BEVILLESTA PTY LTD v SOVEREIGN MOTOR INNS PTY LTD

Court of Appeal (NSW)|2002-07-19|Before: Handley JA, Sheller JA, Austin J

CITATION : BEVILLESTA PTY LTD v SOVEREIGN MOTOR INNS PTY LTD [2002] NSWCA 279 FILE NUMBER(S) : CA 40447/01 HEARING DATE(S) : 19 July 2002 JUDGMENT DATE : 26 August 2002

PARTIES : Bevillesta Pty Ltd - Appellant Sovereign Motor Inns Pty Ltd - Respondent JUDGMENT OF : Handley JA at 1; Sheller JA at 2; Foster AJA at 81

COUNSEL : B W Walker SC/S A Kerr/S M Foda - Appellant M Cashion SC/F P Donohoe - Respondent SOLICITORS : Robinson Legal - Appellant Laurence & Laurence - Respondent CATCHWORDS : DAMAGES - construction of lease - covenant to use best endeavours - apportionment - expert evidence LEGISLATION CITED : N/A Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827 Sydney City Council v West (1965) 114 CLR 481 Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (The Antwerpen) (1993) 40 NSWLR 206 Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625 CASES CITED: Commonwealth v Amman Aviation Pty Ltd (1991) 174 CLR 64 Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 R V Kotzmann [1999] 2 VR 123 Silver v Ocean Steamship Company [1930] 1 KB 416 Ratcliffe v Evans [1892] 2 QB 524 Government of Ceylon v Chandris [1965] 2 Lloyds Rep 204, (1965) 3 All ER 48 at 56-7 Gosse Millerd Ltd v Canadian Government Merchant Marine Ltd [1929] AC 223 DECISION : 1 The appeal should be allowed for the limited purpose of varying Austin J's costs order; 2 Set aside order 2 made on 11 February 2002 and in lieu thereof, order that the plaintiff pay the defendant's costs of the further hearing which began on 23 October 2001 but that otherwise the defendant should pay the plaintiff's costs of the proceedings; 3 Confirm orders 1 and 3 of the orders made on 11 February 2002; 4 Bevillesta to pay Sovereign's costs of this appeal.

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40447/01 ED 4486/96

HANDLEY JA SHELLER JA FOSTER AJA

BEVILLESTA PTY LTD v SOVEREIGN MOTOR INNS PTY LTD The appellant was the lessor and the respondent the lessee of a motel. The dispute between the parties arose over the meaning of clause 7.1, which dealt with air-conditioning and elevators, in the lease. The trial Judge found that the appellant had breached its covenant to use its best endeavours to maintain and service the air-conditioning plant to the best of its ability (clause 7.1(a)). However, the trial Judge concluded that the respondent had failed to establish that the appellant did not use its best endeavours to maintain and service the elevators to the best of its ability. He was of the further opinion that no breach of the lease had been established in relation to the maintenance of the exterior of the building. His Honour held that the respondent was entitled to recover damages, notwithstanding clause 7.1(d) which purported to remove the rights of the respondent to seek compensation or damages against the appellant if the air-conditioning plant or elevators failed to function "for any reason". His Honour found that employees or consultants of the appellant had regularly turned off the chillers in order to reduce the cost of operating the air-conditioning system. As such, clause 7.1(d) was not applicable because a piece of machinery which has the capacity to function does not fail to function simply because an operator reduces the level at which it functions or turns it off. A verdict was given for the respondent in the sum of approximately $1.9 million. The appellant appealed from the decision on the grounds that his Honour erred in his construction of clause 7.1(d) and in his findings in relation to damages. The award of damages was derived from the evidence of the respondent's expert witness. This witness produced four reports which were tendered to the Court. The appellant challenged the expert's findings on the basis that he had failed to determine whether, or in what proportion, the motel's lost revenue was attributable to the air-conditioning problems as distinct from the elevator and external maintenance problems. While the trial Judge recognised that cross-examination weakened the expert's opinion, he held that it did not destroy the entirety of his evidence. The trial Judge ultimately found that the apportionment of the loss attributable to the air-conditioning problem was 50.01 per cent of the total loss occasioned by the elevator, air-conditioning and external maintenance problems. The appellant argued that the evidence relied upon by the trial Judge to reach this percentage was not sufficient for the task and that the respondent was therefore entitled to only nominal damages. HELD (per Sheller JA, Handley JA and Foster AJA concurring)

On its proper construction, clause 7.1(d) does not absolve the appellant from its liability to pay compensation or damages for the breach of clause 7.1(a) which the trial Judge found.
The trial Judge recognised the limitations of the expert's evidence. However, his Honour was able to conclude on the basis of that evidence that the air-conditioning problems were more significant than the combined effect of the elevator and building presentation problems, though not much more significant. No ground has been established for this Court to interfere with that finding.
When admissible evidence can establish the general loss done to business but it remains necessary to do an apportionment, that apportionment can be done by estimate: see Ratcliffe v Evans [1892] 2 QB 524, Silver v Ocean Steamship Company [1930] 1 KB 416.
While the calculation of the total damages to the respondent before apportionment was of doubtful weight because of the limitations of the expert evidence no sufficient ground was shown for the Court to interfere with the trial Judge's findings.
It is appropriate to order that the respondent pay the appellant's costs of the second hearing before the trial Judge. That hearing was intended to determine the extent of the impact of the air-conditioning problem and the amount of the loss the consequence of that problem. None of the evidence led by the respondent at the further hearing assisted in making that determination. The fact that the Court received no assistance and the appellant was put to unnecessary legal expense justifies the making of a costs order against the respondent in respect of the second hearing.

Legislation cited: Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827 Sydney City Council v West (1965) 114 CLR 481 Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353 Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (The Antwerpen) (1993) 40 NSWLR 206 Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625 Commonwealth v Amman Aviation Pty Ltd (1991) 174 CLR 64 Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705 R V Kotzmann [1999] 2 VR 123 Silver v Ocean Steamship Company [1930] 1 KB 416 Ratcliffe v Evans [1892] 2 QB 524 Government of Ceylon v Chandris [1965] 2 Lloyds Rep 204; (1965) 3 All ER 48 Gosse Millerd Ltd v Canadian Government Merchant Marine Ltd [1929] AC 223

ORDERS 1. The appeal should be allowed for the limited purpose of varying Austin J's costs order; 2. Set aside order 2 made on 11 February 2002 and in lieu thereof, order that the plaintiff pay the defendant's costs of the further hearing which began on 23 October 2001 but that otherwise the defendant should pay the plaintiff's costs of the proceedings; 3. Confirm orders 1 and 3 of the orders made on 11 February 2002; 4. Bevillesta to pay Sovereign's costs of this appeal. **********

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40447/01 ED 4486/96

HANDLEY JA SHELLER JA FOSTER AJA

Monday, 26 August 2002 BEVILLESTA PTY LTD v SOVEREIGN MOTOR INNS PTY LTD Judgment 1 HANDLEY JA: I agree with Sheller JA. 2 SHELLER JA:

