Keeley v Horton

Case [2016] QCA 68

SUPREME COURT OF QUEENSLAND

CITATION:

Keeley & Ors v Horton & Anor [2016] QCA 68

PARTIES:

WILLIAM IAN KEELEY
LEANNE FAYE KEELEY
(first appellants)
MARINE WAREHOUSE PTY LTD
ACN 066 954 112
(second appellant)
v
ROBERT WILLIAM HORTON
DESLEY MARGARET HORTON
(respondents)

FILE NO/S:

Appeal No 12298 of 2014
DC No 3231 of 2007

DIVISION:

Court of Appeal

PROCEEDING:

General Civil Appeal

ORIGINATING COURT:


District Court at Brisbane – [2014] QDC 260

DELIVERED ON:

22 March 2016

DELIVERED AT:

Brisbane

HEARING DATE:

9 June 2015, supplementary written submissions dated 18 June 2015

JUDGES:

Holmes CJ and Peter Lyons and Burns JJ
Separate reasons for judgment of each member of the Court, each concurring as to the orders made

ORDERS:

1.   Leave to appeal is granted to the first appellants.

2.   The appeal by the first appellants is allowed in part by:

(a)   Varying paragraph A(1) of the judgment pronounced on 24 November 2014 by deleting “$100.00” and substituting “$96,367.00”; and

(b)   Setting aside paragraphs B(1) and B(2) of the judgment pronounced on 24 November 2014.

3.   The application by the second appellant for leave to appeal is refused.

4.   Within 14 days, the parties shall file and serve written submissions with respect to:

(a)   The interest to be awarded with respect to the judgment amount as varied by paragraph 2(a) above;

(b)   The costs of the trial; and

(c)    The costs of the applications for leave to appeal and the appeal.

CATCHWORDS:

APPEAL AND NEW TRIAL – APPEAL - GENERAL PRINCIPLES – EXCESSIVE OR INADEQUATE DAMAGES – DAMAGES INADEQUATE – where the first appellants purchased the issued share capital in the second appellant from the respondents – where in respect of that purchase the respondents breached a warranty that affected the calculation of the purchase price – where nominal damages were awarded for the breach on the basis that the appellants had suffered no actual loss – whether the damages assessed at first instance were inadequate

APPEAL AND NEW TRIAL – APPEAL - GENERAL PRINCIPLES – EXCESSIVE OR INADEQUATE DAMAGES – DAMAGES INADEQUATE – where the first appellants purchased the issued share capital in the second appellant from the respondents – where in respect of that purchase the respondents breached a further warranty by failing to disclose an unresolved claim for compensation made against the second appellant – where the loss claimed for that breach related to increased WorkCover premiums payable by the second appellant – whether the damages assessed at first instance were inadequate

APPEAL AND NEW TRIAL – PROCEDURE – QUEENSLAND – WHEN APPEAL LIES – FROM DISTRICT COURT – BY LEAVE OF COURT – where judgment at first instance was given for an amount less than the Magistrates Courts’ jurisdictional limit – where an error was made in the assessment of damages which, if not made, would have resulted in an award of damages to the first appellant in excess of that limit – whether the Court should exercise its discretion under s 118 of the District…

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AGLC
Keeley v Horton [2016] QCA 68
Case
[2016] QCA 68
Decision Date

CaseChat Overview and Summary

The appeal before the court concerned the adequacy of the damages awarded to the Keeleys following the Hortons' breach of warranty. The court was also required to consider whether leave to appeal was necessary and, if so, from which court. The first appellants, Mr and Mrs Keeley, were successful in their appeal against the damages awarded for the breach of warranty related to the loss of the Hy-Drive distributorship. The primary judge had awarded nominal damages of $100 to the Keeleys, finding that they had suffered no actual loss as a result of the Hortons' failure to disclose the distributorship loss. The court found this assessment of damages to be inadequate.

In assessing the adequacy of the damages, the court considered the evidence provided by the expert witness, Mr Williams, who had valued the business and the impact of the distributorship loss on that valuation. Mr Williams' evidence indicated that the loss of the distributorship resulted in a decrease in the value of the business by $98,000. The court held that the primary judge erred in finding that the Keeleys had suffered no actual loss and that the award of nominal damages was inadequate. The court varied the damages award from $100 to $96,367, the amount representing the loss suffered by the Keeleys due to the Hortons' breach of warranty.

Regarding the costs, the court set aside the orders made by the primary judge, finding that the costs orders were not appropriate in the circumstances of the case. The court granted leave to appeal to the first appellants and refused the second appellant's application for leave to appeal. The parties were directed to file written submissions on the interest to be awarded on the varied judgment amount, the costs of the trial, and the costs of the applications for leave to appeal and the appeal.

Orders

Orders of the court

1. Leave to appeal is granted to the first appellants.

2. The appeal by the first appellants is allowed in part by:

(a) Varying paragraph A(1) of the judgment pronounced on 24 November 2014 by deleting “$100.00” and substituting “$96,367.00”; and

(b) Setting aside paragraphs B(1) and B(2) of the judgment pronounced on 24 November 2014.

