persons who fail, in the circumstances of the case, to take reasonable care of their own interests and also that it would be wrong to select particular words or acts which, although misleading in isolation, do not have that character when viewed in context.
In this case the respondents have put a strong argument that Hill’s own conduct made, at the very least, the principal contribution to his own downfall. It is readily apparent that Hill did not take particular care to establish the trading position of the hotel before he purchased it. Rather he chose to make a number of unfounded assumptions which brought him to the conclusion that the figures which he had seen could be relied on to represent the current and future trading position of the hotel. There were further circumstances that attended this transaction which highlight Hill’s naive approach to the purchase. Not once did he sight the books of the hotel before agreeing to buy, and although there is some evidence that at one stage the books were unavailable, there is no evidence that Hill made any concerted effort to establish whether they could be inspected either by him or by somebody on his behalf, nor did he refuse to exchange contracts until the books, especially those showing the trading figures in June and July 1991, were made available.
Although he was borrowing over a million dollars to purchase the business, and paying $62,000 more than the 1991 valuation, Hill did not commission a valuation to be done exclusively on his own behalf to establish the hotel’s market value as at August 1991. There was evidence that at the time of the purchase, Sydney metropolitan hotels had been experiencing a lengthy downturn in trade. Hill guessed or assumed, and I accept, believed, that this trend had levelled off and that there would be no further downturn in the future, supposedly on the basis of his experience, despite the fact that he had been out of the industry for the previous 18 months. He admitted that he had no way of ascertaining whether the trend had in fact stopped at the particular hotel he and his wife were purchasing, as the only trading figure he had sighted was an average, incapable of showing any trend in takings over a period. There were in fact major discrepancies between the 1990 and the 1991 trading figures, showing a serious decline in trade.
Further, Hill did not take any steps to ascertain the expenses of the hotel he was about to purchase. He instead relied on estimates of his own which were based on his expenses at a different hotel some years previously. On the same basis, he assumed a certain profit margin without undertaking any verification of that assumption.
Although it is abundantly clear, even on Hill’s own evidence, that the decision to purchase the Orange Grove Hotel was, at best, commercially naive, one must not lose sight of the aim of section 52 which is to prevent misleading and deceptive conduct in trade and commerce. In Sutton v A J Thompson Pty Ltd (in liq) [1987] 73 ALR 233 a Full Court of this Court (Forster, Woodward and Wilcox JJ) held that a failure by the applicants to adequately check for themselves a number of representations was not a defence to a claim under section 52:
But there is nothing in the principles cited, or in any other authority which has been brought to our attention, to suggest that a person who has been misled into entering a contract, by false representations of a type which were likely to produce that result, and in fact did so, can be deprived of his remedy because of his failure to check the accuracy of those representation...
In Henjo Investments Pty Ltd & Ors v Collins Marrickville Pty Ltd [1988] 79 ALR 83 at 96 Justice Lockhart stated:
In Neilsen v Hempston Holdings Pty Ltd (1986) 65 ALR 302 at 313, a case which concerned an action for damages under s 52 where misleading statements had been made to the applicant as to the occupancy rate of a motel, Pincus J held that the causal chain allowing recovery of damages under s 52 of the Trade Practices Act was not broken even where the applicant had failed to take reasonable care of his own interests by undertaking a proper investigation of the figures presented. These decisions support the view that recovery under s 52 is founded by the applicant’s actual reliance upon the misleading or deceptive conduct of the respondent, although that conduct was not the only factor in the applicant’s decision to enter a particular agreement, and although the applicant did not seek to verify the representations or did so inadequately and so failed to discover their falsity.
In Antoniou & Anor v Karedis Enterprises Pty Ltd & Anor (unreported, 15 December 1994) I expressed reservations about this approach to the concept of liability under section 52 and noted the anomaly that although damages are assessed in a manner analogous to damages in tort, the important tortious concept of contributory negligence could not be a factor in the determination of TPA actions. However, that was, and remains, the better view of the law. The exception to the principle in Sutton and Henjo was stated by Justice Hill in Argy v Blunts & Lane Cove Real Estate [1990] 26 FCR 112 at 138:
A case may perhaps be imagined where an applicant is so negligent in protecting his own interests that there will be a finding of fact that the representation complained of was not in the circumstances a real inducement to his entering a contract. In such a case the element of causation between misrepresentation and damage will have been severed by the intervention of the negligence of the applicant.
