WP Kidd P/L & Anor v. Panwell P/L & Ors
[2007] QSC 373
•18 December 2007
SUPREME COURT OF QUEENSLAND
CITATION:
WP Kidd P/L & Anor v Panwell P/L & Ors [2007] QSC 373
PARTIES:
W P KIDD PTY LTD ACN 010 461 426
(first plaintiff)
and
WILLIAM PETER KIDD
(second plaintiff)
v
PANWELL PTY LTD ACN 010 236 852
(first defendant)
and
O’ROURKE HOSPITALITY PTY LTD
ACN 068 930 414
(second defendant)
and
MICHAEL O’ROURKE
(third defendant)
and
RAYMOND GRAHAM CLARK TRADING AS GRAHAM CLARK REALTY ABN 8078 852 496 946
(fourth defendant)
and
GRAHAM STANLEY
(fifth defendant)
and
RHONDA KEATING
(sixth defendant)
and
PETER KEATING
(seventh defendant)
and
TELERN PTY LTD ACN 010 730 006
(eighth defendant)
and
CURETON PTY LTD ACN 010 949 596
(ninth defendant)FILE NO/S:
BS 5121 of 2003
DIVISION:
Trial Division
PROCEEDING:
Trial
ORIGINATING COURT:
Supreme Court at BrisbaneDELIVERED ON:
18 December 2007
DELIVERED AT:
Brisbane
HEARING DATE:
16, 17, 18, 19, 22, 23, 24, 25 and 26 October 2007
JUDGE:
McMeekin J
ORDERS:
Judgment for the first plaintiff against the second and third defendants in the sum of $640,351 in respect of its claim and $182,745 for interest.1.
Judgment for the second plaintiff against the second and third defendants in the sum of $77,000 in respect of his claim and $32,000 for interest.2.
Judgment for the first, sixth and seventh defendants against the first and second plaintiffs on the plaintiffs’ claim against them.3.
Judgment for the first defendant against the first plaintiff on its counterclaim in the sum of $218,733 together with $53,345 for interest.4.
Judgment for the first, sixth and seventh defendants:5.
against the second and third defendants on the third party claims brought by the second and third defendants against them; (a)
against the eighth and ninth defendants on the third party claims brought by the eighth and ninth defendants against them. (b)
Judgment for the second and third defendants:6.
against the first, sixth and seventh defendants on the third party claims brought by the first, sixth and seventh defendants against them; (a)
against the eighth and ninth defendants on the third party claims brought by the eighth and ninth defendants against them. (b)
Judgment for the fourth defendant:7.
against the first, sixth and seventh defendants on the third party claims brought by the first, sixth and seventh defendants against him.(a)
against the eighth and ninth defendants on the third party claims brought by the eighth and ninth defendants against him.(b)
Judgment for the eighth and ninth defendants:8.
against the first, sixth and seventh defendants on the third party claims brought by the first, sixth and seventh defendants against the eighth and ninth defendants;(a)
against the second and third defendants on the third party claims brought by the second and third defendants against the eighth and ninth defendants.(b)
CATCHWORDS:
TRADE PRACTICES – MISLEADING &
DECEPTIVE CONDUCT - NEGLIGENCE – ECONOMIC LOSS – CARELESS ADVICE - CONTRACT – BREACH OF RETAINER – where misleading advice re suitability of hotel business – where purpose of advice known by second defendant – where reasonable care not exercised in giving the advice – where no proper basis for recommendation – whether reliance on advice
TRADE PRACTICES – MISLEADING &
DECEPTIVE CONDUCT – whether vendors of hotel business liable for representations re future profits and for statements made by salesman – whether actual or apparent authority of agent – whether reliance by plaintiff purchasers – whether causation when advice not known to plaintiffs and ignored by plaintiffs’ agent
DAMAGES – causation – ineptitude of plaintiff in conducting hotel business – whether sufficient to break causal nexus
DAMAGES – assessment – allowance for wasted effort – allowance for lost profit in addition to capital loss – whether reduction for receipt of compensation for poker machine operating authorities during lease of the business
LEASE – breach by non-payment of rent – damages
Trade Practices Act 1974 (Cth), ss 51A, 52, 75B, 82
A New Tax System (Goods and Services Tax) Act 1999 (Cth), ss11-20
Gaming Machine Act 1991 (Qld), ss 55, 56, 58 and 68Supreme Court Act 1995 (Qld)
Aceridge Pty Ltd v Chatswood Hills Tavern Pty Ltd & Anor [2004] CCT G 502-03, cited
Bevanere Pty Ltd v Lubidineuse [1985] 7 FCR 325, applied
BMD Major Projects Pty Ltd v Victorian Urban Development Authority [2007] VSC 409, considered
Burke v LFOT Pty Ltd (2002) 209 CLR 282, cited
Butcher v Lachlan Elder Realty (2004) 218 CLR 592, considered
Carlton v Pix Print Pty Ltd [2000] FCA 337, cited
Colonial Mutual Life Assurance Society Ltd v Producers & Citizens Co-Operative Assurance Co of Australia Ltd (1931) 46 CLR 41, applied
Crystal Auburn Pty Ltd v IL Wollermann Pty Ltd [2004] FCA 821, cited
Cut Price Deli Pty Ltd v Jacques (1994) 49 FCR 397, cited
Elders Trustee & Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193, cited
Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1995-1997) 188 CLR 241, applied
General Newspapers Pty Ltd v Telstra Corp (1993) 117 ALR 629, cited
Henville v Walker (2001) 206 CLR 459, cited
I & L Securities v HTW Valuers (2002) 210 CLR 109, cited
Jaldiver Pty Ltd v Nelumbo Pty Ltd (unreported – Federal Court of Australia – V G51 of 1991 – Heerey J – 2 December 1992- BC 9203862), applied
Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281, cited
Manwelland Pty Ltd v Dames & Moore Pty Ltd [2001] QCA 436, distinguished
Meates v Attorney-General [1983] NZLR 308, applied
NEA Pty Ltd v Magenta Mining Pty Ltd [2007] WASCA 70, considered
Netaf Pty Ltd v Bikane Pty Ltd (1990) 92 ALR 490, cited
Totff v Antonis (1952) 87 CLR 647, cited
WP Kidd Pty Ltd v Panwell Pty Ltd [2004] CCT G 514-03, citedCOUNSEL:
MD Martin with N Sadler for the plaintiffs and 8th and 9th defendants
RS Ashton for the 1st, 6th and 7th defendants
DW Marks for the 2nd and 3rd defendantsPJ Woods for the 4th defendant
SOLICITORS:
McDonnells for the plaintiffs and 8th and 9th defendants
Baker O’Brien & Toll for the 1st, 6th and 7th defendants
Kerrin & Co Lawyers for the 2nd and 3rd defendantsHQF Lawyers for the 4th defendant
Introduction
McMEEKIN J: Sometime in March or April of 2000 the second plaintiff, Mr William Peter Kidd, decided that he would investigate investing in a hotel business. Despite his years[1] he was a complete novice in that industry. He determined to retain an expert to help him make a wise decision. He duly retained the second defendant O’Rourke Hospitality Management Pty Ltd, which held itself out as having expertise in giving such advice. Mr Michael O’Rourke, the third defendant, was a director and the principal guiding mind of that company.
