Oneflare Pty Ltd v Chernih

[2017] NSWCA 195

Court of Appeal

Supreme Court

New South Wales

• Amendment notes

Medium Neutral Citation:

Oneflare Pty Ltd v Chernih [2017] NSWCA 195

Hearing dates:

19 June 2017

Decision date:

07 August 2017

Before:

Meagher JA at [1];
Gleeson JA at [95];
Leeming JA at [96]

Decision:

Appeal dismissed with costs.

Catchwords:

CONTRACTS – construction – informal and partly oral contract to provide search engine optimisation services – where service provider instructed to undertake “aggressive” strategy including link building – where “unnatural”, “artificial” or “spammy” links to target website created in violation of Google Webmaster Guidelines – where algorithmic and human demotion in search results applied by Google – whether “aggressive” strategy entailed impugned link building

 

CONTRACT – remedies – damages – assessment – where marginal profit calculated assuming initial sales revenue from before revenue loss period and growth rate from period after consequences of breach ceased – whether appropriate to apply discount for endogeneity problem, apparent difference in growth trend lines and counterfactual possibility of adverse competition and harmful conduct by plaintiff

  EVIDENCE – witness evidence – cross-examination – rule in Browne v Dunn – reliability and truthfulness – where adverse credibility findings made against directors of plaintiff – where substantial points of difference between significant affidavit evidence of plaintiff’s directors and defendant – where truthfulness of plaintiff’s directors put in issue by opening statements and cross-examination – whether denial of procedural fairness

Cases Cited:

Armory v Delamirie (1722) 1 Stra 505; 93 ER 664
Browne v Dunn (1893) 6 R 67
Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26; (2016) 90 ALJR 770
Kuhl v Zurich Financial Services Australia Limited (2011) 243 CLR 361; [2011] HCA 11
Malec v JC Hutton Pty Ltd (1990) 169 CLR 638
McCartney v Orica Investments Pty Ltd [2011] NSWCA 337
Seymour v Australian Broadcasting Commission (1977) 19 NSWLR 219

Category:

Principal judgment

Parties:

Oneflare Pty Ltd (Appellant)
Nicholas Chernih (First Respondent)
Linkbuild SEO Pty Ltd (Second Respondent)

Representation:

Counsel:
NJ Kidd SC (Appellant)
MK Condon SC, DW Robertson (First Respondent)

  Solicitors:
Levitt Robinson (Appellant)
Robertson Saxton Primrose Dunn (First Respondent)

File Number(s):

2016/301512

 Decision under appeal 

Court or tribunal:

Supreme Court

Jurisdiction:

Equity – Commercial List

Citation:

[2016] NSWSC 1271

Date of Decision:

13 September 2016

Before:

McDougall J

File Number(s):

2014/336363

Headnote

[This headnote is not to be read as part of the decision]

The appellant company retained the respondents to devise and implement an “aggressive” search engine optimisation strategy to improve the ranking of its website on Google. The contract between the parties was partly oral, and the evidence of the appellant’s directors and the respondents as to its terms differed substantially. The respondents proceeded to generate links to the appellant’s website which were described as “unnatural”, “artificial” or “spammy” and violated the Google Webmaster Guidelines. Upon identifying these links as non-compliant, Google algorithmically and then manually demoted the appellant’s website in its search rankings. The appellant’s sales revenue thereafter declined.

The appellant brought proceedings against the respondents for damages for breach of contract and negligence. Dismissing that claim, the primary judge (McDougall J) held that the intended “aggressive” strategy included “unnatural” link building and that the risk of adverse action by Google was known to the appellant. In doing so, the primary judge rejected as dishonest much of the evidence given by the appellant’s directors as to their knowledge of link building and Google’s algorithm and their role in implementing the intended strategy. Damages were assessed, in the alternative, by estimating the marginal revenue loss from the algorithmic and manual penalties and then applying a discount. The methodology for calculating that estimate adopted the maintainable sales revenue from the period before demotion and the growth rate from after the likely effect of penalties had dissipated. The discount accounted for an endogeneity problem, the apparent difference in growth trend lines and the counterfactual possibility of adverse competition and independent non-compliant link-building by the plaintiffs. The appellant appeals against those findings and conclusions.

Held (Meagher JA, Gleeson and Leeming JJA agreeing), dismissing the appeal:

i.   The parties’ affidavit evidence and opening statements and the cross-examination of the appellant’s directors made plain that the truthfulness of the directors’ evidence was challenged. The primary judge’s adverse credit findings being wholly consistent with the conduct of the trial, there was no denial of procedural fairness: at [45]–[57].

Browne v Dunn (1893) 6 R 67; Seymour v Australian Broadcasting Commission (1977) 19 NSWLR 219 applied. Kuhl v Zurich Financial Services Australia Limited (2011) 243 CLR 361; [2016] FCAFC 17 distinguished.

ii.   Construed as reasonable persons in the position of the parties would have understood it, the reference to an “aggressive” strategy involved the creation or use of “unnatural” links: at [64]–[65].

Crown Melbourne v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26; (2016) 90 ALJR 770 applied.

iii.   The drawing of inferences favourably to a plaintiff is not required in all cases where there is uncertainty which may be expressed as a range of possible outcomes. Accordingly, the primary judge did not err in assessing the appropriate discount by taking into account the factors above: at [89]–[93].

McCartney v Orica Investments Pty Ltd [2011] NSWCA 337 applied.

Judgment

MEAGHER JA

Overview

1. This appeal is concerned with an agreement for the provision of search engine optimisation (SEO) services to improve a website’s ranking in search engine results, particularly on Google. In organic search results (those excluding paid advertising), such rankings depend, amongst other things, upon the number and quality of links to the target website from other websites. Accordingly, “link building”, a form of SEO, is directed to improving those characteristics of the target website. It may take several forms, which range from encouraging so-called “natural” links (the product of an authentic editorial decision to create a link to the target website) to generating “artificial” or “unnatural” links (including on unrelated websites created or used solely for the purpose of manipulating the search algorithm). As expressed in its Webmaster Guidelines, Google opposes practices at the latter end of the spectrum. To discourage them, it uses algorithmic and human means to identify and demote websites that benefit from artificial links. In the circumstances of this case, Penguin 2.0 was the most recent update to Google’s search algorithm directed to that objective.

2. In May 2013, the appellant (Oneflare) retained the respondents (initially Mr Chernih and later his company, Linkbuild) to provide SEO services in relation to its website. The services ultimately provided by Mr Chernih included the creation of artificial links. As Mr Chernih freely accepted in cross-examination, the strategies adopted to boost the website’s ranking were only “good so long as you don’t get caught out”. Within a month of the introduction of Penguin 2.0 on 22 May 2013, the traffic to Oneflare’s website had diminished substantially as a result of an “algorithmic” demotion. The drop was from in excess of 22,500 visits per week to about 17,500 visits per week. On 26 July 2013, Google imposed a “manual” penalty on the website, following which its traffic dropped almost to zero. In early August 2013, the arrangement with Linkbuild was terminated. Oneflare engaged in further link building and, on 21 November 2013, a second manual penalty was imposed.

3. In November 2014, Oneflare brought proceedings against Mr Chernih and Linkbuild for damages for breach of contract, negligence and misleading or deceptive conduct. The last of those claims was abandoned. Oneflare’s case at trial was that Mr Chernih had developed and recommended a SEO strategy which was “incompetent" because, in the language of its opening written submissions, “the whole approach to off-page SEO - and link building in particular- was in such flagrant breach of the Google Webmaster Guidelines that it exposed [Oneflare] to the real risk (which materialised) of being punished by Google”. Those guidelines warned against engaging in “tricks intended to improve search engine rankings”.

4. There were three strands to Mr Chernih’s response. The first was that the directors and principal officers of Oneflare, Mr Dong and Mr Lim, were technically experienced and sophisticated users of the web and well aware of the nature of SEO services and how they interacted with search engine algorithms; and also well aware that there was a risk that in the face of “manipulative” SEO practices Google could take action that would negatively impact on the website’s search ranking results. The second was that he was retained by Oneflare to pursue and execute an “aggressive” SEO strategy which described activities that included the creation of “unnatural” or artificial links. The third was that Oneflare understood and implemented that strategy, including, of its own initiative and without Mr Chernih’s knowledge or advice, by the creation of “unnatural” links.

5. The primary judge (McDougall J) dismissed Oneflare’s claims: Oneflare Pty Ltd v Chernih [2016] NSWSC 1271. His Honour held that Mr Chernih had been retained to devise and implement SEO strategies that were “aggressive”; that such strategies included building “unnatural” links; that from the outset at least Mr Dong understood that the pursuit of such strategies carried the risk of adverse action by Google; and that Mr Chernih implemented and assisted Oneflare to implement those strategies. In doing so, the primary judge rejected as dishonest much of the evidence of Mr Dong and Mr Lim concerning their knowledge of link building and Google’s algorithm, and their role in the implementation of Oneflare’s strategy.

