Sovereign v Bevillesta (No.2)

Case •

[2002] NSWSC 7

•

23 January 2002

No judgment structure available for this case.
CITATION: Sovereign v Bevillesta (No.2) [2002] NSWSC 7
CURRENT JURISDICTION: Equity
FILE NUMBER(S): SC 4486/96
HEARING DATE(S): 23, 24 and 25 October 2001 (with written submissions dated 5, 16 and 23 November 2001)
JUDGMENT DATE: 23 January 2002

PARTIES :
Sovereign Motor Inns Pty Ltd (P)
Bevillesta Pty Ltd (D)
JUDGMENT OF: Austin J
COUNSEL : M Cashion SC with F Donohoe (P)
B Walker SC with K Smark (D)
SOLICITORS: Laurence & Laurence (P)
Robinson Creais )D)
CATCHWORDS: CONTRACT - measure of damages when defendant lessor failed to comply with air conditioning covenant and plaintiff lessee's hotel suffered loss of profits - court accepts general statements but not specific assessments by plaintiff's expert - whether evidence sufficient to amount to proof of damages - proper approach for court in assessing damages in such a case
CASES CITED: Ashcroft v Curtin [1971] 1 WLR 1731
Bonham-Carter v Hyde Park Hotel Ltd (1948) 64 TLR 177
Commonwealth v Amman Aviation Pty Ltd (1991) 174 CLR 64
Minchin v Public Curator of Queensland [1965] ALR 91
Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625
Sovereign v Bevillesta [2001] NSWSC 369
Tate & Lyle Food & Distribution Ltd v Greater London Council [1982] 1 WLR 149
DECISION: See under heading 'Conclusion'

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

AUSTIN J

WEDNESDAY 23 JANUARY 2002

4486/96 SOVEREIGN MOTOR INNS PTY LTD V BEVILLESTA PTY LTD (NO.2)


      HIS HONOUR:

1 The plaintiff was a lessee, conducting a motel business, of part of a building at 220 Pacific Highway Crows Nest. The defendant was the lessor. The lease, for a term of 10 years commencing on 11 July 1991, with options to renew, contained a covenant by the lessor (clause 7.1 (a)) to use its best endeavours to maintain and service the air-conditioning plant and the elevators to the best of its ability, to ensure that they were kept working and reasonably available for use of the lessee.

2 In proceedings commenced in 1996, the plaintiff sought damages for breach of this covenant, and also for failure by the defendant to maintain the exterior and common parts of the building to a reasonable standard.


      My judgment of 7 May 2001

3 On 7 May 2001 I handed down reasons for judgment (Sovereign v Bevillesta [2001] NSWSC 369) in which I concluded that the defendant had breached clause 7.1 (a) with respect to the air-conditioning plant. Mr Ramian was the maintenance manager of the building who was responsible for maintenance of the air-conditioning system, and Mr Reidy was an air-conditioning expert engaged by the defendant. I concluded (at paragraph 98) that

          "Mr Reidy or Mr Ramian or both of them engaged in persistent and systematic interference with the cooling and heating systems in a manner that reduced their capacity and efficacy on weekends and public holidays and outside business hours during the week. They did so by downloading the chillers, adjusting the temperature set points and sometimes turning the chillers or boilers off. It is likely that they did so in order to reduce the cost of the operation of the air-conditioning plant to Bevillesta."

4 I described this interference with the system (at paragraph 99) as "the recurrent, persistent cause of the cooling and heating problems" in the hotel and I said that "the overall failure of the system to provide satisfactory cooling and heating to the hotel premises was caused by Bevillesta's conduct in introducing impediments to the system, and by its failure to remove those impediments."

5 As regards the elevators, I found (at paragraph 102-107) that the there were frequent complaints by guests and staff relating to reasonably serious problems, in the period from 1991 to 2000. I found that the elevators were more than usually troublesome. However, since the defendant had engaged a reputable lift maintenance company, which had responded to problems and had carried out general maintenance, the plaintiff had failed to establish that the defendant was in breach of clause 7.1 (a).

6 As regards presentation of the building, I found (at paragraph 109) that the miscellaneous evidence about various problems with the building and its facilities, and the defendant's responses, did not establish a breach of any provision of the lease. My reasoning on this point did not assert or imply that there was in fact a problem (as opposed to a miscellany of discrete complaints and responses) with respect to presentation of the building and its facilities.

7 I then turned to the assessment of damages. The plaintiff seeks to recover damages representing its loss due to under-performance of the hotel. An important question is whether any such loss was caused by the defendant's breach of clause 7.1 (a) with respect to the air-conditioning plant. At the initial hearing the plaintiff sought to establish causation by relying on both expert and lay evidence. The defendant led expert evidence contrary to the plaintiff's evidence.


      The first, second and third HAP reports, and Mr Robertson's report

8 The plaintiff relied on four letters by experts in hotel management, Mr Greg Vains and Mr Vasso Zographou, who were at relevant times a manager and a director, respectively, of Horwath Asia Pacific Pty Ltd ("HAP").

9 The first letter is a report, dated 12 November 1998, which gave some projections on operating performance and cash flow for the period from 1 July 1992 to 30 June 1996, based on assumptions to the effect that the air-conditioning plant and elevators were adequately serviced and maintained and the external appearance of the building was maintained to a proper commercial standard. The report asserted that there was a variance between actual net results during that period and estimated re-forecast net results, of $1,772,000. By a letter dated 24 May 2000, the experts corrected this figure, having discovered that the first report incorrectly stated the actual trading results for the 1994 and 1996 years. The corrected figure was $1,838,000.

10 They prepared another report dated 24 May 2000, which was closely similar in approach, methodology and assumptions to the report of 12 November 1998, but covered the period from 17 July 1996 to 31 May 2000. I shall refer to the report of 12 November 1998, as corrected by the letter of 24 May 2000, as the first HAP report, and to the report dated 24 May 2000 as the second HAP report.

11 It is important for present purposes to note that both the first and second reports disclose the approach of the authors to the task assigned to them, by setting out information sources and assumptions, and dealing at some length with methodology. The methodology explains the concept of "fair share" and a method of projecting market penetration rate, the calculation of average daily rate, and the inputs of departmental revenue and costs to the HAP forecasting model. The reports annex statements of projected cash flows and operations for the relevant years, split up into the component parts identified in the methodology. Thus, for the purposes of the references in my judgment of 7 May 2001, and subsequent orders, to the approach and methodology of the HAP reports, the meaning of the words "approach" and "methodology" can be ascertained from carefully reading the reports themselves.

12 The defendant relied on a report dated 31 March 2000 by Mr John Robertson, a valuer with expertise in hotel valuations. Mr Vains and Mr Zographou responded with a critique of Mr Robertson's report, in a letter dated 25 May 2000, to which I shall refer as the third HAP report.


