Malabar RSL Sub-Branch Club Pty Ltd v RSL Custodians Pty Ltd
[2014] NSWSC 1016
•25 July 2014
Supreme Court
New South Wales
Medium Neutral Citation: Malabar RSL Sub-Branch Club Pty Ltd v RSL Custodians Pty Ltd [2014] NSWSC 1016 Hearing dates: 1-4, 7-9 July 2014 Decision date: 25 July 2014 Jurisdiction: Equity Division Before: Rein J Decision: See [84]
Catchwords: EQUITY - Commercial leases - Breach of a lease - Failure to rectify defects in accordance with obligations under the lease - Defendant admitted failure to rectify leaks was a breach of the lease - Failure to repair car park was a breach - Damages - Claim for loss of profits - Erroneous calculation of loss - Failure by plaintiff to establish loss - Insufficient evidence to support claim - Alternative assessment of damages - Loss not assessable on available evidence Cases Cited: Charltons CJC Pty Ltd v Fitzgerald (No 3) [2013] NSWSC 1945
Howe v Teefy (1927) 27 SR (NSW) 301
Mummery v Irvings Pty Ltd (1956) 96 CLR 99
NCON v Australia Limited v Spotlight Pty Ltd [2012] VSC 604
Payne v Parker [1976] 1 NSWLR 191
Water Board v Moustakas (1998) 77 ALR 193Category: Principal judgment Parties: Malabar RSL Sub-Branch Club Pty Ltd (Plaintiff)
RSL Custodians Pty Ltd (Defendant)Representation: Counsel:
G Parker SC/ R Vincent (Plaintiff)
C Harris SC/L Tyndall/M Avenell (Defendant)
Solicitors:
HWL Ebsworth (Plaintiff)
Bowen Legal (Defendant)
File Number(s): 2013/227548
Judgment
The plaintiff ("the Club") is a social and recreational club, operating at 22-24 Ireton Street, Malabar NSW ("the property"). The property is now owned by the defendant ("the Custodian") which is the trustee for the RSL Sub-Branch, and which became the registered proprietor of the property in November 2006.
Background to the dispute
The property has been used as a club since 1950 but the current lease between the Club and the then trustee of the Sub-Branch ("the 2003 lease") commenced on 1 January 2003 and ended on 31 December 2007. That lease contained an option to extend the lease for a further 5 years but the Club did not exercise the option for reasons which have not been explained. In 2011 the Club commenced proceedings against the Custodian claiming that the Club was entitled to lease the property without any time limit and to pay rent at a rate which it could afford. The Custodian contended that the 2003 lease had expired and the Club was on a holding over with either party able to terminate on 3 months' notice. Those proceedings, I was informed by counsel, ended with the Club's summons dismissed and an order that the Club pay the Custodian's costs but with agreement that the Club could remain in the premises until 31 December 2014. The Custodian has made clear to the Club that it has plans to sell the property and that it will not, under any circumstances, be extending the lease. It is not without significance to the issues in this case that the Club has since late 2007 had no long-term lease and that its occupation of the property could until the 2011 proceedings were settled, be terminated on 3 months notice, and thereafter that the lease would end on 31 December 2014.
The Club's case
In these proceedings the Club, (for whom Mr Parker SC and Mr R Vincent appear), claims that the Custodian (for whom Mr Harris SC, with Mr L Tyndall and Ms M Avenell appear) had failed to maintain the property in accordance with its obligations under the lease in a number of respects. The proceedings commenced in July 2013 as a claim for a mandatory injunction that the Custodian carry out the work necessary to repair the alleged defects but the Club later amended its claim to allege that it has, by virtue of the defects suffered significant trading losses. It has quantified those trading losses at $3.3 million for the period 1 January 2008 to 31 December 2014 (see [24] below). The Club does not now seek orders for repair of the defects and it seeks damages solely on the basis of its lost profits claim. Expedition of the hearing was sought, and obtained, on the basis that the Club will have to move out of the premises by the end of the year and if successful in obtaining a significant sum of money from the Custodian it will be able to put that money to securing a future for the Club in other premises whether as part of another club or otherwise. Having regard to the fact that the matter has been expedited I have endeavoured to provide the parties with judgment as soon as possible.
The Club called three witnesses in its case Mr Brett Gibson, the Chief Executive Officer of the Club since 2010, and, as an expert, Mr Peter McLean, an accountant who has had experience with registered clubs. Mr Gibson's affidavits of 22 July 2013 and 25 June 2014 were read and he was extensively cross-examined. Mr McLean's reports (two in chief and one in reply to the defendant's expert Mr Russell) were relied on and Mr McLean was extensively cross-examined. Mr Alan Rose, an engineer, was called as an expert by the Club and Mr Rose and the Custodian's engineering expert Mr Peter Broune prepared a joint report Exhibit E. There was short cross-examination of both of these witnesses but there was very little dispute between them.
The Custodian called Mr Russell as an expert accountant who had provided two reports and was cross-examined. Mr Russell who is a registered liquidator, also has had experience in the Club industry, including having been appointed to perform the function of the governing body of Ramsgate RSL Club by the Independent Liquor and Gaming Authority. The Custodian also tendered in its case a considerable number of the Club's documents.
The defects about which the Club complains fall into two categories: (1) leaks and (2) the state of the car park.
Leaks
Mr Parker identified the leak problems as:
(a) Water is leaking through the first floor roof "through a decommissioned air conditioning plant and other entry points created by rust and corrosion to the junctions of the housing between the decommissioned air-conditioning ducts and housing which are fixed to the first floor roof as well as the flashing to the first floor roof".
(b) Ground floor leaks caused by:
(i) the lead flashing between the metal roof and the yellow brick being in an unsatisfactory condition;
(ii) Inadequate sealing of the roof and duct system; and
(iii) Rivets having become weakened and corroded.
para 12 of the Plaintiff's Opening Submissions of 26 June 2014 ("POS").
Mr Gibson, Chief Executive Officer of the Club since 2010, in his first affidavit of 22 July 2013 gave the following evidence, much of it supported by the photographs in Exh A, about the leaks:
(1) That when it rains water leaks into the ground floor, first floor and in the past into the auditorium of the Club (see paras 26 and 27 of his first affidavit of 22 July 2013, CB p 36).
(2) Since 2010 the area where water has entered the premises has become significantly worse as the ground floor and first floor ceilings have begun to crumble and deteriorate.
(3) Water has leaked into the first floor IT room requiring permanent tarpaulins to be fixed to the ceiling.
(4) The hallway in between the Boardroom and IT room has damage to the ceiling.
(5) The second floor roof in the past also leaked water into the auditorium area.
(6) During very heavy rain in June 2013 water leaked into the Club requiring 8-10 buckets to be placed around the Club and constantly emptied; he estimated more than 200 litres of water was required to be emptied per day from the buckets around the Club during period of heavy rainfall.
(7) Buckets are left out overnight after closing whenever inclement weather is predicted.
(8) During periods of rain he affixes a sign at various locations in the Club.
(9) There has been no lighting in the IT room since 19 April 2011.
(10) The car park has numerous potholes and cracking (see 10.1-10.12 of Mr Broune's report, pp 133-140).
(11) One of the four light poles that has collapsed (see 10.32-10.33 pp 213-214 of Mr Broune's second report and figure 10.1 at p 134).
(12) The current air conditioning was installed in December 2002 before the 2003 lease.
(13) The Club had, as at the date of his affidavit, 2,700 members.
Mr Gibson, in his affidavit in chief, made no mention of any impact on trading revenue (gaming or bar). In his affidavits in reply Mr Gibson gave evidence relevant to the condition of the roof directed particularly to questions of responsibility of the Custodian for the roof and decommissioned air conditioning unit. Mr Gibson deposed to the fact that the Club replaced the carpet in the gaming room area in 2007, the whole of the ground floor in 2009, the bistro in May 2011 and that it continued to repair portions of the carpet and or spot clean the carpet following periods of rain or portions of the ceiling collapsing. In his affidavit Mr Gibson does not expressly say that the new carpet was installed because of water damage to the old carpet and there is no evidence to support that conclusion.
Mr Gibson describes steps taken to divert water: see para 17 of his second affidavit, and these are identified by reference to photographs attached to Mr Rose's affidavit (as well as those in Mr Gibson's earlier affidavit). In para 18 he deposes to the steps taken to improve the amenity of the Club - the placing of the tarpaulin referred to before, replacement of LED lights, installation of a coffee machine, a JP service, a free Christmas kids show, kids bingo in school holidays, a poker night and the introduction of new marketing material. He does not give dates for these steps. He says that since he began with the Club he has had the practice of replacing stained or water damaged tiles every 3 to 6 months depending on rain and wind conditions.