Given the importance which Hill attached to the trading figures in making his decision to purchase the hotel and the circumstances already set out, I do not think that this is a case which falls into the category described in Argy v Blunts.
To focus too narrowly on Hill’s acts or omissions is not the correct approach to a case of this type. The fundamental question to be determined is whether there has been misleading and deceptive conduct which has caused loss and damage to the applicant. As with the assessment of whether the impeached conduct is misleading or deceptive, or is likely to mislead or deceive, the concept of the reasonableness of an applicant’s conduct falls to be determined in the circumstances of each case. In this case it was not the page of trading figures in isolation which constituted the misleading and deceptive conduct, but that representation and the attendant actions and words of Tooth and its agent. Attributing a certain level of rashness or carelessness to the actions of Hill cannot create sufficient unreasonableness on his part such as to obliterate a finding that, in all the circumstances, he has demonstrated a sufficient nexus between the misleading and deceptive conduct and the damage suffered as to establish a breach of section 52.
The second element
It was not disputed that the correct average for the stated period was in fact lower than the amount $18,450. Robin Humphreys, a chartered accountant called in the applicants’ case, determined that the average weekly takings for the specified period were in fact $17,947. He therefore concluded that the figures shown to Hill overstated the average takings by $503. Robert Harris, also a chartered accountant called by the applicants, determined from the weekly income and expenditure records of the hotel that the average weekly takings were overstated by $508.09. In a report dated 30 May 1997, a third chartered accountant, Alexander Penklis, called by the third respondent, agreed with the figure calculated by Mr Harris. Given that there was no real dispute about the precise quantum of the difference in that there was agreement between experts called on both sides, I find that the difference in average weekly takings for the period ending 31 May 1991 was in fact $508.
The true dispute was whether this difference was so material as to warrant being classed as misleading and deceptive. In his affidavit of 16 May 1997, Hill stated:
If the average weekly takings were materially less than $18,450, I would have felt unable to satisfy our interest and loan repayments, meet the overheads of the business and provide sufficient drawings from the business on which to live and put money into superannuation for my retirement in 9 years time.
In his oral evidence Hill claimed that had he known the average weekly takings for the period shown were some $508 less than was indicated, he would not have entered the contracts to purchase the hotel, despite the fact that such a discrepancy represented only a 2.7% difference in the average weekly takings over 11 months.
There was a significant attack on the credibility of this statement in light of Hill’s attitude to other figures in the negotiations. Hill claimed that at the meeting between himself and Carnovale at which he was shown page five of the 1991 valuation, he compared the individual component figures that made up the average weekly takings with the corresponding figures from the 1990 valuation. There were significant differences which Hill admitted were of concern to him: the saloon bar takings had fallen by $1262, the bottle shop sales had increased by $800, cigarette takings had fallen by $1200. Carnovale was unable to explain these discrepancies to Hill. There were various suggestions offered, including that Ruddock had used live entertainment in the saloon bar up to 1990 but ceased to do so at some point thereafter, which might account for the decrease in sales for that bar. Hill made no investigation of this matter and it is apparent from the records of the hotel that live entertainment was in fact provided in the saloon bar almost up to the point of sale in 1991.
It was also suggested that the saloon bar figure had been transposed with the cigarette figure. Tooth was approached to try to ascertain whether this was correct and had indicated that it was a possibility but that it did not know. While this might explain the change in cigarette sales, it would result in saloon bar sales being only $392 per week in 1991 -- an even more dramatic decrease than was apparent on the face of the document.