      My findings with respect to the experts' reports

13 I considered these various reports in paragraphs 113-127, 131, 134 and 135 of my judgment. I identified a dispute between Mr Vains and Mr Robertson with respect to certain aspects of the methodology used in the first and second HAP reports. I dealt with two matters.

14 First, I noted that Mr Robertson criticised Mr Vains for not attempting to assess the impact of the alleged problems with respect to air-conditioning, lifts and presentation of the building, but simply comparing actual profits with an estimate of profits on the basis that those problems did not exist. Mr Robertson's report asserted that no nexus had been established between the alleged problems and the actual loss of revenue, noting that underperformance of the hotel could be attributed to other reasons.

15 I disagreed (at paragraph 122) with Mr Robertson's view that no nexus had been established between the air-conditioning problem and the hotel's underperformance. I said that his opinion rested upon a proposition about causation which was a legal question rather than one for his expert opinion, and that his opinion was more narrow than the applicable law. I said that the Court could form a view about causation by inference from the known facts even if there was no specific evidence establishing a nexus. I quoted a long passage from the third HAP report (at paragraph 117), to the effect that, based upon their experience in and knowledge of the hotel industry, Mr Vains and Mr Zographou held the opinion that air-conditioning is one of the most important factors in ensuring that guest comfort levels are satisfied, and that guests having a bad experience of air-conditioning would pass on negative comments and this would lead to a loss of business. I said (paragraph 123) that this passage reflected ordinary common sense and experience, and I noted (paragraph 118) that Mr Leatherbarrow, a person of great experience in the hotel industry who had lived in the hotel for some time, had given similar evidence.

16 I held (paragraph 131) that the approach taken in the first and second HAP reports, as justified in the third report, was consistent with the approach taken in cases dealing with the measure of damages in contract. I noted that the reports assessed the variance, and therefore damages, for each of the periods they addressed.

17 I rejected the defendant's submission, supported by the opinion of Mr Robertson, that it was impossible to assess damages because there was no basis for separating loss of revenue referable to the defendant's conduct from loss of revenue referable to air-conditioning problems not produced by the defendant's conduct. I held (at paragraph 134) that the approach and methodology taken in the HAP reports, which assessed loss of revenue caused by the air-conditioning, elevator and presentation problems together, should be accepted by the Court, and further evidence should be adduced, for the purpose of applying that approach and methodology to assess the loss of revenue caused by the air-conditioning problem alone. As I have said, I had earlier found (paragraph 99) that the defendant's breach of clause 7.1 (a) by interference with the system was the recurrent and persistent cause of the hotel's cooling and heating problems. I specifically rejected the defendant's contention that there were other significant causes of the cooling and heating problems (at paragraph 135).

18 In written submissions dated 16 November 2001 (paragraph 11) counsel for the defendant submitted that "at no stage in the plaintiff's evidence was any attempt made to separate or allow for air-conditioning difficulties which arose from breaches of the lease and air-conditioning difficulties which would have arisen notwithstanding compliance with clause 7.1 (a)". That submission is contrary to the findings of fact in paragraphs 99 and 135 of my judgment of 7 May 2001. I see no reason for revising those findings, and I therefore reject the submission.

19 Secondly, Mr Robertson criticised, as inapt, the choice by Mr Vains and Mr Zographou of eight other specific hotels, for the purpose of calculating the applicable average daily rate and occupancy rates for the plaintiff's hotel. I held (at paragraph 121) that Mr Robertson's criticism of the HAP reports on this ground did not destroy the value and utility of those reports, though the assault served to weaken the evidence to a degree. I said that while a valuer should have regard to the most closely analogous comparative information when making an assessment, the lack of close analogues did not prevent an estimate from being made, and that making adjustments to allow for limits of comparability was an important part of the expert's task.

20 Consequently, I held that to the extent that Mr Robertson, and counsel for the defendant in submissions, had criticised the methodology of the first and second HAP reports, those criticisms were rejected. Overall, my view was that the approach and methodology in those reports was acceptable to the Court, but needed to be re-applied in light of my findings on breach, so as to assess the loss attributable to the air-conditioning problem alone (see paragraph 134).


      Orders for the further conduct of the proceedings

21 The conclusions stated in my reasons for judgment of 7 May 2001 included the following:

          "142. Those damages [for the defendant's persistent breaches of clause 7.1 (a) with respect to air-conditioning] are to be assessed by the contract measure of damages, and the methodology adopted by Mr Vains [that is, the methodology in the first and second HAP reports] is the appropriate methodology. However, the reports by Mr Vains do not deal separately with breaches arising with respect to the air-conditioning plant, since Mr Vains assumes breaches with respect to the elevators and the presentation of the building as well.
          143. In my opinion the correct approach is to give Sovereign the opportunity to present further evidence, along the lines of the reports by Mr Vains, but confined to the air-conditioning problems, and to give Bevillesta the opportunity to challenge that evidence and tender, if it wishes, an alternative assessment made on the same principles. This can be achieved if I direct an inquiry, either before the Master or before me, as to the amount of damages payable in light of the Court's findings with respect to breach, using and applying the methodology set out in the three reports of Mr Vains. The question of assessment of damages will not be reopened at large, since my orders will accept the methodology and approach of Mr Vains."

22 Consequently, on 24 May 2001 I made orders including declarations as follows:


· that the defendant breached clause 7.1 (a) of the lease with respect to air-conditioning, and that the plaintiff was entitled to recover damages for that breach notwithstanding the limiting provisions of clause 7.1 (d); and


· that the assessment of damages for that breach, and any interest to be awarded thereon, would be the subject of further consideration by the Court, "to be carried out in accordance with the reasons for judgment of Justice Austin delivered on 7 May 2001".


      Findings as to quantum

23 In the "Plaintiff's submissions on Damages" dated 5 November 2001, paragraph 10, the plaintiff proceeded on the basis that the Court had accepted not only the approach and methodology in the HAP reports, but also the numerical assessments of loss of revenue contained in the first two reports. The damages attributable by those reports to the three elements of air-conditioning, elevators and building presentation was $2,941,000 in total. In the plaintiff's submission, therefore, the Court's present task is to identify the portion of that figure attributable to air-conditioning alone.

24 This submission misreads my judgment of 7 May 2001. At paragraph 31 of my judgment, I recorded the numerical figures reached in the first and second reports. However, I did not adopt those figures, but merely said that the approach of assessing variance and therefore damages was consistent with the case law. I decided to accept the approach that had been used in the HAP reports, but the numerical conclusions are clearly not part of the approach or methodology of the authors of the report. At paragraph 142-143, quoted above, I made it plain that the task of assessing damages was still to be undertaken. It is, of course, open to me to accept the HAP figures now, having reviewed all the evidence on assessment of damages.


      The hearing on assessment of damages

25 The hearing on 23, 24 and 25 October 2001, supplemented by written submissions, was for the assessment of damages pursuant to my orders of 24 May 2001.