Mr Gibson deposed to the fact that there was a 20% increase in the number of members following the introduction of a drive whereby membership was reduced to $5.00 (per annum I assume), and increased prices for non-members and raffle tickets and promotions for members. Importantly at para 30 of his second affidavit he said:
"In circumstances where any new furniture or painted areas of the Club may be ruined following one period of heavy rainfall, the Club has not renovated the internal areas of the Club".
At para 49(11) of his affidavit (CB p 41), Mr Gibson gave evidence of a reduction in bar revenue.
The Custodian does not dispute that there were leaks and in closing submissions the Custodian admitted that its failure to rectify the leaks in the areas identified was a breach of the lease removing the need for determination of the question of whether the damage was structural or not and its precise cause. The Custodian also accepts that the Club has suffered some damage as a result of the leaks but it disputes that the Club has suffered lost revenue as a result of the leaks or established what its loss is.
Car park
The Club claims that the asphalt surface of the car park has deteriorated to the point that it has broken up and the light poles in the car park are corroded. One of the light poles collapsed due to the severe corrosion at its base.
The Custodian accepts that the car park surface has needed repair for a long time but does not accept that it is responsible for repair or that the Club has suffered the damage claimed by the Club.
The car park surface has depressions in various locations. There are photographs of these depressions or what has been described by Mr Broune as "potholes" shown in photographs annexed to Mr Broune's report. I am satisfied on the evidence of Mr Rose and the photographs annexed to Mr Broune's report that the car park surface has not been properly maintained and that it contains depressions or potholes which create a potential hazard to pedestrians. I shall deal below with the question of whether the Custodian is responsible for the failure to maintain. When the light pole fell is not in evidence, and there is no evidence that the Club or the Custodian had, prior to the commencement of the hearing, taken any steps to assess the risk of another pole collapsing. No restrictions have been placed on the use of the car park by the Club or the Custodian. During the hearing I encouraged the parties to make an assessment as to whether any of the remaining poles are in imminent danger of collapse and arrangements were made for an inspection to take place. Whilst members using the car park might have been endangered there is no evidence of any complaints to the Club or CEO concerning the potholes other than a letter from the Sub-Branch Secretary Mr Perry (dated 26 June 2011, see Exh C4 p 1046).
The Club submits that the car park surface is part of the structure of the car park and that the Custodian has the obligation to keep it in a good state of repair. Clause 8.1(b) provides:
8.1 The Lessor must:
...
(b) maintain in a structurally sound condition the Building.
Clause 1.1 provides:
"Building" means any building and/or structures existing now or which may be erected after the Commencement Date on the Land.
Clause 8.3 provides:
Notwithstanding the provisions of sub-clause 8.1(b) the Lessee must perform any structural work required to the Premises arising from the use of the Premises at the Lessee's cost but only in accordance with the written directions of the Lessor, and must not otherwise perform any structural works.
The Custodian's answer to this part of the claim is that the Club is required to perform structural work that arises from the use of the premises. The Custodian submits that the problems with the car park arise from the use of the premises by the Club and that by its letters of 6 October 2006 (p 1047) and 8 July 2011 from the Sub-Branch (p 1053) the Custodian has directed the Club to perform the structural work i.e. repair the car park surface. The Custodian also claims that it arranged for the work to be done and the Club refused access to the contractor to undertake the repair work it also claims that it is entitled to reimbursement of any repair cost from the Club. The Custodian did not resist the proposition that the surface of the asphalt was structural.
In my view the Custodian was required to maintain the surface of the car park in a good condition (whether or not it could debit the expense of repair to the Club) unless it could establish that the Club had the responsibility under clause 8.3 because the problems arose from the Club's use.
The Custodian has failed to establish that the problems with the car park surface and the fallen light pole arose from the Club's use of the car park in the lease period. I should also note that Mr Parker objected to the Custodian being able to maintain an argument of tender of performance when no such defence had been pleaded. I accept that submission as well. Further the Custodian has, by the letters to which the Custodian has referred, not in terms, directed the Club to do anything.
Conclusion on the leaks and the car park surface
The evidence of Mr Gibson to which I have referred and the photographs and video (see disc at Exh C7) establish that the Club has suffered numerous leaks when there is heavy rain and has, since 2010 at least, suffered significant staining and some ceiling damage.
I accept that the Club has, in certain locations, had to place plastic or tarpaulins over bulkheads and that when there has been heavy rain it has had to place buckets in various locations and I accept that it has suffered damage to its IT room and the nearby hallway and inconvenience as a result of the electrical problems caused to the lighting in that room resulting from water ingress in the roof. Although those latter areas are not public areas there is clear evidence of leaks staining and the tarpaulins/plastic visible in major public areas of Club patronage.
The Custodian took the view that the repair of the roof was the responsibility of the Club - it seems at least in part because the Club believed that a $30,000 discount it had given to the Club (or believed it had given to the Club) was relevant to that matter. I refused leave to the Custodian to advance material relevant to that point on the fifth day of the hearing as the point had not been raised prior to that and the Club complained of prejudice to its position by such an argument being permitted to be advanced so I do not need to determine whether the Club's assertions in that regard are correct.
I shall in the balance of these reasons refer to the leaks identified at [7] above and the problems with the car park surfaces identified at [13]-[15] above and the defective light pole as "the defects".
The Club's loss of profits claims
The Club claims that from 2008 it has suffered significant damage as a result of the failure of the Custodian to repair the defects leading to a significant loss of earnings of the Club over the period 1 January 2008 to the present day, which the Club now quantifies at $2,091,593 (lost profit on gaming revenue) and $414,783 (lost profit on bar revenue) i.e. until December 2013 (the Club operates on a calendar year financial basis) and another $500,000 for lost gaming revenue in 2014 and another $300,000 for lost bar revenue in 2014 i.e. a total of $3,306,376. That figure is said to be the profit element of earnings lost by the Club as a result of the effect of the defects. The plaintiff relies on the expert report of Mr McLean of 26 June 2014 (CB 369), although the Club in arriving at the figure accepts a reduction from the amount postulated by Mr McLean and adopts the calculations of Mr Russell, the defendant's expert, in two respects which I detail below.
The Club points to its revenue from the period 2008 to 2013 and to the fact that that gaming revenue shows a significant and continuous decline over the period. The gaming revenue is summarised as part of a table at p 71 of Exhibit B ("CB"), and can be seen in the aide memoire MFI 3. The bar revenue has also suffered an overall decline in the same period but one not as dramatic as that in the gaming area see CB 71 and MFI 3 also.
Mr McLean, in his report, approached the question of lost revenue by comparing the actual revenue of the Club for gaming and bar to the figure he calculated it would have earnt. To arrive at a figure of anticipated earnings he accepted that, having regard to the fact that on 1 July 2007 a smoking ban was introduced which prevented patrons from smoking indoors in clubs and pubs in NSW, there was to be expected a decline in Club revenue because the contribution of poker machine revenue is a significant component of all clubs' revenue and there is a strong correlation between smoking and gambling.
Mr McLean assessed the likely downturn in the Club's revenue as a result of the smoking bans by examining the average decline in revenue of all licensed clubs in the Randwick Local Government Area ("Randwick area"), identifying that decline at 7.3% (CB p 70) and then reducing the 2006 income of the Club by that percentage to arrive at the figure for 2007 and he used the same figure for each year until 2013 as the prospective revenue for each of the following years. He then reduced the revenue to arrive at a lost profit figure by applying a standardised cost of sales for each of gaming and bar revenue.
Mr McLean expressed the following views:
"7.0 Calculation of Loss
Background - Factors for a Club to Remain Competitive
7.1 In my 30 years' experience in the hospitality and gaming industry, I have observed that the industry is very competitive, with registered clubs having to compete against all leisure activities to maintain/drive visitation and therefore ensure their operations are viable.
7.2 It is my observation that cubs now have to compete against other clubs, hotels, small bars, restaurants even the large shopping malls that now provide food, beverage and entertainment.
7.3 In my opinion, for a club to remain competitive it must have "five star" premises that are regularly upgraded (as a general rule every five years), an up to date gamin installation, excellent customer service and a targeted marketing strategy that links to the community. In my observation, the following clubs in the vicinity of the Club, have carried out significant upgrades during the period covered by this report:
7.3.1 Eastern Suburbs Leagues Club;
7.3.2 Souths Juniors;
7.3.3 Maroubra Seals; and
7.3.4 South Sydney Graphic Arts Club.
7.4 It is my opinion that quality premises and adequate/safe car parking are key ingredients to a club's offering and if these are not up to a similar standard as to other venues in the catchement area of a club it will erode a club's trade.