6. The grounds of appeal are considered in three parts. The first (ground 15) is concerned with the primary judge’s dishonesty findings. Oneflare submits that Mr Dong and Mr Lim were not afforded procedural fairness in relation to findings with respect to “fundamental parts of Oneflare’s case”: Judgment [16]. If that argument is upheld, the judgment must be set aside, and a new trial ordered. The second (grounds 1 to 9, 10, 11 and 12) challenges his Honour’s finding that Oneflare’s instruction that it wanted to pursue an “aggressive” SEO strategy involved, as was understood by Oneflare, that the link building to be undertaken was contrary to Google’s guidelines and carried the risk that Google might penalise the website. It is said that by reason of this error the primary judge’s findings as to the scope and terms of Mr Chernih’s retainer and as to breach also involved error. The remaining issue (ground 14) arises if Oneflare is successful on its challenges to those findings and conclusions. It is said that the primary judge’s application of a 30% discount to the “low estimates” of its loss involved error.

7. Before turning to these issues, it is necessary to refer in more detail to the background facts, and then to the findings and conclusions of the primary judge.

Background facts

Oneflare’s business

8. Oneflare operates an internet business directed to putting people who are looking for a service provider (such as a removalist or plumber) in contact with such providers. Once the prospective customer is on the Oneflare website, they are able to post details of the services they require. Service providers then provide quotations for those services. The online customer may then choose from the quotations provided. Oneflare’s revenue is derived from service providers, who pay a fee for access to the website and the opportunity to submit quotes for services.

SEO and the Google guidelines

9. The Google search engine generates and ranks search results by reference to its assessment of the characteristics and qualities of websites it has “indexed” and their relevance to the search enquiry. In determining a website’s ranking, Google’s algorithm takes account of the website’s “on-page” and “off-page” characteristics, where the latter includes the quantity and quality of links to the target website from other website. That component of the algorithm was explained in the following passage from Mr Weyher’s expert report, extracted at Judgment [42]:

The quantity and quality of links to a given website determine that websites ranking in organic search results. “Link building” is the process of obtaining and acquiring links from other pages on the internet in order to improve organic traffic. This is one of the key areas of SEO and an integral part of any SEO campaign.

Search engines register these links and count them as a ‘vote of confidence’ in the website that acquired them. The higher the quality of the site that link to another, the higher the value of the link. Acquiring links from high-end websites can be compared to a Public Relation campaign, an example of this would be writing an article about the topic of ones website that might be of interest to a journalist working for “news.com.au”. If the article is hosted on “news.com.au”, the author would often receive a link to his page as he would be seen as an authority on the subject he has written about. Having a large amount of links like these to the authors website will result in higher rankings on Google and other search engines.

A “natural link” is a link which is the product of an authentic editorial decision made by a real human being. The greater the online reputation of the site that provides the natural link, the greater the effect will be to a websites ranking in organic search results. [Emphasis in original]

10. The Google Webmaster Guidelines prohibit SEO practices which seek to manipulate the Google algorithm. At Judgment [44], the primary judge extracted Mr Weyher’s uncontroversial description of some of those activities and Google’s attitude to them:

Google defines a link scheme as “any links intended to manipulate PageRank or a site’s ranking in Google search results may be considered part of a link scheme and a violation of Google’s Webmaster Guidelines” (“the guidelines”).

Acquiring a vast amount of links from low quality websites may provide some short-term SEO benefits but such benefits will only last until a Google algorithm and/or reviewer detects that the scheme is a violation of the guidelines. SEO techniques that deliberately violate the guidelines are called “Black Hat”.

Google’s guidelines prohibit unnatural links because they provide no useful or valuable information to anyone and are effectively just ‘internet pollution’ that only exists in order to trick Google’s PageRank algorithm.

…

An artificial or unnatural link is a link that is being created with nothing else in mind than SEO value. Google counts links as an organic ranking factor but wants these links to be, first and foremost, of value to the website visitor and placed by the webmaster for authentic, value-based reasons.

Range of link building activities

11. At one end of the spectrum of link building is the generation of a link which is the product of what Mr Weyher described as an “authentic editorial decision made by a real human being”. Such a link is capable of being created intentionally for the purposes of SEO by the retaining of an original content creator to write a blog entry, press release or other article containing a link to the relevant website. That article is then posted to a reputable third party website which, exercising its independent editorial discretion, accepts or rejects the post. Link building of that kind would not, as I understand the evidence, be contrary to the Guidelines.

12. At the other end of the spectrum is the creation or exploitation of a website populated by hundreds or thousands of links to a target website. The content of those webpages may be very poor, consisting of nonsensical phrases or gibberish, or make sense but have no relevance whatsoever to the purpose or business of the target website. At the same time, the “anchor words” – which constitute the clickable link to the target website – may themselves be “unnatural” in the sense that they do not bear any relation to the text in which they appear. Such a website, serving no purpose other than to provide off-page links to another or other websites, is described as a “spammy site”, and the links as “spammy links”.

13. There is then a range of link building activity which falls in between. Some of that activity more closely replicates the features of a natural link. For example, artificial links may be created by purchasing an “aged” website, which has an established usage history in relation to a particular subject, and populating that website with a small number of off-page links, each created using original content and anchor words that relate to the text in which they appear.

14. Mr Chernih, whose evidence the primary judge accepted, considered the aim of SEO and the purpose of engaging a person with expertise in SEO techniques to be to apply “the right mix of SEO techniques to boost the value or rank of a website as high as possible without being penalised by a search engine for doing so” [emphasis added]. He also described that purpose as being to “artificially boost the value or rank of a website in the Google search algorithm. It is by artificial means because the increase in rank or value is being driven by actions taken by the operators of the website itself, rather than by user traffic”. That description could extend to actions “driven” or initiated by the operators of a website (such as the creation of original content for the consideration of an independent website), which would not involve breaches of the Google guidelines or at least any risk of being penalised. However, the strategies pursued by Oneflare and Mr Chernih contemplated and involved the creation of unnatural links contrary to the Google guidelines. One such strategy was the population of aged website domains, acquired for that purpose, with links to the Oneflare website.

Oneflare’s retainer of Mr Chernih and Linkbuild

15. Oneflare’s business was originally conducted under the name PickAQuote. In about January 2012, the Oneflare website became operative. Prior to that, Oneflare (then known as PickAQuote) had created a PickAQuote website and retained a freelance SEO provider to undertake link building to that website. In early May 2012, Mr Chernih was provided with a report which showed that, between May and July 2011, in excess of 7,700 links had been created to the PickAQuote website. Mr Chernih described those links as “spammy”.

16. In about March 2012, Mr Dong and Mr Lim learned of an American website known as Thumbtack which had a business model similar to Oneflare. They also became aware that Thumbtack had improved the traffic to its website very substantially by using SEO strategies, including link building. In their initial meeting with Mr Chernih on 27 April 2012, Mr Lim described Thumbtack as having “a very aggressive SEO policy”, and Mr Chernih was informed that Oneflare wanted to copy that business. At that meeting, and at a second meeting on 3 May 2012, it was said that the traffic to the Oneflare website was currently around 100 views per day, and that its traffic goal was 100,000 views per month within 10 to 12 months.

17. The primary judge’s acceptance of Mr Chernih’s evidence as to what was said at this first meeting is not challenged on appeal. Following reference to Thumbtack, the conversation (the “Me” being Mr Chernih) continued as follows:

Mr Dong: "How do you think you help us grow, Nick?"

Me:   "Well, firstly, if I were you I would focus on making sure your on-page is right”

Mr Dong & Mr Lim: "Ok."

Me:   “After that, it is mostly about off-page, in particular link-building, building links to artificially inflate your link profile in Google’s eyes”.

Mr Dong:   “Yeah, we know a bit about link-building, we have had some SEO work done before, when we were PickAQuote.”

Mr Lim:   “If it is just about building x amount of links per month until we rank well, why can’t we just build more and more?”

Me:    “Well, it's not just about the quantity of the links. You need to get good quality links as well. Google is like a popularity contest, and links are like votes. Though it's not just a numbers game, it's a quality thing too. Getting a vote from a popular website, like a link on nlnemsn.com.au, is better than a thousand votes/links from smaller websites. I can build you a million links in an hour if you want, but that is more likely to get you penalized than help your rankings. That is why SEO can also be used in a negative way too, which is something you guys will have to watch out for as well. It’s called “Negative SEO”. Negative SEO is when someone else, like a competitor, uses SEO as a weapon against you. They attack your site to get you penalized by Google. I’ve seen it happen. A competitor can build a million links to your site in an hour and there’s nothing you can do to stop them. If you get penalised, you then have to get Google to restore you. If that’s an algorithmic penalty, you don’t get restored until the algorithm updates again.”

Mr Lim:   “Can we use link-building against our competitors?”

Me:   “I don’t advise it. It is unethical and it is usually easier and more cost effective to just focus on your own site rather than trying to dislodge a competitor.”

