Webster v Pether - [1999] WADC 110

JURISDICTION : DISTRICT COURT OF WESTERN AUSTRALIA
IN CIVIL

LOCATION: BUNBURY

CITATION: WEBSTER & ANOR -v- PETHER & ANOR [1999] WADC 110

CORAM: O'BRIEN DCJ

HEARD: 7-8 OCTOBER1999

DELIVERED : 11 NOVEMBER 1999

FILE NO/S: CIV 52 of 1996

BETWEEN: CHARLES STUART WEBSTER
HELAN MAREE WEBSTER
Plaintiffs
AND
JAMES WILLIAM PETHER
ROSIE PETHER
Respondents

Catchwords:

Breach of contract for sale of business - Contract for sale and purchase of fast food business with 10 year lease plus 10 year option - Lease in fact had no option - Assessment of damages for loss of option.

Legislation:

Nil

Result:

Damages awarded.

Representation:

Counsel:

Plaintiffs: Mr J C Curthoys
Respondents : Mr D J Beere

Solicitors:

Plaintiffs: Slee Anderson & Pidgeon
Respondents : Beere May & Meyer

Case(s) referred to in judgment(s):

Alati v Kruger (1955) 94 CLR 216
Fink v Fink (1946) 74 CLR 217
Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1
Hill & Anor v Canberra Centre Holdings Limited (1995) 122 FLR 434
Johnson v Perez (1988) 166 CLR 351
Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5
Sargent v ASL Developments Limited (1974) 131 CLR 634

Case(s) also cited:

BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 16 ALR 363
Hamlyn & Co v Wood & Co [1891] 2 QB 488
Robinson v Harman (1848) 1 Ex 850

O'BRIEN DCJ: In a written agreement dated 23 September 1993 ("the agreement") the plaintiffs agreed to buy and the defendants agreed to sell a business known as the "Burger Shop" ("the business"). Settlement was on 10 November 1993. The business was a fast food shop selling hamburgers.
Prior to its sale the business was operated from premises which were leased to the defendants by Chickenco Pty Ltd ("Chickenco") pursuant to a lease dated 12 February 1993. The lease was for 10 years.
The description of the business in the agreement included particulars to the effect that after expiry of the lease there was an option for 10 years. It is common ground that the lease did not contain that or any other option. The plaintiffs claim that the defendants have therefore breached the agreement .
The plaintiffs also plead that the expiry date of the lease was in the agreement as being 4 May 2003 whereas in fact the lease was due to expire on 16 February 2003. However, the plaintiffs abandoned that part of their claim and rely solely on the alleged breach relating to the option.
The plaintiffs claim that by virtue of the breach the residual value of the business has been reduced, in particular:
1.The business now has no goodwill whereas but for the breach the goodwill of the business would be worth $50,000:
2.The value of the plant and equipment of the business, which was valued in the agreement at $36,000, is reduced as a result of the breach from having going concern value to what will eventually be a fire sale value of only approximately $10,000.
The plaintiffs claim damages, interests and costs.
The defendants deny that it was an express term of the agreement that the lease had a 10 year option. They claim that although there is reference in the agreement to the lease having the option, both the plaintiffs and the defendants were aware that in fact there was no option in the lease. The defendants claim that the plaintiffs executed the agreement subject to the condition that such an option would be granted to the plaintiffs by Chickenco as part of the assignment of lease from the defendants to the plaintiffs.
Further, the defendants allege that it was an implied term of the agreement that the plaintiffs would apply to Chickenco for an option and settlement of the sale of the business was subject to execution of an assignment of the lease by Chickenco containing such option.
The defendants also allege that Mr Damien Brennan, a solicitor for the plaintiffs:
•sought Chickenco's consent to the assignment of the lease without requesting the option;
•obtained a copy of the lease and agreement before settlement and perused the documents;
•knew or ought to have known that the lease contained no option;
•prepared the assignment of lease without incorporating the option and arranged for the parties to execute it before settlement of the business.
The defendants allege that by failing to secure the option and proceeding to settlement without it, they affirmed the agreement but without the option.
Further the defendants allege that both before and after settlement Chickenco had indicated to the plaintiffs that it was prepared to grant the option. However, from 1996 onward Chickenco's attitude changed and it was only prepared to grant the option if the plaintiffs complied with all the conditions of the lease including payments of rentals and outgoings thereunder. The defendants allege that the plaintiffs failed to pay those outgoings and Chickenco then refused to grant the option. The defendants claim that had the plaintiffs paid the outgoings, the option would have been granted and they would have mitigated their loss.
The defendants allege in the alternative that if the plaintiffs are entitled to damages then by electing to affirm the agreement without the option for renewal and thus settling, they are now estopped from relying on the breach and recovering damages.
As to the obligation to pay outgoings, the Commercial Tribunal decided on 26 May 1998 that as the lease was not in accordance with s12 of the Commercial Tenancy (Retail Shops) Agreement Act 1985 that the plaintiffs were under no obligation to pay the outgoings referred to in the lease as "utility charges". The tribunal ordered that Chickenco repay the outgoings already paid by the plaintiffs to Chickenco.