7.5 This position can no more be highlighted than in the case of the Club. The Club is at a significant disadvantage to competing venues due to the physical state of the premises and car park.
7.6 In my 30 years' experience in the hospitality and gaming industry, a club's bar and gaming revenue is heavily reliant upon ensuring that the particular venue has attractive premises. In my observation, where attractive premises are not present, a club will struggle to maintain its membership and patronage.
7.7 As contained in the Club's annual reports, it is evident that the Club has lost more than 1000 members between 2006 and 2012, with the Club having 3,642 members in 2006 and 2,555 in 2012.
7.8 Damage to the Club's Trade
7.8.1 The smoking bans which were the result of the implementation of the Smoke Free Environment Act 2000. I have calculated the impact of the smoking bans on the gaming trade of the Club based upon the overall decline in gaming in the Randwick Local Government Area (LGA) and have deducted this from my calculation of the overall loss for the Club;
7.8.2 The state of the Club's premises and car park. "
In section 8 of his report Mr McLean addressed the question of "Other Possible Reasons for the Club's Loss of Trade" being:
(i) Impacts of regulation changes
(ii) Gaming regulation
(iii) Federal and State environmental legislation
(iv) The fact that the Eastern Suburbs of Sydney have had a larger percentage decline in gaming machine turnover and revenue as a result of the bans compared to the Sydney average since the bans
(v) Metered gaming revenue
"While many venues in various areas of New South Wales have since recovered to pre-smoking ban gaming turnover levels, there are some venues that have not been able to adjust their facilities to the new non-smoking era and thus have not recovered"
(vi) Net gaming revenue
"While turnover is a good indicator of activity; a venue cannot 'bank turnover'. This it is necessary to look to the net clearances (net gaming revenue after payouts) each venue achieves. This is known as the retention to venue.
The impact of the smoking bans was generally the greatest during the first year of the smoking bans thereafter clubs progressively started to claw back lost gaming revenue."
(vii) Randwick area trends post bans
(viii) Club's poker machine revenue trends
(ix) Club's market share in Randwick area
(x) Net gaming revenue
(xi) Net profit per EGM (electronic gaming machine) per day
(xii) Competitors
(xiii) Taxation of gaming machines
(xiv) Industrial relations
(xv) Operational efficiency
(xvi) Wage costs
(xvii) Advertising, Entertainment, Marketing and Promotion costs ("AEMP")
(xviii) Overhead costs
He said at 8.9.5:
"In summary:
In my experience, I would have expected the Club's gaming results to be relatively consistent with its main competing clubs. I would have expected the Club to have a relative decline in its state gaming profit ranking of approximately 25 positions rather than a decline of 81 positions."
He expressed the view that with smoking bans there was, across the industry, a tendency for visitation levels to licensed venues to increase "and often food and beverage income of those venues tended to increase to levels about that experienced prior to the smoking bans", which he noted was also the case with the Club in 2007. He said that:
"However, from 2008 onwards the bar trade of the Club declined significantly which could not be directly attributed to the smoking bans or any other specific reasons, other than the continuing deterioration of the condition of the Premises".
He also said at 8.9.8:
"Comments on Impact of Smoking Bans on the Club's Bar Trade - 2006 to 2013 Years
In summary:
· It is my opinion that the smoking bans should not result in an erosion of the bar trade of the Club in its own right.
· The data from CDOL (Annexure 4) highlighted that both food and beverage income for clubs in their database increased after the smoking bans. Particularly food in which sales increased over 10% at September 2007 with bar sales increasing some 1.98% for the same month.
· Certainly the worsening condition of the auditorium and its ultimate closure would have certainly negatively impacted on the bar trade of the Club.
· It is my opinion that the decline in bar trade is due to the overall condition of the premises and not as a result of the changes to smoking in licensed premises."
And at 8.12.1:
"In my opinion the Club has not been able to maintain market share and has suffered a reduction in revenue due to the poor state of its premises.
The Club appears to be making best endeavours in mitigating this damage by discounting beverages and higher levels of promotions to attract patronage. It is my observation that the Club is attempting to 'buy trade' by lowering the price of beverages and increasing its promotions."
In short, and confirmed by his summary at 8.14, Mr McLean opined that the losses suffered in gaming and bar revenue were, after exclusion of the smoking bans effect, the consequence of the poor state of the premises.
The Custodian's response to the Club's case on loss of profits
The Custodian relied on two reports of Mr Russell, both dated 10 June 2014 (at Tabs 14 and 15 of CB), and a considerable amount of documentary material which called into the question the bona fides of the Club's claim that it had lost revenue as a result of the defects. Mr Russell's report attacked a number of aspects of Mr McLean's report, namely:
(1) That Mr McLean had, in assessing the impact of smoking bans, derived a 7.3% average for all the clubs in the Randwick area, whereas according to Mr Russell he should have had regard to the decline in revenue of the clubs comparable in size by reference to poker machine numbers, which would have produced a higher figure of decline than the average. Mr Russell explained that the larger clubs in the Randwick area did not suffer the gaming loss that the average figure produced and as an example he recalculated the average loss for the Randwick area without the three largest clubs producing a 25% downturn rather than 7.3% as used by Mr McLean of itself reducing Mr McLean's figure by more than $1.5 million: see CB p 313, para 8.2.9. Mr Russell did not (and nor did Mr McLean) calculate the downturn figure that clubs of comparable size would produce.
(2) That Mr McLean had, using the 7.3% reduction, derived a base figure for expected revenue for 2008 and each year thereafter rather than utilising the actual decline for the Randwick Area average (assuming that to be correct) on a year-by-year basis, which made the figure derived erroneous, see CB pp 313-315 and T169.
(3) That Mr McLean had incorrectly determined (on his own approach) a bar figure by using an incorrect formula deriving $250,000 when in fact the figure should have been $414,783 on Mr Russell's calculation - a conclusion of Mr Russell, it will be appreciated, favourable to the Club.
(4) When Mr McLean recalculated the figure in (2) above in purported accordance with Mr Russell's suggested approach he calculated a higher figure than that which he had previously derived. Mr Russell explained why, at T 181.25-48 in his opinion, that new recalculation was itself flawed.
(5) Mr McLean in calculating the gaming loss applied an across the board reduction for cost of sales by using the Club's divisional average. Mr Russell contends that since the tax on gaming revenue is subject to thresholds and the tax rate increases above certain fixed levels that is a figure which can, and ought, be calculated based on the projected earnings derived by Mr McLean rather than treated as part of average fixed costs.
(6) That Mr McLean had not taken into account many factors which were revealed by the Club's own records and which, according to Mr Russell, seriously undermined the reliability of Mr McLean's conclusion that the smoking bans were the only factor to reduce the Club's revenue other than the poor amenity of the Club.
To deal with what he regarded as errors in Mr McLean's calculation of loss (as opposed to the underlying methodology) Mr Russell in his first report recalculated the figures using Mr McLean's general approach (without accepting the correctness of that approach) and arrived at a figure of $1,432,184 for the 2007-2013 gaming loss and $414,184 for bar revenue, making a total loss of $1,846,968.
The Club accepted Mr Russell's approach in (2), (3) and (4) above and applied the adjustment to arrive at the claimed figure for 2008-2013 which I have set out in [24] above. This approach expressly eschewed any claim for lost profits in 2007 treating all losses in 2007 as a consequence of the smoking bans even though the bans commenced in July 2007 and the Club claimed that there were some defects from 2006: see T328.14-31.
This left unresolved the following issues in respect of the calculation within the McLean approach:
(1) Should the figure for each years' average smoking ban loss be derived from all clubs in the Randwick area or only from clubs of a comparable size?
(2) Should the gaming tax be assessed separately in assessing the cost of sale?
Mr Russell did not however put forward any calculation of the loss which he would ascribe to the Custodian's failure to rectify the defects.
It also needs to be borne in mind that both Mr McLean and Mr Russell were asked to assume certain facts. Not all of the facts which Mr McLean was asked to assume were given to Mr Russell as assumptions that he was asked to make in preparing his report.
In order to make out its case the Club must establish that the Custodian failed in breach of its contractual duty to rectify the defects and that the failure to rectify the defects has caused loss and damage to the Club. The loss and damage which the Club advances is that it has, in the period 2008 to 2013, lost revenue and hence profit because of the defects, and will lose revenue and profit until December 2014 as well.