18. On 4 May 2012, Mr Lim confirmed by email to Mr Chernih that Oneflare was looking to implement an “aggressive SEO growth strategy”. By an email sent on 17 May 2012, he also advised that Oneflare had decided to proceed with the SEO initiative with a budget of $1000 per month for Mr Chernih’s services for the first three months. Mr Chernih provided those services until late November 2012, from which time Linkbuild provided the services until August 2013.

Primary judge’s reasoning

19. The primary judge’s reasoning addresses the following four issues agreed by the parties and recorded at Judgment [5]. As his Honour also noted, that formulation concealed “a multitude of sub-issues”:

(1)   [W]hat were the terms of Oneflare’s retainer of Mr Chernih (since there is no relevant distinction between Mr Chernih and his company Linkbuild, I shall refer only to him unless it is necessary to distinguish between the two defendants)?

(2)   Did Mr Chernih devise and recommend the SEO strategy that Oneflare in fact pursued over the relevant period?

(3)   Did Mr Chernih use appropriate skill and competence in formulating any SEO strategy that he recommended to Oneflare?

(4)   If Mr Chernih did not use appropriate skill and competence, what if any damage has Oneflare proved?

The terms and scope of Mr Chernih’s retainer

20. With respect to the first of these issues, the primary judge found:

[118]    I find, specifically, that:

(1)   in the 27 April meeting, Mr Lim, with at least the acquiescence of Mr Dong, instructed Mr Chernih that Oneflare wished to pursue an aggressive SEO strategy that included both on-page optimisation (improving the content of Oneflare’s website) and off-page optimisation (including linkbuilding);

(2)   as at 27 April 2012, Mr Dong at least understood clearly what was involved in linkbuilding and if (which is unlikely, given his failure to question the reference to it) Mr Lim did not, he could have found out very easily from Mr Dong what was involved;

(3)   it was reasonable for Mr Chernih to understand from the conversation that Messrs Dong and Lim had a good understanding of SEO techniques, in particular the technique of linkbuilding;

(4)   Mr Chernih warned Messrs Dong and Lim that overindulgence in (or overenthusiastic pursuit of) linkbuilding could result in Oneflare’s website being demoted in the Google search results; and

(5)   Messrs Dong & Lim understood that warning.

[119]    The formal retainer was not concluded on 27 April 2012. However, nothing that happened thereafter up until 17 May 2012 detracts in any way from the conclusions just expressed. On the contrary, it is plain that, when Mr Chernih was retained to provide SEO advice and assistance to Oneflare, it was a retainer to assist them to pursue an aggressive SEO strategy, including both on-page and off-page optimisation, similar to that employed by Thumbtack. Specifically, as part of the off-page optimisation, Mr Chernih was retained to assist Oneflare in linkbuilding. The object of the retainer was to assist Oneflare in improving its SERP ranking.

21. His Honour then addressed whether, in the exercise of reasonable care and skill, Mr Chernih was required to warn Oneflare of the risks associated with an “aggressive” link building strategy:

[139] I start by referring back to what I have said at [118], [119] above. At the outset, Oneflare made it clear to Mr Chernih that it wanted him to provide SEO strategies that were “aggressive” and that included linkbuilding. I accept, of course, that the SEO strategies also included improving the content of Oneflare’s website. The reason why Oneflare wanted to pursue an aggressive SEO strategy was, as made known to Mr Chernih, that it wished to drive its sales growth in the way that Thumbtack had apparently done in America.

…

[141]    I accept that there was an implied term of the contract of retainer that Mr Chernih would use reasonable care and skill, appropriate to one professing expertise as an SEO specialist, in performing work pursuant to the retainer. I accept, further, that Mr Chernih owed Oneflare an equivalent common law duty of care. The precise content and application of those duties is a matter to which I shall return, in connection with the third issue.

[142]    I do not find that the contractual or common law duties that Mr Chernih owed to Oneflare included a general duty to warn of the risks attaching to particular aspects of the SEO strategy that Oneflare would follow. There was certainly no express term of that kind.

[143]    Further, and as to the possible existence of a common law duty of care to warn, the expert evidence was unanimous in opining that an SEO specialist was not obliged, in all circumstances, to warn the “client” of the risks attaching to particular SEO strategies. The experts agreed that it would be reasonable for an SEO expert to take into account, in deciding whether to advise of risks, the experience of the client and its understanding of SEO strategies. In that context, the findings of fact at [118] are relevant.

[144] The discussion in the two preceding paragraphs is confined (as I said at [142]) to “a general duty to warn”. Specifically, where (as I find) Oneflare, through Messrs Dong and Lim, made it clear to Mr Chernih that it wished to pursue a strategy involving linkbuilding, and where Mr Chernih understood (rightly) that Oneflare, through Mr Dong at least, understood both what was involved in linkbuilding and the possible risks attaching to it, there is no basis for imposing a general duty of care to warn of the risks of linkbuilding. In any event, as noted at [115] above, Mr Chernih did proffer such advice, in the meeting of 27 April 2012, where he said, among other things:

I can build you a million links in an hour if you want, but that is more likely to get you penalised than help your rankings.

[145]    Indeed, Mr Chernih went further, and gave an example of how competitors could use “negative SEO”:

Negative SEO is when someone else, like a competitor, uses SEO as a weapon against you. They attack your site to get you penalised by Google. I’ve seen it happen. A competitor can build a million links to your site in an hour and there’s nothing you can do to stop them. If you can penalised, you then have to get Google to restore you. If that’s an algorithmic penalty, you don’t get restored until the algorithm updates again.

[146]    Those words must have informed Messrs Dong and Lim (if they did not already understand) that over-enthusiastic indulgence in linkbuilding carried the risk, and probably the likelihood, of adverse action by Google. Specifically, it must have been clear to them that there was a real risk of algorithmic demotion. Neither of them questioned the advice given by Mr Chernih. Yet, having that understanding, Mr Lim stated in the meeting of 3 May 2012 that Oneflare “will need to adopt an aggressive SEO strategy if we want to replicate Thumbtack’s strategy”, and stated a “traffic goal” of “100,000 thousand [hits] per month”. Mr Chernih replied, saying that it was “a very large increase, given present traffic volumes” and that because Google changed its algorithm, “sometimes 1 to 2 times a day”, that could affect the operation of an SEO strategy.

[147]   I do accept that if Mr Chernih had recommended a new and risky strategy to Oneflare, it may have been incumbent on him to warn Messrs Dong and Lim of the risks attending that strategy (unless well satisfied, on reasonable grounds, that they understood them). But that is not this case. And it does not follow, taking into account the facts as I have found them, that Mr Chernih was bound to warn further than he did of the risks attending the strategy that Oneflare desired, and instructed him to pursue.

22. The primary judge then considered the conduct of the parties in the period up to August 2013. That conduct was relevant to questions of breach of contract and duty of care. It was also relied on by Mr Chernih and Linkbuild as confirming the knowledge and understanding of Mr Dong and Mr Lim of link building and of the risks associated with it at the time the contract was made. Given the contract was informal and not evidenced in writing, the conduct was also relevant to whether the initial oral agreement had been varied or Oneflare’s instruction as to its strategy had changed. His Honour concluded at Judgment [151] that there was “nothing in the conduct of the parties following 31 May 2012 that would in any way add to the scope or terms of the retainer, as I have set out at [141], [142] and [147] above, or qualify, restrict or negate any of those terms”.

23. In particular, his Honour concluded that Oneflare’s basic strategy remained the same (Judgment [202]):

The inference (as to scope and terms of the retainer) to be drawn from performance of the retainer is that Oneflare’s basic strategy remained as it had always been; an aggressive SEO strategy employing both on-page optimisation and off-page activities including linkbuilding. Mr Chernih was consulted about the ways in which that strategy could be pursued. He assisted in the execution of that strategy. But in essence, the strategy was always that which Oneflare had laid out at the meeting of 27 April 2012.

Mr Chernih’s role in devising and recommending the SEO strategy

24. In relation to breach, Oneflare relied on the events after May 2012 as showing the extent to which Mr Chernih had formulated and implemented the link building SEO strategy pursued by Oneflare: Judgment [152]. For Mr Chernih, it was submitted that the dealings of the parties showed “that it was Oneflare, rather than Mr Chernih, that decided the SEO strategy to be followed” and that on a number of occasions Mr Dong and Mr Lim implemented “SEO strategies without seeking comment or advice from Mr Chernih”: Judgment [153].

25. Addressing these submissions, the primary judge made the following general findings. First, his Honour held that there were numerous occasions when Oneflare and Mr Chernih collaborated in the implementation of Oneflare’s SEO strategy. To the extent that strategy included link building which carried the risk of penalty from Google, it reflected what Oneflare wanted: Judgment [171]. Secondly, the primary judge found that Oneflare consistently undertook SEO activities, either through Mr Dong and Mr Lim or through other employees, without any reference to Mr Chernih: Judgment [175]. Thirdly, his Honour accepted that, from time to time, Mr Chernih did recommend software programs for Oneflare to use as part of its link-building strategy: Judgment [178]. And finally, that on the “relatively few” occasions that Oneflare referred something to Mr Chernih for advice, his advice was “rarely precise and unequivocal”: Judgment [179].