Bevillesta Pty Ltd (Bevillesta) was the lessor and Sovereign Motor Inns Pty Ltd (Sovereign) the lessee of a motel in an office building at 220 Pacific Highway, Crows Nest in which Sovereign conducted the motel business. The term of the lease was 10 years commencing on 11 June 1991. In "Part 7 - Air-Conditioning and Elevators" was found cl 7.1 which so far as relevant was as follows: "7.1 Where any plant, machinery or equipment for heating, cooling or circulating air (all of which are herein included in the expression 'air-conditioning plant' but which expression shall not include the chilled water room induction units and room pneumatic thermostats) or any one or more lifts (hereinafter called 'elevators') are provided or installed in the Building or the Demised Premises by the Lessor: [Lessor to endeavour to keep air-conditioning and elevators working] (a) The Lessor shall use its best endeavours to maintain and service to the best of his ability the air-conditioning plant and the elevators to ensure that the same are kept working and reasonably available for the use of the Lessee in such parts of the Demised Premises which are being used by the Lessee at any particular time in conjunction with the business carried on by the Lessee in the Demised Premises, (delays or stoppages due to repairs, maintenance, strikes, accidents or other unavoidable causes excepted). Nothing herein contained shall be construed as imposing on the Lessor any liability to keep the air-conditioning plant and the elevators working in any part of the Demised Premises when that part is not being used by the Lessee in conjunction with the business carried on by the Lessee. The Lessee shall allow the Lessor or any person authorised by the Lessor to enter upon the Demised Premises or any part thereof at any time for the purpose of regulating/balancing the air-conditioning plant and maintaining repairing and replacing the plant and machinery in respect thereof. [Lessor's obligation to hand over induction units in good working order] (b) Notwithstanding the provisions of Clause 7.1(a) and above, the Lessor will ensure that the chilled water room induction units will be in good working order upon the Commencement Date. [Lessee to comply with Lessor's requirements] (c) The Lessee will at all times comply with and observe the reasonable requirements of the Lessor in regard to the air-conditioning plant and the elevators and will not do or permit to be done anything in relation to the same or otherwise which might interfere with or impair the efficient operation of the air-conditioning plant and the elevators. [Consequences of failure to function] (d) If any of the elevators or the air-conditioning plant fails to function for any reason the Lessee shall not by reason of such failure be entitled to determine this Lease nor shall the Lessee have any right of action or claim for compensation or damages against the Lessor in respect thereof. [Access to Lessor for maintenance etc] (e) The Lessee shall allow the Lessor and the Manager of the Building and the Lessor's engineers or mechanics to enter the Demised Premises at any time to examine give maintenance attention to and to repair as well as to install or replace all or any of the air-conditioning plant or the elevators. [Use of the elevators] (f) The Lessee will not use or permit to be used the elevators (except for the non-exclusive use of one workable elevator which also operates as goods lift) other than for the conveyance of passengers with or without their personal luggage." 3 In 1996 Sovereign began proceedings against Bevillesta to recover damages for breaches by Bevillesta of: · cl 7.1(a) by failing to use its best endeavours to maintain and service to the best of its ability the air-conditioning plant and to service the elevators adequately and keep them in working order; and · Pt 11.8 by failing to maintain the exterior and common parts of the building to a standard consistent with a quality commercial office building.

In 1997 Bevillesta began proceedings against Sovereign for a declaration about the meaning of a phrase in the description in the lease of the demised premises. 4 Austin J heard both proceedings and gave a judgment on 7 May 2001 (the first judgment). His Honour concluded that Bevillesta had breached its covenant to use its best endeavours to maintain and service the air-conditioning plant to the best of its ability and to ensure that the plant was kept working and reasonably available for use by Sovereign in its business. However, the trial Judge concluded that Sovereign had failed to establish that Bevillesta did not use its best endeavours to maintain and service the elevators to the best of its ability, to ensure they were kept working and reasonably available for Sovereign's use in the hotel premises. He was further of opinion that no breach of the lease had been established in relation to the maintenance of the exterior of the building or the common parts. 5 His Honour held that Sovereign was entitled to recover damages notwithstanding cl 7.1(d) of the lease. 6 His Honour said the damages were to be assessed by the contract measure of damages and gave Sovereign the opportunity to present further evidence along lines which he prescribed. 7 In the 1997 proceedings Austin J decided that Bevillesta was entitled to the declaratory relief it sought. 8 After a further hearing, Austin J gave judgment on 23 January 2002 (the second judgment) which, after calculations made by the parties based upon the reasons for judgment, resulted in a verdict and judgment for Sovereign against Bevillesta in the sum of $1,939,888 together with costs. 9 Bevillesta appeals from this decision. Despite wider grounds in its amended notice of appeal, the appeal as argued was limited to claimed error in his Honour's construction of cl 7.1(d) of the lease and in his Honour's findings in relation to damages.

Findings about air-conditioning plant 10 In the first judgment Austin J examined the evidence about air-conditioning carefully and in detail. The plant was a conventional induction unit system comprising two primary supply air-conditioners to cool and to de-humidify or heat the primary supply air on a pre-set schedule based on the ambient outdoor air temperature. The primary supply catered for approximately 20 to 25 per cent of the room loads, the secondary chilled water supplied to the induction units provided the other 75 to 80 per cent of the room cooling climate. The air-conditioning plant was controlled by a Direct Digital Control (DDG) system in which there were programmable controls which compared the outdoor ambient temperatures and indoor temperatures to sensors around the building. In the opinion of the experts the system was capable of providing satisfactory cooling and air-conditioning for the motel premises. 11 Because of remarks Austin J made in the second judgment and the submissions that Bevillesta puts about them, I must refer in detail to paras 55 and 56 of the first judgment. In para 55 Austin J said he was satisfied on the evidence that the system in fact did not consistently provide satisfactory cooling and air-conditioning. His Honour listed persons who had complained about the air-conditioning to the motel, sometimes to the effect that the motel area was too hot and sometimes that it was too cold. The restaurant and bar were very hot and stuffy during the summer. There were days during the winter when the restaurant and bar were very cold. One observation was that from 9am to 5pm Monday to Friday and excluding public holidays the air-conditioning operated at a satisfactory level. However, between 6pm and 6am weekdays and for the whole of the weekends and public holidays the air-conditioning in all parts of the motel was very uncomfortable. 12 Austin J said: "56 There is no credible challenge to this evidence, and I accept it. It is evidence which establishes that there were serious and persistent problems with the cooling system of the hotel premises. They were not problems that could be explained by reference to the inevitable breakdowns that occur in any air-conditioning system. Nor could they be explained by reference to problems with equipment that Bevillesta was not required to maintain, such as pneumatic thermostats in the hotel guest rooms. The problems were too general and persistent to be explained in that way." 13 His Honour agreed with the submission that the fact that numerous complaints were made in circumstances where the evidence showed that they were likely, more often than not, to have been true, was an important link in the causal chain between the breaches and the under-performance of the hotel. 14 Bevillesta advanced two explanations for the consistent problems: "the low load theory in connection with the chillers" and "the wear and tear theory". His Honour carefully considered the evidence about these theories and rejected them. He did not regard the wear and tear theory as a satisfactory general explanation for the persistent cooling problem or even as an explanation for any of the reported problems. Variants advanced by Bevillesta were also rejected. 15 Sovereign submitted that the evidence established that the persistent cooling problems were caused by the introduction of impediments to the design operation of the system namely, the unloading of the chillers, turning the chillers off and changing the temperature set points on the chillers. Chillers are unloaded when something is done to reduce the capacity of the chiller to chill the primary chilled water for the "set point" temperature. If a chiller is unloaded it will not have sufficient capacity to provide primary chilled water to the system at the set point temperature, if a sufficient load is placed on the system. Consequently room temperature will rise. It was acknowledged in the course of cross-examination that a pattern of cooling problems overnight on weekdays, and during weekends and public holidays, was consistent with the chillers being unloaded prior to those periods and then "re-loaded" at the commencement of business hours. In Austin J's opinion the chillers were persistently unloaded in a manner which reduced their performance outside commercial office hours. He was further persuaded by the evidence that either Mr Reidy, Bevillesta's Systems Maintenance Controller and Consultant or Mr Ramian, the Maintenance Manager of the building, or both of them regularly turned the chillers off in order to reduce the cost of operating the air-conditioning system. He said: "98 The evidence shows, by inference, that Mr Reidy or Mr Ramian or both of them engaged in persistent and systematic interference with the cooling and heating systems in a manner that reduced their capacity and efficacy on weekends and public holidays and outside business hours during the week. They did so by unloading the chillers, adjusting the temperature set points and sometimes turning the chillers or boilers off. It is likely that they did so in order to reduce the cost of the operation of the air-conditioning plant to Bevillesta. 99 It may be that problems occurred from time to time for other reasons, not fully explained. However, the recurrent, persistent cause of the cooling and heating problems was intervention by Bevillesta in the ways described. The overall failure of the system to provide satisfactory cooling and heating to the hotel premises was caused by Bevillesta's conduct in introducing impediments to the system, and by its failure to remove those impediments. 100 It was a simple matter for Bevillesta either manually or remotely to allow the system to perform satisfactorily without impediments. Thus, the evidence indicates that the problems disappeared after Mr Ramian told Mr Hancock that he had overridden the system so that the chillers and boilers would be running all the time; and the heating problems were minimal after Mr Ramian told Mr Hancock in the winter of 1997 that he would have the boilers running continuously. 101 It follows, in my opinion, that Bevillesta did not use its best endeavours to maintain and service to the best of its ability the air-conditioning plant to ensure that the plant was kept working and reasonably available for Sovereign's use in the hotel premises. That was a breach of clause 7.1(a)." 16 On this appeal Bevillesta did not challenge this conclusion but argued that cl 7.1(d) operated to preclude Sovereign's claim for damages for breach of cl 7.1(a).