The facts

Before deciding to purchase the business the plaintiffs (Mr and Mrs Webster) lived in Katanning. Mr Webster was not happy in his job and wished to run his own business. They saw the business advertised and made enquires of the agent's representative, Mr Justin Devitt. There were discussions concerning the ease of running the business, its turnover, hours of opening and its profitability. Mr Devitt provided certain financial data and a written business profile.
The business profile contained the following:
"A long lease is available providing an incoming owner with approx nine and a half years plus a 10 year option …."
Eventually Mr and Mrs Webster went to Busselton to look at the business in operation. They spoke to the defendants (Mr and Mrs Pether). Mr Devitt was present for some of that discussion. Mrs Pether was cooking lunches at the time but she discussed with the Websters cleaning and staff rosters and how the business operated on a day to day basis. Mr Pether then arrived, Mrs Pether went back to her cooking and the Websters continued their discussions with Mr Pether. Mr Devitt also left.
Mr Webster testified that Mr Devitt told him that there was a 10 year option in addition to the nine and a half years left to run on the lease. He could not recall Mr Devitt saying that this was specifically in the lease. He denied a suggestion put to him that Mr Devitt said that there was only a 10 year lease to the business and that they would have to negotiate with Chickenco for such an option when they took over the business. Mr Webster testified that the option was one of the attractions of the business. Mrs Webster testified that one of the reasons they decided to buy the business was because of the long tenure presented by the option. She said that because of this they thought that they would have no trouble selling the business. She was not very keen on buying the business but agreed to stand by her husband who was unhappy in his job and wanted a change. She said that she agreed to run the business for a couple of years and then they would sell it.
The Websters say they discussed the location of the business, its growth potential, advertising, the ease of running the business, shift rosters, various food deals which were available through Chickenco and so on. The Websters both testified that Mr Pether made specific reference to the 10 year option. Mr Webster said that most of the technical aspects of the business were discussed with Mr Devitt but he was adamant that Mr Pether also referred to the 10 year option.
Mr Pether testified that he was keen to sell the business because he and his wife also owned the adjacent chicken outlet called River Rooster and they wanted to devote all their efforts to that shop.
Mr Pether said that he knew that the lease did not contain an option. He was advised by Mr Devitt that an option would make the business more attractive and therefore approached Mr Steven Hansen who was then the managing director of Chickenco. Mr Hansen agreed that he would give the new owners of the business a 10 year option on the lease.
Mr Pether denied telling the Websters that the lease was for a 10 year term with a 10 year option. He said the lease was not discussed at all with the Websters. He said that the Websters were in the same situation as he and his wife when they first bought into the business about nine months previously, in that the Websters had no experience at all in fast food or running any business. Mr Pether testified that the Websters were concerned with the day to day operations of the business and it was those matters which were discussed with them. He said that Mr Devitt had been provided with all the relevant financial information and was instructed to discuss that with the prospective buyers. He did not recall discussing outgoings with the Websters.
Mr Devitt testified that he was instructed to sell the business on the basis that there was a lease for a 10 year period which had partly run and that an option of a further 10 years was available.
He said that on reading his business profile, a person might understand that the lease contained a 10 year option. What he meant to convey was that the option was available. Similarly when preparing the offer and acceptance, he knew that the option was not in the lease but because of the landlord's willingness to grant the option, he put that in the offer and acceptance when describing the lease.
Mr Devitt testified that the option was discussed with Mr Webster early in the negotiations. He said that Mr Webster always understood that the option was not in the lease but was available. He did not tell the Websters how to go about getting the option. He said that he believed that the Websters knew that the option would be in the assignment of the lease.
The first Mr Pether knew about the there being no option in the assignment of lease was when Mrs Webster came to him about two years after the sale and told him.
In any event after further financial inquires and advice from their accountant, the Websters decided to put in an offer for the business. Their first offer on the standard REIWA Agreement to Purchase a Business form was rejected by the Pethers. The Pethers counter‑offered and that was accepted by the Websters.
The purchase price was $113,000 made up of $72,000 for goodwill and licence; $36,000 for plant and $5000 for stock in trade. It was subject to finance and a restrictive covenant.
Clause G of the particulars in the offer to purchase form headed "Lease of Premises" was as follows:
Date of expiry: 4th May 2003.
Options: 10 years.
Landlord:Chickenco Pty Ltd.
Annual rent $18,000 per annum.
Next review: 1994.
Clause 6 in the agreement is as follows:
"This contract is conditional upon the purchaser receiving written approval from the landlord or agent … to an assignment of the existing lease as specified … and the vendor shall do all things necessary to assign the tenancy of the premises to the purchases and have him accept [sic] as a tenant of the landlord of the premises and the purchaser will procure references and do all things necessary to have himself accepted as a respectable and responsible tenant of the landlord."
The relevant special condition is as follows:
"This contract is subject to the satisfactory assignment of the lease of premises at settlement."
The Websters did not have a settlement agent and took the advice of Mr Devitt to engage Mr Brennan as their solicitor to handle settlement and the assignment of the lease.
The Websters looked to Mr Brennan to provide the expertise and give them the appropriate advice. The Websters testified that prior to settlement they did not obtain a copy of or otherwise see the lease.
After settlement, Mrs Webster was primarily responsible for running the business. Mr Webster obtained another full time job.
In 1995 the Websters decided to sell the business. They advertised it through two agents over a six month period but received no offers. In June 1996 they decided to sell the business privately. Mr Webster's employer wanted him to move to Albany. In fact, he ended up moving to Albany himself to save his job, leaving Mrs Webster to run the business and look after their children in Busselton.
They advertised the business two or three times and received about 20 enquiries but no offers to purchase.
A potential buyer of the business wanted to look at the lease. The Websters testified that they did not have a copy of the lease and on 7 June 1996 Mrs Webster received a copy from Mr Brennan's office. Each denied that they had previously received it enclosed in a letter from Mr Brennan dated 11 December 1993 although the letter purports to enclose the lease.
A letter and account from Mr Brennan was tendered by the Pethers' counsel as evidence that the Websters had received advice concerning the terms of the lease. However, neither of the Websters was asked whether Mr Brennan ever advised them that there was not a 10 year option.
Correspondence from Mr Brennan to the Websters was tendered on behalf of Mr and Mrs Pether and Mr Webster was cross‑examined about it. A letter dated 18 October1993 from Mr Brennan to the Websters says inter alia: "We confirm that we will peruse your lease and advise you when you next attend upon us as to the terms of the lease". Mr Brennan's account dated 11 November 1993 includes the following:
"To our professional costs with respect to this matter, including receiving instructions, arranging for the settlement of the burger shop on your behalf including all necessary preparation of documents and correspondence with the agents for the vendors, attendances upon yourselves, perusing the lease on your behalf, and advising as to its contents, attendance upon the directors of Chickenco Pty Ltd and upon Mr and Mrs Pether, all due care and attention.
To our professional costs with respect to preparing assignment of lease, arranging for execution by all parties."
Mr Brennan testified that he "would have" read the agreement. He said he received the lease about a month after receiving the agreement. This was before preparing the assignment of lease and before settlement of the business. He said he spoke to Mr Hansen on the telephone who thereafter wrote a letter to Mr Brennan confirming that he had no objection to the lease being assigned.
Mr Hansen testified that Mr Devitt telephoned him and asked about an option. Mr Hansen said that he had no objection to an option. He said that he could not recall the term of the option requested but "would imagine" that it was for a further term of 10 years.
Later, when there was the dispute with the Websters over the outgoings, he wrote to the Websters' lawyers advising that he was not prepared to grant an option unless the outgoings as he calculated them were paid.
Mr Brennan said that he read the lease including the schedule when he received it. He found that there was no option for renewal of the lease. He also read the offer and acceptance and saw that it referred to an option.
Mr Brennan referred to his file notes which revealed that he perused the lease on 26 October 1993 and noted that there was no option for renewal. He saw the Websters the following day and went through the lease with them. He does not have a note as to whether or not he queried the option with the Websters. However, he believes from the notes of the conference that he "would have told them that the lease was a 10 year lease".
Under cross examination Mr Brennan agreed that knowing that the offer and acceptance referred to a lease with an option then he would have required specific instruction not to do something about the option. He had no note of instructions to that effect.
Mr Brennan said that there is no note on his file which reveals whether or not he dealt with anyone in relation to the option. He could not recall whether the Websters mentioned the importance of the option to him.
It was only in 1996 after the potential buyer perused the lease that the Websters say they became aware that there was no option in it.