26. Addressing the second issue formulated by the parties, the primary judge held that the essential elements of the strategy which was pursued and implemented from May 2012 was that laid down by Messrs Dong and Lim on 27 April 2012: Judgment [218]. Mr Chernih then assisted in the execution of that strategy, both by providing assistance to Oneflare’s employees, and by carrying out aspects of the SEO work himself: Judgment [219].

Mr Chernih’s use of appropriate skill and competence

27. With respect to the third issue, the primary judge held that no question of breach arose because Mr Chernih did not formulate the strategy pursued by Oneflare. He was retained to devise and implement an “aggressive” SEO strategy that included link building (Judgment [222]):

… Mr Lucarelli did not submit that, if this were the nature of the retainer, the work done by Mr Chernih nonetheless breached his implied contractual duty or his equivalent common law duty. Nor do I see how such a submission (if made) could be sustained: at least, if it be accepted that (as I have concluded) the duty owed did not have, as a component, a duty to warn of the risks inherent in that strategy.

Quantification of damages

28. The fourth issue concerned the quantification of any damage Oneflare had suffered, assuming it succeeded on liability. The damage claimed was the marginal profit Oneflare lost because of the decline in both traffic and “sales” resulting from the algorithmic demotion in May 2013 and the manual penalty in July 2013. The proposed measure of that damage was the difference between the sales revenue actually achieved in the period 22 May 2013 to 17 March 2015 and the sales revenue that would have been achieved in the same period had those penalties not been imposed, less any additional direct costs which would have been incurred in achieving that increased revenue. Mr Cavanagh’s “low estimates” of the marginal profit lost as a result of those events were $464,516 due to the algorithmic demotion and $497,713 due to the first manual penalty. Oneflare contended that those estimates should be accepted as reflecting its loss: Judgment [269].

29. The primary judge discounted the sum of those estimates by 30% to account for two matters which he specifically identified – “the endogeneity problem and the apparent difference in the growth trendlines” – as well as for other contingencies and uncertainties, including the possibilities of increased competition and of Mr Dong and Mr Lim having engaged in alternative “aggressive” SEO strategies: Judgment [271]–[274].

Findings as to the credibility of Mr Dong and Mr Lim

30. In arriving at his conclusions on liability, the primary judge made significant adverse findings as to the credibility of Mr Dong and Mr Lim:

[12]    Messrs Dong and Lim swore several affidavits. It became clear that, in those affidavits, they sought to downplay their knowledge and deployment of SEO techniques, in particular, the technique of “linkbuilding” (as to which, see at [42] and following below). I have come to the conclusion, on the whole of their evidence, that each of them knew, and did, far more than he suggested in his affidavit evidence as to those topics. In my view, each sought to downplay his knowledge and actions because he feared that the truth would be prejudicial to Oneflare’s claim.

[13]    Each of Messrs Dong and Lim was very concerned to ensure that the Court should understand, and conclude, that all SEO actions taken by them or by Oneflare’s employees at their directions were undertaken “under the instruction” or “under the advice” of Mr Chernih. Their concern to ensure that the Court understood this aspect of their case was such that they sought to insert that qualification, or rider, on numerous occasions in the course of their cross-examinations.

[14]    On most occasions when they did so, that rider could not be thought to have been responsive to the particular question asked. The liberality of use of those forced responses in cross-examination stands in stark contrast to the absence of any such evidence in the affidavits in chief. Some attempts were made to rectify that startling deficiency in the affidavits in reply. Those attempts were manifestly inadmissible and, on objection being taken, were rejected.

[15]    In similar vein, each of Messrs Dong and Lim was concerned to suggest that he did not give instructions to Mr Chernih as to particular SEO activities to be undertaken but, rather, relied on him to tell them what to do. On occasions, this evidence was flatly inconsistent with contemporaneous documents. That led each from time to time to insist that he did not understand the content of emails from the other or from Mr Chernih; but both the form of those emails and the contemporaneous circumstances surrounding them suggest very strongly, and I find, that he did.

[16]    In my view, the evidence to which I have referred in the three preceding paragraphs was dishonest. And in each case, it is dishonest as to fundamental parts of Oneflare’s case.

31. His Honour also made specific findings as to aspects of their evidence in support of his conclusion that Mr Chernih’s account of the meeting on 27 April 2012 should be accepted: Judgment [94]. Although Mr Dong was also at this meeting, he gave no evidence about it in his affidavit in chief. Mr Lim’s evidence as to what was said included that in response to a reference by Mr Chernih to his contract work in SEO having a “specific focus on link building” Mr Dong asked “What’s link building?” Mr Chernih denied that was said and maintained that during the meeting Mr Dong proffered “We know a bit about link building, we have had some SEO work done before when we were PickAQuote”. In his first affidavit in reply, Mr Dong denied saying these words and added that Oneflare’s earlier exposure to SEO (as PickAQuote) did not include “any kind of link-building or aged-domain purchasing work”.

32. The primary judge found that Mr Dong did not say “What’s link building?” His Honour’s second and third reasons for doing so were:

[98]    Secondly, in my view, Mr Dong was well and truly aware of what was involved in linkbuilding. He strove to conceal the extent of his knowledge, and to convey the impression that he knew nothing about this before 27 April 2012. He said in evidence (both in his principal affidavit and in cross-examination) that before about May 2012, Oneflare had not engaged in linkbuilding. That evidence was directly inconsistent with evidence given by Mr Lim.

[99]    Ultimately, Mr Dong had to agree that Oneflare had engaged in linkbuilding prior to May 2012. He sought to cover himself by saying that this had been done by Mr Lim and that he did not know of it. I do not accept that explanation. It is obvious that Messrs Dong and Lim worked closely together. It is not credible that Mr Lim would have retained (as he said he did) a consultant to engage in linkbuilding without discussing this with Mr Dong. That conclusion is reinforced by the fact that it was Mr Dong who was the “computer expert”, and Mr Dong indeed who, by October 2013 at least, regarded himself as sufficiently expert to present himself as an SEO expert.

[100]    I add that, in his affidavit in reply to Mr Chernih’s affidavit, Mr Dong denied that he said that he knew anything about linkbuilding, or that Oneflare had had some SEO work done. He accepted that Oneflare (under its previous name) had retained the services of an SEO specialist. He said, however, that the services provided did not extend to linkbuilding. For the reasons I have just given, I do not accept the first and third aspects of that evidence, which in my view were dishonest.

[101]    Third, Mr Dong agreed that, in the course of the meeting of 27 April 2012, he said words to Mr Chernih to the effect:

I was looking at your LinkedIn profile and saw that you mention that you are across all of the Google updates like Penguin and Panda.

[102]   Mr Lim said in his affidavit that Mr Dong had made a comment to that effect to Mr Chernih. However, the version of Mr Chernih’s LinkedIn profile current as at 27 April 2012 did not say anything about his being “across all of the Google updates like Penguin and Panda”. It is no doubt possible that this aspect of Mr Lim’s evidence, and of Mr Dong’s acceptance of it, could have been mistaken. However, in my view, the real explanation is that Messrs Dong and Lim were seeking to bolster their case, in circumstances where they knew that the Penguin updates (in particular) were of great significance.

33. The fourth reason given by the primary judge for rejecting this evidence of Mr Dong included reference to an email sent by Mr Lim to Mr Chernih shortly after the meeting on 27 April 2012. In the course of dealing with that email, his Honour made the following finding about an aspect of Mr Lim’s evidence:

[108]    As Mr Lim recognised, that email did confirm Mr Chernih’s account of the conversation insofar as it dealt with Thumbtack. Mr Lim sought to downplay his use of the adjective “aggressive”. He said it “meant … a strategy that produced good results”; “a strategy that achieved results in a shorter period of time” (see generally T90-91). In my view, Mr Lim was dissembling when he said that, in an attempt to deflect the consequences that might follow from an understanding that a strategy involving linkbuilding (which to his knowledge Thumbtack had adopted) could be described as “aggressive”.

Denial of procedural fairness by adverse credibility findings (ground 15)

34. In Kuhl v Zurich Financial Services Australia Limited (2011) 243 CLR 361; [2011] HCA 11, the majority (Heydon, Crennan and Bell JJ) said at [67]:

It is not sound judicial technique to criticise a party-witness for deliberately withholding the truth in a fashion crucial to a dismissal of that party's claim unless two conditions are satisfied. First, reasons must be given for concluding that the truth has been deliberately withheld. Secondly, the party‑witness must have been given an opportunity to deal with the criticism.