26 The plaintiff tendered a further report by Mr Vains and Mr Zographou, dated 8 June 2001. The report is on HAP letterhead, but it notes that in early 2000, Mr Vains left HAP to form his own consulting practice, called Hotel Consulting Services, of which he is managing director. The defendant objected to the admissibility of the whole of this new report, but for reasons delivered ex tempore on 23 October 2001, I held that the report was admissible, although I rejected certain specified parts of it.

27 As I have said, Mr Vains supplemented the new report with brief oral evidence, by leave. He was cross-examined extensively. My assessment of Mr Vains as a witness appears below. Suffice it to say at this stage that he was an unimpressive witness, whose evidence tended to undermine part of the written evidence constituted by the new HAP report. No doubt perceiving or apprehending that this was so, at the end of the hearing counsel for the plaintiff sought leave to adduce evidence from Mr Zographou. In the special circumstances applicable at that stage of the hearing, I rejected the application for leave, giving ex tempore reasons for my decision on 25 October 2001.

28 The defendant sought to tender a long report, with nine appendices, by PricewaterhouseCoopers, dated 21 September 2001. The plaintiff objected to the admissibility of that report. On 25 October 2001, I held, for reasons given ex tempore, that a large portion of the report was inadmissible, principally because the authors of the report had misunderstood in a fairly basic way the limits of the present inquiry, as set out by me in my orders of 24 May 2001 and in paragraphs 110-127, 134, 142 and 143 of my reasons for judgment of 7 May 2001. Indeed, they appear to have seen their brief as to comment, without restriction, on the new HAP report and to provide their own assessment of the plaintiff's damages (covering letter to the report, paragraph 4).

29 My decision had the effect of removing most of the meat from the PricewaterhouseCoopers report. Subsequently counsel for the defendant withdrew the tender of the whole document, and after cross-examination of Mr Vains, he tendered only four pages, comprising a table showing the plaintiff's actual earnings before depreciation, interest and taxes, a histogram charting HAP's projected damages year by year, and a table showing percentage occupancy and average daily rates in the North Sydney market.


      The new HAP report

30 The new HAP report purported to assess the impact that the ineffective operation of the air-conditioning system had upon the trading performance of the hotel, and to disregard the impact associated with the elevators and the appearance of the building. It relied on the following information sources:


· statistics supplied by the Australian Bureau of Statistics;


· HAP's earlier reports;


· financial records indicating the actual operating and expense levels achieved by the hotel for the financial years 1993 to 2000;


· responses obtained from research in respect of the "relative perceived importance of the three physical elements";


· various Court documents, namely my judgment of 7 May 2001 and orders, and affidavit material referring to the air-conditioning system, the elevators and the appearance of the building.

31 Clearly the new and critically important element of these information sources is the research in respect of the "relative perceived importance of the three physical elements". According to the report, this research contained three components. First, Mr Vains and Mr Zographou "conducted interviews with a sample group of hotel operators and owners to gain their opinions and first-hand experiences as to the perceived impact of each of the three physical elements upon the performance of a hotel operation". Secondly, they reviewed AAA Accommodation Classification Guidelines and conducted a telephone interview with the Training Manager for Hotel Services to discuss "the perceived impact of each of the three physical elements upon the performance of a hotel operation and how the three elements impact upon the grading of the hotel and a guest's experience". Thirdly, they reviewed guest satisfaction hotel questionnaires or survey forms and results, "to determine if these documents highlighted the perceived impact of each of the three physical elements upon the performance of the hotel operation".

32 My judgment on the admissibility of the new report referred to the persistent and curious use of the word "perceived" in the report, saying (at paragraph 16) that in my view the word "perceived", as used in the report, was not meant to refer to perceptions in the strict sense, but rather it was intended to identify the impression gained by the authors with respect to the relative importance of the three physical elements on the basis of their research.

33 The report quoted statements purporting to have been made by people interviewed, but I ruled that those statements were inadmissible, as were statements in the report purporting to summarise the results of the research.

34 I allowed brief supplementary evidence to be given orally by Mr Vains. He was asked to state his opinion in relation to the comparative significance of the air-conditioning, elevators and building presentation problems, in the context of the trading operation of the hotel. He replied (Transcript, p 44.15) that he formed the opinion "that the air-conditioning would have the greatest impact on the operation of the hotel and that conclusion was drawn in my experience in hotel operations where similar problems have occurred." That was an opinion formed by him after he had conducted the research.

35 The new report reiterated the opinion expressed in the third report, that it would be impossible to quantify with mathematical precision the impact of the air-conditioning, elevator and building presentation problems on the hotel, and how such matters would translate into lost accommodation demand and other losses of revenue generating opportunities; but that as experienced hotel consultants, the authors could make "general [semble, statements] and where appropriate, predictions relating to the particular hotel, on the likely impact".

36 Using the methodology adopted in the earlier reports, the authors calculated that the variance between actual net results and estimated re-forecast net results, limited to the effect of the air-conditioning system, for the period from 1 July 1992 to 31 May 2000 was $1,960,000. Applying simple interest at Supreme Court rates to that accumulating figure, the report calculated that interest to 31 July 2001 was $1,192,951. The daily interest rate thereafter was stated to be $591.

37 An important component in the calculation of the variance was the authors' estimate, year by year, of the percentage occupancy that would have been achieved if the air-conditioning problems were the only problems affecting the hotel. These estimates were compared with percentage occupancy actually achieved, and with the estimates made in the first three reports of percentage occupancy that would have been achieved were none of the three elements present. The results were said to be consistent with the authors' previous methodology, and to have involved the exercise of "professional judgment". They were presented as a table ("the percentage occupancy table") at page 7 of the report, as follows:

      Financial Year
      Actual Occupancy Achieved
      Revised occupancy (Report 1,2 & 3) all physical impacts
      Revised occupancy (this Report) Air-Conditioning impact only
      1993
      22%
      50%
      46%
      1994
      31%
      60%
      56%
      1995
      48%
      66%
      62%
      1996
      70%
      71%
      70%
      1997
      68%
      71%
      69%
      1998
      65%
      71%
      69%
      1999
      60%
      71%
      69%
      2000
      61%
      68%
      66%

      Mr Vains' oral evidence

38 Mr Vains was cross-examined to such good effect that on two occasions, I thought it appropriate to discuss the progress of the cross-examination with counsel in the absence of the witness. I did so because I anticipated that I would have difficulty reconciling the oral evidence of the witness with the written reports, unless further efforts were made to give the witness the opportunity to clarify his oral evidence.

39 My first intervention arose when the witness gave evidence, repeatedly, that he and his co-author had assumed, in preparing the new HAP report, that the elevator problems had no impact on the hotel's financial results. That was flatly inconsistent with the text of the new HAP report (including the percentage occupancy table), as well as with the earlier reports. I told counsel that it seemed to me that "the witness has become horribly muddled and inconsistent with his own report".