[1]Born 1939 – T 40/19
On 25 July 2000 the company which Mr Kidd controlled, the first plaintiff, WP Kidd Pty Ltd, purchased[2] the leasehold of the business known as the Melbourne Hotel at Bundaberg from the first defendant Panwell Pty Ltd for a period of 5 years.[3] The directors and principal guiding minds of Panwell Pty Ltd were the sixth and seventh defendants, Mr and Mrs Keating. I will generally refer to these defendants collectively as “the vendors”.
[2]There is a written contract dated 25 July 2000 between the first plaintiff and the first defendant (see pp 1-24 of Ex 1).
[3]A lease was entered into – see pp 25-48 of Ex 1- commencing 30 October 2000
The business was not a success under Mr Kidd’s stewardship. He lost money in every year of its operation.[4] The plaintiffs now seek damages. The plaintiffs allege:
[4]The losses are summarised at p 321 of Ex 1 but subject to the adjustment at p 590 of Ex 1. See paragraph 7.6 of Ex 25
(a) that the second defendant breached its retainer, was negligent and was misleading within the meaning of s 52 of the Trade Practices Act1974 (“the Act”) in the advice Mr O’Rourke gave;
(b) that the vendors of the business supplied a misleading prediction of future profit to Mr O’Rourke and were in breach of s 52 of the Act; and
(c) that representations were made by the fifth defendant, the salesman involved in the transaction, that were misleading within the meaning of s 52 of the Act and for which the vendors are liable.
To the extent that action is brought under the Act against individuals as opposed to corporations the plaintiffs rely upon s 75B of the Act and allege those individuals were knowingly concerned in the breach of s 52.
To the extent that the statements made involved predictions as to the future the plaintiffs rely on s 51A of the Act and assert that there were no reasonable grounds for making the representations complained of.
The Remaining Proceedings
The fourth, eighth and ninth defendants conduct real estate agencies. The salesman involved in the transaction was Mr Graham Stanley, the fifth defendant. Mr Stanley is an undischarged bankrupt and took no part in the proceedings. Up until 19 June 2000 he was employed by the eighth and ninth defendants. From 27 June 2000 he was employed by the fourth defendant.[5]
[5]See Ex 20
A resolution of the issues between the plaintiffs and the fourth, eighth and ninth defendants took place prior to trial. The terms of settlement between the plaintiffs and the eighth and ninth defendants were tendered.[6] The effect of the settlement is that the plaintiffs have received $120,000 from those defendants (which must be brought into account in respect of any damages awarded) and the plaintiffs will indemnify the eighth and ninth defendants in respect of any claim brought against them in these proceedings.
[6]Ex 12
Mr Woods, who appeared for the fourth defendant, informed me in his written submission[7] that the plaintiffs did not advance a case against his client because, as at the date of the pleaded representations (16 June 2000), Mr Stanley was not his client’s employee or agent.
[7]Ex 35 p1
The first defendant counter-claims against the first plaintiff for rent owing under the lease.
The vendors sought an indemnity from the fourth, eighth and ninth defendants in the event they were found liable for statements made by Mr Stanley. The vendors also claimed indemnity or contribution from the second and third defendants.
The second and third defendants have brought proceedings against the vendors and the eighth and ninth defendants claiming an entitlement to equitable contribution.
The eighth and ninth defendants have brought a claim for equitable contribution against the vendors, the second and third defendants, and against the fourth defendant.
The Case Against the Second and Third Defendants
I will deal with the case against the second and third defendants first. The vendors maintain that an essential element in the case against them – reliance – cannot be established because the plaintiffs relied on Mr O’Rourke, not them, for advice and information, so that must first be determined.
The Issues
The case against the second and third defendants involves the following issues:
(a) whether the advice given by the second or third defendants to the plaintiffs was conduct that was misleading and deceptive or likely to mislead and deceive within the meaning of s 52 of the Act, in breach the implied term of the contract of retainer to act with all reasonable care and skill, or negligent;
(b) whether Mr Kidd relied on the report and advice given by Mr O’Rourke;
(c) whether the damages claimed by the plaintiffs was caused by that advice – it being alleged that it was Mr Kidd’s incompetence in managing the business that was the true cause;
(d) whether in any assessment of damages allowance should be made for:
(i) an amount for Mr Kidd’s wasted effort in conducting the business over five years;
(ii) the amount of compensation that WP Kidd Pty Ltd received in respect of seven poker machine operating authorities.
The Common Ground
It was not in issue that the second defendant held itself out as an expert in the hospitality industry including the giving of advice in relation to the profitability of licensed hotels.[8] Nor was it in dispute that as a result the second defendant was obliged to act with all reasonable care and skill expected of such an expert.[9]
[8]See para 1(k) of the plaintiffs’ third further amended statement of claim admitted at para 1(b) of the third amended defence of the second and third defendants.
[9]See para 3(d) of the plaintiffs’ third further amended statement of claim admitted at para 3(d) of the third amended defence of the second and third defendants
Nor is the fact of the retainer in issue or that consideration passed from the first plaintiff to the second defendant.[10] The retainer was entered into by Mr Kidd on behalf of the first plaintiff and Mr O’Rourke on behalf of the second defendant probably at meetings on 16May and 30 May 2000.[11] It was oral. The terms are in dispute, at least on the pleadings. It is not in dispute that the second defendant’s task was to find and advise the first plaintiff as to the suitability of purchase of a hotel business.[12]
[10]T 41/55
[11]T 573/15 and 577/30-50 for Mr O’Rourke’s recollection refreshed by his diary entry
[12]See para 3(a) of the plaintiffs’ third further amended statement of claim admitted at para 3(a) of the third amended defence of the second and third defendants
It was common ground that Mr Kidd was, at the time he retained the second defendant, totally inexperienced in the running of hotels.[13]
[13]T 156/30 for Mr Kidd’s evidence and T 575/39 for Mr O’Rourke’s evidence – the only experience he (Kidd) had was drinking in them
On 15 June 2000 the second defendant provided a written report to the first plaintiff concerning the Melbourne Hotel.[14] That report contained the following information:
[14]See pp 212-215 of Ex 1
(a) wages at the hotel average $5,500 per month;
(b) the permanent employees were a cook being paid $480 gross per week and a bottle shop attendant being paid $600 gross per week;
(c) excess wages were being paid as the current operators of the hotel spent little time on the premises;
(d) the hotel offered great potential for a lessee operation;
(e) subject to negotiating an acceptable weekly rent the hotel could produce a good net profit.
It is not in dispute that a meeting was held on 16June 2000 between Mr O’Rourke and Mr Kidd. At that meeting Mr Kidd contends by his pleading that he was told by Mr O’Rourke:
(a) that a lease of the hotel was a good business;
(b) that such a lease should be purchased for the sum of $100,000 at a rental of $3,500 per week;
(c) that if the purchase price was increased to $125,000 the first defendant would reduce the rent to $3,100 and the GST would not be payable on such rental;
(d) that the weekly rental of $3,100 was “average for the industry” based on sales of approximately $50,000 per week;
(e) that there were no trading records for the hotel.
Of those various statements the only ones that Mr O’Rourke denies making[15] are that GST would not be payable and the last – that there were no trading records.