It was put to Hill that these queries were never satisfactorily resolved, to which he replied that he had resolved them in his own mind. When pressed further, he admitted that he could only have resolved them by guessing at the possible answer. It was clear at the conclusion of this exchange that Hill had glossed over significant changes in the figures that represented large decreases in revenue between 1990 and 1991. It was submitted by the third respondent that in light of Hill’s attitude to such differences, his claim that a reduction in average weekly takings of $508 would have caused him to reconsider his decision to purchase the hotel ought not to be believed.
There was also substantial evidence from the chartered accountants used by both parties as to what constituted materiality in this context. Attached to the supplementary report of Mr Humphreys, which is annexed to his affidavit of 16 May 1997, is a copy of Australian Accounting Standard 5 (AAS5), issued in September 1995 by the Australian Accounting Research Foundation on behalf of the Australian Society of Certified Practising Accountants and the Institute of Chartered Accountants in Australia, which deals with materiality. Paragraph 4.1.6(b) of the standard states:
An amount which is equal to or less than 5% of the appropriate base amount may be presumed not to be material unless there is evidence, or convincing argument, to the contrary.
The respondents relied on this statement to ground their assertion that a difference of $508 in the average weekly takings for the period, is insignificant and should not be taken into account. Five percent of the appropriate base amount -- $17,942 -- is $897.10, which is substantially above the $508 discrepancy in this case.
Mr Penklis’ report attached AAS5 and set out this calculation, concluding that the variation was below the requisite level of materiality. Nevertheless, Mr Penklis admitted that in applying the method of calculation of value that had been used in this case, a reduction in the average weekly takings of $508 produced a reduction in the ultimate value of the hotel of $89,000. In re-examination he qualified this statement by saying that given a variation in the average weekly takings, other variable factors in the calculation, such as the capitalisation rate, may change, thus rendering a simple mathematical transposition of the average weekly takings of little or no value at all in calculating the final value.
Mr Humphreys asserted that a difference of $508 per week was material, despite the fact that it was below the AAS5 standard. Mr Humphreys assertion was made in cross-examination, however, as he did not include it in his report of 16 May 1997, despite the fact that he annexed AAS5 to the report and discussed materiality. His report did not set out any of the factors which, in cross-examination, he stated gave rise to ‘exceptional circumstances’ which might mean that a 2.7% difference in average weekly takings would become material.
After a consideration of all of the evidence related to this matter, and taking account of the warning of Justice Gummow in Elders Trustee against giving too literal an interpretation to particular words or figures, I have concluded that the overstatement of the average weekly takings by $508 was not sufficiently material so as to constitute misleading and deceptive conduct. The evidence that a difference of $508 per week would make a difference of $89,000 to a valuation cannot be given very great weight. Valuations are often inexact at the best of times and it could not be assumed that the variety of other factors involved would remain static. It must also be remembered that at the time he decided to purchase, Hill had only the trading figures and was not in a position to calculate that a difference of $508 would have any significant effect on the total valuation. I accept that in some circumstances discrepancies which are below the 5% threshold may be material. However, in light of Hill’s apparent willingness to gloss over other much more significant anomalies in the weekly takings figures, it cannot be accepted that a difference of this comparatively minor size would have caused him not to enter the contract for purchase.
LIABILITY OF ROBERTS
The claim is that Roberts’ conduct was misleading and deceptive in itself and also that he aided and abetted Tooth’s conduct. It is of course true that page 5 of Roberts’ 1991 valuation was shown to Hill and that Hill’s misunderstanding of the figures’ meaning and significance was induced by his knowledge that the figures had come from a valuation which had used the method of capitalising assessed (hypothetical) net profit. However, Roberts argued that it was Bolas that made page 5 available to Hill without his knowledge or consent and in the face of the disclaimer in the valuation that it was for the sole use of Tooth. Roberts argued that any consequences flowing from the provision of the single page of figures, in the circumstances, should be borne by Tooth. The whole valuation, which was actually less than he paid, was not seen by Hill until early August.