35. Kuhl was a case in which the trial judge made a finding that a plaintiff claiming damages for a work injury had deliberately supressed material evidence adverse to his case concerning the circumstances in which his injury had occurred. The fact of that suppression had not been suggested to him in cross-examination and the defendant’s counsel had not submitted that finding should be made. If that submission had been made, as the plurality observed at [70], “a breach of the rule in Browne v Dunn would have taken place”. In such a case, the plaintiff’s “remedies might have included a refusal by the judge to accept or entertain the submission, and a recall of the plaintiff to the witness box to deal with the allegation”: Kuhl at [71].

36. That is not this case. Mr Chernih’s final written submissions concerning the credibility of Mr Dong’s evidence included:

[Mr] Dong’s evidence revealed him to be an advocate in his cause, rather than a witness seeking to assist the Court by giving truthful evidence. His evidence in large parts was evasive, argumentative and non-responsive. [Mr] Dong’s evidence on any contested issue should not be believed unless it is corroborated by a contemporaneous document or is against interest. Furthermore, where there is any contest between [Mr] Dong’s evidence and [Mr] Chernih’s evidence, the Court should prefer [Mr] Chernih’s evidence.

[Mr] Dong clearly saw the purpose of his evidence as being (a) to downplay and minimise any technical skills and knowledge on his part, in particular his knowledge of the functioning of the Google search engine algorithm and the existence of the Google Webmaster Guidelines, and (b) to shift all and any blame for Oneflare’s woes on to [Mr] Chernih, willing to say whatever it took to blame [Mr] Chernih, no matter how unbelievable or implausible his evidence was.

37. With respect to Mr Lim, it was accepted that he was “generally more truthful and less obstructive than [Mr] Dong, and also less of an advocate for Oneflare’s cause than [Mr] Dong”. However, it was submitted that on occasion Mr Lim “appeared to be unwilling to answer questions or give truthful evidence that he believed would harm Oneflare’s case”. The most obvious example was said to be “his repetition of the mantra” that everything he or Mr Dong did in relation to SEO was done “under Nick’s guidance” or “under the advice of Nick” or “in consultation with Mr Chernih”. Where there was a conflict between Mr Lim’s evidence and Mr Chernih’s evidence, it was submitted that the Court should prefer the latter.

38. Oneflare’s written and oral responses to these submissions did not suggest that the credit issues raised had not been apparent or unexpected, or that the primary judge should not entertain them, or that the witnesses should be given a further opportunity to deal with them: cf Kuhl at [71]. On the contrary, the responses took issue with the submissions by ultimately arguing that there was no reason not to accept either witness as a witness of truth. At the same time, it was submitted that the Court should reject Mr Chernih as a truthful witness.

39. Oneflare’s complaint is that there was a breach of the rule in Browne v Dunn (1893) 6 R 67. As the following extract from the judgment of Lord Herschell LC makes clear, that rule applies where it is intended to suggest that a witness is “not speaking the truth on a particular point”. His Lordship said at 70:

[I]t seems to me to be absolutely essential to the proper conduct of a cause, where it is intended to suggest that a witness is not speaking the truth on a particular point, to direct his attention to the fact by some questions put in cross-examination showing that that imputation is intended to be made, and not to take his evidence and pass it by as a matter altogether unchallenged, and then, when it is impossible for him to explain, as perhaps he might have been able to do if such questions had been put to him, the circumstances which it is suggested indicate that the story he tells ought not to be believed, to argue that he is a witness unworthy of credit. [Emphasis added]

40. Glass JA observed in Seymour v Australian Broadcasting Commission (1977) 19 NSWLR 219 at 224 (Reynolds JA agreeing) that the rule “is a rule of professional practice as well as a rule of conduct which is essential to fair play at the trial and fair dealing with witnesses”. Once it has been made clear that a witness’s evidence to a particular effect on a given subject should not be accepted as truthful, the rule does not ordinarily require that it then be put to the witness in relation to each answer to that effect on that subject that the answer is untrue. The rule is a practical one designed to ensure procedural fairness from the perspective of the witness and the party calling the witness.

41. Lord Herschell’s statement of the rule at 71 accepts that it is to be applied:

… upon a point on which it is not otherwise perfectly clear that [the witness] has had full notice beforehand that there is an intention to impeach the credibility of the story which he is telling. Of course I do not deny for a moment that there are cases in which that notice has been so distinctly and unmistakeably given, and the point upon which he is impeached, and is to be impeached, is so manifest, that it is not necessary to waste time in putting questions to him about it. All I am saying is that it will not do to impeach the credibility of a witness upon a matter on which he has not had any opportunity of giving an explanation by reason there having been no suggestion whatever in the course of the case that his story is not accepted. [Emphasis added].

42. There are many ways in which a party or other witness might sufficiently be put on notice that their evidence on a particular subject or to a particular effect is challenged as untruthful, and as to the basis of that challenge. Depending on the circumstances, those ways include by pleadings, affidavits or statements of evidence exchanged before the hearing, and opening statements made or exchanged at the commencement of the hearing, as well as by cross-examination.

43. Oneflare submits that Mr Dong and Mr Lim were not afforded procedural fairness in relation to the general and more specific findings extracted at [30], [31] and [32] above. The subject matter of the general findings was their knowledge of and involvement in Oneflare’s deployment of link building that violated Google’s guidelines and was liable to be penalised. The findings made were that each deliberately sought to downplay that knowledge (Judgment [12]); that in relation to the deployment of those strategies each dishonestly maintained that all of those activities were undertaken under Mr Chernih’s instruction or advice (Judgment [13]-[14]); and that each also dishonestly maintained that in relation to that deployment he relied on Mr Chernih for instruction or advice (Judgment [15]).

44. Each of the more specific credit findings at Judgment [98]-[108] concerned the knowledge of Mr Dong or Mr Lim as to the kind of link building which it was proposed be undertaken with the assistance of Mr Chernih. Those findings were directed to: Mr Dong’s knowledge of link building gained from SEO services provided to PickAQuote (Judgment [98]); Mr Dong’s denial that he had said anything about link building at the first meeting and his denial that those earlier services related to link building (Judgment [100]); Mr Dong and Mr Lim’s evidence that there was reference to the Google updates Penguin and Panda at that first meeting (Judgment [102]); and Mr Lim’s evidence as to his understanding of what an “aggressive” link building strategy involved: (Judgment [108]).

45. The affidavit evidence exchanged before the hearing, the parties’ opening statements and the cross-examination of each of Mr Dong and Mr Lim made plain that the truthfulness, not merely the reliability, of their evidence on several matters was challenged. Those matters included what was said at the first meeting, their knowledge of link building and the implementation of Oneflare’s link building strategy. Mr Chernih’s written opening asserted:

Oneflare was a sophisticated client in respect of the provision of SEO services. The technical sophistication and experience of Oneflare’s principals, Messrs Lim and Dong, indicates that Oneflare was fully aware of the nature of various SEO services and how such SEO services interacted with search engine algorithms, and was also aware of the possibility that search engines could take action that may negatively impact a website’s ranking depending on the particular SEO services used.

46. It was also apparent by that time that the challenge to their evidence in relation to those subjects would be made by reference to Mr Dong’s earlier experience in website development, the creation and operation of the PickAQuote website, the contents of the first meeting, and Mr Chernih’s detailed evidence concerning the email and other communication he had with Mr Dong and Mr Lim in the period to August 2013.

47. By the time Mr Chernih’s first affidavit was served, it was plain that there were fundamental differences between his evidence and that of Mr Dong and Mr Lim that could not be explained as due to failures of recollection or of emphasis. For example, in relation to the first meeting, Mr Lim recalled Mr Dong asking “What’s link building?” Mr Lim also recalled Mr Dong asking questions about Google updates like Penguin and Panda which he maintained he had seen on Mr Chernih’s LinkedIn page. Mr Chernih denied that these exchanges occurred. He maintained that following that meeting he believed that both Mr Lim and Mr Dong had prior experience in SEO techniques and a high level of knowledge of those techniques. In his first affidavit in reply, Mr Dong described his understanding of SEO as “very limited” and denied that he or PickAQuote had any previous experience with link building.

48. Several of Mr Chernih’s email communications with Mr Dong and Mr Lim dealt with activities which they apparently initiated and undertook without his prior knowledge or advice. Many assumed or suggested a fairly sophisticated understanding on their part of what various SEO strategies involved. And there was an absence of communications in which Mr Dong or Mr Lim asked questions which might suggest a lack of any real knowledge of what link building involved and of Google’s attitude to it. In his second affidavit in reply, Mr Dong maintained, in relation to Oneflare’s “purchase of aged domain SEO strategy”, that at all times he relied on Mr Chernih’s “oversight, direction and management of that strategy”. That was not in accord with Mr Chernih’s evidence which was that Mr Dong and Mr Lim “generally did not consult me prior to purchasing domains”.