Clause 7.1(d) 17 In the first judgment Austin J reviewed the case law. In particular, he referred to the joint judgment of the High Court in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 at 510 where it was said, after referring to decisions which included Photo Productions Ltd v Securicor Transport Ltd [1980] AC 827, Sydney City Council v West (1965) 114 CLR 481 and Thomas National Transport (Melbourne) Pty Ltd v May & Baker (Australia) Pty Ltd (1966) 115 CLR 353: "These decisions clearly establish that the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity." 18 Austin J said that in the absence of special words such as "claims arising ….in connection with" used in the Darlington Futures case "an exclusion clause may still be construed in the manner adopted by the majority in Sydney City Council v West, however sweeping its language" and referred to the decision of this Court in Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (The Antwerpen) (1993) 40 NSWLR 206. Austin J said: "Here there is nothing equivalent to the stipulation in the Darlington Futures case excluding liability for damages in respect of a claim 'in connection with' the relationship established by the agreement, and there is no equivalent to the specific stipulation of clause 8(3) in the Glebe Island Terminals case. Here, the question is whether the words 'fails to function for any reason', which are literally quite general but which appear proximately to the 'best endeavours' undertaking in clause 7.1(a), should be taken to prevent a claim for damages for non-performance of the 'best endeavours' undertaking. It appears to me that, just as clause 4 would not (had it stood alone) have excluded all liability for damages in the Glebe Island Terminals case, notwithstanding its broad language, so clause 7.1(d) should not be construed to exclude all liability for damages in this case." 19 A little later his Honour said: "41 Clause 7.1(d) does not purport on its face to remove all claims for compensation for breach of clause 7.1(a), but only applies where the air-conditioning plant or elevators 'fail to function' for any reason. The concept of 'failure', when applied to the failure of a natural person to do something, is highly ambiguous. In Ingram v Ingram (1938) 38 SR (NSW) 407, 410 Jordan CJ said: '[W]here it is provided by statute that certain consequences shall follow if a person fails to do something which is directed to be done, the meaning of the word 'fail' depends on the context in which it is found. In some contexts it may mean simply the omission to do the thing in question, irrespective of any reason which may have existed for his not doing it … In other cases it may mean an omission to do the thing, but so that omission caused by impossibility arising from some causes is included and from others is excluded…' (See also CBS Productions Pty Ltd v O'Neill (1985) 1 NSWLR 601, 608-9 per Kirby P, 615-16 per Mahoney JA; Claro v Minister for Immigration (1993) 46 FCR 494, 503-4 per Burchett J.) 42 When the word 'fail' is applied to mechanical equipment, it seems to me that the ambiguity is less acute. In most contexts the word 'fail' is likely to be used in the first of Jordan CJ's senses, so that there is a 'failure' by the equipment whenever it does not do what it should do when activated, whatever the cause. In the present case the words 'for any reason' reinforce that construction. Consequently, clause 7.1(d) lays its cloak of protection over every non-functioning of the air-conditioning plant or elevators, whatever the cause. In my opinion, moreover, the words 'fails to function' apply both where the equipment does not operate at all, and where it does not operate adequately. Thus, an air-conditioning plant fails to function if it does not heat or cool the air to the required temperature, even though it heats or cools the air, as the case may be, to some extent. 43 However, mechanical equipment only 'fails to function' if it does not respond as it should when activated. If the reason for the non-functioning of the equipment is that it has not been turned on, or its normal operations have been interfered with, one could hardly say that the equipment has failed to function. It has been prevented from functioning by human intervention. This is significant in the present case because an important part of Sovereign's claim is its allegation that Bevillesta interfered with the settings of the air-conditioning plant and sometimes turned it off altogether. 44 Clause 7.1(d) only prevents claims for compensation 'by reason of' the elevators or the air-conditioning plant failing to function. When clauses 7.1(a) and 7.1(d) are read together, they can be seen to envisage a sequence. First, the equipment fails. No right of compensation flows from that, whatever the reason for the failure. But Bevillesta must use its best endeavours to fix the problem 'to ensure that the same are kept working …'. If, notwithstanding its best endeavours, the equipment continues to fail to function, there is still no right of compensation. However, if Bevillesta does not use its best endeavours, Sovereign may claim compensation for loss caused by the failure to use best endeavours , though it cannot claim compensation in respect of the failure to function as such." 20 His Honour compared cl 7.1(d) to cl 13.13 which excluded liability for any loss or injury or damage sustained by the lessee or any other person at any time as a result of or arising in any way out of the failure of the electricity or water supply or any other services or facilities provided by the lessor or enjoyed by the lessee in conjunction with the demised premises. His Honour said that although the "facilities and services" to which cl 13.13 applied did not include the air-conditioning plant and elevators, it was likely that the lessor and lessee would adopt the same liability regime for both matters. The structure of cl 13.13 was that the lessor undertook to respond on a "best endeavours" basis if any of the services or facilities failed, but had no liability for losses arising out of the failure of the facilities or services. Liability for failure to use best endeavours had clearly not been excluded. 21 Austin J said: "47 My conclusion, therefore, is that clause 7.1(d), on its proper construction, does not prevent Sovereign from recovering damages in compensation for loss which it has suffered by reason of Bevillesta's breach of its obligation to use its best endeavours, as opposed to loss suffered by reason of the equipment failing to function; and the clause does not prevent Sovereign from recovering damages for loss suffered through human intervention with the operation of the equipment, amounting to breach of the best endeavours obligation. 48 In reaching these conclusions, I have not relied on the proposition that an exclusion clause should be construed contra proferentem. Counsel for Bevillesta submitted that · construction contra proferentem requires the Court to identify the person (the proferens) benefiting from a contractual provision rather than the person who has drafted it or put it forward; · while the proferens of clause 7.1(d) would be Bevillesta if that clause were considered in isolation, the proferens of clause 7.1(a) would be Sovereign if that clause were considered in isolation; · if clause 7 is considered as a whole, it cannot be characterised as a clause for the benefit of one party rather than the other; · in those circumstances, it would be artificial to apply the rule of construction contra proferentem to clause 7 or any part of it: Amax International Ltd v Custodian Holdings Ltd [1986] 2 EGLR 111; K Lewison, The Interpretation of Contracts (2nd ed, 1997), 168-173; · the Court should simply resolve any ambiguity in accordance with the most natural meaning of the words in question, construed in the context of the lease as a whole." 22 In submissions appealing against this conclusion, Bevillesta stressed the words "for any reason" after the words "fails to function". I do not disagree with Austin J's approach but I think the same answer can be arrived at by reference to the ordinary meaning of words applied to inanimate machinery such as elevators or air-conditioning plants. In that context, to say that an air-conditioning plant fails to function means that it has become intrinsically unable to function as required. It does not mean simply "stops functioning for any reason". 23 Austin J rejected both the theory that an inherent feature of the air-conditioning system was that it cycled on and off after office hours when low load conditions prevailed and the wear and tear theory as satisfactory general explanations for the persistent cooling problems. He found that the capacity and efficiency of the cooling system resulted from persistent and systematic interference by Bevillesta's employees or consultants. The results of such interference are not caught by cl 7.1(d) which speaks of a failure to function for any reason. If a piece of machinery has the capacity to function it does not fail to function simply because an operator reduces the level at which it functions or turns it off. 24 While, as Austin J pointed out, para (d) is found in the same sub-clause as para (a) (the best endeavours clause), the two paragraphs are not directed to the same end. Paragraph (a) is designed, as it says, to ensure that the air-conditioning plant is kept working and reasonably available for the use of the lessee in the demised premises. Within para (a) is found the exception for "delays or stoppages due to repairs, maintenance, strikes, accidents or other unavoidable causes". Paragraph (d) is directed to an event such as machinery breakdown. This may or may not be the result of a breach of para (a). But para (d) is not directed to an act of the operator who decides to adjust the operation of the machinery in a way which reduces its capacity or brings it to a stop. 25 In my opinion, cl 7.1(d) does not absolve Bevillesta from its liability to pay compensation or damages for the breach of cl 7.1(a) which Austin J found.