The applicants submitted that the fact that the trading figures were not provided directly to Hill by Roberts did not defeat the claim against Roberts because an unbroken chain of causation existed between his provision of the valuation to Tooth, the reliance by Hill on the trading figures, and the applicants’ losses. It was contended that a person can recover damages for a breach of section 52 without actual reliance on the misleading conduct if it can be demonstrated that loss and damage were sustained as a result of the misleading conduct. Whatever else may be said about that argument, I do not doubt that a person who has relied on a misleading representation in breach of section 52, but to whom the representation was not made directly by the particular respondent, can recover damages against that respondent provided a causal link between the misleading conduct and the person’s loss and damage can be demonstrated: see the dicussion of the relevant principles and case law in my judgment in Haynes v Top Slice Deli Pty Ltd (1995) ATPR (Digest) 46-147.
The question here is whether there is such a causal link. The only evidence as to what Roberts knew about the purpose of his valuation was contained in a letter of 11 July 1991 written by Bolas to Roberts on Tooth’s letterhead:
In March 1990 you were a member of a panel which valued the freehold and lessor’s interest in the above hotel on behalf of Kinnel Pty Limited.
Our tenant Mr A. Ruddock has not been able to purchase the freehold from Tooth & Co. Limited.
We are currently negotiating with the tenant in regard to purchasing his interest in the business with the intention to sell the freehold as a going concern.
The original panel was made up of Messrs Marjason, Marjason (sic - presumably Monaghittie: see p2) and yourself.
The tenant’s accountant is currently updating the trading figures, which will be available within the next week.
We now require a current valuation and have asked Mr Marjason to co-ordinate the panel in the usual way.
This letter is not evidence that Roberts knew or could have foreseen that the valuation was to be shown to Hill or other potential purchasers, still less that potential purchasers were only to be shown page 5 which anyway emanated from BYEP and not Roberts. Moreover, the misleading conduct relied upon in the case is not merely the figures themselves but the attendant conduct of Bolas, Tooth’s employee, and Carnovale, Tooth’s agent. According to the evidence, Roberts played no part in those activities and presumably knew nothing of them. In other words, Hill did not rely on Roberts’ valuation but on the trading figures for which Roberts was not responsible as Hill was informed.
The issues attending Roberts’ liability under the TPA are thus to all intents and purposes identical to those that arise, or are better subsumed, under the negligence claim.
NEGLIGENCE
To establish their claim in negligence, the applicants must prove that a duty of care existed between them and Roberts, that Roberts breached that duty, that damage resulted, that it was foreseeable, and that it resulted from the breach.
Duty of care
It is now well recognised that damages can be recovered in negligence for purely economic loss: Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465; Caltex Oil Australia Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529 and San Sebastian Pty Ltd v Minister Administering the Environmental Planning and Assessment Act (1986) 162 CLR 340. However, where the loss is alleged to have been occasioned by the negligent misstatement of another, it is necessary to establish not only the reasonable forseeability of harm but also that there existed a relationship of proximity between the party alleged to have made the statement and the party bringing the action: Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (Reg) (1997) 142 ALR 750 where Brennan CJ stated at 757:
The uniform course of authority shows that mere foreseeablility of the possibility that a statement made or advice given by A to B might be communicated to a class of which C is a member and that C might enter into some transaction as the result thereof and suffer financial loss in that transaction is not sufficient to impose on A a duty of care owed to C in the making of the statement or the giving of the advice....But, in every case, it is necessary for the plaintiff to allege and prove that the defendant knew or ought to have known that the information and advice would be communicated to the plaintiff, either individually or as a member of an identified class, that the information or advice would be so communicated for a purpose that would be very likely to lead the plaintiff to enter into a transaction of the kind that the plaintiff does enter into and that it would be very likely that the plaintiff would enter into such a transaction in reliance on the information or advice and thereby risk the incurring of economic loss if the statement should be untrue or the advice should be unsound. (my underlining)
It is important to note the repeated use of the word “would” in contradistinction with the word “might”.