Dispute over outgoings

In 1996 the Websters had a dispute with Chickenco over the variable outgoings they were paying. The business was located on premises with two other businesses. When the offer to purchase was made it was on the Websters' understanding that the business was paying one third of the outgoings and that after a party hire business was erected on the land, that their outgoings would be reduced to one quarter of the total. This did not happen. Mr Webster denied that this was a condition of the agreement. However, he said that when Party Hire was erected on the land and opened before Christmas the Websters kept paying one third of the outgoings.
They discussed this with Chickenco but were unable to arrive at any resolution. Mr Brennan advised the Websters that in order to facilitate negotiations with Chickenco concerning their request for an option on the lease, they should continue paying the outgoings.
The negotiations in relation to the option and outgoings are contained in a series of correspondence between Chickenco and the Websters and their solicitor, Mr Brennan.
In January 1996 Mr Brennan wrote to Chickenco concerning the payment of outgoings and advising that they were only liable to pay one quarter of the outgoings.
On 5 June 1996 Mr Brennan wrote to Chickenco informing it of his opinion that the lease was not in accordance with s12 of the Commercial Tenancy (Retail Shops) Agreements Act (1985) but expressing the Websters' attitude that they were prepared to pay their fair proportion of the rates and taxes.
Mr Webster testified that up until June 1996 they would have been happy to pay one quarter of the outgoings. He agreed that if they had accepted the offer of Chickenco relating to the outgoings as expressed in their letter dated 7 March 1993, it was possible that the option would have been granted.
The relationship with Chickenco became strained and eventually the Websters took action in the Commercial Tribunal which ultimately ordered that they did not have to pay any outgoings and that those paid to date ($17,779.95) should be repaid by Chickenco.
In 1998 the land was sold to Yandavale Pastoral Company ("Yandavale") and Yandavale became the Websters' landlord. In June 1999 the Websters wrote to Yandavale (Korogaro) requesting a 10 year option on the lease. On behalf of Yandavale, Bird Cameron wrote to Mrs Webster by letter dated 11 August 1999 offering them a replacement lease for three years with a three year option with other conditions attached. There were other proposals put by either party but no agreement relating to a new lease and/or options was reached.

Findings of fact

I cannot accept Mr Devitt's evidence that he told the Websters that the lease did not contain an option. He was instructed to sell a business with a 10 year lease and a 10 year option. He advertised it as such in his business profile. His explanation that what he meant to convey in the business profile was that an option was available is implausible. It would be a simple matter to insert the words "is available" after the words "plus a 10 year option". It was put to Mr Webster in cross‑examination that Mr Devitt told them that there was a 10 year lease but that they would have to negotiate with Chickenco for the option before they took over the business. Mr Devitt did not give evidence along these lines. His evidence was that he told the Websters that an option was available but he did not tell them how to go about obtaining one.