In Charltons CJC Pty Ltd v Fitzgerald (No 3) [2013] NSWSC 1945 at [6] I summarised what is required in this type of case including [6](2):
"What is required, in effect, is a comparison of the position in which the plaintiff actually is placed (by reason of the breaches) and the position it would have been if the breaches had not occurred: Commonwealth v Amman Aviation (1991) 174 CLR 64, 99; Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1, 11-12".
which the Custodian submitted (and the Club did not in final submissions dispute) applies here.
On this approach, to establish the lost revenue (from which the profit is derived) the Club has sought to establish (on the balance of probabilities) what it would have earnt (or at least been likely to earn) if there had been no unrepaired defects.
Matters relevant to the Club's ability to earn revenue quite apart from the defects
The Custodian pointed to numerous documents created in the period 2006 to 2012 in which Board members and the CEO report on problems that the Club is facing and even communications from the Club to the Sub-Branch which refer to factors impacting on the Club's performance and which problems are unrelated to the defects.
Mr Gibson, in response to a query by a director at a Board meeting of 21 November 2011 as to the alarming drop in gaming revenue at a time when another director reported that trading at other large nearby clubs was up replied: (see Exh C5 Tab 235 pp 1166-1167)
(a) "All the Clubs compared to Malabar are much larger."
(b) "Most of the Clubs in the area had been renovated and Malabar RSL is possibly the most dated venue in the area (cannot change this until the court case is settled)."
(c) "Malabar RSL has the worst designed outdoor gaming area that the CEO has seen and again this cannot be addressed until after the court case."
(d) "A lot of our members are self-funded retirees and are not spending as much with the current political and economic uncertainties."
(e) "Sub Branch is still doing an incredible amount of damage to the Clubs trade, with lies and stories being spread through the community."
(f) "Some directors are also concerned about levels of service and attitude from some staff."
Mr Gibson has had 15 years experience in the registered club industry and must be taken as at November 2011 to have had a far better idea of what was occurring at the Club and the reasons for it than Mr McLean.
At a Board meeting in December 2007, at a time before the leaks issue had become as pronounced, Mr Lee is reported as having said:
"Stated that we need to get the club to start climbing, it is on a decline, Noted contributing factors to downturn, Smoking, Renovations, Tiredness of facilities - all levels run down, change of culture, Club image, aggressive marketing by competitors, current economics, cost of living. Noted the Board had to come up with ideas to help us improve."
See: Exh C2 Tab 68 p 525.
In the Defendant's Closing Submissions ("DCS") (para 10) handed up in Court on 8 July 2014, together with Document Oral Submissions ("DCSO"), the following items are collected from the documents pointing to factors identified as contributing to poor earnings:
(a) At a May 2006 Board meeting Trevor Grant said "the whole bottom floor needed to be renovated" and vice president Greg Shaw said "the whole building needed it." (Tab 34 p 325)
(b) At an August 2006 Board meeting president Arthur Strange said "the club was looking old and tired and renovations needed to take place 'especially in the members lounge' to get the club moving again." (Tab 36 p 340)
(c) In June 2007 CEO Paul Russell emailed to the RSL State Branch "I need to have a new lease in place before the bank would consider lending the Licensed Club funds to proceed with renovations, so the sooner we can reach an agreement the better." (Tab 54 p 440)
(d) At a September 2007 Board meeting Mr Strange said "as agreed at the last meeting the club would hold off on anymore renovations until we see how financial the club [is] after the effects of the smoking ban have bottomed out...need to be sure that the club could service a loan if we [were] to borrow." (Tab 63 p 468)
(e) Following Mr Lee's remarks in December 2007 above, he said "the Licensed Club needed a reassurance of lease and rent amounts. Noted if the Licensed club was going to spend big money it should ask for a 20 year lease when the money is spent on the building we know we are secure." (Tab 68 p 525)
(f) The Club did propose some ground floor renovations around early 2008, however, as was reported by a consultant to a Board meeting in January 2008 "Sorting out the problems with the Sub- Branch is a priority, Club needed a 5, 10, 20 year building plan." At this time, Mr Strange wrote to the Sub-Branch advising that "to reposition Malabar RSL in the current market a complete refurbishment program would need to be undertaken" to the first floor and auditorium, and that required a new, long lease for substantial capital investment. He repeated this to a Board meeting in February 2008. (Tab 73 p 541, Tab 75 p 547, Tab 78 p 586)
(g) At a March 2008 Board meeting Mr Lee said "renovations over the years had only been half assed jobs and were done just as a band aid solution" and "the club needs a long term lease, at least 15 years before it spends its members' money back on the building." (Tab 80 pp 596-597)
(h) At an April 2008 finance meeting Pam Theobald said "The Club needs a good clean, that downstairs smells like a brewery" and Mr Strange stated that " ...new carpet has been purchased and paid for but was not willing to put it down until lease, and any further renovations done". (Tab 88 p 628)
and at para 14(f) of the DCS:
On many occasions during 2012 and 2013 in his monthly CEO Report, Mr Gibson reported to the Board: "As the Club continues to fight the RSL business will continue to decline due to the fact that our competition is renovating (and) providing better facilities for members. Malabar RSL décor is terrible compared to most clubs in the area and until this issue can be addressed and rectified it will be extremely difficult to generate additional revenue." (Tab 244 p 1204, Tab 257 p 1234, Tab 262 p 1257, Tab 293 p 1390, Tab 296 p 1406, Tab 300 p 1424, Tab 306 p 1406, Tab 311 p 1482, Tab 338 p 1594, Tab 371 p 1691)
Further the minutes and reports (see [47](c), (e) and (f)) make it clear that the Board and the CEO were very conscious of the fact that the Club by January 2008 had no lease in place. The need for a long lease before substantial capital improvement be spent was emphasised by the Club to the Sub-Branch (see Tab 75 p 547) and the members were told much the same thing by Mr Gibson (see 2011 report at Exh 1). By 2011 the 2011 proceedings were on foot and not concluded, and were affecting the Club's attitude to expenditure, see for example: Exh 1, Tab 235, T148-149 and T289. Illustrative of the problem is the fact that the Club was considering moving a glass partition to expand the outdoor smoking area, a matter of considerable importance to countering the loss of revenue due to the smoking bans. At Tab 178 p 925 the following was included in the CEO's report of January 2011:
"The outdoor gaming area is expected to cost $50,000 and due to the current situation with the Sub Branch I have not asked for more detailed costing. Although this is not a great expense I can not justify any expenditure at the moment as our lease may be terminated with 3 months notice. Outside machines going better under the new configuration with new games".
(emphasis added).
The Club had been actively looking to merge with another club and moving to other premises (T47.4-46) and there appears also to have been a real concern as to whether the Club could meet the loan repayments on a substantial loan for renovation: see [47](d) above. The new lease proposed by the Custodian in 2009 was viewed as unfavourable to the Club because it was limited in the number of years offered and permitted the Custodian to end the lease on limited notice should it decide to demolish. There was concern about the Club's future and its viability whether at the premises or elsewhere and a number of possible steps to improve the Club were shelved pending the outcome of the 2011 proceedings.
This material is potentially relevant to:
(1) Whether the CEOs, including Mr Gibson and the Club's Board in the period 2008 to 2013 believed that the decline in revenue was attributable to the defects.
(2) Whether Mr Gibson's evidence that he was aware by 2011 that the Club was losing hundreds of thousands of dollars by virtue of the defects is truthful.
(3) Whether the Club was in fact losing revenue as claimed by the Club by virtue of the defects.
(4) Whether the Club would have renovated the premises had there had been no defects (i.e. whether the leaks were the reason that no renovation to improve the appearance of the Club had been undertaken).
(5) Whether the assumptions in Mr McLean's report, express and implied, have been made out.
(6) The reliability of Mr McLean's conclusions.
Mr Gibson's credibility
I did not find Mr Gibson to be a credible witness in important respects. His principal affidavit was silent on matters relevant to the Club's downturn in gaming revenue but did refer to a drop in bar revenue. His affidavit in reply did not give any details of what he had earlier noticed about downturn in gaming or bar revenue and its linkage to the defects yet his evidence in cross-examination is that he believed from 2010 when he started at the Club that the Club was losing hundreds of thousands of dollars a years in revenue because of the defects. This sits uncomfortably with his failure to mention anywhere in his reports to the Board or the members that the defects were having that effect. His cogent enumeration in those reports of other specified causes of the downturn without any reference to the defects repels the conclusion that he had formed the view that he says now he had. I did not find credible his explanation that he did not need to say anything because everyone knew about the leaks. The relevant point is not whether the Board and members knew about the leaks but rather whether they knew that the leaks were having the serious impact on revenue that the Club, in these proceedings, claims they were.