[15]T 590-592
Whilst Mr Kidd only spoke of the one meeting with Mr O’Rourke in which he received advice, that of 16 June, Mr O’Rourke said that there were “numerous telephone conversations” as well[16] in the context of him having received, by this stage, the vendors’ trading figures from Mr Stanley. I am confident that in this respect Mr O’Rourke’s recollection is the better one. I mention this as on Mr Kidd’s account of the 16 June meeting Mr O’Rourke is virtually mute. I doubt that that is likely having observed Mr O’Rourke for some time in the witness box. He was articulate, very familiar with his facts and very ready with his answers. As well on his account[17] he discussed his report with Mr Kidd, as I would expect.
[16]T 582/40
[17]T 592/55
Subject to what I have to say below I am satisfied that statements were made to Mr Kidd of the kind pleaded either at the meeting of 16 June 2000 or in the phone calls that Mr O’Rourke speaks of as occurring between late May and mid June 2000.
GST
As to the GST point, Mr Marks, counsel for the second and third defendants, has pointed out that the GST payable would have been recovered as an input credit under the relevant legislation.[18] Thus it is not material to any assessment of the value of the business being purchased and so resolution of the issue irrelevant in any practical sense to the case. Mr O‘Rourke says that in June 2000 he was conscious that the GST provisions were to shortly come into effect and made plain to Mr Kidd the effect of those provisions[19] – it may be that Mr Kidd has confused discussion as to his right to recover payments made as equivalent to there being no obligation to pay. I am not satisfied that Mr O’Rourke made any such representation as pleaded.
[18]ss 11-20 A New Tax System (Goods and Services Tax) Act 1999
[19]See T 590/2
Trading Records
It is plain that there were trading records and it is plain that Mr O’Rourke analysed them. His written report of 15 June 2000 makes express reference to trading figures which on the face of the report could only have come from the vendors. As well, Mr Kidd’s own evidence suggests that he believed that Mr O’Rourke must have analysed trading figures.[20]
[20]See T 46/35
I suspect that the confusion was more in the pleading than in Mr Kidd’s mind as he seemed to assert in cross-examination that the statement concerning a lack of trading figures related only to an earlier meeting prior to 16 June[21] which is, to some extent, in accord with other accounts.[22]
[21]See T 203/20; 204/20
[22]See T 580/30
By the time of the operative advice I am satisfied that Mr Kidd was well aware there were trading records from the vendors’ operation.
Credit
Mr Ashton, counsel for the vendors, submitted that I should not accept Mr Kidd as a witness of credit. I reject that submission. I do so for a number of reasons.
First, I thought that it was apparent that Mr Kidd was trying to do his best. He accepted propositions when they might well have been against his interest.[23] At times he was remarkably candid – to his potential detriment.[24] I detected no attempt by him to dissemble despite a long period in the witness box. I did not think he was inappropriately dogmatic.[25] That is not to say he was invariably accurate in his recollections but the same criticism can be levelled at other witnesses, including Mr O’Rourke.
[23]eg T 97/30
[24]eg T 154/20
[25]eg T 211/10
Secondly, the suggested bases for the attack on his credit were not persuasive. First, it was submitted that Mr Kidd had accepted that he had promoted false figures – a reference to trading figures put forward when Mr Kidd was himself trying to sell the lease of the hotel.[26] It seemed to me evident that when Mr Kidd adopted counsel’s word “false” the meaning he intended to convey was “inaccurate” rather than “I have deliberately falsified figures”. Counsel was not prepared to put the direct allegation to him. And this was against a background that Mr Kidd was criticised for employing for a significant period as his book-keeper, a person who had, allegedly, very limited knowledge[27] and who was eventually dismissed, apparently in May 2001.[28]
[26]The relevant cross-examination is at T 78-81 and Ex 2
[27]eg T 595/25 – 596/20
[28]T 210/30
Secondly, reliance was placed on Mr Kidd’s denial of any knowledge of the footnote on a letter from his solicitor which became Exhibit 5. It was suggested that this footnote was against his interest and hence his denial. I very much doubt that Mr Kidd had the subtlety of mind to understand why Mr Ashton thought the footnote was adverse to his interest. Further his answers where hardly a categorical denial[29], and the information he did give was more fulsome than the note indicated.[30]
[29]“I really can’t say. I would be guessing to say yes or no”: T 72/28 & 74/20
[30]T 72/50 – 73/25
The final ground of criticism related to mistaken evidence about the performance of the hotel. In my view this amounted to no more than an imperfect memory about matters that probably were never Mr Kidd’s strong suit.[31]
[31]eg T 78/5; 121/15
What was a “Good Profit”?
By the pleadings the plaintiffs contend and the second and third defendants deny that it was a term of the retainer that the second defendant would find for Mr O’Rourke a hotel earning a minimum net profit of $250,000 per annum. Mr Marks, who appeared for the second and third defendants, described this as the “key question on the retainer”.[32]
[32]See T 563/33
However the pleading does not reflect Mr Kidd’s case accurately. It became apparent from his evidence that what he asserted was not that Mr O’Rourke was obliged or promised to find him a hotel earning such a sum but rather that he made it plain to Mr O’Rourke in his first conversation with him that to be suitable to the first plaintiff the hotel would need to be one earning a minimum net profit of $250,000 per annum.[33] Thus it was not a matter of being any term of the retainer but rather an assertion as to the factual matrix within which the discussions and the giving of advice took place.[34]
[33]See T 41/30 and 196/5, 197/35
[34]I see no injustice to the defendants in receiving the evidence – the evidence was led at an early stage, no objection was taken, Mr O’Rourke gave evidence and was cross-examined on it and was very much alive to the issue as presented – the principles discussed in cases such as Water Board v Moustakas (1988) 180 CLR 491 at 497 are not engaged.
Whilst Mr O’Rourke said that he could not recall any such conversation[35] he does accept that he told Mr Kidd that he should be able to net eight percent to ten percent of a turnover of $2.5 million out of the hotel.[36] His evidence that “no-one ever asked me ... to find them a hotel netting so much”[37] does not sit well with this earlier statement to Mr Kidd.
[35]See T 573/25 & 629/25-35
[36]T 581/1-10 ie $200,000 to $250,000
[37]T 573/35
It is not in contention that Mr O’Rourke advised Mr Kidd that the business could earn him a “good net profit”. So much is expressly stated in his report of 15June. The issue is whether that statement was made in a vacuum or rather in a context that gives it some meaning.
Given Mr O’Rourke’s evidence concerning the return that he told Mr Kidd he could expect I am in no doubt that he intended Mr Kidd to read “good net profit” as indicating something in the order of $250,000.
Whilst the resolution of the question of whether Mr Kidd had expectations and expressed them to Mr O’Rourke seems to me moot given Mr O’Rourke’s evidence I would add the following. I am satisfied the witnesses generally were doing their best to accurately recall events of seven years ago however it was evident they had become entrenched in their views. I will say something of how I assess the probabilities.
Firstly, I would expect that a novice investor in hotels, as Mr Kidd undoubtedly was, would make enquiry of an expert such as Mr O’Rourke as to what return he could expect – it would be surprising if he did not. My assessment of Mr Kidd is that he was the sort of person who would be very likely to identify what it was that he was getting into – he may have had no expertise in how to run a hotel but he had been an investor and run businesses for a significant time and at his age did not have the luxury of long periods of time to catch up if he made a bad investment. Mr Kidd was adamant that there was discussion about the level of profitability he was looking for. I believe him.