Given the importance of the option to the Websters, I have no doubt whatsoever that if they had been told that by Mr Devitt they would have either made some enquiries themselves of Chickenco and/or specifically instructed Mr Brennan to deal with the situation. There is no evidence that they made those enquiries nor does Mr Brennan have a note that the Websters drew the lack of an option to his attention.
Another factor which contributes to my finding that before settlement the Websters did not know there was not an option is the Websters' evidence that Mr Pether made specific reference to the lease and the 10 year option. Mr Pether denied that the lease was even mentioned during his discussions with the Websters. I do not accept this. The length of the lease and the option were part of the selling features of the business. It would be remarkable if during the discussions Mr Pether did not at least mention the lease given the fact that only nine or so months had expired since the Pethers bought the business themselves.
Further, if more is needed, the actual agreement for the sale of the business mentions the lease and the 10 year option specifically.
The effect of this finding of fact is that the Pethers agreed to sell a business with a 10 year lease and a 10 year option and the Websters agreed to buy the same. They did not find out until 1996 that they had bought what they contracted to buy. It was the Pethers' responsibility to secure the option before settlement.

Is the knowledge of the solicitor the knowledge of the client?

Counsel for the Pethers submitted that because Mr Brennan knew the true situation, that is that the lease did not have an option, his knowledge was in effect the knowledge of his clients, the Websters. The defence pleads that in electing to proceed with the purchase of the business and in completing settlement, the Websters affirmed the agreement but without the option.
In relation to the solicitor's knowledge being in effect the clients' knowledge, counsel for the Pethers referred to Sargent v ASL Developments Limited(1974) 131 CLR 634 particularly pp645-646, 649 and 658-659; and Hill & Anor v Canberra Centre Holdings Limited (1995) 122 FLR 434.
However, even if those cases are authority for the proposition that the knowledge of the solicitors is the knowledge of the clients, the contractual obligation of the Pethers arose when the offer and acceptance was signed on 23 September 1993. The obligation on the Pethers at that time was to "provide" a business which had a 10 year lease with a 10 year option.
I am satisfied on the evidence of the Websters that they had had no experience in running a business. They did not look at the lease themselves. They relied on the expertise of Mr Brennan to conduct their settlement of the business and draw and have executed the assignment of lease.
Mr Brennan knew that the offer and acceptance referred to a 10 year option in the lease as a condition of the agreement. He knew that the lease did not contain an option. He knew that the agreement was subject to the assignment of the lease. He was instructed to prepare the assignment. Given that the Websters wanted to buy a business in premises which were leased with an option and all the documents to which I have just referred, Mr Brennan knew or ought to have known that to effect the intention of the parties, the assignment of the lease needed to contain an option as a variation of the lease. Further, in fulfilling his duty to his clients in advising them about the lease and knowing that the lease did not contain an option, he should have told them of that. I have no doubt that if the fact that the lease did not contain an option was mentioned to the Websters, they would have given instructions to rectify the situation to at the very least brought the importance of the option to Mr Brennan's attention. I therefore find that even if Mr Brennan did go through the lease, he did not mention to the Websters that it did not contain an option.
Notwithstanding that it is incumbent on individuals to read and approve documents before they are signed, it is more probable than not that the Websters did not read the assignment of lease nor more particularly the lease itself. The Websters clearly relied on Mr Brennan's advice. In my view they believed that the documents which he had prepared were in accordance with their understanding of what they were buying, that is, a business in premises with a lease of some nine and a half years and with an option for another 10 years.
Mr Curthoys, counsel for the Websters, submits that if the Websters found out that there was no option after signing the offer and acceptance but before settlement, they had three options:
1.to terminate the agreement and sue for damages;
2.to affirm the agreement and sue for specific performance and damages; or
3.to affirm the agreement and sue for damages for breach of the express term.
Mr Curthoys submits that the breach occurred when Chickenco refused to provide the option. In my view, the breach occurred at settlement when the Pethers did not provide what they agreed to provide, that is, a business with lease of 10 years and an option of 10 years. Even if the Pethers could be said to have substantially performed the contract at settlement, the failure to provide the business with the lease and option nonetheless constitutes a breach.
It is said on behalf of the Pethers that the Websters affirmed the contract by proceeding to settlement, imputedly knowing that the lease did not have an option. However, if that is the case, all the Websters have lost is their right to terminate the contract (ASL Developments Limited at pp645-46). They still have the remedy of taking action for damages available to them (Alati v Krueger(1955) 94 CLR 216 at 222). If a contract is affirmed after breach, the parties continue to be bound by it. Given my finding that the Websters were told that the lease had a 10 year option, the defences pleaded in 2.2.1(denying the express term) and 2.2.2 (claiming the implied term) fall away.
It is not to the point as far as the Pethers' liability is concerned that Mr Brennan did not bring to the lack of the option to the attention of the Websters. Knowing or suspecting that this was the case as is disclosed in the Defence to the claim, the Pethers had other options open to them in relation to Mr Brennan's conduct.