The first hearing 26 To quantify its claim for damages for breach of cl 7.1(a), Sovereign relied upon reports prepared by an expert witness, Mr Greg Vains, of Horwath Asia Pacific Pty Ltd (HAP). Before the first judgment was given on 7 May 2001 there were three such reports dated 12 November 1998, 24 May 2000 and 25 May 2000. These became known as the first, second and third reports. They were tendered in the 1996 proceedings as part of Sovereign's claim that it had suffered from Bevillesta's failure to: · maintain and service the air-conditioning plant; · service the elevators adequately and to ensure that they were kept working and reasonably available for use by Sovereign; and · maintain the exterior of the building and the common parts of the building to a standard consistent with a quality commercial office building. 27 In the first report Mr Vains set out projections of operating performance and cash flow for the period from 1 July 1992 to 30 June 1996, based on assumptions to the effect that the air-conditioning plant and elevators were adequately serviced and maintained and the external appearance of the building was maintained to a proper commercial standard. The second report was a similar analysis for the period from 1 July 1996 to 31 May 2000. 28 In the first judgment Austin J said: "114 The first two reports attempted to assess the likely performance of the hotel within the North Sydney market on the basis that there were no physical impediments impacting on the trading performance. The reports make projections of occupancy rates for the hotel based on Mr Vains' analysis of the competitive hotel market research and research into the historical performance of the North Sydney hotel market. The reports identify six hotels thought to be contributors to confidential survey information regarding occupancy rates and other matters." 29 In reply to the first report Bevillesta relied upon a report by Mr John Robertson of John Robertson & Associates Pty Ltd dated 31 March 2000. Mr Robertson concluded that in view of the lack of documentary evidence to support the claims made by Sovereign, and the absence of any evidence to establish a nexus between the alleged problems with the air-conditioning, lifts and the presentation of the building and the hotel's under-performance, he was unable to make an assessment of damages. The third report was a response to Mr Robertson's report. 30 Part of the third report, as quoted in para 117 of the first judgment, was as follows: "With respect to air-conditioning problems, where the expected guest comfort levels and satisfaction had not been achieved, this translates into lost business opportunities, such as: early check-outs of hotel guests and associated ancillary income streams which are foregone; in-house and external restaurant patrons refusing to pay for services and/or departing the restaurant prior to the completion of their meal; and lost business opportunities arising from other uncontrollable events, such as: bad 'word of mouth' feedback disseminated by disenchanted patrons; potential negative publicity; and the negative sentiment that is created in such situations and difficult to reverse (particularly amongst travel agents and accommodation organisers and professional conference organisers). 5. Based upon our collective practical working experience in hotel operations, combined with our knowledge of the hotel industry, it is our opinion that air-conditioning is one of the most important factors in ensuring guest comfort levels are satisfied. Faults with the air-conditioning system are one of the more frequent complaints of hotel guests. The design construction of the hotel is to prevent the opening of the windows by occupants of the rooms, and if they are, the outside noise generated from passing traffic would be unbearable for hotel guests (this would be the case with the subject hotel, as it is located adjacent to the Pacific Highway)." 31 In the first judgment Austin J referred to criticism of Mr Vains' opinion evidence but said that on balance he did not regard this criticism as destroying the value and utility of the evidence for the purposes of the proceedings. His Honour accepted that, for the purpose of estimating average daily rates and occupancy rates on any hypothesis, the valuer should have regard to the most closely analogous comparative information. But this did not mean that no estimate could be made unless close analogues were available. While the assault on his work served to weaken Mr Vains' evidence to a degree it did not "undermine his expertise sufficiently to destroy the evidence". Austin J went on to say: "123 In the present case ordinary common sense and experience are reflected in the passage from Mr Vains' third report which I have set out. If this view establishes a causal nexus, as I believe it does, then the Court's only remaining task is to assess damages, using such evidence as it has. Mr Vains' expert estimates are evidence relevant for this purpose, though admittedly that evidence is not overwhelmingly strong. But there is nothing to contradict it. 124 Secondly, counsel for Bevillesta complained that Sovereign did not call evidence from any independent patron of the hotel. No evidence was given from the corporate clients to whom Ms Steiner referred as to why they moved their conference business away from Sovereign's hotel. Counsel invites the Court to draw the inference that this evidence would not have assisted Sovereign. According to this submission, the complaints in fact put in evidence do not assist the Court. The customer complaints reveal a pattern, not of concern about air-conditioning or elevators, but about a range of issues which go further to explain the competitive disadvantages under which hotels such as Sovereign's was labouring. 125 I am prepared to assume that evidence from the corporate clients to whom Ms Steiner referred would not have assisted Sovereign. It appears that some of those clients have remained with Sovereign, and others may have left for reasons not relevant to the present case. But the persistent customer complaints include, amongst many other things, a strong component of complaints about the air-conditioning system. To that one must add the evidence of Sovereign's witnesses of their own personal experience of discomfort. It is true that the discomfort was not of such a level as to force Mr Leatherbarrow out of the hotel, but there may have been other reasons for him to stay. All in all, my view is that there is some evidence of customer complaints about the air-conditioning plant, although not overwhelmingly strong, that corroborates the evidence of Sovereign's witnesses to the effect that there were persistent cooling and heating problems which caused discomfort. 126 Thirdly, according to counsel for Bevillesta there is no reliable evidence of the reaction of individuals to conditions of excessive heat or cold, sufficient to establish that a person affected by discomfort would be driven away from the hotel causing loss of business. I do not agree that there is no such evidence, all I accept is that the evidence does not come from individuals who are independent of Sovereign. But the absence of independent evidence is not fatal, since the linkage can be established by the application of ordinary common sense and experience. 127 Finally, counsel for Bevillesta invites the Court to infer that Sovereign did not believe that Bevillesta's conduct was having a substantial adverse effect upon its trading, on the basis that it did not seek interim or expedited injunctive relief and did not negotiate with the purchasers of the building from Bevillesta, to explore the prospect of having the lease bought out. It seems to me that these matters are insufficient to warrant the inference which counsel seeks to draw." 32 In Austin J's opinion, Bevillesta grossly overstated the difficulties that were posed by the assessment of damages in the case. He thought that Mr Vains had given evidence which set out a methodology for separating loss of revenue, caused by air-conditioning and elevator problems and problems as to presentation of the building, from other influences. While the evidence was not overwhelmingly strong no alternative methodology in assessment had been submitted by Bevillesta's expert. In the circumstances, it was open to the Court to accept Mr Vains' approach. His Honour saw no reason in principle why once he had found that Bevillesta's breach was confined to its interference with the air-conditioning system, Mr Vains could not apply the same methodology to produce an assessment of loss in light of that finding. 33 However, a problem with the evidence arose with Austin J's conclusion that Sovereign had failed to establish that Bevillesta was in breach of any covenant in the lease for failure to maintain and service the elevators or maintain the exterior or common areas of the hotel. 34 In the first judgment Austin J said: "141 I have found that Bevillesta breached clause 7.1(a) of the lease by failing to use its best endeavours to maintain and service the air-conditioning plant to the best of its ability to ensure that the plant was kept working and reasonably available for use by Sovereign in its business. The breaches were persistent breaches during the term of the lease up to the hearing. Sovereign is entitled to recover damages notwithstanding clause 7.1(d). 142 Those damages are to be assessed by the contract measure of damages, and the methodology adopted by Mr Vains is an appropriate methodology. However, the reports by Mr Vains do not deal separately with breaches arising with respect to the air-conditioning plant, since Mr Vains assumes breaches with respect to the elevators and the presentation of the building as well. 143 In my opinion the correct approach is to give Sovereign the opportunity to present further evidence, along the lines of the reports by Mr Vains, but confined to the air-conditioning problems, and to give Bevillesta the opportunity to challenge that evidence and tender, if it wishes, an alternative assessment made on the same principles. This can be achieved if I direct an inquiry, either before the Master or before me, as to the amount of damages payable in light of the Court's findings with respect to breach, using and applying the methodology set out in the three reports of Mr Vains. The question of assessment of damages will not be reopened at large, since my orders will accept the methodology and approach of Mr Vains."