Roberts directed the Court’s attention to two District Court cases which dealt with claims of negligence against valuers by third parties who had relied on the valuations. The first was Plowman v McCarney & Associates Pty Ltd (17 December 1990, unreported). In that case a valuation was commissioned by Action Home Loans (Action), a lender of money, after an application by the owner of the property for a loan which was to be secured by a mortgage over the land in question. This transaction was not ultimately proceeded with and the valuation was filed away by Action. Some time later, the owner of the property again sought to secure a loan using the same property, and supplied Action’s valuation to a new lender which eventually relied on it. Action played no part in the provision of the valuation. Because of statements contained in the valuation, Kinchington DCJ held that the class of persons to whom liability was owed was not any investor at large who might use the valuation as a basis for a decision to lend money on the property in question but was limited to the company which had commissioned the valuation and any investor who might be induced by that company to lend money on the property.
The second case cited was Annechini & Anor v McDonald (23 December 1991, unreported) in which Garling ADCJ also held that no duty of care existed between a valuer and a party who relied on his valuation. Again the valuation in that matter was used by a party completely independent of the commissioner of the valuation. His Honour held that the class of persons who could rely on the valuation consisted of the party who commissioned it and “any person who had gone to [the] company for the purposes of lending money on the property”. Both decisions focused on the fact that the third party who relied on the valuation was not connected in any way to the commissioner of the valuation and therefore there was no relationship of proximity with the valuer. They are principally useful in emphasising the need to define and limit the class of people with whom the alleged misleader is in the required relationship of proximity.
Roberts was aware that the valuation was to enable Tooth to establish a market value for the hotel, and the then current lessee of the hotel to consider its option to purchase the freehold. Roberts was also aware that BYEP had not taken up its option to purchase and that his 1991 “up-dated” valuation had been commissioned because Tooth was attempting to sell the hotel to other purchasers. The applicants contended that it was reasonably foreseeable that the valuation would come into the hands of potential purchasers and that the trading figures would be relied on as indicating the current or future maintainable earnings of the hotel.
However, assuming that the figures could reasonably bear the extended significance which Hill placed on them, the applicants could succeed only if they showed that Hill, as an experienced publican, was a member of a limited class who Roberts knew or ought reasonably to have known would see and rely on, not the value he placed on the hotel, but on the trading figures on which it was based. I do not doubt that if there was such a class, Hill as a potential purchaser would be a member of it. But in determining whether the requisite proximate relationship existed, the key question is whether Roberts knew that when he provided the valuation to Tooth, the trading figures would be represented to members of this class as Roberts’ figures.
In BT Australia Ltd v Raine & Horne Pty Ltd (1983) 3 NSWLR 221, a trustee commissioned a valuation of a property as part of its duties in valuing the trust’s assets. Certain unit holders in the trust relied on the valuation and suffered loss. They then brought an action against the valuer. In holding that a duty of care existed, Wootten J stated:
It was apparent from the information available to the defendant that BT requested the valuation to use in the execution of its duties as investment manager of the funds in the class and as trustees of the trust established for their investment. It should not be necessary that the defendant should know precisely what the inquirer’s duties are or precisely what he proposes to do. Speaking in Shaddock [L Shaddock & Associates Pty Ltd v Parramatta City Council (1981) 55 ALJR 713] of the classic Hedley Byrne situation, Mason J said that the existence of a duty of care does not depend upon knowledge on the part of the speaker of the precise use to which the information will be put.
Roberts’ evidence was that he received instructions to value the hotel for Tooth in the letter of 11 July 1991. He was thereby made aware that Tooth’s purpose for the valuation was to inform itself of the price they might obtain for the hotel and give it a basis for fixing the price they might ask for. Despite this letter, and his declaration in the valuation itself that only Tooth could rely on the valuation, I think that Roberts should be taken to have known that Tooth would use the valuation to influence its negotiations with prospective purchasers. But I do not think that he should be imputed with the knowledge that the valuation would necessarily be shown to them. It does not matter that Roberts was not aware of Hill as a specific individual, as Hill was undoubtedly a member of any class that could be constituted of prospective purchasers of the hotel. As it happens, Roberts did become actually aware that Hill was an interested purchaser when Gonzales of Westpac telephoned Roberts to ask for his endorsement of the valuation, but even then he would not necessarily have known that Hill as distinct from Westpac would rely on it. He might have given contemplation to that possibility but Esanda Finance speaks not of “might” but of “would”.