Damages

The Websters claim that as a result of the breach the business now has no goodwill and but for the breach the goodwill would be worth $50,000. Further they claim that the value of the plant and equipment is reduced as a result of the breach from having a going concern value to what will eventually be a fire sale of approximately $10,000.
The Pethers claim in the alternative that if the Websters are entitled to damages, "then by virtue of [them] electing to affirm the agreement with the option of renewal and proceeding to settlement they are now estopped from relying on the breach and from recovering damages in respect thereof". Defence para 4.2.)
In other words, what the Pethers are submitting is that the Websters have somehow led them to believe that they will not enforce their strict legal rights because of their conduct in affirming an agreement for the sale of the business which they either actually or imputedly knew did not comply with the description on the agreement.
In my view, even if this submission were legally sound, the Pethers' position has always been that the Websters had no legal right to enforce the contract insofar as it related to the lease having an option for 10 years. The Pethers could not have believed that the Websters had a legal right to enforce the contract as it related to the option and therefore could not have been led to believe or assume that by not raising any objection or query about the option, they were thereby forsaking their right to enforce it. Accordingly, in my view, there is no merit in this alternative plea by the Pethers.

Calculation of damages

I have already expressed my view that the breach occurred at the time when the obligation of the Pethers to "provide" a business with a lease and a 10 year option became absolute, namely at settlement. The Websters' claim in relation to loss of goodwill is supported by the evidence of Mr Franklin, a valuer, who calculated that the loss arising from the absence of the option is $50,000 as at February 1997 (the date he prepared his report).
The Pethers dispute Mr Franklin's method of calculation but it seems not the basic premise that the lack of the option meant that the goodwill was lost.
Mr Franklin posed himself this question:
"What would a prudent but not anxious purchaser pay for the particular asset on a given date being fully aware of the factors which advantage and disadvantage the asset such price being acceptable to both the vendor and the purchaser?"
Mr Franklin had been supplied with the profit and loss statements for the business for part of the year 1993/94, the full year 1994/95 and the full year 1995/96.
In Mr Franklin's view:
"The true net profit being the addition of disclosed net profit plus owners' wages plus interest, plus drawings, plus depreciation for part of the 1994/1995 (sic 1993/1994 year) shows at $26,367, in 1994/95 the true net profit is $38,552 and in the 1995/96 year the true net profit is $40,855. From the profit and loss statements the turnover between 1995 and 1996 remains virtually static, purchases are at a similar level and gross profit is virtually static. In the expenses rates and taxes increase dramatically through the three financial years, 1994 being a part year only."
Mr Franklin proceeded on the basis that:
"The scenario is one where a business person has a business comprising goodwill, plant inventory and stock which would be sold towards the end of the term of the lease. Without an ongoing right to occupy the premises (lease) then the purchaser would substantially reduce the amount paid for the business or not buy the business at all."
Mr Franklin was of the view that if the option was not available then damages would be in the form of a complete loss of goodwill and possibly a reduction in the value of the plant inventory down to salvage or auction values as the sitting tenant might be forced to vacate the premises.
Mr Franklin calculated goodwill as equating to the true net profit. In his view, the "current goodwill" is $40,000. I take it that by "current", Mr Franklin means February 1997, the date of his report. Mr Franklin was of the view that over the remaining portion of the lease, the goodwill would, by normal economic factors, increase to $50,000.
Mr Franklin assumed that the Websters would keep the business for some time given the amount of money they paid for it and "only sell it towards the end of the lease". He considered this assumption to be critical as the business would have a rapidly decreasing value towards the end of the term of the lease.
Mr Brian Middleton was called on behalf of the Pethers to give his view as to the measure of damages appropriate. Mr Middleton is a certified practising accountant with 30 years accounting experience. His experience is largely advising businesses on whether they should buy and sell and how much they should pay. He agreed that this was essentially an accounting exercise. Mr Middleton is not a licensed valuer. He has not had the same practical experience in valuing businesses as has Mr Franklin.
Mr Middleton adopted an entirely different method of assessing the value of the option to renew. The method he used he described as the return on investment percentage method ("ROI"). He said that this method is almost universally accepted throughout the valuation industry as the best and fairest way to value small businesses. The ROI involves a three stage process, namely:
1.calculate the net annual profit before tax;
2.find the industry range of ROI percentages;
3.determine the actual percentage within the range.