40 My second intervention arose when the witness endeavoured to explain a discrepancy between the new HAP report and other evidence he had given orally. The new HAP report showed that by far the greatest financial loss caused by air-conditioning had occurred in the 1993/94 year, and thereafter losses attributed to air-conditioning had fluctuated up and down in a "sawtooth" fashion. The apparently inconsistent oral evidence was that the air-conditioning problems were ongoing and consistent and would produce an accumulating effect on profits, rather than a volatile and fluctuating effect.

41 In the absence of the witness, I said to counsel (Transcript, p 89), "I have to say that I have the impression as we go along that the witness holds you somewhat in awe, Mr Walker." Counsel replied that he was just using plain English, and I said:

          "I understand your practice in plain English. I am not suggesting anything in the slightest bit improper. I think you have the better of him. I am not sure the answers he is giving to you are the answers he would give if he had half an hour to think about it."

42 After further discussion, counsel agreed to invite the witness to reconsider the matter overnight and produce some brief notes. On the following morning, the witness produced a single page headed "Greg Vains cross-examination answer" (which became exhibit D11), which put forward a different explanation for the fluctuations.

43 Further consideration of the oral evidence of Mr Vains has served to confirm my view that much of his oral evidence was sometimes muddled and not adequately thought through, so that part of it is not credible. The plaintiff submits that, taking into account the obvious fact that Mr Vains did not handle the witness box environment well, the Court should conclude that some of his written and oral evidence survives as expert opinion evidence, even if the specific assessment of loss and the specific estimates in the percentage occupancy table are rejected. In my opinion, this submission is sound. I shall first deal with various challenges to Mr Vains' evidence, and then summarise the evidence that survives.

44 The defendant attacked the oral evidence of Mr Vains and on the HAP reports in its written submission dated 16 November 2001.

45 The defendant criticised the reports for not complying with the Experts' Code of Conduct in numerous respects. It appears to me that there are two problems. First, some reasoning which Mr Vains articulated in the witness box, and some research that he told the Court had been made, are not set out in any of the reports. Secondly, the reports do not clearly distinguish matters of assumption from matters of opinion, and they do not make it clear that some of the opinions that have been expressed are unsupported by objective data.

46 I agree that there are some deficiencies in the reports of these kinds. In my opinion, however, while they would affect the weight to be accorded to the expert opinions if there was competing evidence tendered on behalf of the defendant, in circumstances where the only expert evidence relied on by the defendant is the evidence of Mr Robertson, whose opinions I have rejected, the opinions in the HAP reports stand and are available to be accepted by the Court notwithstanding their imperfect compliance with the Experts’ Code of Conduct.

47 To this conclusion there is an important exception. The percentage occupancy table purports to give, with mathematical precision, an expert opinion on the impact of the air-conditioning problems on occupancy rates in the hotel. Nothing in the report explains the process of reasoning by which the precise figures in the table were derived, nor the data relied upon (except for the research which I have held to be inadmissible, and which in any event would not of itself justify precise numerical conclusions). There are other difficulties with the last column of the percentage occupancy table, which I shall explain. I have reached the conclusion that the last column is unreliable.

48 Next, the defendant criticised Mr Vains for assuming his conclusions on material aspects as a starting point of his analysis. I have decided that I cannot accept the oral evidence of Mr Vains that the new HAP report was prepared on the assumption that the elevator problems had no impact on the hotel's financial results, in view of the fact that the relevant text of the report is inconsistent with the oral evidence. For example, on page 2 of the report the authors referred to the "need to disregard the impact associated with" the elevators and the appearance of the building. This acknowledges that those other problems had some impact. Similarly, the percentage occupancy table on page 7 purports to give percentage occupancies removing the impact of the air-conditioning and, separately, percentage occupancies removing the impact of all three physical elements, and for each year the percentages for the former are lower than the percentages for the latter. This implies that the authors regarded the elevator and building appearance problems as having an impact together, and since Mr Vains regarded the elevator problems as more serious than the building appearance problems, which he described as not a significant component, it is appropriate to infer that the major variance between the two columns is attributable to the impact of the elevator problems.

49 Mr Vains gave his oral evidence, that the new HAP report assumed that the elevator problems had no impact, on no fewer than four occasions (at Transcript pages 61, 62, 64 and 67). On the last occasion he agreed with the proposition that the assumption, that the elevator problems were not an important component in bringing about financial loss, was contrary to his opinion. For the Court to prefer the witness's earlier written evidence to his later oral evidence, which repeatedly asserted a proposition inconsistent with the written evidence, is a big step to take. I do so because, notwithstanding my intervention during the cross-examination, I remain convinced that on this point, the witness had become completely muddled and was unable to extricate himself from his confusion. The source of his confusion was probably that the new HAP report was designed to disregard the impact of the elevator problems so as to isolate and identify the impact of the air-conditioning problems. That is, of course, quite a different matter from assuming that the elevators problems had no impact at all.

50 Doing my best to assess the evidence of Mr Vains as a whole, I have decided that I should not treat any of the HAP reports as lacking credibility merely because Mr Vains gave muddled and incorrect evidence about the assumptions upon which the new report was prepared. The confusion about assumptions was confined to the oral evidence and is not detectable in the new HAP report itself.

51 Next, the defendant criticised the evidence of Mr Vains on the ground that his attempts to explain large fluctuations in annual damage assessments by reference to undistributed operating costs was not supportable. This is an issue of central importance. I believe there are really two elements to this complaint. The first is the witness’s failure to explain the fluctuating relationship between the air-conditioning problems and the elevator and building presentation problems in the percentage occupancy table, and the second is his alleged failure to explain the fluctuations in the figures set out in the table of annual variances between actual and projected net results on page 13 of the new HAP report.

52 As to the first of these matters, in my opinion the cross-examination of Mr Vains demonstrated that the last column in the percentage occupancy table (that is, the column headed "Revised occupancy (this Report) Air-Conditioning impact only") is unreliable and should not be accepted. Mr Vains agreed in cross-examination (Transcript page 71ff) that nothing had happened during the period 1993 to 2000 to alter the relative influence of the three elements on occupancy rates. However, the percentage occupancy table purports to show very substantial fluctuations in the relative importance of air-conditioning on the one hand, and elevators and building presentation on the other. In the year 1994, air-conditioning alone accounts for a 25% drop in occupancy, while the elevators and building presentation account for only an additional 4%, a ratio of 6.25: 1. At the other extreme, in the year 1996 no drop in occupancy is attributed to air-conditioning, while a 1% drop is attributed to the elevators and building presentation.