Secondly, it seems not to be in contest that Mr Kidd’s interest in a hotel business was first attracted by a hotel at Murgon advertising a return of $250,000 net. He claims that he mentioned the hotel to Mr O’Rourke.[38] It was put in cross‑examination that he did not[39] although there was no evidence denying the claim.[40] It would be odd if he did not talk about how realistic that return was.
[38]T 41/15-20
[39]T 197/50
[40]T 573/20 seems to be the only evidence from Mr O’Rourke about the early exchanges
Thirdly, as I have said, it is evident that Mr O’Rourke thought that as a rule of thumb an investor should get a return of between eight percent and 10 percent on gross turnover[41] – the turnover here was said to be $2.5 million.[42]
[41]T 581/5 and more emphasis on 10% at T 587/20-30
[42]I appreciate that this fact was not known at their first meeting on 16th May but it was by the 30th May and so well prior to Mr O’Rourke forming his advice and Mr Kidd accepting it.
Fourthly, Mr O’Rourke was very enthusiastic about the hotel.[43]
[43]T 591/5 – “the return on his investment was going to be excellent, far better than I’ve ever seen anywhere”
Fifthly, Mr O’Rourke’s explanation that he would never give any such advice because there are too many variables involved[44] does not sit well with his evidence so readily given as to the return one should expect and his statement of what he told Mr Kidd.[45]
[44]See T 573/32
[45]T 581/1-10
In my view it is probable that there was discussion at an early stage along the lines that Mr Kidd’s idea of a worthwhile investment would be a business returning him $250,000 per annum and that Mr O’Rourke not only well understood that Mr Kidd would read “good net profit” in that sense but led him to believe that this hotel met his criteria.[46] I accept that Mr Kidd did not intend to “buy on potential”[47] and that was obvious to Mr O’Rourke.
[46]T 582/40: Mr O’Rourke advised Mr Kidd that the “hotel appears to be a good operation and may be a good investment for him”; and see T 587/60 and 590/50 – 591/10. See also T 321/1.
[47]T 187/20
The Plaintiffs’ Contentions
On the strength of the advice given by Mr O’Rourke the plaintiffs say that the first plaintiff entered into the contract to purchase the hotel business for the sum of $125,000 at a rent of $3,100 per week.
Whilst the plaintiffs’ contentions are more fully particularised in the pleadings[48] the real gravamen of the plaintiffs’ complaint is that no competent broker or consultant would have advised the plaintiffs to purchase the business for the sum of $125,000 at a weekly rental of $3,100. The Plaintiffs’ contend that on a reasonable analysis the hotel business was operating marginally – well below a return of $250,000 – and this in the hands of the vendors who were highly experienced operators.[49] To return any significant profit it would require very substantial improvement in its profitability under Mr Kidd’s ownership, that this should have been evident to Mr O’Rourke, and that this was not explained by Mr O’Rourke to Mr Kidd as it should have been.
[48]Para 8 of the third further amended statement of claim
[49]The Keatings having some 26 years experience in the hotel industry and having been involved in this hotel since 1981. I note Mr Duthie’s assessment of them: p 14 of his report Ex 28 paragraph 5.6
What was the Hotel’s Profitability?
An assessment of the true profitability of the hotel business is necessary to determine the issues. In support of their case the plaintiffs called Mr Alan Robert Butcher, a chartered accountant.
Mr Butcher prepared a report dated 12 October 2007 for the purposes of the proceedings.[50] The relevant part for present purposes is section 3. He there calculates the EBITDA[51] figures for various periods from trading figures supplied by the vendors and to some extent available to Mr O’Rourke.
[50]See pp 586 - 714 of Ex 1
[51]Earnings Before Interest Tax Depreciation and Abnormal transactions
The purpose of Mr Butcher’s EBITDA calculations was to arrive at the historical non-interest operating profit on a commercial basis for the business operations – it shows what profit the business in fact earned shorn of items of expense that were personal to the vendors. These figures of course are those for the vendors’ trading. They were limited to commencing 1 July 1999 because that best covered the period that Mr and Mrs Keating had the management of the hotel.[52]
[52]Tenants had operated the hotel from September 1992 for six years and then the Keatings’ son and daughter-in-law for 12 months
Based on the eight month trading figures to 29 February 2000 the annualised EBITDA calculated by Mr Butcher was $176,740. He also had available to him the trading figures to 30 June 2000[53] and calculated an EBITDA of $192,031. I note that Mr Duthie, an expert valuer retained by the vendors, arrived at virtually the same figure.[54]
[53]Which Mr O’Rourke did not have but they are more favourable to his case
[54]See T 508 and Ex 28 at p 18
This should be contrasted with Mr O’Rourke’s analysis.[55] The relevant information and trading figures that Mr O’Rourke had when providing his advice were:
[55]I set out the analysis done in the witness box.
(a) a facsimile from Mrs Keating;[56]
(b) trading figures for the eight month period to 29 February 2000 prepared by the vendor’s accountants McLellan & Co[57] and supplied by Mr Stanley; and
(c) trading figures supplied by Mrs Keating at a meeting at the hotel on or about 13/14 June for the 12 week period from 1 March to 25May 2000.[58]
[56]a copy of which is at p 239 of Ex 1
[57]See p 240 of Ex 1
[58]See p 233 of Ex 1 and T 584-585
Mr O’Rourke claimed that in advising Mr Kidd he analysed the McLellan & Co figures[59] and the three month figures to 25 May 2000[60] and had regard to aspects of the facsimile message.[61]
[59]See p 232 of Ex 1
[60]See p 233 of Ex 1
[61]See T 624/50-625/20
The McLellan & Co figures indicated a net profit of $108,776 for an eight month period. Mr O’Rourke appreciated that expenses incurred by the Keatings in running the hotel reflected in the trading figures needed to be adjusted if one was to assume that Mr Kidd was to run the hotel on the same basis. The only item that Mr O’Rourke could identify as needing to be deducted from the expenses listed in the McLellan & Co figures were the leasing charges of $31,998.[62] Adjusting for those leasing charges the profit for the eight month period would have been about $140,000 and annualised it would have been $210,000 – about $18,000 more than the figure calculated by the experts retained by the parties.
[62]See Mr O’Rourke’s evidence at T 626/1-35. This deduction is debateable given the recommendation to lease new gaming machines
For Mr Kidd’s operation it would be necessary to factor in two things to the analysis of the EBITDA to determine the profit Mr Kidd would make assuming the same trading – increased management costs and rent.
First, the agreed rent was $3,100 per week or an annual figure of $162,000 approximately (which Mr O’Rourke thought was appropriate).