I set out four passages of the transcript from his cross-examination:
At T121.19 - T122.21:
Q. So the estimates that you have been given at that stage in August 2011 was that for somewhere around the $30,000 to $40,000 mark, the leaks could be rectified?
A. There would be no guarantee of completely fixing them, but he thought he could do the work for that amount of money.
Q. Now you are saying to the Court, aren't you, that at this stage the club was suffering a loss of in excess of $500,000 profits just on the poker machines as a result of these leaks?
A. Yes.
Q. And had been suffering loses, and significant loses, on poker machines for some years by this time?
A. Yes.
Q. And it had also been suffering significant loses from its bar trading you say for some years as a result of water leaks?
A. Yes.
Q. There is no reference in this report to the fact that these leaks are causing loss of profits any loss of profits, is there?
A. No, the report was looking at fixing the problem.
Q. And there is certainly no reference to the leaks causing profits of several hundred thousand dollars each year to be lost?
A. No.
Q. And the reason that there is no reference to that is because it was not the case, the leaks were not causing loses of hundreds of thousands of dollars of profit a year, were they?
A. I disagree with that.
Q. I asked you a question to which you gave an answer yesterday that the club had I think some hundreds of thousands of dollars in bank accounts at this stage?
A. Yes.
Q. So it certainly had the money to pay that 30 or $40,000 to do the work that you were referring to at page 1090, didn't it?
A. Yes.
Q. The reason it didn't do that work was because it didn't have a lease over the premises?
A. That was one of the reasons.
Q. That was the only reason, wasn't it?
A. We weren't responsible to do the - we'd been advised we weren't responsible to do the work.
Q. The defendant wasn't doing it, and if it had been costing you hundreds of thousands of dollars of lost profit a year, you would have done it yourself if you had a lease, wouldn't you?
A. Possibly.
T127.44 - T128.28:
Q. You are saying to his Honour that in fact at this stage the club was losing hundreds of thousands of dollars a year as a result of these leaks?
A. Yes.
Q. And you say in this case the club had lost over two and a half million dollars by this stage as a result of leaks?
A. If that's the correct number, yes.
Q. The solicitors haven't mentioned it in this letter, though?
A. No.
Q. I want to put to you the reason it hasn't been mentioned is because you hadn't told them that?
A. I had told them.
Q. You hadn't said to them that the club was losing hundreds of thousands of dollars in profits each year as a result of these leaks, had you?
A. Yes. Possibly not in those exact words, but I said we are definitely losing a hell of a lot of money because people aren't returning to the club because of the condition of the building.
Q. Did you see this letter before it was sent out?
A. Probably not. I couldn't say.
Q. Do the solicitors, before they send a letter off on the club's behalf, send a copy of it to you to approve?
A. Yes, I think so, yeah.
Q. They do?
A. Yeah.
Q. So, you would have seen this letter and approved it before it was sent to Mr Bowen?
A. Yes.
T130.09-40:
Q. When you spoke to the solicitors, did you tell them that the club was suffering a loss of profits as a result of the water leaks?
A. Yes.
Q. And how much did you tell them the club was losing?
A. I don't think I put a specific number on it. I said
Q. Would you say it was a large amount or a small amount or what did you say?
A. I could have said something in terms of hundreds of thousands of dollars, but I can't recall exactly. They knew
HIS HONOUR: Don't tell us what they knew, please.
WITNESS: Sorry.
A. I made it clear it was a substantial amount.
HARRIS
Q. You made it clear that the club was losing a substantial amount, maybe hundreds of thousands of dollars per year as a result of the water leaks?
A. Yes.
Q. Did you say to them the problem with the water leaks is that we can't renovate the club because of those leaks?
A. That would have been included, yes.
Q. You said that to them. Did you say to them "that the appearance of the club and its unrenovated condition is what is actually causing the loss of profits that we're suffering from"; did you say that to them?
A. Yes.
T226.07-.22 (in re-examination):
Q. When was the first time that you actually sat down yourself and sought to put a number for your own purposes on what that trading loss was?
A. After I saw the McLean report.
Q. When did you see the McLean report for the first time?
A. Four weeks ago, something like.
Q. During the period from 2010 to when you saw the McLean report did you yourself make any attempt to calculate or assess the quantum of the trading loss?
A. I knew that we were losing money.
HIS HONOUR
Q. No, what you were asked
A. Sorry. No I did not.
There is an inconsistency in Mr Gibson's evidence in that he asserts in re-examination that the first time that he sought to put a number on the trading loss was after he saw Mr McLean's report but his evidence in cross-examination was that he had told the Club's lawyers in April 2012 that the Club was losing hundreds of thousands of dollars a year as a result of the leaks (T127-128). I do not accept that Mr Gibson told the Club's lawyers that the Club was losing hundreds of thousands of dollars a year as a result of the leaks because:
(a) There is no reference to such losses in the solicitors' letters.
(b) On his own evidence at T226.07-22 he said he did not put a number on what the trading loss was until a few weeks ago.
(c) In the earlier proceedings no claim was made for loss of profits and even in these proceedings the Statement of Claim did not include such a claim (the claim for loss of profits was introduced by an Amended Statement of Claim in April 2014). Even when the Club made a demand by letter of 19 June 2013 and by letter of 8 July 2013 (Tab 379 pp 1721-1724 and Tab 385 p 1743) no claim was made that the Club had suffered a loss of revenue although it did in the correspondence make a claim for $15,000 additional insurance premium (a claim which it has not pursued in these proceedings). If the Club had suffered the loss of revenue due to the defects in the premises that Mr McLean (and Mr Gibson) asserts it had suffered it would amount to a loss of at least $2 million by the end of 2012.
(d) There are references to leaks in the Board minutes: see Tabs 35, 153, 157, 158, 200 and 218, and it is noted that the matter has been put in the hand of the Club's solicitors (Tab 228) but there is no such suggestion anywhere in either the Board minutes or Mr Gibson's reports to the Board that leaks were causing any revenue loss (let alone significant revenue loss) and there are explanations given by Mr Gibson in which he articulates other reasons (and entirely credible ones) for the downturn in revenue.
(e) When the Club, and later the Club's solicitors, did write to the Custodian about the state of the premises they did not mention that the Club was suffering any downturn in revenue because of the defects. I infer that that is because the Club did not inform the solicitors that the Club had suffered such a downturn because of the defects and I infer that they did not inform the Club's solicitors because they did not perceive that the leaks had had any material impact on the Club's revenue.
(f) Mr Gibson's explanation as to why he did not point out the absence of any reference to losses in the solicitor's letter, namely that he thought it was not necessary to do so, is difficult to accept, and even more so is his explanation that in enumerating the reasons for the downturn in revenue he did not tell the Board of the connection which he says he had perceived between the downturn in revenue and the defects, because the Board knew.
(g) There was discussion in the Board minutes in respect of the loss of revenue as a result of problems in the auditorium (see Tab 225 p 1117, Tab 226 p 1122 and Tab 234 p1158) and this was the subject of a letter from Mr Gibson to the Sub-Branch (see Tab 162 p 869) and problems with the first floor were the subject of a letter from the Club's solicitors to the Custodian (Tab 264 p 1282) in which the Club's solicitors warned:
"We note that presently our client's business is being significantly affected by its inability to access and make use of the first floor of the property"
Those references, and the claim for $15,000 increased insurance premium to which I have earlier referred, are the only references in the internal documents or the correspondence sent by the Club or its solicitors to loss or quantification of loss as result of problems in the premises.
I think that Mr Gibson's evidence generally needs to be approached with considerable caution. He sought to resile from opinions that he had expressed to the Board prior to the advancement in this case of a claim for lost profit (as an example see T46.48-T47.02, T62.39-64.43, T68.07-17 and T70.30) and a number of times he sought to avoid questions by giving non-responsive answers (for example T 49.44, T57.46-48, T59.11-25, T64.15 33, T65.10-30, and T226.14-22). I gained the impression that he was endeavouring to minimise the problems which he had himself recognised in 2010-2012 because those earlier expressed opinions were inconsistent with the case now being advanced by the Club. I do not accept his evidence that he ever formed the view that the Club was losing significant revenue by reason of the defects and I find that he, in 2011, assessed the causes of the significant and alarming revenue loss as being those set out in [44] above.