53 When asked to explain this fluctuation, Mr Vains said (Transcript p 69) that in years when there were stronger market conditions, if there was a problem it had less of an impact on occupancy rates due to "turnaway demand" from superior hotels (that is, demand produced by customers who had been unable to obtain accommodation in better hotels). Of course, that is not an explanation for changes in the relative influence of the three elements from year to year, as Mr Vains later conceded (Transcript p 71). The overall effect of his evidence was to acknowledge that the relative influence of the three elements should have remained stable, and that there was no explanation or justification for the figures in the last column of the percentage occupancy table, because they presented a fluctuating inter-relationship amongst the three elements.

54 As to the second aspect, there are marked fluctuations from year to year in the variances between actual net results and the estimated re-forecast net results in the new HAP report. A table on page 13 of the report shows that the variances for the years 1993 to 2000 were, respectively, $68,000, $748,000, $283,000, $112,000, $330,000, $114,000, $253,000 and $52,000. Mr Vains gave evidence that the constant problems with air-conditioning (and also with the elevators and building presentation) would produce a progressive manifestation of damage, as more and more potential hotel guests heard about the problems by word of mouth (Transcript p 57-8).

55 When asked to explain the extreme fluctuations in the variances between actual and estimated net results (which were depicted graphically in a histogram which became part of Exhibit D12), Mr Vains at first referred to fluctuations in undistributed operating expenses of the hotel. He was then taken to some figures (now part of Exhibit D12) which showed that undistributed operating expenses in the 1994 year (when the variance was $728,000) were $600,000, while in 1996 (when the variance was $112,000) the undistributed operating expenses were $605,000. He conceded (Transcript p 87) that the undistributed operating expenses did not explain the fluctuations in the variances.

56 As I have said, following my intervention Mr Vains agreed to give the problem further consideration overnight, and on the following day he produced a single page which is now Exhibit D11. In that document he asserted that the fluctuations in the variances were due to fluctuations in the hotel's actual results rather than any significant fluctuations in HAP's projections. That is true.

57 The HAP projections of net results depend on their projections of revenue, because the project expenses are based closely on the hotel's actual expenses (affected by projected occupancy rates, to the extent that expenses are seen to be related to occupancy). The projected revenue, in turn, depends principally upon HAP's projections of occupancy penetration rates and average daily rates for rooms. The average daily rates in the new HAP report are closely similar to the rates used in the first and second HAP reports, except that in the first and second reports, adjustments were made to reflect movements in the consumer price index, while in the new HAP report the impact of consumer price index movements was excluded and instead, interest was calculated. The new component in the most recent report is the projected occupancy table, set out above, from which it appears that the projected occupancy removing the impact of air-conditioning, and also the projected occupancy removing the impact of all three elements, trend upwards and then taper off, without significant fluctuations.

58 Exhibit D11 then offers an explanation for fluctuations in the hotel’s actual net results, saying that they are "predominantly due to the expected varying behavioural patterns of different market segments and their differing tolerance levels of the air-conditioning problems". The document claims that a corporate guest is less willing to accept poor conditions than a discount leisure traveller, and prevailing market conditions are relevant because, if the market reaches capacity, guests are forced to be more tolerant of problems as there are fewer alternative accommodation options available. In addition, the document claims that price increases in the hotel market increased toleration levels for the air-conditioning problems "where the guest's price barrier did not allow them to pay the higher room rates in the marketplace".

59 In cross-examination Mr Vains admitted that the explanation in Exhibit D11 was not based on any "hard facts" (Transcript p 99) and that it was a "generalised and incomplete impression" from his understanding of other hotels at other times and other places (Transcript p 100). He insisted, however, that the document presented an expert opinion based on his experience and understanding of the hotel market. He agreed that he had made an assumption in the document that there were no differences between the present hotel and other hotels of which he was aware, but that it was a "truism" of his profession that there are particular aspects of particular hotels which will influence trading performance, and that this invalidated his expert opinion (Transcript p 101).

60 In my opinion the cross-examination of Mr Vains showed that the explanation put forward in Exhibit D11 is not based on any objective data or observable facts, and is essentially an extrapolation to the circumstances of the plaintiff's hotel of impressions gained by Mr Vains with respect to other hotels. The document is not a fully reasoned expression of opinion and does not explain its own limitations. Nevertheless, my view is that the cross-examination does not destroy the evidence given in terms of Exhibit D11 completely. I am left with an explanation, by a person who has expertise in the hotel industry, not contradicted by other evidence, and not so implausible or weakly reasoned that I would be justified substituting my opinion for the expert's. Therefore in my opinion that evidence stands.

61 This conclusion is important because the criticism of the new HAP report for finding extreme fluctuations in the annual losses attributable to the air-conditioning problems is matched by a criticism of the first and second HAP reports, which produce comparable fluctuations in the losses attributable to all three elements. If the criticism were valid, it would undermine the approach and methodology of the reports, which in my judgment of 7 May 2001 I decided to adopt. In light of my conclusions about this aspect of Mr Vains' evidence, there is no need to revisit that decision.

62 Next, the defendant raised the serious criticism of Mr Vains that he admitted to giving opinion designed to assist the plaintiff to recover damages. Mr Vains gave evidence that he did not regard the problems about the presentation of the building as a significant component, but agreed that he had not said so in any of the HAP reports. He was then asked (Transcript, p 65.15):

          "Q. Did you not state your opinion about that matter in order to assist the plaintiff to recover damages as if it had been material?
          A. Yes, I think we did.
          Q. That was wrong, wasn't it, of you to do that?
          A. No."

63 The defendant submitted that this constituted an admission by Mr Vains that he gave an opinion to the Court that was designed to assist the plaintiff to recover damages. I do not believe that it is correct to interpret the evidence in that way. The answer must be assessed bearing in mind the ample indications the witness had given that he was quite muddled by the cross-examination. The question sought to have the witness agree that he had omitted his opinion about the insignificance of the building appearance problems so as to create the impression that those problems were material, and therefore to augment the damages that the plaintiff would recover if the building appearance problems had been found to be attributable to breach of the lease by the defendant. If the witness had intended to agree with that proposition, I do not believe he would have answered the question, as it was framed, by saying "Yes, I think we did". The answer implies that the witness was agreeing to positive conduct, rather than omitting to disclose something. It is significant that in his next answer he denied that what he had admitted to was wrong. In my opinion, it is more likely than not that in giving his answer, Mr Vains merely intended to acknowledge that he had been retained by the plaintiff to assist it in its claim to recover damages by providing an expert report.

64 Similar criticisms are made to the effect that Mr Vains


· misled the Court by failing to disclose that significant parts of his reports were based on assumptions rather than expert opinion (Transcript pages 75 and 105);


· withheld material factors from his earlier reports, such as the concept of "turn away demand" in an alleged attempt to keep his reports "concise", or alternatively relied upon those facts as expert Facto justifications for conclusions in favour of the plaintiff without acknowledging what he was doing (Transcript p 119 and 120).