Secondly, the assumption on which Mr O’Rourke said he was operating at the time of the giving of the advice was that the hotel would be run by Mr Kidd’s son‑in‑law and daughter, Mr and Mrs Donaghy. Mr O’Rourke maintained that he was told by Mr Kidd that they would be paid $800 per week gross between them[63] so that if there were no other adjustment to the wages bill (by reducing the number of staff or the hours worked by the staff) Mr Kidd would need to find an additional $40,000 over and above that which the Keatings had to find.[64]
[63]See T 625/45
[64]The Keatings were not paying themselves a wage or if they were it was not reflected in these figures – T 626/20-30
Thus, on this analysis – it assumes no change to the method of operation of the hotel and no change to the expenses (apart from rent and the manager’s wage) likely to be incurred or the profit likely to be earned – the profit that Mr Kidd could expect for his outlay, on Mr O’Rourke’s analysis was in the order of $10,000. Mr Butcher’s analysis was less generous to Mr O’Rourke – a loss of about $26,000 on the eight month figures, or $10,000 on the full year figures. None of these analyses brings into account the $480 per week for the write-off of the premium paid of $125,000 over the period of the lease.[65]
[65]See the report of Mr Currey at p 720 of Ex 1 – para 5.2
At one point, Mr O’Rourke seemed to be minded to suggest that a $10,000 per annum return was a “healthy bottom line”[66] and in accordance with his statement in his report to Mr Kidd that the hotel “could produce a good net profit”.[67] I think it apparent, however, from the examination of whole of his evidence, particularly his responses to the cross-examination by Mr Martin, counsel for the plaintiffs, that that was not his contention.
[66]See T 628/40-50
[67]See p 215 of Ex 1
Mr O’Rourke’s Defence
To the plaintiffs’ argument that this was not a good business, could not achieve a $250,000 net profit and should not have been recommended, Mr O’Rourke’s defence is effectively that, fairly read, his report was accurate and contained ample cautions.
The written report of Mr O’Rourke concluded that the hotel offered “great potential for a lessee/operator” and that pending agreement on an acceptable weekly rental, the hotel and its two detached bottleshops “could produce a good net profit”. Those statements were made with the following qualifications that can be found through the body of the report.[68]
[68]See pp 213 – 215 of Ex 1
· “Since the current operators have been running the hotel, they mention that they have not been too enthusiastic about running the hotel. The wages and the lack of promotion that has been done (sic)and the lack of atmosphere reflects (sic) this.”
· “There appears to be excess wages being paid as the operators spend very little time actually operating the hotel.”
· After discussing the gaming figures for three months to May 2000 Mr O’Rourke indicated that “about three of the machines should be traded in for newer machines to increase the turnover and profit”.
· Relocation of gaming machines and promotion of them would “definitely increase turnover of the machines, bars and the food areas, thus increasing profits”.
· If the lounge areas were “themed” it would “certainly give the patrons a reason to come to the hotel.”
· Marketing for the hotel appears to be non-existent.
· “Currently there appears to be no reason why patrons would visit the hotel.”
· “Competition in Bundaberg has been very strong over the past months” but Mr O’Rourke had been informed that “it has settled down.”
· “If the drive-in could increase its gross profits to say, 22 percent from 19 percent, this would represent an increase in gross profit by some $400 per week.”
· To produce “a good net profit” would require implementing tighter control of wages and general expenses, marketing and implementing a theme in a hotel lounge.
As well Mr O’Rourke contends that his advice was subject to the following strictures:
(a) the increased cost of management should be offset by a decrease in the wages bill for other employees – ie the manager would be hands on and replace some, at least, of the labour being employed under the Keatings’ management;[69]
(b) he intended that the “good net profit” could only be achieved if there were stricter control on costs and particularly wages costs which in his view had not been adequately controlled under the Keatings;[70] and
(c) inherent in Mr O’Rourke’s approach, was that Mr Kidd would be putting in the “right management”[71] by employing his son-in-law and daughter, Mr and Mrs Donaghy.
[69]T 626/15
[70]T 628/55 – 629/5
[71]See T 629/22 and 635/49
Rejection of Mr O’Rourke’s Defence[72]
[72]This section deals with paragraphs 8 (g) (h) and (i) and 10(b) of the Third Further Amended Statement of Claim
I reject Mr O’Rourke’s defence essentially for four reasons:
(a) whilst he indicated that his opinion was qualified by the admonition that costs needed to be tightened he gave no indication of the extent that was necessary for his opinion to be remotely accurate. His admonition was little more than a platitude;
(b) he failed to advise Mr Kidd that if the business continued as in the hands of the Keatings, but with the rent and management expenses Mr Kidd would incur, it would not make a profit at all. That was essential information for Mr Kidd to make an informed decision;
(c) his advice gave no idea of the task that confronted Mr Kidd in achieving a profit of $250,000 or anything near that[73] – he had to increase profits by about 80 percent. The reference to marketing, the drive-in and lounge themes, if anything, had the effect of underplaying the difficulties;
(d) his opinion was given without any proper effort to analyse the business or its competition and this lack of analysis was not revealed.
[73]T 636/20
My reasoning for the foregoing conclusions I now set out:
(a) Mr O’Rourke’s approach was to commence with the proposition that in order to have a “good bottom line” you had to put controls in place, that one of those was to run your wages at an average of 10 percent of your gross turnover,[74] and implicitly that any business could achieve this. None of the other experts called in the case expressed such a view and Mr Currey, an experienced hotel broker, disagreed – in his view the appropriate figure for this business was more like 14 percent of turnover;[75]
[74]See T 587/10
[75]Para 5.4 at p 720 of Ex 1
(b) further there was no examination by Mr O’Rourke of whether the 10 percent figure had ever been achieved in this particular hotel business even by experienced operators. Indeed, he accepted that the Keatings had not achieved such a wage level despite themselves being hands‑on operators and very experienced hoteliers.[76] Mr Kidd’s intention, at the time he spoke to Mr O’Rourke and received his advice, was that he would not be a hands‑on operator at all, at least in the longer term;[77]
[76]T 631/20 - 30
[77]T 41/35
(c) if Mr O’Rourke was to assume that the amount paid to the manager (which he claims he was told would be $40,000[78]) could be ignored in the analysis because the manager employed would replace labour that the Keatings were currently paying for then it seems to me essential that there be a very close analysis of what the Keatings were doing and what staff could be retrenched or have their hours reduced. The highest that Mr O’Rourke put his knowledge was that Mrs Keating had told him that she and her husband were not as active in the hotel in this last eight month to 12 month period and that they had used excess staff.[79] There was no close analysis of what staff members were doing, what hours they were being paid for and where the cost‑cutting could be made. That hotel businesses could vary significantly in their staffing demands seems clear – see the opinion of Mr Currey.[80] The suggestion of Mr Butcher of Hanrick Curran – an accountant with special expertise in hospitality and gaming – that there needed to be a “fully costed wages roster by reference to duties; hours; licenced hours; off‑site detailed bottleshop opening hours”[81] seems to me, with respect, to be obvious;
[78]I note that Mr Kidd in fact paid $50,000
[79]See T 586/40; 636/30. There was no evidence given at trial on the extent of their activity.