Adoption of page 5
The applicants also submitted that Roberts was negligent in extrapolating a value for the hotel based on trading figures which did not represent the true position of the hotel at the time of valuation, given the significance of the trading figures in the method of valuation used. Roberts conceded in his evidence that at the time he carried out his valuation, in July 1991, he believed that the trading figures represented the current state of trading at the hotel. This was not in fact the case as the trading figures at that time were and had for some time been substantially lower than the average of $18,450 contained in the valuation.
Relevant to this submission is the following extract from the evidence of Mr Penklis, the chartered accountant called by Roberts:
And if it were obvious that there was a significant downwards trend or a decline in the business then it would be unsafe to rely on past historical information without forming a view about the ongoing nature of the downwards trend?---That is correct.
Indeed, if there is a downwards trend taking place, an average over an 11 month period, to take an example, which precedes the date of the valuation, would be inherently unreliable in forming an assessment at the date of valuation of expected future maintainable earnings?---It may be.
This matter was also highlighted in the evidence of Mr Brady, a valuer called to give expert evidence on Roberts’ behalf:
And whether it was that source of information or some other source of information, if he became aware of information which suggested that the average figure given to him might not be representative of the trend at the date of the valuation, then he would stop and pause, would he not?---Yes.
And he would not necessarily accept the average given to him as being the appropriate figure on the basis of which he should capitalise the maintainable earnings of the business?---That is quite possible, yes.
Because the object of the exercise in such a valuation as that which you are describing, is to make a reasoned assessment, an intelligent assessment on the part of the valuer as to what are the achievable or maintainable earnings of the business at the date of the valuation?---Yes.
And a valuation which just capitalised a previous average without considering the current trend might create a misleading impression to the reader, night it not?---It is possible. Another way of looking at it would be to simply adopt the old figure and use a higher capitalisation.
I did not understand this evidence to mean that a valuer would be negligent if he came to a valuation on trading figures given to him by someone who would be expected to know and convey the truth but which were in fact false. Otherwise there would seem to fall on valuers the task of auditing every set of trading figures given to them before completing their valuations of businesses. Or it would require valuers to make assessments of future trends in particular businesses or industries, even down to the specific expectations of these individual businesses in the light of such unknown future alterations to the present circumstances as nearby competition, likely local developments, when a local freeway/tollway might be built, or how parking conditions might change and the like.
My conclusion is that no duty of care for negligent misstatement arose between Roberts and the applicants and their losses did not arise from any misleading and deceptive conduct on his part. The applicant’s claim against him, both under the FTA and in negligence, must therefore fail. There is accordingly no need to consider the questions raised by the disclaimer and the claim of contributory negligence.
CROSS CLAIMS
As Roberts is not liable for any damage suffered by the applicants under FTA or under the general principles of negligence, there is no need to consider his cross-claim against Tooth. Suffice it to say that but for Tooth’s provision to Hill of the single page of trading figures from Roberts’ valuation, there would have been no claim at all against Roberts. For the reasons already set out, there is no evidence to support Tooth’s cross claim against Roberts and that cross-claim is dismissed.
DAMAGES
It is now well settled that the measure of damages under the TPA in cases where misleading and deceptive conduct induced the purchase of a business is the difference between the purchase price and the true value of the business at the time of purchase, together with any consequential losses: Kizbeau v W.G. & B. Pty Ltd (1995) 184 CLR 281. To calculate damages, it is therefore incumbent upon the Court to determine the true value of the business at the time of purchase.