65 As I have said, the reports are deficient because they do not adequately distinguish between matters of assumption and matters of opinion, they do not always support opinion is by full reasoning and an account of all relevant research. However, on the evidence I have heard, I do not regard Mr Vains or his co-author as having consciously set out to mislead the Court or to suppress relevant information. In his confused state, he agreed to some propositions put to him by counsel (such as the proposition that he misled the Court or tried to do so, at Transcript p 77) that he would not have accepted in normal circumstances, and I regard his evidence on such matters as unreliable, although I am prepared to accept his evidence on matters going more directly to his expertise. I therefore regard these criticisms of his evidence as without substance.

66 The defendant submitted that I should not make any allowances for the inability of Mr Vains to handle the witness box environment, because he was given every opportunity to answer material questions, including the opportunity to reflect on a key issue overnight. I made it plain during my interventions that my concern about the witness not handling cross-examination well in no way reflected on the probity and skill of counsel - indeed, to the contrary, the cross-examination was a model of the cross-examiner's art. In the end, however, I must make an assessment on the basis of what I saw and heard, and my assessment is as I have stated it to be. I do not dismiss his evidence as simply the evidence of the advocate rather than expert, or as evidence that is inherently unreliable, and in my view some significant portions of his evidence remain, as I shall indicate.


      What remains of the plaintiff's evidence on assessment of damages

67 First, in my judgment of 7 May 2001, I accepted, as expert opinion evidence, a passage from the third HAP report, which I quoted in paragraph 117 of the judgment. That passage asserted that failure to achieve the expected guest comfort levels and satisfaction because of air-conditioning problems translated into lost business opportunities of various kinds, because the negative sentiment created in such situations is difficult to reverse. The passage expressed the opinion of the authors of the report that air-conditioning is "one of the most important factors" in ensuring that guest comfort levels are satisfied. I found (at paragraph 123) that the passage reflected ordinary common sense and experience.

68 In my opinion, the oral evidence of Vains should not lead me to reject the evidence in the passage quoted at paragraph 117 of my earlier judgment. It was, as I have said, evidence that reflected ordinary common sense and experience. As the authors said, "the design and construction of the hotel is to prevent the opening of the windows by occupants of the rooms, and if they are, the outside noise generated from passing traffic would be unbearable for hotel guests (this would be the case with the subject hotel, as it is located adjacent to the Pacific Highway)". It stands to reason that stuffy, insufficiently cooled bedrooms would be the subject of more frequent complaints than problems with slow and inefficient elevators (unlikely to affect all guests on a given day) and building presentation.

69 The opinion of a person with expertise and experience in the hotel industry, about the way hotel guests react to air-conditioning problems and the likely impact of their reactions on revenue, has some weight even if the expert appears to be muddle-headed and gives contradictory evidence on other matters. The expertise and experience of Mr Vains (said in the first HAP report to have in excess of eight years operational and management experience with major international hotel chains within Australia), as opposed to his competence, was not challenged by the defendant.

70 Secondly, in his oral evidence Mr Vains said, in the passage quoted above, that in comparison with problems about elevators and presentation of the building, problems about air-conditioning "would have the greatest impact on the operation of the hotel". In cross-examination he said that presentation of the facade of the building was "not a significant component" in bringing about financial loss (Transcript paid 65.50), and that "the air-conditioning was the most significant component" (Transcript p 67.45), although the problem about elevators "was an important component" in bringing about financial loss (Transcript p 67.35). It seems to me that this evidence is in the same category as the passage quoted from the third HAP report. In my opinion, it accords with ordinary common sense and experience, and is evidence based upon the expert experience and knowledge of Mr Vains with respect to the hotel industry. It was not contradicted by his other evidence, however much his other evidence diminished the evidentiary value of the new HAP report.

71 Thirdly, as noted above, both the third HAP report and the new HAP report asserted that it would be impossible to quantify with mathematical precision the impact of, inter alia, the air-conditioning problems on the hotel, or how those problems would translate into lost accommodation demand and lost revenue generating opportunities Mr Vains repeated this point on several occasions during cross-examination. It is consistent with this point, as the new HAP report in fact asserts, that experienced hotel consultants can make general statements and predictions about likely impact, such as the statements quoted above, to the effect that air-conditioning problems would have the most significant impact on guest satisfaction and hence revenue, when compared with elevator problems and problems about presentation of the building.

72 I accept the assertions in the third and the new HAP report on these matters. In my opinion the cross-examination of Mr Vains reinforced the proposition that it is not possible to quantify the respective influences of the three elements with mathematical precision, but it did not countermand the proposition that an expert in the hotel industry is qualified to express a general opinion on that subject.

73 Fourthly, other evidence given at the initial hearing provides some support for the proposition that the air-conditioning problems were, of the three elements, the most significant component in bringing about financial loss. There is a summary of such evidence in paragraph 55 of my judgment of 7 May 2001, and I accepted the evidence so summarised in paragraph 56. That evidence demonstrates that there were frequent complaints by guests about the air-conditioning of the hotel. It was admitted to establish the fact that the complaints were made, rather than the truth of the matters complained of, but evidence showing that there were in fact complaints, on a reasonably widespread scale, is significant having regard to my findings based upon other evidence, to the effect that there were persistent air-conditioning problems caused by the intervention of the defendant. Moreover, the individuals mentioned in paragraph 55, other than Ms Steiner but including Mr Ramian, gave evidence based upon personal experience to the effect that the air-conditioning comfort levels were sometimes unsatisfactory. One of them, Mr Robert Hancock, who was licensee of the motel between January 1994 and August 1998, said in his affidavit evidence that in his experience in hotel management, air-conditioning comfort levels are a deciding factor in whether guests will stay on and return.

74 Finally, while Mr Vains' evidence in cross-examination has destroyed the credibility of the quantifications of the new HAP report, my opinion is that the approach and methodology of the first and second reports have survived. I decided to accept the approach and methodology of those reports in my judgment of 7 May 2001, and nothing has happened during the hearing of assessment of damages that has led me to resile from that decision. I shall elaborate on the significance of this point under the next heading.


      The Court's approach to the assessment of damages

75 The Court's task, being satisfied of the causal nexus between the defendant's breach of clause 7.1 (a) with respect to air-conditioning, and the plaintiff's loss of revenue, is to assess damages on the contract measure. In paragraph 129 of my judgment of 7 May 2001, I quoted from Commonwealth v Amman Aviation Pty Ltd (1991) 174 CLR 64, to the effect that damages for breach of contract are designed to protect the plaintiff's expectation of receiving the defendant's performance. Here, the Court's task is to assess what the plaintiff's level of profits would have been during the relevant period if the defendant had fully performed and not breached clause 7.1 (a).

76 A feature of this case is that there are not only difficulties in estimating the plaintiff's loss of revenue due for the breach, but such evidence as I have indicates that it is impossible to quantify the plaintiff's loss with mathematical precision. Not surprisingly, the defendant has submitted that in the circumstances, the proper course is to award only nominal damages.