[80]See para 2.3 of his report at p 718 of Ex 1
[81]See p 606 of Ex 1
(d) that close analysis of what precisely the Keatings were doing needed to take into account the fact that they were to be replaced – so far as Mr O’Rourke knew – with Mr Kidd’s son‑in‑law and daughter, Mr and Mrs Donaghy. It could hardly be supposed that Mr and Mrs Donaghy could possibly have had the same experience and knowledge of the Bundaberg market and of this particular hotel’s operations as had Mr and Mrs Keating who had been in place since 1981 apart from the six years they leased the hotel. It is one thing to expect a very experienced hotel operator to reduce staff whilst maintaining service, stock levels, standards and profitability, but quite another for a new incoming manager to achieve that result;
(e) whilst Mr O’Rourke was very enthusiastic about Mr Donaghy’s abilities, what particular expertise and ideas Mr Donaghy brought to the task was not explained by Mr O’Rourke.[82] Mr Donaghy had worked for breweries over a long period of time, but his actual experience in running a hotel was very limited. It was for a period of only 12 months[83] and with the assistance of another owner. He had a quarter interest in that hotel. The hotel was in Tasmania and was a very different type and size to the Melbourne hotel;[84]
[82]See T 597/30 – 598/10. Mr Kidd’s opinion was less sanguine: T 154/50 -156/5
[83]T 558/10
[84]T 561/50
(f) on Mr O’Rourke’s analysis, the total wages bill should have been around $250,000 a year. If one adopts the figure of $5,500 per week which he told Mr Kidd in his report that the wages were averaging,[85] then the actual annual wages bill for the business as run by the Keatings was in the order of $286,000. To that had to be added something for the work that the Keatings were doing. The extent of that work was never identified either by Mr O’Rourke or at all in the trial. Without allowing for the Keatings work at all, the wages bill had to be reduced by over 12½ percent from its current levels assuming the $5,500 figure was accurate. If one allows for the Keatings’ management and work activities, then it is very likely that the reduction in wages had to exceed 20 percent;
[85]See p 214 of Ex 1
(g) this analysis is confirmed by Mr O’Rourke’s evidence that his intention was that the hotel could have been run on a wages bill of $4,200, with $800 for the manager and his wife in addition,[86] a 23 percent reduction in the wage level of $5,500. That was not spelt out to Mr Kidd;
[86]See T 631/18
(h) assuming that the tighter control over wages that Mr O’Rourke envisaged could have been achieved, that improves the profit by only $25,000 a year.[87] In order to meet the profit that Mr O’Rourke told Mr Keating he could achieve from the hotel Mr Kidd had to find another $235,000 in profit. Nowhere was this explained to Mr Kidd;[88]
[87]See T 629/10
[88]Mr Kidd of course did not have the McLellan & Co trading figures: T 64/30
(i) further, and it may only be a relatively small matter, but the assumption of $5,500 as the average reflected by the McLellan & Co records, understates the true figure. Mr Martin was inclined to adopt the figure of $5,700 as the average shown by those figures[89] and I work out the average to be closer to $5,590. The fact is that there was another $4,000 to $5,000 per year that needed to be made either in cost cuttings or increased profits;
[89]eg see T 631/1
(j) the analysis to date ignores the fact that fundamental to Mr O’Rourke’s approach was that Mr Kidd had to spend more money. Not only was he required to outlay $125,000 on the premium and some $200,000 on stock, but he had to make alterations to the hotel that would inevitably involve expenditure. Mr O’Rourke had advised that the lounge areas had to be “themed”, that gaming machines had to be relocated, and that gaming machines had to be replaced. Nowhere does Mr O’Rourke analyse how much all this was to cost. Thus, whilst for the purposes of the discussion expenses (other than wages) have been assumed to remain the same as under the Keatings, it was inevitable that they would increase;
(k) Mr O’Rourke’s true view was that in order to run this hotel successfully, it was necessary to run it “in a real, lean and mean way”.[90] That was not conveyed to Mr Kidd by the written report;
[90]See T 631/19
(l) all this demonstrates that there would need to be a dramatically increased level of profitability from the business in order to be satisfied that it would make a “good profit”. Mr O’Rourke agreed that that was so.[91] Given that was the true position, I would expect that Mr O’Rourke, before giving any advice of the sort that he did, would need to carry out a very close analysis of precisely how this dramatic increase in profit was to be achieved. The evidence given by Mr Butcher to the effect that there needed to be complete profit and loss centres for each division of the business, a business plan prepared, a SWOT analysis performed and a sensitivity report generally and for each division seems to me to be common sense.[92] Without such an approach I cannot see how one could reach a view as to where the profit was being made and where and how it might be improved. This is especially so when implicit in the advice was the optimistic view that profits could be so dramatically increased. I do not accept that any thorough analysis was carried out.[93] Mr O’Rourke did not look at the individual departments of the business[94] save for the analysis for the three month period to 25 May 2000.[95] What conclusion he drew from that analysis nowhere appears;
[91]See T 635/25
[92]See paras 9.4 to 9.9 of his report at p 606 of Ex 1
[93]See the cross examination at T 306-308
[94]See T 635/35 although he seemed to plainly recognise the importance of examining each department: T 583/40-60
[95]See p 233 of Ex 1 and T 584/1
(m) not only was there no such analysis but this analysis had to be carried out bringing into account a new manager untried in the district and with only 12 months’ experience behind him in a different hotel and environment, and with a price war being carried on in the Bundaberg area;[96]
[96]As to the price war see T 54/40; Mr Currey’s report at paragraph 5.7 p 722 of Ex 1
(n) the McLellan & Co trading figures show just how dramatic that profit increase needed to be to achieve Mr O’Rourke’s optimistic advice. The trading figures demonstrate, when adjusted, a weekly profit of about $4,650 under the Keatings operation. To achieve the net profit that Mr O’Rourke speaks of, and which he told Mr Kidd the hotel could achieve, there would need to have been an increase in the profitability of the hotel of over $4,000 per week. Effectively, the profit had to nearly double. That was not conveyed to Mr Kidd by the written report;
(o) no evidence was led to show that as at June 2000 this business was capable of earning anything like a profit of $250,000 per annum given the expenses that Mr Kidd was required to necessarily bear. Indeed I could not discern any factual basis, as at June 2000, on which to predicate an assumption of any increase in profits – all depended on attracting more custom from the competitors.[97] What those competitors were doing and spending, and what advantages or disadvantages they had was nowhere explored;
(p) the foregoing takes no account of the criticisms expressed by Mr Currey in his report that generally estimations of expenses and projections of profits made by Mr O’Rourke were too optimistic.[98] He was there referring to a projection prepared by Mr O’Rourke that came into existence sometime after Mr O’Rourke’s advice to Mr Kidd and used to support an application for a gaming licence,[99] but which may give some insight into his thinking. Mr Currey was plainly greatly experienced and independent. The point that I took from his evidence is that these projections were outside the modelling standards that he was familiar with[100] and would need to be justified to show that they were applicable to this business. In my view there was no such justification. Indeed his criticisms of the projections at paragraph 5.5 of his report seemed to me to be compelling.[101]
[97]In this regard note Mr Currey’s observation that Mr O’Rourke assumed a 40% reduction in advertising costs which would have a substantial effect upon sales: see his report at para 5.5 p 721 of Ex 1
[98]See paragraph 5.4 of his report at p 720 of Ex 1
[99]See pp 234-235 of Ex 1 & T 261/40; 630/30
[100]See annexure 3 to his report
[101]See p 721 of Ex 1
In my view it is not possible to read Mr O’Rourke’s written report that he provided on 15 June 2000 as giving Mr Kidd any real guidance as to what was in fact required in order to achieve a “good net profit”, in the sense they had discussed. And once it is appreciated in what sense he used that expression there was no basis for so optimistic a view as he expressed. Nor is there any suggestion in the evidence that any other advice was given orally – quite to the contrary.
The true effect of the report in the context of the advice given in telephone calls and at the meeting of 16 June was to indicate that despite there being no marketing and no reason for the hotel to attract customers, and with the adoption of relatively simple measures, improvement in wage costs, facilities and trading could be achieved. The implication was that this business was already earning a very substantial profit that could but improve.