Problems with the loss of profits claim
There are a number of difficulties with Mr McLean's approach (quite apart from the very significant discrepancy between his calculation and Mr Russell's which has led to a different amount being now advanced by the Club to that which Mr McLean arrived at):
(1) He has not had made available to him, and not asked for, the Club's documentary records in relation to the conduct of the Club in the period 2006 to 2013.
(2) Had Mr McLean had recourse to the Board minutes and CEO reports contained in Exhibit C1-C7, he would have noted that there is not a single reference in those reports or minutes to membership decline or lost revenue due to the defects and he would have noted that the CEO (both Mr Gibson and his predecessor) gave explanations for the downturn in revenue which reasons (other than the smoking bans) are not treated by Mr McLean as having any impact on revenue.
(3) The Club has called no evidence from any member that he or she left the Club or reduced his or her attendances at the Club because of the leaks or car park surface and there is no document of the Club recording that the Club is concerned about such an effect.
(4) Mr McLean admitted in cross-examination that there were a number of factors which either would, or could, have adversely impacted on revenue which he did not investigate and which (implicitly by his report) he has assumed did not impact on revenue:
(a) The failure of the Club to respond quickly to the smoking bans by establishing an outdoor gaming room where gamblers could smoke and play the machines. This did not occur until mid 2010 and at that time only 5 machines were utilised for that area - in December 2013 the Club placed another 3 machines outdoors (T72). Mr McLean had been asked to assume that the Club's outdoor smoking area was constructed in September 2007 an erroneous assumption as the Custodian demonstrated. The Club's outdoor smoking area was described by Mr Gibson in November 2011 as the worst outdoor gaming area he had seen: see [43](c). Even with the additional 8 machines the numbers of machines in the outdoor area in comparison to the total number of machines is low by having regard to an industry rule of thumb of 20% see T247.25, and Russell report para 8.7.1 CB 339.
(b) The failure of the club to refresh the machines they had in the Club in the 2008-2009 period, see Table 1 of Mr Russell's report, CB p 340.
(c) The concentration of self-funded retirees in the Malabar district, and the impact that the global financial crisis has had on their spending.
(d) Matters going to governance of the Club such as the President's suspension for being drunk in the Club, dissension between Board members and between some Board members and the CEO, and Board members and members of the Club, with "bad mouthing" of the Club's Board members by others.
(e) Staffing problems, and issues between staff and Board members (see Tabs 183, 184, 185, 188, 191, 193, 194 and 228, 289).
(f) The absence of a lease of commercial duration and its effect on club patronage.
(g) The general decline of club revenue in the Eastern Suburbs of Sydney (see T303).
(h) The Club's spending on gaming promotions for the Club reduced very considerably in the period and Mr McLean had given no attention to that: see CB p 377 and T258.
(i) He had referred in his report to absence of excellent customer service as a potential factor in revenue loss but did not regard that as a factor relevant to the Club. At T270 he stated that he had not assumed the Club had excellent customer service but rather that there would have been no difference in customer service between 2006 and 2007 which, if it was his approach, is not made clear in his report. He said he had no detailed assessment of customer service (T270.34-41) but in fact there is no evidence of any assessment by him.
(5) When confronted with material which cast doubt on his conclusions Mr McLean was reluctant to make concessions that in my view ought to have been made particularly having regard to the fact that the concessions he was being asked to make were based on what had actually been said to the Board, and seeking to qualify his answers in ways that did not reflect well on his role as an expert witness: see T270.34 41, T274.7 21, T279.28-50 and T281.36-282.4.
(6) The Club lost 1400 members in the period 2008-2011, that would seem to be a very significant decline which could impact on revenue, but membership increases in 2013 quite dramatically which casts doubt on the leaks as being a significant factor and at the very least was a matter calling for investigation. That the leaks may not have been as significant to patrons as might be expected is given some support by the rise in membership in 2013 and also by the lack of concern which gaming patrons seem to exhibit to the large drops of water coming from the ceiling at the side of the one of the indoor rooms: see video disc in C7.
(7) The drop in gaming income from 2007 to 2008 was very significant and indicative of "some very significant event having occurred in 2007 or 2008" with continued deterioration after that time and was more consistent with a very significant effect caused by the smoking bans than a problem with the roof: T268-269.
(8) Mr McLean in his report identified, as the sole cause of the downturn (after excluding the smoking bans), the state of the premises. He did not, in identifying that cause, limit himself to the leaks and the car park. Rather what he said was that the Club was, in addition to the ill effect of the leaks, in a poor state in terms of décor, furniture and the like and he contrasted the Club's premises with the premises of some of its competitors in the Randwick area.
(9) Mr McLean identified, as an important contributing factor to the loss of bar revenue, the auditorium roof problems: see para 8.9.8, p 87 of CB and also para 2.2.5 of his first report, p 61 of CB. The problem with this conclusion is that, as Mr Harris pointed out, the auditorium was not one of the areas of defects which the Club identified in its pleadings or its opening submissions in the case and nor was it a matter addressed in the joint expert report which encapsulated the areas of agreement and disagreement between the experts. This may have been because the auditorium roof was severely damaged in a storm in February 2013 and replaced in March 2013 with the proceeds of an insurance payout. Mr Parker referred to Mummery v Irvings Pty Ltd (1956) 96 CLR 99 particularly as to what was said at pp 110-112 per Dixon CJ, Webb, Fullager and Taylor JJ, and to Water Board v Moustakas (1998) 77 ALR 193 in which the Court (Mason CJ, Wilson, Brennan and Dawson JJ) noted that in deciding whether or not a point was raised at trial no narrow or technical view should be taken (at p 197), and seemed to assert that because there are documents in C1-C7 which contain a reference to the auditorium that is sufficient; he could rely on material which has gone into evidence to bring about a situation in which the Club can proceed on the basis that the auditorium's problems were part of the claim. Given that the auditorium issues were not identified in the opening, were not the subject of the experts' reports or their joint report and were not the subject of any application to amend the pleading, I am unable to accept that the Club can rely on it as a defect for which the Club is liable and I do not regard the Court's observation in Mummery as supporting the Club - it concerned an invitee's claim in negligence and the High Court held that there was no evidence to support the allegation of negligence on the part of the defendant's foreman. Whilst the Court accepted that evidence of negligence different to that pleaded by the plaintiff and led by a defendant could be taken into account even if not pleaded that is far from the situation here. Nor does Moustakas assist the plaintiff here. It follows that Mr McLean has identified a factor in bar trade results which is not ascribable to an established breach by the Custodian and he has made no calculation for the impact of that factor removed from his assessment.
(10) I formed a favourable impression of Mr Russell as an expert and no submissions were made to suggest any doubt as to his reliability. I accept Mr Russell's view that the smoking bans' effect on the Club would be more reliably assessed by reference to clubs with a similar number of poker machines. However no one had undertaken that calculation or submitted that I should do so. I also accept Mr Russell's view that since the tax applicable to gaming revenue can be precisely determined that is a more reliable approach which would as Mr Russell demonstrated at 8.5.4 of CB p 315, of itself reduce the amount which Mr McLean determined.
(11) Although at T260.31-.40 Mr McLean said he had referred in his report to the fact that the lease was limited in duration and I gave Mr Parker the opportunity to advise where that was found, no passage was identified.
Mr McLean referred in his report to the need for a club to have "five star premises" in the competitive environment of the industry and the need for clubs to be upgraded every 5 years. He did say in cross-examination that clubs are capital intensive operations and need a minimum of a 10 year lease (or 5 + 5) to be able to commit to capital works as and when needed: T289.24-30. Mr McLean was asked by his instructing solicitors to assume that the Club was "unable to paint or update the internal area of the Club due to continued water damage to the ceilings": see para 2.2.6 at CB p 61. He was not asked to assume that the Club could not proceed with the car park surface relaying and he was not asked to assume that the Club could not proceed to repair the cause of the leaks. On the Club's documents it appears that the renovation which the Board and the CEOs had in mind as necessary to upgrade the Club. Mr Gibson for example spoke of an amount around the million-dollar mark: T88.38. It appears that there is a significant gap between what the Club thought was required to put the premises into a "five star" condition and what Mr McLean was asked to assume could not be undertaken because of the leaks.
Whilst I can accept as a matter of logic that it might not be desirable to carry out repainting or installing new furniture for example without repairing the ceiling, the Club's documents do not support the assumption Mr McLean was asked to make and the assumption does not take into account the need for a more extensive renovation. Mr Russell agreed that one of the things that could be done, if a renovation was not possible, was a "makeover" T191.28-192.2. He also said that the Club should have removed the cause of the leaks. The questions points out the difference between renovation and makeover. I deal below at [61]-[66] with the assumption that Mr Russell was asked to make at T192.11-16 and that Mr McLean made in his report.