The goodwill is calculated by deducting tangible assets (plant and stock) from the price. Using this method of calculation, Mr Middleton was of the view that "it could reasonably be said of this business that it rated an ROI of 50 per cent". The ROI percentage he used he said he obtained from experts in the industry. He said that this is common practice when applying this method of valuation.
Mr Middleton valued the worth of the 10 year option at the time of purchase. He regarded any other time as being inappropriate.
Mr Franklin was critical of Mr Middleton's methodology of assessing the value of the option and Mr Middleton was critical of Mr Franklin's methodology. Each was cross‑examined with a view to establishing flaws in their respective methodologies.
The general rule is that damages are assessed as at the date of the breach. Courts can depart from this general rule whenever it is necessary to do so in the interests of justice (Johnson v Perez (1988) 166 CLR 351 at 356; see generally at 555-560).
This is a difficult case in that if damages were to be assessed at the date of the breach, then they might be calculated by reference to the price paid for the goodwill. The Websters paid $72,000 for goodwill on the basis that the lease of the premises was for 10 years with a 10 year option. They were "supplied" with a business having a lease of about nine and a half years, roughly half the length of the lease they thought they were getting out of the bargain. It would be too simplistic to roughly halve the price of the goodwill paid on settlement because the value of an option is dependent on a number of contingencies. In this regard it is not in the same category as the difference between the price of, say, a 1998 vehicle contracted for and a price of a 1997 vehicle supplied.
The contingencies which might affect the value of an option in a case like this might include competition from other fast food providers (this in fact happened), a down turn or up turn in the tourist industry, the diversion of through traffic from the Bussell Highway, an unexplained inability to sell the business at any given time and so on. There was evidence that competition probably affected the profitability of the business and there was evidence that in 1995 and 1996, when the business was advertised for sale, no offers to purchase were made. Apart from those factors, there was no real evidence as to other factors which might assist in valuing the worth of the option.
In contract, damages are awarded with the object of placing the plaintiff in the position in which he or she would have been in had the contract been performed. There are two elements of loss involved – damages for loss of bargain (expectation loss) and damage suffered, including expenditure incurred, in reliance on the contract (reliance loss) (Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 11-12).
In this case, the loss which the Websters will suffer will be the value of the option calculated at the time of the purchase (ie settlement) which was in November 1993. This involves going back to 1993 and looking into the future.
Difficulty in estimating damages does not relieve the court from the responsibility of assessment. The process of assessing damages in a particular case may involve an element of guesswork and where acceptable or precise evidence is not available, the court must do the best it can (Fink v Fink (1946) 74 CLR 217 at 143).
As the lease runs out, it is clear that the value of the business as a going concern diminishes. However, that is not to say that all goodwill was lost because there was no option in the lease.
I have difficulties in finding Mr Franklin's calculation to be absolutely reliable. This is because he valued the option as at February 1997 and then extrapolated his calculations, being of the view that the goodwill, "by normal economic factors" increase to $50,000. I assume that Mr Franklin meant that by the end of the lease, if there were an option to renew, the goodwill would be worth $50,000. It is not clear to what extent, if any, he took into account contingencies other than "normal economic" factors.
On the other hand, Mr Middleton's method of calculation involved the use of the ROI percentage. This figure was obtained by experts in the industry. In my view, it would have been more convincing to have some evidence explaining how the ROI percentage is calculated. Mr Middleton relied on information from a third party, who was not called, as to the ROI percentage. This is strictly speaking hearsay and inadmissible. However, in any event, Mr Middleton did not qualify as an expert and did not have the same practical experience as Mr Franklin in valuing business.
On balance I accept the methodology adopted by Mr Franklin. However, even if I accept that the value of the goodwill towards the end of the lease if $50,000, that does not necessarily reflect the amount of the Websters' loss. I consider it important to take into account contingencies of the type to which I have referred. I therefore reduce Mr Franklin's valuation of the goodwill and reduce it by 20 per cent to reflect those contingencies. The sum I award for loss of good will is $40,000.
The Websters also claim for the reduced value of the plant and equipment at the end of the lease. As at June 1999 the written down value of the plant and equipment was $16,748. According to Mr Gary Black, an auctioneer/valuer called on behalf of the Websters, its sale value would be $9524. The difference between the two values is therefore $7620. I use this figure as a guide only especially given that there is no guarantee that the plant and equipment will be removed from the premises before being sold, which was the premise on which Mr Black based his calculations. I am prepared to award the sum of $5000 for the loss in value of the plant and equipment.