The further hearing 35 The further hearing began on 23 October 2001 when Mr Vains' report of 8 June 2001, the fourth report, was tendered and admitted. In this report were two tables or schedules. The first table at page 7 listed the financial years from 1993 to 2000 and the occupancy rate achieved in the hotel for each of those years. The next column was headed "Revised occupancy (Report 1, 2 & 3) all physical impacts" to reflect the expected occupancy rate if not affected by the alleged failures to maintain and service the air-conditioning plant, to service the elevators adequately and ensure they were kept working and to maintain the exterior of the building and the common parts of the building. The last column in this table headed "Revised occupancy (this Report) Air-Conditioning impact only" was said to be an attempt to provide a comparative occupancy rate, assuming the inadequacies of the elevators and the maintenance of the exterior of the building, on the basis that the air-conditioning plant had been maintained and serviced in accordance with the requirements of cl 7.1(a). The second table at page 13 of the fourth report for the same years listed "Actual Net Result", "Estimated Re: Forecast Net Result" and "Variants". 36 In the second judgment of 23 January 2002 his Honour said: "23 In the 'Plaintiff's submissions on Damages' dated 5 November 2001, paragraph 10, the plaintiff proceeded on the basis that the Court had accepted not only the approach and methodology in the HAP reports, but also the numerical assessments of loss of revenue contained in the first two reports. The damages attributable by those reports to the three elements of air-conditioning, elevators and building presentation was $2,941,000 in total. In the plaintiff's submission, therefore, the Court's present task is to identify the portion of that figure attributable to air-conditioning alone. 24 This submission misreads my judgment of 7 May 2001. At paragraph 31 of my judgment, I recorded the numerical figures reached in the first and second reports. However, I did not adopt those figures, but merely said that the approach of assessing variance and therefore damages was consistent with the case law. I decided to accept the approach that had been used in the HAP reports, but the numerical conclusions are clearly not part of the approach or methodology of the authors of the report. At paragraph 142-143, quoted above, I made it plain that the task of assessing damages was still to be undertaken. It is, of course, open to me to accept the HAP figures now, having reviewed all the evidence on assessment of damages." 37 Austin J concluded that the opinions in the HAP reports stood and were available to be accepted by the Court notwithstanding their imperfect compliance with the Expert's Code of Conduct. To this conclusion there was an important exception. His Honour said: 47 …. The percentage occupancy table [the first table at page 7] purports to give, with mathematical precision, an expert opinion on the impact of the air-conditioning problems on occupancy rates in the hotel. Nothing in the report explains the process of reasoning by which the precise figures in the table were derived, nor the data relied upon (except for the research which I have held to be inadmissible, and which in any event would not of itself justify precise numerical conclusions). There are other difficulties with the last column of the percentage occupancy table, which I shall explain. I have reached the conclusion that the last column ["Revised occupancy (this Report) Air-conditioning impact only"] is unreliable." 38 Mr Vains was extensively cross-examined at this second hearing. Austin J said this about Mr Vains' evidence: "48 Next, the defendant criticised Mr Vains for assuming his conclusions on material aspects as a starting point of his analysis. I have decided that I cannot accept the oral evidence of Mr Vains that the new HAP report was prepared on the assumption that the elevator problems had no impact on the hotel's financial results, in view of the fact that the relevant text of the report is inconsistent with the oral evidence. For example, on page 2 of the report the authors referred to the 'need to disregard the impact associated with' the elevators and the appearance of the building. This acknowledges that those other problems had some impact. Similarly, the percentage occupancy table on page 7 purports to give percentage occupancies removing the impact of the air-conditioning and, separately, percentage occupancies removing the impact of all three physical elements, and for each year the percentages for the former are lower than the percentages for the latter. This implies that the authors regarded the elevator and building appearance problems as having an impact together, and since Mr Vains regarded the elevator problems as more serious than the building appearance problems, which he described as not a significant component, it is appropriate to infer that the major variance between the two columns is attributable to the impact of the elevator problems. 49 Mr Vains gave his oral evidence, that the new HAP report assumed that the elevator problems had no impact, on no fewer than four occasions (at Transcript pages 61, 62, 64 and 67). On the last occasion he agreed with the proposition that the assumption, that the elevator problems were not an important component in bringing about financial loss, was contrary to his opinion. For the Court to prefer the witness's earlier written evidence to his latter oral evidence, which repeatedly asserted a proposition inconsistent with the written evidence, is a big step to take. I do so because, notwithstanding my intervention during the cross-examination, I remain convinced that on this point, the witness had become completely muddled and was unable to extricate himself from his confusion. The source of his confusion was probably that the new HAP report was designed to disregard the impact of the elevator problems so as to isolate and identify the impact of the air-conditioning problems. That is, of course, quite a different matter from assuming that the elevators problems had no impact at all. 50 Doing my best to assess the evidence of Mr Vains as a whole, I have decided that I should not treat any of the HAP reports as lacking credibility merely because Mr Vains gave muddled and incorrect evidence about the assumptions upon which the new report was prepared. The confusion about assumptions was confined to the oral evidence and is not detectable in the new HAP report itself. 51 Next, the defendant criticised the evidence of Mr Vains on the ground that his attempts to explain large fluctuations in annual damage assessments by reference to undistributed operating costs was not supportable. This is an issue of central importance. I believe there are really two elements to this complaint. The first is the witness's failure to explain the fluctuating relationship between the air-conditioning problems and the elevator and building presentation problems in the percentage occupancy table [the first table at page 7], and the second is his alleged failure to explain the fluctuations in the figures set out in the table of annual variances between actual and projected net results on page 13 [the second table] of the new HAP report. 52 As to the first of these matters, in my opinion the cross-examination of Mr Vains demonstrated that the last column in the percentage occupancy table (that is, the column headed 'Revised occupancy (this Report) Air-Conditioning impact only') is unreliable and should not be accepted. Mr Vains agreed in cross-examination (Transcript page 71ff) that nothing had happened during the period 1993 to 2000 to alter the relative influence of the three elements on occupancy rates. However, the percentage occupancy table purports to show very substantial fluctuations in the relative importance of air-conditioning on the one hand, and elevators and building presentation on the other. In the year 1994, air-conditioning alone accounts for a 25% drop in occupancy, while the elevators and building presentation account for only an additional 4%, a ratio of 6.25:1. At the other extreme, in the year 1996 no drop in occupancy is attributed to air-conditioning, while a 1% drop is attributed to the elevators and building presentation. 