49. Similarly, there were substantial points of difference between the evidence of Mr Lim and Mr Chernih. They disagreed as to what was said at the first meeting concerning link-building and the Google updates. Mr Lim also gave evidence of the following conversation with Mr Chernih on 6 August 2013, at the time Linkbuild’s retainer was effectively terminated:

Marcus:    “Nick, in terms of the link building that you have done for Oneflare why have you intentionally disobeyed the Google guidelines? It has only [been or become apparent] after the manual penalty that you have built toxic and spam links for short term gains. You should have known right from the start that you were breaching Google’s guidelines for SEO and should have stopped what you are doing and advise us not to do it”.

Nick:    “Hey Marcus, yeah I’m really sorry I knew of the Google’s guidelines but I thought my methods were faster and we could get around it and not get detected by Google. I completely admit it’s my fault.”

50. The significance of this evidence was obvious. If it was accepted, Mr Chernih had made admissions that almost certainly were fatal to his defence of Oneflare’s claim. Mr Chernih denied that there was any such conversation. That he would have so spoken was wholly inconsistent with his affidavit evidence. The question for the primary judge was who was telling the truth. Mr Lim’s evidence could not be dismissed as merely mistaken or based on imperfect recollection.

51. Oneflare’s opening submissions to the primary judge confirmed that there were fundamental issues as to the knowledge of Mr Dong and Mr Lim of link building and as to how Oneflare’s strategy was implemented. Oneflare’s counsel described there being a “hot dispute” as to whether “what the plaintiff did in terms of SEO activity was the product of advice and recommendation of the first defendant, or whether the plaintiff acted unilaterally. The plaintiff’s case is that it acted at all times in accordance with the advice and guidance of the first defendant.” It was also stated, in relation to that dispute, that Oneflare’s case was that it “was not aware that the activities it was undertaking at the advice and recommendation of the first defendant [were] in serial breach of the Google webmaster guidelines until it discovered that for itself following the algorithmic penalty of May 2013”.

52. The cross-examination of Mr Dong challenged his evidence that at the outset he did not know anything about link building and the risks that it involved; and that he relied on Mr Chernih and did not undertake any SEO activity without his advice or instruction. Those challenges as to the truthfulness of his affidavit evidence were made by reference to the subjects referred to in [46] above. The propositions put as reflecting the true position included: that Mr Dong did not ask questions at the first meeting about Google because he and Mr Lim “were well aware of the type of SEO techniques that Google rewards or punishes”; that while Mr Chernih was retained Mr Dong and Mr Lim were pursuing their own SEO strategies without any instruction or pre-approval from Mr Chernih; that his evidence that he learnt of the Google Webmaster Guidelines in June 2013 was false; that he was well aware of the existence of those guidelines at all times Mr Chernih was retained by Oneflare; and that his evidence that he did not proceed with any purchases of aged domains without first consulting, or receiving a direction from, Mr Chernih was not correct.

53. At the conclusion of Mr Dong’s cross-examination, the primary judge confirmed, in response to a question from Mr Chernih’s counsel, that there was no need to take the witness through each conversation with Mr Lim or Mr Chernih that was disputed. It was expressly noted that “the rule in Browne v Dunn is amply satisfied when competing affidavits are put on”. That short exchange assumed, as was otherwise obvious, that the credibility of much of the evidence of Mr Dong and Mr Lim, as well as that of Mr Chernih, was in issue.

54. In relation to the findings at Judgment [98]-[102], Mr Dong was cross-examined on each of the subjects on which his evidence was challenged. Whilst those challenges were directed to particular matters, their relevance ultimately lay in establishing his knowledge and experience of link building. With respect to each, he was given an opportunity to explain what he maintained the position was. It was not necessary in that context for the cross-examiner to put to him that his evidence was deliberately evasive or false. It was plain for the reasons I have already given that his evidence on that general subject was challenged as untruthful.

55. In cross-examination, Mr Lim was also challenged as to his understanding of the link building to be undertaken and the extent to which he and Mr Dong devised and implemented the strategies pursued. Again, those challenges as to the truthfulness of his evidence were made by reference to the subjects referred to in [46] above, insofar as they related to him. In the course of his cross-examination, the following propositions were put as reflecting the true position: that from time to time he and Mr Dong devised strategies without first seeking advice from Mr Chernih; that he had previously engaged persons to undertake link building for PickAQuote; that he believed that to increase traffic volumes to 100,000 visits per month required “an aggressive SEO policy”; that he was making up evidence because he thought it would assist his case; that he understood in June 2012 that “spam link building” could attract an algorithm penalty from Google; that he was aware from the outset of the possibility that particular SEO work could result in Google imposing a penalty; and that he had made up evidence as to his receiving advice from Mr Chernih about particular webpage content containing links.

56. With respect to the specific finding at Judgment [108] Mr Lim denied that an “aggressive” SEO strategy included “aggressively link building”. In context that question could only be understood as referring to link building which carried a risk of being penalised by Google. That sufficiently gave Mr Lim the opportunity to respond to the challenge to his evidence that he did not have that understanding.

57. For these reasons, ground 15 is not made out. The conclusion that there was no denial of procedural fairness is wholly consistent with the way in which counsel for each party conducted the trial, and with the primary judge’s observation at Judgment [11]:

Messrs Dong and Lim were cross-examined extensively, and their credibility was put in issue. Mr Chernih, too, was cross-examined extensively, and his credibility was put in issue.

58. Finally, I note that nowhere in Oneflare’s written or oral submissions in support of this ground was it suggested that there was any particular matter which either of Mr Dong or Mr Lim was not given an opportunity to explain or lead evidence about that was relevant to the issues on which their credibility was challenged.

Remaining liability grounds of appeal (grounds 1 to 9, 10, 11 and 12)

59. Grounds 1 to 9 challenge his Honour’s finding that Oneflare’s instruction that it wanted to pursue an “aggressive” strategy entailed, to the knowledge of Oneflare and understanding of Mr Chernih, that the proposed link building would breach Google’s guidelines and thereby carry the risk of penalty. That error is said to affect the reasoning supporting his Honour’s overall conclusions as to the scope of the retainer and the breach of Mr Chernih’s duty of care. Grounds 10, 11, 12 separately challenge specific findings made at Judgment [185], [205] and [212].

Findings as to the scope and terms of the retainer and breach of duty (grounds 1 to 9)

60. Oneflare’s argument proceeds as follows: SEO includes “off-page” optimisation, which essentially is link building that may or may not be in accordance with Google’s guidelines. Google seeks to detect and not take account of or penalise link building which violates those guidelines. Oneflare instructed Mr Chernih to pursue an “aggressive” SEO strategy, which included link building similar to that employed by Thumbtack. The primary judge construed “aggressive” in this context as meaning link building which was not compliant with Google’s guidelines. His Honour thereby “conflated” aggressive link building and non-compliant link building and overlooked that an “aggressive” link building strategy could comply with Google’s guidelines. The evidence did not support his Honour’s conclusion that such an instruction described link building not in accord with Google’s guidelines. Accordingly, the primary judge should have found that Oneflare’s instruction as to “aggressive” link building required Mr Chernih to engage in link building that did not breach Google’s guidelines.

61. This “conflation” error is said to have induced a series of wrong findings, each of which is challenged: that Oneflare’s instruction was to pursue a SEO strategy that necessarily involved non-compliant link building (grounds 1(a), 5); that Oneflare understood instruction as requiring the pursuit of a non-compliant link building strategy (grounds 1(b), 2); that it was reasonable for Mr Chernih to understand that Oneflare understood what “aggressive” link building involved (ground 2); that Mr Chernih sufficiently warned Oneflare about the risks of such link building (grounds 1(c), 3, 4, 6); that there was no basis for imposing on Mr Chernih an obligation to warn of those risks where he rightly believed that Oneflare understood them (ground 7); and that there was no breach by Mr Chernih or Linkbuild of any obligation to use reasonable care and skill (ground 8). Finally, ground 9 formulates the favourable findings that it is contended the primary judge should have made, having accepted Oneflare’s underlying argument.

62. Oneflare’s argument takes issue with the primary judge’s conclusion – which involved construing the language of the parties – that its instruction to pursue an “aggressive” SEO strategy proposed link building “for its own sake” and accordingly involved the risk that Google might demote or penalise the website: Judgment [116]. His Honour’s reference to link building “for its own sake” describes the creation of artificial or unnatural links intended to “manipulate” Google’s search results in the sense described in Mr Weyher’s evidence extracted at [10] above. However, it did not follow, as his Honour’s other findings make plain, that such link building necessarily carried a high risk of detection and penalty by Google.

63. The primary judge recognised that, within the range of activities that may constitute such link building, the risk of detection and action by Google increased depending on the number and lack of “quality” of the links created. His Honour described those more risky activities as involving “over indulgence in (or over enthusiastic pursuit of) link building”: Judgment [118(4)], [146]. He also noted in this context that the success of any link building strategy that includes the building of artificial or unnatural links depends on the links not being detected as such by Google: Judgment [40]. These findings and observations show that, contrary to Oneflare’s submission, in concluding that its instruction was directed to the building of artificial or unnatural links, the primary judge did not overlook that link building could comply with Google’s guidelines. At Judgment [41], his Honour noted that such strategies are referred to as “white hat” strategies. He expressly recognised the distinction between those strategies and what Oneflare proposed by use of the words “for its own sake”.