77 There is an important distinction between a case where it is difficult to award damages, and to do so involves making an estimate as to which there cannot be mathematical precision, and a case where the problems of assessment of damages are so great, or the plaintiff's evidence is so weak, as to lead the Court to conclude that the plaintiff has failed to prove its case with respect to its allegation of loss.

78 Where the case is in the former category, the fact that the assessment of damages is difficult and requires the Court to make estimations is no bar to recovery, and the Court must do its best to make an assessment upon the evidence before it. Thus, in Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625, Barwick CJ said (at 636):

          "It is perhaps not a very satisfying answer to say that damages are not in every case a perfect compensation but in many cases no more than an approximation lacking in mathematical or economic accuracy or sufficiency. But however unsatisfying, that answer, in my opinion, must be accepted."

79 Those observations were cited with approval in Commonwealth v Amman Aviation Pty Ltd, where Toohey J said (at 138):

          "However, to say as a general proposition that it is for the plaintiff to prove his damages is not to say that, in some instances, damage may not be inferred or presumed. Nor is it to fail to recognise that the quantification of damages is "in many cases no more than an approximation lacking in mathematical or economic accuracy or sufficiency" or even that the assessment of damages "does sometimes, of necessity, involve what is guesswork rather than estimation"."

80 Where the case is in the latter category, the plaintiff has no ground to complain if the award of damages is too small to cover its actual loss, if it has failed to provide evidence upon which a more adequate assessment could have been made (Minchin v Public Curator of Queensland [1965] ALR 91, 93), for in all cases where damages are claimed for breach of contract, actual proof of loss is required (Bonham-Carter v Hyde Park Hotel Ltd (1948) 64 TLR 177, 178).


      Assessment of damages in the present case

81 Here the course of the trial, including my decisions on the admissibility of evidence and the course of Mr Vains' cross-examination, have left me with only a little acceptable evidence from the plaintiff, going to the assessment of damages. The evidentiary thinness of the plaintiff's case is not simply a product of the difficulty of making an assessment. In my opinion a rigorous and clearly thought out application of the approach and methodology in the first two HAP reports could have produced robust conclusions that would have survived challenge. It is the inadequacy of the plaintiff's evidence, rather than the sheer difficulty of the task to be performed, that has left the Court with very slim evidence upon which to base its decision.

82 Nevertheless, in my opinion the evidence on the plaintiff's part that has survived (summarised above) gives the Court a sufficient basis for making an assessment of substantial and not merely nominal damages in this case. An award of damages based on the plaintiff's surviving evidence would not be "pure speculation" (see Tate & Lyle Food & Distribution Ltd v Greater London Council [1982] 1 WLR 149, 152), and I believe the Court is able to make a proper and reasonable assessment which, while based on estimation, will not fairly be open to the attack that the Court is "simply plucking a figure from the air" (see Ashcroft v Curtin [1971] 1 WLR 1731).

83 The defendant submitted that this is a proper case for an award of nominal damages, because the plaintiff's difficulty in proving the extent of its loss was derived from the manner in which the plaintiff sought to prove its case. Apart from the inadequacies of the new HAP report and the evidence of Mr Vains, the defendant referred to the plaintiff's decision not to call evidence from its customers who had experienced the air-conditioning problems of the hotel.

84 There was, as I have said, some evidence, which I summarised in paragraph 55 of my judgment of 7 May 2001. The defendant submitted that the evidence before the Court, which had led me to conclude that some loss must have been caused by the breach of the lease, was of relatively little assistance in determining the amount that loss. It is, however, of assistance to the degree that I have indicated. I very much doubt that further evidence from customers, complaining about the air-conditioning problems, would have done anything more than confirm my conclusions.


85 I do not believe that it would be justifiable to infer, in the absence of that further evidence, that there were in fact no other identifiable complaints about the air-conditioning. Even Mr Ramian gave evidence (first Transcript p 225) that from his personal experience, on the occasion of complaints the temperature level was consistent with the complaint.

86 My conclusion is that, although the plaintiff may have made the Court's task considerably easier if the expert evidence had been more rigorous and helpful, there is sufficient evidence before me to make an assessment and I should proceed to do so.

87 Counsel for the defendant submitted that if that were my view, my award should reflect the notion that any harm caused by the air-conditioning problems would be expected to manifest itself gradually and in an increasing fashion. He contended that Mr Vains' acceptance of the "progressive manifestation theory" carried the corollary that if the effect of the air-conditioning was worst in the final year and had no effect on the opening day of the hotel, a line could be drawn between these two points for the purpose of assessing damages. Since, according to the new HAP report, the loss in the final year was $57,000, loss for each previous year should be calculated by reducing that figure by $8,000 per year. That would give a maximum claim for damages of $232,000.

88 Then the defendant submitted that this amount should be heavily discounted because of the uncertainty of the exercise, and because even in the last year the assertion of damages by Mr Vains was (in the defendant’s submission) significantly exaggerated. The defendant suggested a 25% discount to $174,000, or a 50% discount to $116,000.

89 I reject the method of calculation proposed by the defendant, because of the findings I have made on the evidence of Mr Vains and the HAP reports. I regard the approach and methodology adopted in the reports as a suitable means of assessing damages in this case. It has produced, in the first and second HAP reports, an assessment of loss attributable to the three elements, which fluctuates from year to year, because of fluctuations in the actual net results of the hotel. I have found that, while the explanation of the fluctuations offered by Mr Vains in Exhibit D11 is not supported by data or strong reasoning, it is the only available expert explanation and it is not so lacking in plausibility that I should substitute my opinion for the expert's.

90 Given these findings, my view is that an assessment of damages along the lines proposed by the defendant would not be supported by the evidence, and I should therefore not proceed in that fashion.


      The matters to be determined in this case

91 In light of the evidence, it seems to me that the plaintiff's damages can properly be assessed by


· employing the approach and methodology of the first and second HAP reports to reach a figure for the variance between actual net results and the estimated net results that would have been derived if there were no problems with respect to air-conditioning, elevators or building presentation;


· estimating, as best one can in light of the evidence that has survived challenge, the proportion of the total variance which is properly attributable to the air-conditioning problems, rather than the elevators and building presentation problems; and


· treating the figure so calculated as the loss suffered by the plaintiff due to the defendant's breach.

92 Proceeding in this way implies a finding not articulated in my previous judgment, though supported by the evidence adduced at the original hearing, and by the evidence of Mr Vains in cross-examination at the assessment of damages hearing. The finding is that, for the purpose of assessing damages, the assumptions made in the first and second HAP reports, as the basis for making projections of estimated re-forecast net results, were reasonable and appropriate. Those assumptions were not only to the effect that the air-conditioning and elevators performed adequately and the external physical appearance of the building was properly maintained, but also that


· there were no other physical impediments affecting the trading performance of the hotel, to prevent guests and patrons from assessing the hotel and its facilities in accordance with the plaintiff's reasonable expectations; and


· the hotel was professionally managed and marketed throughout the projection period.