53 When asked to explain this fluctuation, Mr Vains said (Transcript p69) that in years when there were stronger market conditions, if there was a problem it had less of an impact on occupancy rates due to 'turnaway demand' from superior hotels (that is, demand produced by customers who had been unable to obtain accommodation in better hotels). Of course, that is not an explanation for changes in the relative influence of the three elements from year to year, as Mr Vains later conceded (Transcript p71). The overall effect of his evidence was to acknowledge that the relative influence of the three elements should have remained stable, and that there was no explanation or justification for the figures in the last column of the percentage occupancy table, because they presented a fluctuating inter-relationship amongst the three elements. 54 As to the second aspect, there are marked fluctuations from year to year in the variances between actual net results and the estimated re-forecast net results in the new HAP report. A table on page 13 of the report shows that the variances for the years 1993 to 2000 were, respectively, $68,000, $748,000, $283,000, $112,000, $330,000, $114,000, $253,000 and $52,000. Mr Vains gave evidence that the constant problems with air- conditioning (and also with the elevators and building presentation) would produce a progressive manifestation of damage, as more and more potential hotel guests hear about the problems by word of mouth (Transcript p57-8). 55 When asked to explain the extreme fluctuations in the variances between actual and estimated net results (which were depicted graphically in a histogram which became part of Exhibit D12), Mr Vains at first referred to fluctuations in undistributed operating expenses of the hotel. He was then taken to some figures (now part of Exhibit D12) which showed that undistributed operating expenses in the 1994 year (when the variance was $728,000) were $600,000, while in 1996 (when the variance was $112,000) the undistributed operating expenses were $605,000. He conceded (Transcript p87) that the undistributed operating expenses did not explain the fluctuations in the variances." 39 At the close of his evidence in chief on 24 October 2001, Mr Vains gave this evidence: "Q. In the course of preparing the report of 8 June 2001 did you turn your mind to the comparative significance in the aspect of the trading of the hotel of firstly the satisfactory operation of air-conditioning, plant and equipment. Secondly, satisfactory elevator functioning. And thirdly satisfactory state of repair of the hotel building? A. We did. Q. Having turned your mind to the subject matters did you form the opinion, in relation to the comparative significance, of those three items, in the context of the trading operation of this hotel? A. Yes, we did, we asked -- Q. If you can confine yourself to the opinion there? A. Yes. Q. Did you personally form the opinion? A. Yes, I did. Q. What was the opinion you formed? A. That the air-conditioning would have the greatest impact on the operation of the hotel and that conclusion was drawn in my experience in hotel operations where similar problems had occurred." 40 In the cross-examination that followed is to be found this passage: "Q. When you produced your bottom line conclusion in P20 [the fourth report] did you regard having working lifts as essential? A. Yes, we did. Q. Did you regard it in particular as essential to ensure guest comfort and satisfaction levels? A. Yes, we did. Q. Did you regard a history which included people being stuck in lifts as being very serious? A. Well, we were requested to exclude the impact of that so we assume that it had no impact. Q. It had what? A. It had no impact. Q. When you were asked, do you mean by the lawyers for the plaintiff? A. Yes. Q. You were asked to exclude the lift problem? A. Just to consider based upon his Honour's judgment the effect of the air-conditioning on the hotel. Q. You assumed the lift problem had no impact, that is what you just said? A. Yes. Q. You assumed your conclusion? A. Yes. Q. That is ridiculous and a waste of time isn't it? A. Sorry? Q. The question was how much was it attributable to the air-conditioning compared to the other two of the three elements? A. Yes. Q. You told his Honour of the method adopted of the other two, the lift had no impact? A. That is what I said. Q. I suggest to you that is not the application of expert or investigation of fact but an absurd waste of time because you have assumed your conclusion. What do you say to that? A. I haven't got anything to say." 41 A little later in the absence of the witness, Austin J said: "The problem I have, it seems to me in cross-examination the witness has become horribly muddled and inconsistent with his own report. I don't know what to make of that." 42 In later cross-examination Mr Vains gave this evidence: "Q. I will start again. Your first four reports you put a figure 2.9 million, your figure on the financial loss about you said by the three physical elements, correct? A. That is correct. Q. One of them is presentational façade, is that correct? A. Yes. Q. You found it impossible to quantify between the three, is that correct? A. Yes. Q. Obviously you found it possible to quantify the three together, is that correct? A. No, I understand what you are saying. Q. You came up with a figure of 2.9 million, didn't you? A. That is correct. Q. Well, I may be wrong. You didn't think it was possible to come up with that figure, financial loss brought about by the three physical elements? A. That is correct. Q. But as between each of the three against themselves, and each other you have expressed the opinion that when you did your first four reports you regarded that as impossible, is that right? A. Yes. Q. However, when I invited you no doubt to use not numbers but words an impression today you say the presentation façade aspect was not a significant component in causing financial loss, is that right? A. That is right. (sic) Q. Whereas today you have ventured the word 'important' to describe what you believe to be the impact on financial loss of the lift problems, is that right? A. It is important, it is a more important factor than the facade. Q. You said 'important' today, didn't you? A. I can't recall what I used, but something like that. Q. Now you want to downgrade that so it is more important than something that is not significant, is that right? A. No, you are trying to confuse me." 43 Later when cross-examined about the first table at page 7 in the fourth report to which I have referred and in particular the change in different periods of the proportionate impact shown of the inadequately serviced elevators and maintained exterior on the one hand and the inadequately maintained air-conditioning on the other, one to six in one period and one to three and a half in another, Mr Vains' evidence continued as follows: "Q. But again may his Honour take it you don't say there was anything that happened that altered the relativity amongst themselves in the year in question, you don't say that, no? (sic) A. No. Q. For all of the years you don't claim there was anything that happened in a particular year altering the relativities among the three? A. That is correct." 