64. The primary judge did not err in concluding that Oneflare’s reference to an “aggressive” strategy was one involving the creation of “unnatural” links or use of link schemes. Link building is the creation of links to a website, and the adjective “aggressive” is apt to denote both intensified quantity or frequency and the taking of calculated risks. The creation or acquisition of “natural” links to a website is not “aggressive” in either of those senses.

65. The context provided by the parties’ exchanges at their first meeting show that these were the senses in which “aggressive” was reasonably to be understood. Notwithstanding that the contract was informal and partly oral, the objective theory of contract requires, once a finding is made as to what was said, that the parties’ language be construed as reasonable persons in their position would have understood it: see Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd [2016] HCA 26; (2016) 90 ALJR 770 at [22] (French CJ, Kiefel, Bell JJ), [196] (Nettle J), [242] (Gordon J). In that first meeting, Mr Chernih described link building as “building links to artificially inflate your link profile in Google’s eyes” [emphasis added]. That was not a description of a strategy involving the creation of “natural” links which in no sense “artificially inflate” a website’s link profile. Mr Dong replied that Oneflare knew “a bit about link building”. That response would be understood as directed to link building of the kind described by Mr Chernih. And it was most likely that was what Mr Dong in fact intended because the link building to which he was referring was the creation of “spammy”, and accordingly “unnatural”, links: see [12] and [15] above.

66. Mr Chernih also explained that link building which focussed on the quantity and not quality of the links created was “more likely to get you penalised than help your ratings”. There was no point in his answering Mr Lim’s question in that way if the parties were talking about the creation of links which involved no such risk. In that context, the contrast implicit in Mr Chernih’s observation was between such an outcome and one in which the link building improved the website’s rankings without being penalised. All of this would have been apparent to someone who had a good working knowledge of link building techniques and the risks they presented.

67. That directs attention to the primary judge’s finding that at the time of these exchanges Mr Dong, and likely also Mr Lim, understood what was involved in link building “for its own sake”: Judgment [118]. That finding is challenged. That challenge must also be rejected. Mr Chernih explained in the exchanges to which reference has been made that he regarded an “aggressive” strategy as involving building links to “artificially” inflate the website’s link profile, an activity which carried the risk of being penalised by Google if detected. That risk of detection depended on the perceived “quality” of the links created. As those links were to “artificially” inflate the website’s link profile, their “quality” was to be measured by the extent to which they replicated or had the appearance of “natural” links. Mr Dong and Mr Lim did not ask for any further explanation or suggest that what they knew about link building did not extend to an understanding of what Google sought to penalise.

68. Almost immediately after Mr Chernih was retained, it was readily apparent from the email exchanges between the parties that Mr Dong and Mr Lim did appreciate that the link building being undertaken involved the creation of links of the kind Google sought to detect and penalise. It is sufficient to give four examples.

69. The first is an email exchange on 4 June 2012. Mr Lim had asked Mr Chernih to send him blogs written for posting onto third party websites. On receipt of those blogs by Mr Lim the following exchange occurred:

Mr Lim:    “That’s excellent! Thanks for sending through those samples. Adam and I have one question regarding the blogs that have been written. I noticed that some of the link [sic] are referencing other sites such as Alibaba.com for instance… I am assuming this is intentional and used for SEO purposes.”

Mr Chernih:    “Yep, we like to link out to other high authority sites, as you see people naturally link out to authority sites in their blogs. It can look suspicious if there are blogs with the only links to you. Sometime we’ll do that, but that’s to get variety.”

70. Mr Dong did not enquire what Mr Chernih meant by “suspicious”. The word was plainly understood as a reference to Google’s means of detecting “unnatural” links.

71. The second was an email exchange between Mr Lim and Mr Chernih on 8 June 2012, after Google notified Oneflare of a technical error in displaying its website and began to lower its ranking:

Mr Lim:   “Is there any way to get Google to index us faster apart from link building?”

Mr Chernih:   “You can ping, but it’s not faster…”

Mr Lim:   “Lol Adam wants to know if we spam link build say 100–500 links would it go crawl us faster.”

Mr Chernih:   “You would get crawled faster but lose ranking, haha.

Well, temporarily you could rank first…”

Mr Lim:   “Point taken! Thanks mate.”

72. When cross-examined about this exchange Mr Lim accepted that by this time he was aware that link building carried a risk of penalty.

73. The third email exchange occurred on 23 and 24 July 2012. Mr Dong sent Mr Chernih an email that listed 5 off-page links to the Oneflare website on redirect pages of websites operated by the US Government. He asked:

Mr Dong:   “Would it be worthwhile building links to these redirect pages to get them indexed by Google and use anchors [such as] “home services” on said links?”

Mr Chernih:   “Yes, it can be worthwhile doing a little bit, but not too much.”

Mr Dong:   “alright cool thanks :)”

74. The fourth occurred in early August 2012. On 8 August, Oneflare had received a Google Alert notifying it that there was a reference to “OneFlare Saves the Day” in a blog posted to a website address which included “cameroonchurches.org”. It was then the subject of the following exchange between Mr Lim, Mr Chernih and Mr Dong:

Mr Lim:   “Hey is this coming from anyone’s link building?”

Mr Chernih:   “I’ll ask one of my VA’s if it was them when they come online. I don’t like these types of links because notice the amount of posts going out on that site – it’s not good.”

Mr Dong:   “This is me. yeh it’s pretty shit I won’t get these things again.”

Mr Chernih:   “You should get away with it, but that’s the type of stuff that happened with BMR. It was a blog network, highly publicised (main problem, easily on Google’s radar), that people shared blogs to the network to get posts, and saw hundreds of posts per day.”

75. The comments “it’s not good”, “yeh it’s pretty shit”, “You should get away with it” and “easily on Google’s radar” make plain the understanding of each of the participants that the link building undertaken by Mr Dong was of the kind sought to be penalised by Google. There was no suggestion in any of these email exchanges of surprise on the part of Oneflare that the links being created had that character. Nor was it said that the creation of those links was contrary to Oneflare’s instruction or expectation. All of this was wholly consistent with his Honour’s findings that from the outset at least Mr Dong, and most likely also Mr Lim, were aware of those risks and were prepared to accept them (Judgment [116]), and that it was reasonable for Mr Chernih to understand, as he maintained he did, that they had “a good understanding of SEO techniques” (Judgment [118(3)]).

76. These conclusions require that the challenge made by grounds 1 to 9 be rejected. It was accepted before the primary judge and not argued otherwise in this Court that, if Mr Chernih was retained to implement an “aggressive” strategy and reasonably believed that Oneflare was aware of the risks involved, there could be no breach of the retainer in implementing such a strategy or breach of duty in not warning of the risks inherent in it: Judgment [222].

Three further and specific findings (grounds 10, 11 and 12)

77. Ground 10 challenges the finding at Judgment [185]. That finding related to the email exchange of 8 June 2012 (see [71] above) concerning the acquisition of aged domains. The ground misstates the effect of the finding which was not that Mr Chernih did not recommend the buying of aged domains, but that the advice given by Mr Chernih on that occasion could not be interpreted as an unqualified endorsement of a strategy of purchasing aged domains and populating them with backlinks to Oneflare’s website. For this reason, ground 10 is without substance and rejected.

78. As to ground 11, in cross-examination Mr Chernih agreed “Your SEO strategy” was to “break Google’s guidelines at all times”. At Judgment [205], the primary judge described that evidence as a concession by Mr Chernih concerning “Oneflare’s SEO strategy”. This ground challenges that “finding” – and its reference to the strategy being Oneflare’s as distinct from Mr Chernih’s – as inconsistent with what Mr Chernih said. This ground also misstates the effect of his Honour’s finding. As is apparent from Judgment [208], among other places, the strategy to which his Honour is referring at Judgment [205] is that which “Oneflare retained Mr Chernih to devise and implement”. So understood, the finding was justified and in accord with his Honour’s findings at Judgment [218] and [219], as to which see [26]. Ground 11 is rejected.

79. Ground 12 challenges as a “finding” the primary judge’s statement at Judgment [212] that “Oneflare did not consult Mr Chernih to find out what could be done”. The primary judge continued “It retained Mr Chernih to devise and implement an SEO strategy that had as its centrepiece the creation of backlinks”. Oneflare’s written submissions acknowledge that this challenge depends upon its establishing that the second statement is not correct. For the reasons given above, that argument has not been made out and ground 12 must be dismissed.

80. Finally, none of these challenged findings, even if shown to have involved some error, is said or shown to require a different outcome on the question of liability to that which follows if grounds 1 to 9 are not made out.

81. In the result, these and the other grounds of appeal going to the question of liability are rejected. It follows that the appeal should be dismissed. There remains the now moot issue as to the quantification of Oneflare’s damages.