It is worth noting that both experts called by the vendors and relied on by Mr O’Rourke – Mr Duthie and Mr Kendall – expressed reservations about drawing any firm conclusions based on eight months of trading figures.[102] Mr O’Rourke based his advice primarily, although not exclusively, on that basis.[103]
[102]Mr Duthie at T 511/20; Mr Kendall - p 7 Ex 27
[103]eg T 638/5; 606/45
I am mindful of Mr Marks’ submission that the advice had to be read in context and his reliance on Elders Trustee & Executor Co Ltd v EG Reeves Pty Ltd.[104] The difficulty for Mr O’Rourke is that his advice must be read in the context that a certain level of profit was at the heart of the discussion.
[104](1987) 78 ALR 193, at p 242 per Gummow J
Was the Rent of $3100 Per Week Appropriate?[105]
[105]This section deals with paras 8(e) and (i) and 10 (c) and (d) of the Third Further Amended Statement of Claim
The plaintiffs make two complaints concerning Mr O’Rourke’s advice in respect of the rent – first that a rent at $3,100 per week could not be supported by this business and secondly, that it was not in accordance with industry standards. In reality both amount to the same thing – that the rent was well outside what was appropriate for the profit that the business was earning, and that Mr Kidd should have been so advised.
The experts suggested various methods of determining a fair market rental. Mr Currey suggested[106] that 45 percent of net yield (Mr Butcher’s EBITDA) was one method. Another, he asserted, was to add eight percent of in‑house sales, five percent of retail and 20 percent of net gaming. Adopting either method would result in a rent well below the $3,100 per week that Mr O’Rourke thought appropriate – in the order of $1,525 to $1,910 on the figures that Mr O’Rourke had available to him.
[106]Ex 1 p 722
Mr Kendall is an expert valuer called by the vendors to establish the market value of the business and the fair weekly rental for the lease. His opinion on those matters was of little assistance as he based his views on the assumption – without any evidence but on the instructions of the vendors – that the net profit of the business under the Keating’s management was in the order of $250,000.[107] As I have found, the true net profit is reflected in the EBITDA calculated by Mr Butcher at $192,000.
[107]See p 33 of Ex 27; T 446/40-60
Of present interest is that Mr Kendall thought that a reasonable formula to adopt to determine a fair rent was to take 50 percent of net yield. He accepted that adoption of 45 percent would not be unusual.[108] He accepted that Mr Currey’s alternative formula would be a “good sensitivity measure”.[109] The 50 percent figure would result in a rental of about $1850 per week.
[108]T 448/50-60
[109]T 449/15
The $3100 per week figure was 64 percent of an assumed net profit of $250,000. It could only be justified if one assumed not only that the true net profit was $250,000 but also that the business was in a growth phase and further that the premium paid of $125,000 was well below market value.[110] Whilst there was evidence to support the argument that turnover improved when the Keatings regained control of the hotel, the growth phase assumption ignores the fact that in other and less skilled hands (which of course was the premise with Mr Kidd assuming control) the hotel had not done as well. Neither of the remaining assumptions was established as valid.[111]
[110]That was Mr Kendall’s approach – see p 34 of Ex 27
[111]Mr Kendall conceded that if one assumed an EBITDA as Mr Butcher calculated it the proper capital payment was under $100,000 – T 451/5. I am mindful of his qualification that he would look to the future maintainable EBITDA figure and so the past actual would not be conclusive - but in the absence of any proper analysis concerning the future it rather begs the question.
Mr O’Rourke rejected the approaches of both Mr Currey and Mr Kendall. In his view all that mattered was turnover, almost regardless of profit.[112] I do not accept that such an approach can be justified.
[112]T 632/30 - 40
As Mr O’Rourke observed “wages, stock and rent are three of your biggest cost factors in a hotel”.[113] Informed and accurate advice on this point was essential. Accurate advice to Mr Kidd would have been that he was paying well above the appropriate rental given the actual profits of the hotel. In my view Mr O’Rourke should have so advised him.
[113]T 600/55
Wages and Staff Levels[114]
[114]Refer paras 8(b) and (d) of the Third Further Amended Statement of Claim
There are two contentions. The first contention is that the true wage levels under the Keatings’ management averaged $6,000 per week and not $5,500 as represented by Mr O’Rourke. As I have indicated I calculate the average wage levels based on the eight month figures to be about $5,590. Mr Marks contended for $5,565 adopting a 35 week period. I accept his submission that the true difference is of no consequence as indeed Mr Kidd conceded.[115]
[115]T 194/20
The second contention is that Mr O’Rourke wrongly asserted that wage levels under the Keatings were excessive. This claim is on firmer ground. Without an analysis of the sort I have previously discussed[116] I cannot see on what basis Mr O’Rourke could make such a claim. The sole support that Mr Marks could advance was Mr O’Rourke’s own opinion concerning wages as a percentage of turnover that I have earlier discussed.[117] For the reasons mentioned earlier I consider there to be no valid basis for the representation.
[116]See [62] (c)
[117]T 630/47 – 631/10 & see [62] (a) and (b)
Accurate and informed advice on wages was crucial and in my view plainly not provided.
Reliance
In deference to the submissions made by Mr Marks I will address the issue. Mr Marks argued that as Mr Kidd did not adopt suggestions contained in the report such as implementing a theme in the lounge, promoting the lounge, implementing tighter control over wages and marketing the hotel the conclusion followed that Mr Kidd did not rely on the report or advice he received concerning the suitability of the hotel as an investment.
In my view the conclusion does not follow from the premise.
There is no dispute that Mr O’Rourke was retained to provide advice on the suitability of the investment. This he did. The whole point of the initial retainer was for Mr Kidd to obtain guidance in a new field of investment.[118] He read the report of 15 June[119] and had a meeting the following day to discuss it. He sent Mr O’Rourke to Bundaberg to analyse the hotel for him.[120] As Mr Kidd said Mr O’Rourke was “in charge of recommending a hotel. That was his brief”.[121]
[118]T 156/30; 201/40
[119]See T 46/30
[120]T 146/40 & 201/49
[121]T 202/1
Accepting that Mr Kidd did not implement all suggestions made by Mr O’Rourke, the failure to do so is at a later time than that under consideration, in respect of different issues, and due to factors quite unrelated to Mr Kidd’s acceptance of Mr O’Rourke’s expertise. Indeed it is evident that Mr Kidd continued to rely on Mr O’Rourke well after the decision to enter into the contract and in relation to diverse aspects of the business, eg the details of setting up the investment in relation to the lease and licences,[122] assistance at the changeover,[123] organising the accounts in November 2000,[124] performance of the stocktake in December 2000,[125] and the dismissal of Ms Northey in May 2001.[126] Mr Kidd did not even visit the hotel until October 2000, well after he had signed the contract and after the lease had been entered into.[127]
[122]T 73/1-5, 182/40, 185/35
[123]T 207/20-30
[124]T 208/45
[125]T 209/50
[126]T 210/30
[127]T 146/35. Mr Keating’s recollection was different: T 406/10. Mr Kidd said he had a broken leg at the time. That is a circumstance that he would be unlikely to mistake and tends to confirm his recollection as probably more accurate
A further submission was made to the effect that as late as 11 July 2000 Mr Kidd had not satisfied himself as to the takings – the inference being I take it that he therefore did not rely on Mr O’Rourke’s report and advice given in June. This submission was based on the footnote to a letter sent by Mr Kidd’s then solicitor Mr Bradley that I have referred to earlier[128] advising Mr Kidd to satisfy himself as to the takings and Mr Bradley’s evidence concerning the footnote.[129]
[128]See Ex 5 and [30] above
[129]T529/55
Whilst there was no question about Mr Bradley’s honesty I was far from satisfied that he had any real recall of the transaction. He was shown the letter from his file (Ex 5) and asked to explain the footnote on it seven years after he sent the letter, with no apparent opportunity to refresh his memory of the file,[130] and without any contemporaneous note of any discussion with Mr Kidd to support the inference sought to be drawn. In my view Mr Bradley’s note indicates nothing more than him providing a standard caution to a client. There is no hint in any other evidence of Mr Kidd not being satisfied, at that time, with the advice Mr O’Rourke had given him about takings. His later reliance on Mr O’Rourke suggests he put implicit faith in him.