3. The application by the second appellant for leave to appeal is refused.

4. Within 14 days, the parties shall file and serve written submissions with respect to:

(a) The interest to be awarded with respect to the judgment amount as varied by paragraph 2(a) above;

(b) The costs of the trial; and

(c) The costs of the applications for leave to appeal and the appeal.

Background

Background to the litigation

By this appeal, the adequacy of the damages awards is challenged as well as the orders made as to costs. There is also a question whether leave to appeal is required and, if so, from which court, but it is convenient to first examine the substance of the appeal.Material facts In late October 2004, Mr and Mrs Keeley learned that the business was for sale. At that time, Mr and Mrs Horton were the directors of the company and together owned 74 per cent of the issued capital. Two employees of the company, Mr Liu and Mr Smith, owned the remaining 26 per cent of the issued capital as to one-half each. Mr Ham, a chartered accountant in private practice, had acted for the company as well as the Horton family for almost 40 years. Over much the same period, he also acted for the Keeley family. Mr Ham was a central figure in the case, and not only because he acted for all parties in the transaction. He also provided a written valuation of the business that the parties accepted and then relied on, in reaching agreement regarding the purchase price. So, too, did the parties accept Mr Ham’s advice that it was preferable for the share capital in the company to be acquired by Mr and Mrs Keeley, as opposed to a purchase of the business alone, along with advice as to the overall consideration to be paid for the shares and how it should be paid. Then, Mr Ham prepared settlement figures for the completion of the sale including details of the amounts to be paid, and to whom, and attended on the settlement on 4 January 2005 at the company’s premises. Despite all of this, however, Mr Ham was not called as a witness at the trial. Be that as it may, Mr Ham’s valuation of the business was dated 9 December 2004 and was in the sum of $668,000.[5] It was initially provided to Mr and Mrs Horton but, two days later, Mr Ham provided a copy of it to Mr and Mrs Keeley.[6] In his covering letter dated 11 December 2004, Mr Ham recorded that he had met “with the parties concerned and they are happy to go ahead with the proposed sale using the Valuation figure” subject to adjustments for profits since 1 July 2004 as well as stock. He then advised Mr and Mrs Keeley that the sale could proceed in one of two ways; either by the company selling the business or by the shareholders selling their shares, with the latter being the “preferred option”. Under that option, Mr Ham advised that Mr and Mrs Keeley could acquire the whole of the issued capital for $663,744. This sum was said to have been comprised of $65,515 to purchase the shares and a loan to the company of $651,422 – a total of $716,937 – but it was then adjusted down for debtors, prepayments, creditors and taxation in amounts set out in Mr Ham’s letter. The primary judge found that, although Mr and Mrs Keeley were not constrained “to pay any specific sum”, the parties must be taken to have accepted “some advice to the effect of” the 11 December 2004 letter including the “specific stated figures” and to have acted accordingly.[7][5]ARB 1003.[6]ARB 1012.[7]Trial Judgment at 6 [16].

Evidence

Evidence Before The Court

The corollary to the primary judge’s finding that the consequences flowing from the business valuation as they applied to the acquisition of the company were “influential, if not decisive, in the final sums agreed”[79] is that if, as his Honour also found, the business valuation was premised on an inflated profitability scenario, Mr Ham would have arrived at a lower valuation and advised lesser amounts for the purchase of the shares had he known that the Hy-Drive distributorship had been lost. That this would have occurred not only accords with logic, it is confirmed by the hearsay accounts from Mr Ham that were admitted into evidence without objection. In Mr Charlton’s first report, Mr Ham’s statements that, had he been aware of the loss of the distributorship, he would have “amended his actions and advice in relation to the sale” and “made adjustments to his advice on the sale process” are recorded.[80] In the letter from Mr Ham to the solicitors for Mr and Mrs Keeley dated 16 January 2006, he stated that, if any of the trading figures were changed, that would have resulted “in either a greater or lesser valuation of the business, and therefore an increase or decrease in the goodwill figure.”[81] In Mr Williams’ first report, he recorded that Mr Ham had indicated in his letter to Mr and Mrs Keeley of 3 November 2005 that, had he been aware of the loss of the distributorship, his estimate of the business’ maintainable earnings would have been impacted and that this would have flowed on to his valuation of the business as well as the company.[82][79]Ibid 15 [59]. See also 15 [57].[80]Report of Mr Charlton dated 23 November 2010, Exhibit 18, [18] (ARB 1057),[33] (ARB 1059).[81]Report of Mr Williams dated 29 August 2013, Appendix 5 (ARB 928).[82]Report of Mr Williams dated 28 May 2007, [3.13] (ARB 812-813).The valuation evidence Mr Williams produced three reports,[83] and gave evidence in support of each.[84][83]Dated 28 May 2007 (ARB 807), 16 November 2012 (ARB 854) and 3 December 2013 (ARB 910).[84]On 17 October 2012 (ARB 127) and 25 August 2014 (ARB 249). In his first report,[85] Mr Williams’ approach to calculating the loss was to adopt the valuation method used by Mr Ham, namely, capitalisation of future maintainable earnings, and to use it to value the business on the footing that the Hy-Drive distributorship had been terminated. He did not value the company. Using the same capitalisation rate as Mr Ham had adopted, and an average EBIT of $134,000, Mr Williams arrived at a capitalised value for the business of $536,000. This was $132,000 less than the value arrived at by Mr Ham ($668,000) with the distributorship income included in the EBIT. Because of that, the two categories of net tangible assets identified by Mr Ham (totalling $571,633)[86] exceeded the capitalised value of the business and, therefore, the goodwill identified by Mr Ham of $96,367 was reduced to nil. Mr Williams accordingly adopted the sum of the included net tangible assets as the value of the business, which he rounded down to $570,000. The difference between that value and Mr Ham’s valuation was $98,000 which, Mr Williams opined, represented the loss suffered by Mr and Mrs Keeley in consequence of the non-disclosure of the loss of the Hy-Drive distributorship.[85]Dated 28 May 2007 (ARB 807).[86]Letter of Mr Ham dated 9 December 2004, 6 (ARB 548).