If the Club's failure to renovate and to pay to fix the leaks arose because the Club did not want to expend money in the absence of a long lease (as the minutes reveal) then even if it was impracticable to carry out a makeover without a major renovation and fixing the leaks Mr McLean has not attempted to divorce the absence of renovation and absence of repair/makeover.
Mr Gibson at T88.42-89.31 admitted even if the leaks had not been repaired the Club would not have renovated without a lease in place. He also said at T123.15-18 that he would regard a 10-year lease as the minimum to make renovations viable. Mr Parker contended that the problems due to the defects could have been addressed relatively cheaply through painting, redecorating and new furniture referring to what was said by Mr Russell at T191.28-192.09 and Mr Gibson at T87.06-33. The fact is that the Club was not willing to spend money to fix the leaks because there was no lease in place and there is no contemporaneous evidence that the Club decided not to spend money redecorating because of the leaks.
Since Mr McLean identified the state of the premises rather than just the leaks and car park as the causes of the downturn the Club felt compelled in its case to establish that the Club had not embarked on a redecoration and refurbishment because of the leaks. I shall deal with that issue next.
The Club's failure to refurbish/renovate
The Club claims, and it was Mr Gibson's evidence, that it did not renovate or refurbish the Club because of the leaks.
There was perhaps an additional theme in the opening submissions which is that the Club could not undertake the repairs of the leaks itself because that involved structural work but not even Mr Gibson advanced that as a reason for not carrying out the work. I do not think there is any basis to think that the Custodian would have prevented the Club from carrying out repairs to the roof or the car park if the Club had wanted to do so, although it can be inferred that the Custodian would have resisted any later claim for reimbursement of the expense.
The problem with the Club's argument that it could not renovate because of the leaks is that there is nothing in the Club's Board minutes which suggests that the Club wanted to renovate but decided against it because the Club or its officers were concerned by the leaks. There is evidence that the Club did recarpet the premises in 2009-2010 and did undertake some other minor refurbishment but more importantly there is evidence that the Club decided not to embark upon rectification of the roof because of advice that the roof leaks were "not worth pursuing at the moment considering the other case that is under way" Tab 272. The "other case" to which reference was made was the 2011 case and that involved an attempt to secure a permanent lease of the premises. The Club's decision to await the outcome of the 2011 proceedings is consistent with a view that there was no point repairing the leaks if the Club would have to vacate the premises within a short period. Also repair of the leaks was far less extensive than renovation which would make the Club competitive with other clubs and revive membership or trade. The estimate for repairing the leaks into the bistro area was $4,000 to $6,000 (see Tab 213 p 1060).
The absence of a lease cast a long shadow over the Club - it engendered concern in the Club as to its future - it seems to have been of sufficient concern to members to generate comment in the Treasurer's report in 2008 (see Exhibit 1) and the practical effect of the uncertainty as to whether the Club would remain at the premises seems to me to be a very real and understandable concern, impeding the expenditure of any significant amount of money for renovations: see Tab 235 Exh C5 p 1166 and [47](c), (e) and (f) above. There is no dispute that the Club at all times had the funds to carry out repairs of the leaks at a cost of $30,000-$40,000 (i.e. not involving a completely new roof: see Tab 213 of Exhibit C4 pp 1086, 1090 and Tab 218 p 1101 and see T53.35) if it had wanted to but the Club had, according to the minutes, a good reason for not renovating: see Tab 272 p 1313, which Mr Gibson accepted was one of the reasons T123.29-124.4. I am not able to accept Mr Gibson's assertion in his second affidavit that the Club did not renovate because the leaks would continue; that was not advanced by him to the Board as the reason for not expending money and rather another compelling reason is given, namely the fact that the 2011 proceedings were under way and obviously the outcome was unknown (see Tab 272). Repair of the leaks, according to the minutes, was not progressed because it was not worth pursuing because of the 2011 proceedings (Tab 272 p 1313). Nor was the Club willing to spend $50,000 on improving the outdoor gaming area: [46] above, an expenditure directly linked to improving gaming revenue and unconnected in any way with the leaks.
Even were I wrong in the conclusion that a concern about the effect of the leaks on a newly decorated Club was not one held by the Club I find that, even absent the leaks, renovation to a level that would make the Club competitive with other clubs in the area would not have been effected, because the Club did not have security of tenure. This conclusion would at the very least require the Club to establish what was the impact of the defects on patronage in contrast to the impact of the overall tired and undesirable appearance of the premises.
I conclude that Mr McLean's report and his conclusion as to the likely earnings of the Club absent defects cannot be relied on to establish prospective revenue to which actual revenue can be compared.
Additional contentions in relation to the loss of profits claim
I am unable to accept Mr Parker's submissions (see PCS 3.3.5) that the availability and adequacy of outdoor gaming facilities is already covered by the effect of the smoking ban. The Custodian has pointed to evidence that the Club did not respond well to the smoking ban problem and its failure to do so offers an explanation, at least in part, of why the Club's earnings did not bounce back.
Mr Parker, in his submissions, asserted that the failure of the Club to renew poker machines in the 19-month period "must be marginal at most". That contention is not really supported by Mr McLean but it is inconsistent with what Mr Gibson was saying to the Club in 2009 and 2010: see Tab 218 p 1100 and T67. Relevant also is Tab 244 p 1205 where once again the unresolved issue of the lease was impacting expenditure that the CEO thought would improve gaming revenue.
Mr Parker contended that there was no sign of a decline affecting Matraville RSL "which is the closest comparable club". That Matraville RSL did not suffer a decline or arrested the decline consequent upon the smoking bans does indicate, as the experts agreed, that the decline in the Club's revenue was not solely a result of the smoking bans but it does no more than that if the Custodian is able, as it has done, to establish that there are factors at work peculiar to the Club.
Mr Harris described the Club's case of loss of profits as a result of a failure of the Custodian to maintain or rectify defects at the premises as one of recent invention. He submitted that the claim that the Club had not renovated the premises because of the defects was one which had not been pleaded and which therefore the Club ought not be allowed to advance. Alternatively he submitted that in the absence of any reliable evidence as to what the Club's revenue ought to have been the Court could not speculate on what it ought to have been and deduce that the differential was caused by the defects.
Mr Parker, faced with the absence of any evidence that the Club in the period 2007 to 2012 had connected its declining revenue with the defects, submitted that the question is not whether the Club, through its Board or CEO, thought that there had been a loss of revenue due to the defects but rather whether in fact there had been a loss of revenue because of those defects. The general statement can be accepted but the contention misses the point that the Club asks the Court to accept Mr McLean's implicit assumption that the only cause of a downturn in revenue is the state of the premises in the course of determining what the likely revenue would have been but for the condition of the Club. As I have explained Mr McLean's assumption has been comprehensively undermined. Further as I have pointed out unless it can be demonstrated that but for the defects the Club would have renovated the Club, and unless all aspects of the Club's poor appearance can be said to have been caused by the defects, revenue would still have been poor for reasons unconnected with the defects and it would be necessary to apportion responsibility for the defects for which the Custodian was responsible.
The second argument advanced by Mr Parker was that the Club was not claiming that its revenue would have been any higher than it was in 2006 (leaving aside CPI adjustments). Thus he contended it did not matter if there were problems in the Club with staffing and or Board politics - the Club was the same Club in 2008 and beyond as it was in 2007 and 2006. I accept that the Club did not pitch its case as being that it would have been more successful in 2008 to 2014 then it would have been in 2006 but the fact is that a number of the items identified earlier would provide an explanation as to why the Club's revenue from 2006 would not be regarded as likely to continue even absent smoking bans and Mr McLean seemed to think that the Club had to work hard to maintain its competitive position vis a vis other clubs. In other words, quite apart from the failure to modernise the appearance and décor of the Club, poor outdoor gaming areas, lack of machine turnover, bad customer service, dissension in the ranks, and uncertainty of tenure, are all matters which could, in a tough economic environment, be far more significant to a Club's bottom line when the industry is more competitive both internally and as against other leisure activities. Poorly run establishments of any kind, it can be contemplated, are likely to suffer more of a downturn in harsh economic conditions than well-run establishments. The need for an edge is recognised in Mr McLean's first report: see 7.3 of McLean set out at [28] above and the author of Exh 4 (a document of the Club's, a copy of which was sent to the Custodian) seems to have had a similar view (in 2008 it would appear) when he wrote:
"After investigation it can be said without doubt that the slow decline in profits over the last eight years is mainly due to the clubs ever declining facilities, ambiance, staff moral and customer service.