93 The effect of those assumptions is to take away the possibility that the variance between actual and estimated net results might have been caused wholly or partly by factors other than the three elements identified by the evidence. Mr Robertson said in his report, and counsel for the defendant submitted at the original hearing, that the approach and methodology of the HAP reports were deficient because they did not allow for the possibility that extraneous influences may have contributed to the underperformance of the plaintiff's hotel. However, such evidence as was adduced as to extraneous influences (including matters such as the size and location of the hotel and its potential market, and matters going to the "competitive disadvantages" and relaunching of the hotel) indicates that all of the extraneous factors identified by the defendant in its evidence, cross-examination and submissions have been catered for in the approach and methodology used in the three HAP reports. The matter was canvassed in the cross-examination of Mr Vains (Transcript, pp 46-50). It appears to me reasonable to infer, and I do infer, that there were no influences upon the performance of the plaintiff's hotel other than those identified, and taken into account, in the HAP reports. This enables me to say that the assumptions set out in those reports were reasonable assumptions to make, and that if the variance between estimated and actual results were to be accurately assessed, that variance could be used towards the assessment of damages, in the manner I have outlined.


      The variance between actual and estimated net results

94 Taking the approach and applying the methodology set out in the first and second HAP reports, Mr Vains and Mr Zographou concluded that the variation between the actual and estimated results for the period from 1 July 1992 to 31 May 2000 was $2.941 million. Although I did not accept this numerical assessment in my judgment of 7 May 2001, it is open to me to do so now if the evidence supports it.

95 As I have indicated, my view is that the approach and methodology in the first and second HAP reports have survived the cross-examination of Mr Vains and the submissions of the defendants. While the application of that approach and methodology has produced wide fluctuations in losses assessed from year to year, Mr Vains has offered in Exhibit D11 an explanation as an expert, which I have accepted. Therefore the fact that the assessed annual losses fluctuate widely is not itself a ground for rejecting the numerical conclusions expressed in the first and second HAP reports.

96 The defendant submitted that it would be inherently outlandish for me to assess the damages caused by the air-conditioning problems at $2.941 million, given that the total profit of the plaintiff's business for the eight years from 1993 to 2000 was in fact only $1.262 million. This means, said the defendant, that if the HAP estimate were accepted, the profit figure would have more than tripled to $4.2 million.

97 There is no direct evidence, expert or otherwise, to support the defendant's assertion that the figure advocated in the first and second HAP reports is inherently outlandish. I must make my decision based on the evidence before me. The evidence indicates that the air-conditioning and elevator problems were serious problems. I am able to infer from the evidence that hotels have substantial fixed costs, so that increasing the occupancy beyond an occupancy level that covers fixed costs will have an exponential effect on net results. I am unable to say, on the evidence, it is inherently outlandish or even implausible to conclude that the variance between actual net results, and estimated net results assuming the absence of the three elements, would be as high as $2.941 million.

98 However, in one respect the evidence indicates that the estimate of $2.941 million should be revised. In calculating average daily rates and in other respects, the authors of the first and second HAP reports made consumer price index adjustments. It seems to me more appropriate, in the assessment of damages for breach of contract, for the loss to be calculated using the value of currency in the relevant years, rather than a current value after consumer price adjustments. The effect of a decline in the value of money should be addressed by the award of interest, at the rates set out in Schedule J to the Supreme Court Rules. This point was acknowledged by the authors in the new HAP report, and the figures they calculated for the purposes of that report excluded consumer price index adjustments.

99 My conclusions are that the expert assessment of the amount of variance between actual net results and estimated net results excluding the impact of the three elements, as contained in the first and second HAP reports, has survived the defendant's challenges and should be accepted, subject to one point. That point is that the calculations of the variances should be revised to exclude adjustments based on the consumer price index, along the lines of the revisions made in the new HAP report. That will presumably produce a figure lower, but not very much lower, than $2.941 million.


      The proportion attributable to the air-conditioning problems

100 The next task is to estimate the proportion of that variance properly attributable to the air-conditioning problems, rather than the elevators and building presentation problems. For the reasons I have given, I have derived no assistance in this task from the calculations in the new HAP report. Specifically, I reject its conclusion that the variance attributable to the air-conditioning problems was $1,960,000.

101 The plaintiff's evidence supports the conclusion that the air-conditioning problems were the most significant of the three elements in contributing to the plaintiff's financial loss and therefore to the variance that I have assessed; that the building presentation problems were not a significant component; and that the elevator problems were an important but not the most significant component. Estimation in these circumstances is not a precise science, but the plaintiff's evidence suggests or implies that the air-conditioning problems were more significant than the combined effect of the elevator and building presentation problems, though not very much more significant, since the elevator problems were important. Given that the plaintiff might have adduced more convincing evidence but failed to do so, but on the basis of such evidence as I have accepted, I have decided that I should go as far as, but no further than, to find that the proportion of the variance attributable to the air-conditioning problems was 50.01%.


      Conclusion with respect to assessment of damages

102 To summarise, my findings are that

      (1) based upon the approach and methodology used in the first and second HAP reports, the variance between the plaintiff's actual net results in the period from 1 July 1992 to 31 May 2000, and the net results that would have been achieved during that period were it not for the air-conditioning, elevators and building presentation problems, is $2,941,000, adjusted to exclude consumer price index variations;
      (2) there were no factors other than the air-conditioning, elevators and building presentation problems, affecting the underperformance of the plaintiff's hotel during that period, not properly taken into account in the approach and methodology adopted to calculate that variance;
      (3) in light of the plaintiff's evidence, such as it is, the proportion of that variance properly attributable to the air-conditioning problems, and hence to the defendant's breach of clause 7.1 (a) the lease, is 50.01%.

103 Consequently, the plaintiff is entitled to recover damages for its loss of revenue due to the defendant's breach of contract, measured as 50.01% of $2,941,000 adjusted to exclude consumer price index variations.

104 The plaintiff is also entitled to recover simple interest on that sum. The defendant did not attack the method of calculation of interest employed in the new HAP report. In my opinion that method should be adopted and applied to the figures that I have calculated as the annual variances, dividing each annual loss into twelve equal monthly amounts in the manner set out in Annexure 2 to that report.

105 I shall stand the matter over to give the plaintiff the opportunity to have the calculations made, and to prepare draft short minutes of orders accordingly. I intend, on the next occasion, to hear the submissions of the parties with respect to costs, and make final orders.

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Last Modified: 02/13/2002
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Cases Cited

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Sovereign v Bevillesta [2001] NSWSC 369
Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54
Commonwealth v Amann Aviation Pty Ltd [1991] HCA 54