Quantification of damages (ground 14)

82. Mr Cavanagh’s methodology for calculating Oneflare’s loss required estimation of its counterfactual revenue between 22 May 2013 and 17 March 2015 but for the imposition of the algorithmic and manual penalties. There was then to be subtracted from that revenue the actual revenue earned during that period, as well as the additional direct costs it would likely have incurred to achieve the additional sales revenue. No challenge is made in the appeal as to that being a correct measure of Oneflare’s loss as a result of the alleged breaches of contract and of duty. The narrow issue between the parties is as to the discount applied to Mr Cavanagh’s estimate of loss using that methodology.

83. The first and third elements in Mr Cavanagh’s calculation required estimates to be made as to a hypothetical past situation if the penalties were not imposed (presumably because Mr Chernih would not have employed non-compliant SEO strategies in the period before May 2013). Mr Cavanagh estimated the first by applying assumed sales growth rates to maintainable sales revenue at the start of the loss period. The sales growth rates were estimated by taking the actual growth rates achieved by Oneflare in the six month period from March to August 2014 (when it was considered the likely effect of the penalties had dissipated). The maintainable level of sales was estimated by adopting the sales Oneflare was achieving immediately before 22 May 2013. That level of sales followed a period during which Oneflare had engaged in SEO strategies that were contrary to Google’s guidelines.

84. Before the primary judge, Mr Chernih submitted that the sales growth rates used to make the revenue estimate also included the beneficial influence of non-compliant SEO strategies employed during the earlier period. That beneficial influence was referred to by the parties and the primary judge as “the endogeneity problem”. In response to Mr Chernih’s submission that some allowance should be made for that problem (which was said to result in higher growth rates and thus to increase the estimated past revenue), Oneflare suggested that an allowance could be made for it by discounting Mr Cavanagh’s overall estimate of the lost marginal profit for the relevant period: Judgment [228]-[230]. The primary judge accepted that such a discount should be made: Judgment [257]-[258].

85. Mr Chernih submitted that the level of maintainable sales to which Mr Cavanagh applied those growth rates was overstated for the same reason. The primary judge accepted that was so: Judgment [259]-[260]. However, a further consideration revealed in his view a number of uncertainties that had to be taken into account when considering each of those estimates – the starting sales figure and the rates of growth. First, he observed that, even if only compliant SEO strategies had been employed before May 2013, the later growth rates were consistent with the sales figures in May 2013 being about the same as they were in fact: Judgment [261]. His Honour then noted that the revenue growth rates in the later period (from March 2014) appeared to be slightly higher than those during the earlier period from December 2012 to May 2013 and that, looking at the overall period from December 2012, the rate of growth may have “flattened out somewhat”: Judgment [262]-[263]. At that point, his Honour acknowledged that there “may be other possible outcomes, or other possible explanations, as to how these matters might have played out” and that, as a result, there was a level of uncertainty which must be factored into any discount.

86. In assessing the appropriate discount, his Honour took into account “the endogeneity problem and the apparent difference in the growth trend lines”. He also sought to take into account other factors that might have affected Oneflare’s estimated revenue in the past hypothetical period from May 2013. These included the possibility of disruption of Oneflare’s business (presumably conducted before May 2013 using compliant SEO strategies) from competition, as well as the possibility that Oneflare would have independently sought to employ some non-compliant strategies: Judgment [271], [273]. His Honour’s earlier discussion showed that these possibilities could have affected Oneflare’s revenue levels as at May 2013, and sales growth rates experienced after that time. Taking account of these matters, and accepting that the exercise was “necessarily impressionistic”, the primary judge concluded that an “appropriate discount rate” was 30%: Judgment [274].

87. Oneflare submits that in making this assessment the primary judge took into account irrelevant matters and failed to apply the principles referred to Armory v Delamirie (1722) 1 Stra 505; 93 ER 664, as explained in McCartney v Orica Investments Pty Ltd [2011] NSWCA 337 at [148]-[161] (Giles JA, Macfarlan and Young JJA relevantly agreeing). It is said those principles required, as distinct from permitted, the primary judge to resolve the uncertainties to which he referred against Mr Chernih “whose wrong has thrust the innocent party into a difficult task of proving a past hypothetical”.

82. It is sufficient, in order to deal with this second argument, to refer to the following observations of Giles JA in McCartney at [156]-[158]:

[156]   Armory v Delamirie, L J P Investments Pty Ltd v Howard Chia Investments Pty Ltd (No 2) and Houghton v Immer (No 155) Pty Ltd were footnoted in the reasons of Gleeson CJ and McHugh, Gummow, Kirby, Hayne, Callinan and Heydon JJ in Murphy v Overton Investments Pty Ltd [2004] HCA 3; (2004) 216 CLR 388 at [74] for the proposition that the trial judge on remitter "may think it proper to draw inferences in favour of [the plaintiffs] if it is concluded that the respondent's wrong itself made quantification difficult". The quantification was of loss or damage through undertaking financial obligations, by no means involving the defendant's control of relevant evidence.

[157]    In State of New South Wales v Burton [2008] NSWCA 319 the principal issue was the chance of a better outcome if the plaintiff had been provided with early counselling and appropriate psychological or psychiatric care. Basten JA, with whom Allsop P and Handley AJA agreed, cited L J P Investments Pty Ltd v Howard Chia Investments Pty Ltd (No 2) and Houghton v Immer (No 155) Pty Ltd and said that "[t]he appropriateness of drawing inferences in favour of a plaintiff in such circumstances" was approved in Murphy v Overton Investments Pty Ltd (at [107]-[108]). His Honour identified a range from 16 per cent to 20 per cent for the lost chance, and said (at [110]) -

"Although the onus is on the plaintiff to identify the value of the lost chance, in accordance with the authorities referred to above, it is reasonable to err on the side of generosity, to avoid the negligent defendant obtaining too great a benefit of the doubt from uncertainty as to the causes and treatment of psychiatric conditions. Taking these factors into account, I would assess the value of the lost chance at 20%."

[158]    Such a course is not a substitute for proof of loss, or an invitation to punishment rather than compensation. It need not be taken, but may be; many assessments of future economic loss from impairment of earning capacity, for example, involve uncertainty, but an approach of resolving the uncertainty against the wrongdoer is generally not taken. Where within the proved case there is a range, however, the wrongdoer can hardly complain if the loss is found at the upper end of the range.

89. As the last observation makes clear, the principles identified do not require inferences to be drawn favourably to a plaintiff in all cases, or even in all cases where there is uncertainty which may be expressed as a range of possible outcomes. Accepting that to be the position, it is not shown that the primary judge erred in not taking that approach in this case.

90. Oneflare identified five matters which it submitted were taken into account, although not relevant. The first was the endogeneity problem which is said not to have existed based on the finding at Judgment [261]. That finding is that the rates of sales revenue growth in the periods December 2012 to May 2013 and March to August 2014 were “similar”. The primary judge did not, however, find that they were the same, and at Judgment [262] his Honour noted that the rate of growth in the later period was “slightly higher”. That difference was sufficient to justify a conclusion that the problem remained present.

91. The second and fourth matters relate to the differences in the growth trend lines for those two periods. It is accepted that there were uncertainties as to the reliability of each as an indicator of what the position was likely to have been in the past hypothetical. That is sufficient to justify the primary judge’s accounting for that uncertainty.

92. The third and fifth matters are the possibilities of adverse competition and independent use of non-compliant strategies. It is submitted that, as the loss being estimated was for a past period, what Oneflare might or might not have done was irrelevant. That is not so where, as here, that loss is being estimated by reference to a past hypothetical. As Brennan and Dawson JJ uncontroversially observed in Malec v JC Hutton Pty Ltd (1990) 169 CLR 638 at 639, “[h]ypothetical situations of the past are analogous to future possibilities: in one case the Court must form an estimate of the likelihood that the hypothetical situation would have occurred, in the other the Court must form an estimate of the likelihood that the possibility will occur. Both are to be distinguished from events which are alleged to have actually occurred in the past.”

93. The hypothetical events with which the sales revenue estimate is concerned are those that might have happened in the periods before and after May 2013, assuming that Mr Chernih in the performance of his retainer had made Oneflare aware of the SEO strategies available and the risks they entailed. The uncertainties included that Oneflare might have faced different competition in response to the different SEO strategies it adopted and that it may have continued to pursue non-compliant link building. The happening of those possibilities could have affected the level of Oneflare’s sales as at May 2013 and the rate of growth of its sales thereafter. In my view the primary judge is not shown to have erred in taking these matters into account. Ground 14 should be rejected.

Conclusion

94. In the result, the appeal should be dismissed with costs.

95. GLEESON JA: I agree with Meagher JA.

96. LEEMING JA: I agree with Meagher JA.

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Amendments

07 August 2019 - inclusion of a missing "not" in [40]

Decision last updated: 07 August 2019