44 Mr Vains agreed that there was nothing to explain this variation which continued from period to period. Later Mr Vains referred to the undistributed operating expenses mentioned in a PricewaterhouseCoopers' document which became Exhibit D12. Going to the second table at page 13 of the fourth report which dealt with "Variance" between actual net result and estimated re-forecast net result the following cross-examination occurred: "Q. I pointed, among other things, the pattern shown by the zigzag between years 4, 5, 6, 7 and 8 high, low, high, low, low, high to low again to 9. Having asked you about whether that was not erratic and volatile trading conditions and you agreeing, having suggested that difference from what you would have expected according to your opinion about these influences, air-conditioning influences, you then said you cannot look at this in isolation, you ought to look at costs, didn't you? A. Yes. Q. Finally, we got these pages in appendix E where you have identified them for us total undistributed operating expenses, that's correct? A. Yes, that's correct. Q. You explained, paraphrasing as being head office expenses not specifically allocated to this hotel, is this right? You are nodding. You have to say something? A. Yes, they are allocated to the hotel. Q. They are allocated to the hotel? A. Yes. Q. What is the relationship you are suggesting between the level of those costs and the up and down of the claimed financial loss from air-conditioning shown on the page 13 graph? What is the relationship? A. The graph is comparing -- Q. I know what the graph does. I am asking about the relationship between what is shown on the graph and the figures you have drawn to attention for undistributed operating expenses? A. Yes. Q. When the revenues are high, the losses incurred in air-conditioning are low or high? A. Could you repeat that please? Q. No. Could you just explain in your own words the effect you say these different annual costs for undistributed operating expenses have on the different results you produce year by year for the loss caused by air-conditioning. What is the effect, what is the relation? A. I guess you could determine that the difference between the actual achieved revenue for the hotel and what we projected was different from year to year. Q. That does not explain the inconsistency I have asked you about, does it? A. No. Q. What you have been doing this afternoon is clutching at a straw, isn't it? You cannot explain the difference between the pattern, the smooth pattern you expect and the erratic pattern you have achieved, could you? A. I acknowledge from year to year the hotel had different income levels. Q. Please try and answer my question. You cannot explain the difference between the smoothness you would expect in a progressively manifested damages and the erratic pattern shown on page 13. You can't explain it, can you? A. Except for some of the unusual management expenses. Q. The line of costs you have taken us to, I will tell you figures if you like, that line of costs does explain the pattern, does it? A. No, this in its entirety. Q. Not at all. What do you say to that, not at all? A. What do I -- Q. What do you say to that? A. Well, it does. They do vary from year to year. So it has some impact. Q. If you looked at the highest claimed loss which is year 3, that is the year corresponding to 600, all those expenses, is that right? A. That's right. Q. Year 5 corresponds to 605, do you see that? A. Correct. Q. They are very different on the graph, aren't they? A. Yes. Q. They are very similar on the expenses, correct? A. Yes. Q. Then we take 485, which is the expenses for year 4, do you see that? A. Yes. Q. But 706 which is the expenses for year 7, do you see that? A. Where's the last figure. Q. 706 for year 7? A. Yes. Q. You have got 485 in a year of higher claimed loss than 706. Do you see that? A. I do. Q. But you start thinking, well, maybe the pattern is a relatively lower figure for the higher loss years and vice versa. Then you have got to look at what year 2 does compared to year 6 because the lowest of those expenses year 2, 316 and the highest of those expenses is year 6, 829 isn't that correct? A. That's correct. Q. 829 is larger than the expenses in every year with a lower claimed loss debit, did you see that? A. Yes, I do. Q. You can scrap any relation which I think it is an inverse relation, that is, one apply one below, that does not work. What I suggest to you there is no relation and you have none in mind. What do you say to that? A. Yes. Q. You agree, don't you? A. Yes. Q. And I suggest you have just been clutching at straws looking for an explanation for something you cannot otherwise explain. What do you say to that? A. Without analysing it in detail, yes. I cannot give you an explanation. Q. You agree with me? A. I cannot give you an answer. Q. You agree with me, don't you, you are clutching at straws? A. I am not clutching at straws. I cannot give you an answer. Q. What you reached for does not support any argument. Do you agree? A. Yes." 45 This cross-examination took place on 24 October 2001. It was followed by Austin J's remark in the absence of the witness that he had the impression that the witness held cross-examining counsel "somewhat in awe". After some discussion and cross-examining counsel's remark that the witness had given an earlier contrary answer and had been given another chance, his Honour said: "That is exactly what I am saying. That's why he is flummoxed. He would have if he had more time. They are, in other words, management for this hotel essentially. It is true there is no direct correlation between undistributed operating expenses and expenses for the various years on outcomes on page 13 [the second table in the fourth report]." 46 In the result the witness accepted an invitation from counsel to think about the matter overnight and put something in writing. On 25 October Mr Vains returned with a document which became Exhibit D11. About this Austin J said as follows in the second judgment: "56 As I have said, following my intervention Mr Vains agreed to give the problem further consideration overnight, and on the following day he produced a single page which is now Exhibit D11. In that document he asserted that the fluctuations in the variances [the second table at page 13] were due to fluctuations in the hotel's actual results rather than any significant fluctuations in HAP's projections. That is true. 57 The HAP projections of net results depend on their projections of revenue, because the project expenses are based closely on the hotel's actual expenses (affected by projected occupancy rates, to the extent that expenses are seen to be related to occupancy). The projected revenue, in turn, depends principally upon HAP's projections of occupancy penetration rates and average daily rates for rooms. The average daily rates in the new HAP report are closely similar to the rates used in the first and second HAP reports, except that in the first and second reports, adjustments were made to reflect movements in the consumer price index, while in the new HAP report the impact of consumer price index movements was excluded and instead, interest was calculated. The new component in the most recent report is the projected occupancy table, set out above, from which it appears that the projected occupancy removing the impact of air-conditioning, and also the projected occupancy removing the impact of all three elements, trend upwards and then taper off, without significant fluctuations. 58 Exhibit D11 then offers an explanation for fluctuations in the hotel's actual net results, saying that they are 'predominantly due to the expected varying behavioural patterns of different market segments and their differing tolerance levels of the air-conditioning problems'. The document claims that a corporate guest is less willing to accept poor conditions than a discount leisure traveller, and prevailing market conditions are relevant because, if the market reaches capacity, guests are forced to be more tolerant of problems as there are fewer alternative accommodation options available. In addition, the document claims that price increases in the hotel market increased toleration levels for the air-conditioning problems 'where the guest's price barrier did not allow them to pay the higher room rates in the marketplace'. 59 In cross-examination Mr Vains admitted that the explanation in Exhibit D11 was not based on any 'hard facts' (Transcript p99) and that it was a 'generalised and incomplete impression' from his understanding of other hotels at other times and other places (Transcript p100). He insisted, however, that the document presented an expert opinion based on his experience and understanding of the hotel market. He agreed that he had made an assumption in the document that there were no differences between the present hotel and other hotels of which he was aware, but that it was a 'truism' of his profession that there are particular aspects of particular hotels which will influence trading performance, and that this invalidated his expert opinion (Transcript p101). 