[130]T 532/40
In my view reliance is plainly established.
Breach
The advice concerning the profitability of the business and the ability to reduce wages costs each involved predictions and was subject to s 51A of the Trade Practices Act 1974. There was no proper basis for making those predictions. The qualifications contained in the report of 15 June 2000 in no way alerted Mr Kidd to the difficulties that he faced.
The statements concerning the profitability of the business, whether it was suitable for the first plaintiff, the appropriateness of the rental and the ability to reduce the wages cost were each misleading or deceptive or likely to mislead or deceive within the meaning of s 52 of the Act. Those statements were made in the context of an expert advising a client in relation to the suitability of a business knowing that the client intended to use the advice as a basis for a decision whether or not to buy the business and fully aware of the sensitivity of the issues to that decision.
The elements of the tort relevant to the giving of negligent advice were identified by Brennan CJ in Esanda Finance Corporation Ltd v Peat Marwick Hungerfords.[131]
“In every case, it is necessary for the plaintiff to allege and prove that the defendant knew or ought reasonably to have known that the information or advice would be communicated to the plaintiff, either individually or as a member of an identified class, that the information or advice would be so communicated for a purpose that would be very likely to lead the plaintiff to enter into a transaction of the kind that the plaintiff does enter into and that it would be very likely that the plaintiff would enter into such a transaction in reliance on the information or advice and thereby risk the incurring of economic loss if the statement should be untrue or the advice should be unsound.”
Specific findings were made that the premium of $125,000 that the first plaintiff paid to the first defendant to acquire the hotel business for a period of five years was not to be brought into account as it did not enhance the value of the gaming business and was not invested in the gaming business.[260] The Tribunal then simply applied the respective percentage contributions to determine that the value of seven of the 20 operating authorities should be the amount that the first defendant had to pay to the first plaintiff to obtain a transfer of the operating authorities.
[260]Ex 13 at p 33 [82]
Thus it was not the acquisition of the business that resulted in the first plaintiff receiving the benefit of the order of the Tribunal but rather the expenditure by the first plaintiff of its own funds in acquiring and improving the gaming business. It is plain from the Tribunal’s reasons that if there had been no such expenditure there would have been no “compensation” paid at all for the transfer of the operating authorities at the end of the lease.[261]
[261]The operating authorities are attached to a gaming machine licence which can only be held by the holder of the liquor license: see s 55, s 56, s 58 and s 68 of the Gaming Machine Act 1991
In my view the defendants’ argument produces this anomaly: it strikes me as perverse that if the second defendant’s advice had been accurate, so that the first plaintiff had in fact acquired a profitable business, then the first plaintiff would, by reason of the decision of the Commercial and Consumer Tribunal, have enjoyed not only those profits but the sum awarded to it by the Tribunal; but the effect of failing in its duty is said to be that the first plaintiff not only does not enjoy those profits but loses the benefit to which it was otherwise entitled.
I have with some hesitation come to the view that the amount of “compensation” that the first defendant paid to the first plaintiff should not be brought into account in reduction of the damages. It seems to me that the amount awarded is an asset which reflects the first plaintiff’s own expenditure and effort and it is no more to be brought into account than any other asset that the first plaintiff might have acquired during the currency of the lease. It seems to me that the distinction that I referred to earlier is a valid one.
I should mention that if I had been of the contrary view, I would have brought into account the net compensation amount as determined by Mr Butcher, that is, $432,009. If it was appropriate to apply the principle in Manwelland then it is appropriate to bring into account the costs incurred in obtaining the compensation amount as the net amount represents the true position of the first plaintiff.
Interest
Interest is claimed under the provisions of the Supreme Court Act 1995.
In respect of the first plaintiff’s claims the interest allowed must take account of the payment of $120,000 by the eighth and ninth defendants on or about 12 April 2007. The table in Mr Butcher’s first report[262] gives some indication of the timing of the losses and excludes the unpaid rent. I will apply the receipt of the settlement amount to the earliest loss and assume the legal expenses[263] were incurred in the 2004 year – the action having been instituted in the 2005 year.[264] I will allow interest at 10 per cent. I assess the interest at $182,745.
[262]P321 of Ex 1
[263]Of $28,191 that must be taken out of these figures
[264]Both assumptions favour the defendants
I will allow the second plaintiff’s claim for interest at 5 per cent during the period that he worked (from the commencement of the lease to 30 October 2005) and 10 per cent thereafter. I assess the interest at $32,000.
I will allow interest in favour of the first defendant on its counter-claim for rent at 10 per cent. I assess the interest at $53,345.[265]
[265]($95,660 x 10% x 3yrs) + ($123,235 x 10% x 2 yrs)
Summary and Orders
I give judgment for the first plaintiff against the second and third defendants in the sum of $640,351[266] in respect of its claim and $182,745 for interest.
[266]The total loss of $760,351 ($624,263 + $136,088) less the sum received from the eighth and ninth defendants of $120,000
I give judgment for the second plaintiff against the second and third defendants in the sum of $77,000 in respect of his claim and $32,000 for interest.
I give judgment for the first, sixth and seventh defendants against the first and second plaintiffs on the plaintiffs’ claim against them.
I give judgment for the first defendant against the first plaintiff on its counterclaim in the sum of $218,733 together with $53,345 for interest.
I give judgment for the first, sixth and seventh defendants:
(a) against the second and third defendants on the third party claims brought by the second and third defendants against them;
(b) against the eighth and ninth defendants on the third party claims brought by the eighth and ninth defendants against them.
I give judgment for the second and third defendants:
(a) against the first, sixth and seventh defendants on the third party claims brought by the first, sixth and seventh defendants against them;
(b) against the eighth and ninth defendants on the third party claims brought by the eighth and ninth defendants against them.
I give judgment for the fourth defendant:
(a) against the first, sixth and seventh defendants on the third party claims brought by the first, sixth and seventh defendants against him;
(b) against the eighth and ninth defendants on the third party claims brought by the eighth and ninth defendants against him.
I give judgment for the eighth and ninth defendants:
(a) against the first, sixth and seventh defendants on the third party claims brought by the first, sixth and seventh defendants against the eighth and ninth defendants;
(b) against the second and third defendants on the third party claims brought by the second and third defendants against the eighth and ninth defendants.
I will hear counsel as to the appropriate orders as to costs.
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