In this matter the applicants offered two methods. The first would require the Court to undertake a valuation process of its own using the methodology explained in the evidence of the parties’ experts. The first step is to determine an appropriate figure for average weekly takings. According to the applicants, the difference between this amount and the average weekly takings used in Roberts’ valuation ($18,450) is then used to determine the resultant diminution in value of the business using the methodology of Roberts’ expert accountant, Mr Penklis. In my view, this is not an appropriate task for the Court to undertake, as there is no evidence as to the appropriate amount to be used for average weekly takings. The applicants submitted that $16,000 was an appropriate figure to use. This figure was derived from the actual average weekly takings for several disparate periods both before and after the sale of the hotel to Hill. However, there was no expert evidence as to the proper basis for determining such a figure and no argument as to the appropriate period over which weekly takings should be averaged to reach it. Any attempt by the Court to determine a weekly takings figure to be used as the basis for calculating the valuation of the hotel would simply be a guess. Similarly, the Court is not in a position to determine the capitalisation rate to be applied in the valuation process. It was open to the applicants to call expert valuation evidence to establish the true value of the hotel at the time of sale. They did not do so. The Court is therefore not in a position to make a judgment based on its own valuation supported by the necessary evidence from the parties.
The respondents called for a dismissal of the whole claim for damages on the basis that there is in fact no evidence at all on which the Court can form a view as to the true value of the hotel at the time of sale. This is not entirely accurate. There is authority that the resale price of a property is prima facie evidence of its true value which can be used in the assessment of damages, despite the fact that the re-sale price is irrelevant per se: see Macgregor on Damages (Fifteenth edition, 1988, at para 904), quoting an 1869 English case. Such foreign vintage does not provide an entirely satisfactory basis for calculating damages but in the absence of any other material, it is the only reasonable course open to the Court. It supports the applicants’ second method for determining the true value of the hotel, namely to use the re-sale price achieved by Hill in 1994 as evidence of its true value in 1991.
The applicants resold the property for $1,200,000 in 1994. Assuming some inflation in the intervening 3 years, and allowing that the 1991 valuation was inflated because it was based on the wrong trading figures, I have decided to take $1,100,000 as the true value of the hotel at the time Hill purchased it in 1991. The difference of $250,000 between the price actually paid ($1,350,000) and the true value is therefore the damage suffered by the applicants. The consequential losses associated with this loss were identified by the applicants and were not disputed by the respondents. They include excess stamp duty on the conveyance, excess stamp duty on the mortgage, the bill discount on excess borrowing and excess overdraft interest. Based on the diminution in value of $250,000, these consequential losses amount to a round figure of $110,000. The total of these figures is therefore $360,000, but a reasonable allowance should be made for adverse contingencies including the possibility that too generous assumptions have been made due to the absence of evidence. I fix the damages accordingly at $270,000. Pursuant to section 51A of the Federal Court Act and Schedule J to the Supreme Court Rules, interest is payable for the period from 14 October 1991 to 4 June 1998. I assess interest at $130,000. Judgment will therefore be entered in favour of the applicants in the amount of $400,000.
COSTS
The applicants were successful in their application against Tooth but failed against Roberts. In my view this is an appropriate case in which the unsuccessful respondent should bear not only the costs of the applicants arising from their claims against Tooth, but also their costs arising from their unsuccessful claims against Roberts, on the basis that the conduct of Tooth caused the applicants to join Roberts to the action. Roberts was successful in avoiding liability for any damage to the applicants and he should therefore recover his costs. As his involvement in the matter was brought about by the actions of Tooth, Roberts’ costs, both of the cross-claim against Tooth and of the substantive proceedings by the applicants, should be borne by Tooth. I shall make orders to give effect to these conclusions.
I certify that this and the preceding thirty-three (33) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Einfeld
Associate:
Dated: 4 June 1998
Counsel for the Applicant: M.A. Pembroke SC Solicitor for the Applicant: Sowden McInnes Akerman Counsel for the First Respondent: S.G. Finch Solicitor for the First Respondent: Phillips Fox Counsel for the Third Respondent: D.L. Davies SC Solicitor for the Third Respondent: Colin Biggers & Paisley Date of Hearing: 2-3 June 1997 Date of Judgment: 4 June 1998
0
5
0