Mitigation

In their defence, the Pethers plead:
"At all material times both prior to and subsequent settlement of the agreement the landlord of the premises had indicated to the plaintiffs that it was prepared to grant an option for a further period of 10 years but from 1996 onwards subject to the plaintiffs having complied with all terms and conditions of the lease including payment of all rentals and outgoings thereunder." (Defence para 2.5.)
The Pethers contend that the Websters have failed to mitigate their damages as Chickenco was prepared to grant an option of renewal if disputed outgoings were paid by the Websters. It is clear from Mr Hansen's evidence that he was not prepared to grant an option unless outgoings were paid to his satisfaction. The Commercial Tribunal decided on 26 May 1998, for reasons which are not relevant in this case, that the Websters were not obliged to pay outgoings, and that Chickenco should refund the sum of $17,779.95 to them.
In effect, the Pethers contend that in order to mitigate their damages, the Websters should have entered into an arrangement with Chickenco whereby in order to secure an option to renew they would agree to pay outgoings which they were not legally obliged to pay.
Counsel for the Pethers concede that an entering into such an arrangement, the Websters would be incurring an annual cost which they would not otherwise have had to pay. However, he submits that the Websters always expected and anticipated paying these costs and took that into account when purchasing the business. The general rule is that damages cannot be recovered for loss which could have been prevented by reasonable mitigation action on the part of the injured party. Counsel for the Websters submits that there cannot be a failure to mitigate where the Websters have complied with their lawful obligations under the lease and Chickenco seeks to charge the Websters an amount he is not legally entitled to recover. He submits that the Pethers' contention that the Websters should forego their right not to pay variable outgoings in order to mitigate their loss is plainly wrong (Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5 at 9).

Counsel for the Websters submits that in any event the cost of mitigation would have been extremely high in that the Websters would have to forego the sum of $17,780 being the disputed outgoings determined by the Commercial Tribunal. In addition, the Websters would have been obliged to incur a liability of approximately $4500 per year for the balance of the term, being a total of $31,500. The total sum required to mitigate the damages would have been approximately $48,500. In my view, it cannot be said that such mitigation on the part of the Websters was reasonable in the circumstances. It would have been a different matter had Chickenco agreed to grant the option to renew without the requirement that the Websters pay outgoings which they were not legally obliged to pay.
I therefore find that the Websters were not required to mitigate their damages as contended by counsel for the Pethers.
In summary, I find that the Pethers breached the agreement with the Websters by not providing a business with a lease with a 10 year option. I award damages in the sum of $45,000. This sum includes $40,000 being the value of the option and $5000 for the loss in value of the plant and equipment.