This conclusion can be reached purely because of the fact nothing in the way the club conducted its business was changed over this period, nothing.
More recently and at possibly the worst time imaginable for a club trying to get back on its feet after eight years of going backwards the unquestionable impact of smoking bans hit, trading figures reflect this impact immediately from the day smoking bans came into effect".
Since Mr McLean's analysis did not identify other matters as having any impact on revenue once they have been identified the Custodian does not have the onus of establishing that other clubs which did not suffer as severe a decline or which bounced back after the bans were well run.
I should also note that neither expert in their reports referred to the fact that the Club had, from 2000 to 2006, suffered a decline in gaming revenue and a decline in bar revenue of approximately 21% and 13% respectively and although Mr Russell adverted to the fact that clubs were in decline quite apart from smoking bans industry wide, Mr McLean did not factor in to his revenue figures any continuation of that well established decline (for the Club), on average 3.5% per annum for gaming and 2.2% per annum for bar before the introduction of the smoking bans. Mr Russell agreed that the years closer to 2007 were more reliable as an indicator of prospective performance rather than fluctuations between 1998 and 2000 (see T160) but he did not say that the existence of a trend over a number of years would not be of significance and he reiterated the existence of a gaming trend line for the metropolitan area at T160.31-48.
The was no evidence from any Club member or former Club member as to the reason for his or her non-attendance reduced attendance or his or her ceasing to be a member the defects. Mr Parker's response to this is that an inference could only be drawn against a party for the absence of a witness when the conditions set out in Payne v Parker [1976] 1 NSWLR 191 were met namely:
(a) the specific issue is one on which the party against whom the inference is sought bears a legal or evidentiary onus;
(b) if it is established that the missing witness is in the camp of the party against whom the inference is sought (or, per Hutley JA, is not available to the party seeking the inference);
(c) if it is established that the missing witness would, not merely might, be able to give evidence bearing on the issue.
Mr Harris did not dispute that the conditions identified would need to be met for a Jones v Dunkel inference but he submitted that he was not asking for a Jones v Dunkel inference (i.e. that evidence that could be given by the witness would not have assisted the Club's case) but rather what he was pointing to was the lack of any evidence in support of Mr McLean's assumptions and a good deal of documentary material which undermined those assumptions. The question is whether the Club has made good the assumptions on which Mr McLean's report is expressly and implicitly based. In my view the answer to that question is that it has not done so.
Case not pleaded
Dealing with the Custodian's contention that the Club was precluded from advancing any case based on the assertion that the Club failed to renovate because of the leaks this is a matter which I think should have been specifically pleaded by the Club but because the Club advanced a case that the Club could have repaired the defects itself (see para 51 of the DOS, although the defence as pleaded at para 20A of the Amended Defence no point was made in the PCSR that the defence could apply to the Club's claim in damage), I do not think that the Club should be shut out from its attempt to make out such a case. Para 30 of Mr Gibson's affidavit was not the subject of objection by the Club.
Alternative assessment of damages
Mr Parker submitted that even were I to find Mr McLean's report unreliable, I should not dismiss the Club's claim for lost profits as the Custodian urges me to do for the following reasons:
(1) There is clear evidence of leaks and the effect of leaks in areas of the Club that member frequent;
(2) There is evidence of unsightly buckets being placed when there is heavy rain, tarpaulins, ceilings stains and the like;
(3) The experts both agreed that the appearance of the Club is important in attracting patrons to join the Club, use its services and hence generate income;
(4) As a matter of commonsense unsightly appearance of the ceiling and attempts to contain water would be likely to put people off from using the Club at all or at least as frequently and for as long as they otherwise might;
(5) The Club has definitely experienced a downturn in revenue since 2006 in a pattern that has shown no "bounce back" even after the effect of the smoking ban has been ameliorated by an outdoor smoking area, changeover of machines and other drives to increase membership;
(6) The Club's revenue downturn is by far the worst decline in 2007 to 2013 of any club in the Randwick area;
(7) The Court can conclude that at least some of the loss in revenue is attributable to the poor state of the premises, directly attributable to leaks.
(8) In the light of (1) to (7) above the Court can and must determine itself what loss is to be attributable to the poor state of the premises due to leaks and the car park.
Faced with Mr Russell's criticism of his report, Mr McLean, other than in the very limited matter of calculation of figures, was not asked by the Club to review his estimate of the Club's loss attributable to the amenity of the Club, or more narrowly, the defects for which the Custodian was said to be responsible. Mr Russell did not undertake such an estimate either and he was not, in cross-examination, asked to do so. I have therefore no reliable information as to what the Club's likely revenue would have been quite apart form the defects and importantly nothing has been put by the Club as to how I should make the assessment, that it says, as an alternative, I should make.
There are some basic principles in relation to the assessment of damages to which I need refer. In NCON v Australia Limited v Spotlight Pty Ltd [2012] VSC 604 Robson J examined these authorities in this area in a comprehensive way and I shall summarise the essential principles outlined by his Honour and relevant to the present case, none of which seems to have been in issue in this case:
(1) The party who sustains a loss by reason of breach, is, so far as money can do so, to be placed in the same position with respect to damage as if the contract had been performed.
(2) Damage includes the profits that the plaintiff expects from the performance of the contract as well as the costs incurred in reliance on the contract.
(3) The plaintiff is not to be placed in a superior position to that which it would have been had the contract been performed.
(4) Mere difficulty in estimating damage does not relieve a court from the responsibility of estimating them as best it can.
(5) The plaintiff must establish that there has been an assessable loss resulting from the breach of contract complained of.
(6) In Howe v Teefy (1927) 27 SR (NSW) 301 at 305-206 Street CJ said:
"The question in every case is: has there been any assessable loss resulting from the breach of contract complained of? There may be cases where it would be impossible to say that any assessable loss had resulted from a breach of contract, but, short of that, if a plaintiff has been deprived of something which has a monetary value, a jury is not relieved from the duty of assessing the loss merely because the calculation is a difficult one or because the circumstances do not admit of the damages being assessed with certainty."
After having outlined the general principles Robson J went on in [286]-[294] of his reasons for judgments to detail the cases in which a court must do its best to quantify the loss even if "a degree of speculation and guesswork" was involved, and at [295] his Honour said:
"In my opinion, these authorities establish that the plaintiff is obliged to call such evidence as can be reasonably expected in the circumstances to establish the damages which the plaintiff claims. The Court's obligation to estimate damage as best it can is only triggered where the circumstances are such that the plaintiff is unable to reasonably establish the damage. McGregor on Damages states that the word "reasonable" is the controlling one, and the standard of proof only demands evidence from which the existence of damage can be reasonably inferred and which provides adequate data."
The Club maintained reliance on Mr McLean's report and has proffered no alternative suggestion as to the basis on which I could approach the determination of loss. It was not suggested, for example, that I could take the actual earnings and allow a nominated figure for increase to reflect the impact of the appearance of the Club due to the defects, or that I should compare revenue of the Club in the 2000 to 2006 period with revenue in the 2007 to 2013 period, as a starting point before making a reduction for smoking bans and all other factors.
In my view the plaintiff, having taken on the task of establishing what the revenue and profit would have been but for the defects, has failed to make out what that figure would have been, and failed to do so because its expert made assumptions which it turns out the Club's own documents do not support. Having had the flaws in Mr McLean's approach drawn to its attention the Club has not sought to have him amend his report even on an alternative basis to provide the Court with a figure based on the calculations necessary to be undertaken. The Club has therefore failed to put forward the necessary evidence and cannot invite the Court to do its best in some imprecise way and without the alternative approach being specifically articulated so that the Custodian could respond to it.
Even were I to accept as a matter of commonsense that the defects, for which the Custodian had an obligation to repair, did have some impact on revenue there is really no reliable material on which to determine what the impact was on sales and hence profit.
Mitigation of damage
The Custodian also submitted that the Club could and should have mitigated its loss by expenditure of $30,000 to $40,000 in mid 2011 and nothing was said by Mr Parker about the point in submissions in reply. I have concluded that the reason the leaks were not rectified was that the Club did not want to expend money if it did not have security of tenure. If the Club's loss had been established to run at approximately $500,000 a year or anything like it the Custodian's argument would have a great deal of force.
Conclusion
It follows that in my view the Club would be entitled to only nominal damages for the Custodian's breach of obligations. That is not however the basis on which damages were sought.
Orders
I will hear counsel on the question of the appropriate orders to be made and the issue of costs.
Decision last updated: 25 July 2014
4
2
0