Decision

Reasons for decision

After a trial in the District Court at Brisbane, Mr and Mrs Horton were found to have breached both forms of warranty. Judgment was given in favour of Mr and Mrs Keeley in respect of the warranties as to earnings and in favour of the company in respect of the warranties that had been given regarding pending claims.[3] However, the primary judge determined that Mr and Mrs Keeley had suffered no loss in consequence of the breach of the earnings warranties and, for that reason, awarded only nominal damages ($100). The company did not fare much better, being awarded $271.48 plus interest by way of damages for breaching the claims warranties. His Honour then ordered that Mr and Mrs Keeley and the company pay 90 per cent of the costs incurred by Mr and Mrs Horton in the proceeding.[4][3]Keeley & Ors v Horton & Anor [2014] QDC 234 (“Trial Judgment”).[4]Keeley & Ors v Horton & Anor (No 2) [2014] QDC 260. By this appeal, the adequacy of the damages awards is challenged as well as the orders made as to costs. There is also a question whether leave to appeal is required and, if so, from which court, but it is convenient to first examine the substance of the appeal.Material facts In late October 2004, Mr and Mrs Keeley learned that the business was for sale. At that time, Mr and Mrs Horton were the directors of the company and together owned 74 per cent of the issued capital. Two employees of the company, Mr Liu and Mr Smith, owned the remaining 26 per cent of the issued capital as to one-half each. Mr Ham, a chartered accountant in private practice, had acted for the company as well as the Horton family for almost 40 years. Over much the same period, he also acted for the Keeley family. Mr Ham was a central figure in the case, and not only because he acted for all parties in the transaction. He also provided a written valuation of the business that the parties accepted and then relied on, in reaching agreement regarding the purchase price. So, too, did the parties accept Mr Ham’s advice that it was preferable for the share capital in the company to be acquired by Mr and Mrs Keeley, as opposed to a purchase of the business alone, along with advice as to the overall consideration to be paid for the shares and how it should be paid. Then, Mr Ham prepared settlement figures for the completion of the sale including details of the amounts to be paid, and to whom, and attended on the settlement on 4 January 2005 at the company’s premises. Despite all of this, however, Mr Ham was not called as a witness at the trial. Be that as it may, Mr Ham’s valuation of the business was dated 9 December 2004 and was in the sum of $668,000.[5] It was initially provided to Mr and Mrs Horton but, two days later, Mr Ham provided a copy of it to Mr and Mrs Keeley.[6] In his covering letter dated 11 December 2004, Mr Ham recorded that he had met “with the parties concerned and they are happy to go ahead with the proposed sale using the Valuation figure” subject to adjustments for profits since 1 July 2004 as well as stock. He then advised Mr and Mrs Keeley that the sale could proceed in one of two ways; either by the company selling the business or by the shareholders selling their shares, with the latter being the “preferred option”. Under that option, Mr Ham advised that Mr and Mrs Keeley could acquire the whole of the issued capital for $663,744. This sum was said to have been comprised of $65,515 to purchase the shares and a loan to the company of $651,422 – a total of $716,937 – but it was then adjusted down for debtors, prepayments, creditors and taxation in amounts set out in Mr Ham’s letter. The primary judge found that, although Mr and Mrs Keeley were not constrained “to pay any specific sum”, the parties must be taken to have accepted “some advice to the effect of” the 11 December 2004 letter including the “specific stated figures” and to have acted accordingly.[7][5]ARB 1003.[6]ARB 1012.[7]Trial Judgment at 6 [16].

Ratio Decidendi

Legal Principle Established

Full text does not contain this section.