60 In my opinion the cross-examination of Mr Vains showed that the explanation put forward in Exhibit D11 is not based on any objective data or observable facts, and is essentially an extrapolation to the circumstances of the plaintiff's hotel of impressions gained by Mr Vains with respect to other hotels. The document is not a fully reasoned expression of opinion and does not explain its own limitations. Nevertheless, my view is that the cross-examination does not destroy the evidence given in terms of Exhibit D11 completely. I am left with an explanation, by a person who has expertise in the hotel industry, not contradicted by other evidence, and not so implausible or weakly reasoned that I would be justified substituting my opinion for the expert's. Therefore in my opinion that evidence stands. 61 This conclusion is important because the criticism of the new HAP report for finding extreme fluctuations in the annual losses attributable to the air-conditioning problems is matched by a criticism of the first and second HAP reports, which produce comparable fluctuations in the losses attributable to all three elements. If the criticism were valid, it would undermine the approach and methodology of the reports, which in my judgment of 7 May 2001 I decided to adopt. In light of my conclusions about this aspect of Mr Vains' evidence, there is no need to revisit that decision." 47 Austin J went on to deal with various criticisms counsel for Bevillesta made about Mr Vains' evidence and the suggestion that his opinion about the impact of problems with the presentation of the building and its insignificance was given in order to assist Sovereign to recover damages. It was submitted that Mr Vains had misled the court and withheld material factors from his earlier reports. Austin J said: "65 As I have said, the reports are deficient because they do not adequately distinguish between matters of assumption and matters of opinion, they do not always support opinion is [sic] by full reasoning and an account of all relevant research. However, on the evidence I have heard, I do not regard Mr Vains or his co-author as having consciously set out to mislead the Court or to suppress relevant information. In his confused state, he agreed to some propositions put to him by counsel (such as the proposition that he misled the Court or tried to do so, at Transcript p77) that he would not have accepted in normal circumstances, and I regard his evidence on such matters as unreliable, although I am prepared to accept his evidence on matters going more directly to his expertise. I therefore regard these criticisms of his evidence as without substance. 66 The defendant submitted that I should not make any allowances for the inability of Mr Vains to handle the witness box environment, because he was given every opportunity to answer material questions, including the opportunity to reflect on a key issue overnight. I made it plain during my interventions that my concern about the witness not handling cross-examination well in no way reflected on the probity and skill of counsel - indeed, to the contrary, the cross-examination was a model of the cross-examiner's art. In the end, however, I must make an assessment on the basis of what I saw and heard, and my assessment is as I have stated it to be. I do not dismiss his evidence as simply the evidence of the advocate rather than expert, always evidence that is inherently unreliable, and in my view some significant portions of his evidence remains, as I shall indicate." 48 This brought Austin J to consider what remained of Sovereign's case for damages. Austin J said: "67 First, in my judgment of 7 May 2001, I accepted, as expert opinion evidence, a passage from the third HAP report, which I quoted in paragraph 117 of the [first] judgment. That passage asserted that failure to achieve the expected guest comfort levels and satisfaction because of air-conditioning problems translated into lost business opportunities of various kinds, because the negative sentiment created in such situations is difficult to reverse. The passage expressed the opinion of the authors of the report that air-conditioning is 'one of the most important factors' in ensuring that guest comfort levels are satisfied. I found (at paragraph 123) that the passage reflected ordinary common sense and experience. 68 In my opinion, the oral evidence of Vains should not lead me to reject the evidence in the passage [from the third report] quoted at paragraph 117 of my earlier judgment. It was, as I have said, evidence that reflected ordinary common sense and experience. As the authors said, 'the design and construction of the hotel is to prevent the opening of the windows by occupants of the rooms, and if they are, the outside noise generated from passing traffic would be unbearable for hotel guests (this would be the case with the subject hotel, as it is located adjacent to the Pacific Highway)'. It stands to reason that stuffy, insufficiently cooled bedrooms would be the subject of more frequent complaints than problems with slow and inefficient elevators (unlikely to affect all guests on a given day) and building presentation. 69 The opinion of a person with expertise and experience in the hotel industry, about the way hotel guests react to air-conditioning problems and the likely impact of their reactions on revenue, has some weight even if the expert appears to be muddle-headed and gives contradictory evidence on other matters. The expertise and experience of Mr Vains (said in the first HAP report to have in excess of eight years operational and management experience with major international hotel chains within Australia), as opposed to his competence, was not challenged by the defendant. 70 Secondly, in his oral evidence Mr Vains said, in the passage quoted above, that in comparison with problems about elevators and presentation of the building, problems about air-conditioning 'would have the greatest impact on the operation of the hotel'. In cross-examination he said that presentation of the façade of the building was 'not a significant component' in bringing about financial loss (Transcript p65.50), and that 'the air-conditioning was the most significant component' (Transcript p67.45), although the problem about elevators 'was an important component' in bringing about financial loss (Transcript p67.35). It seems to me that this evidence is in the same category as the passage quoted from the third HAP report. In my opinion, it accords with ordinary commonsense and experience, and is evidence based upon the expert experience and knowledge of Mr Vains with respect to the hotel industry. It was not contradicted by his other evidence, however much his other evidence diminished the evidentiary value of the new HAP report. … 72 I accept the assertions in the third and the new HAP report on these matters. In my opinion the cross-examination of Mr Vains reinforced the proposition that it is not possible to quantify the respective influences of the three elements with mathematical precision, but it did not countermand the proposition that an expert in the hotel industry is qualified to express a general opinion on that subject. 73 Fourthly, other evidence given at the initial hearing provides some support for the proposition that the air-conditioning problems were, of the three elements, the most significant component in bringing about financial loss. There is a summary of such evidence in paragraph 55 of my judgment of 7 May 2001, and I accepted the evidence so summarised in paragraph 56. That evidence demonstrates that there were frequent complaints by guests about the air-conditioning of the hotel. It was admitted to establish the fact that the complaints were made, rather than the truth of the matters complained of, but evidence showing that there were in fact complaints, on a reasonably widespread scale, is significant having regard to my findings based upon other evidence, to the effect that there were persistent air-conditioning problems caused by the intervention of the defendant. Moreover, the individuals mentioned in paragraph 55, other than Ms Steiner but including Mr Ramian, gave evidence based upon personal experience to the effect that the air-conditioning comfort levels were sometimes unsatisfactory. One of them, Mr Robert Hancock, who was licensee of the motel between January 1994 and August 1998, said in his affidavit evidence that in his experience in hotel management, air-conditioning comfort levels are a deciding factor in whether guests will stay on and return. 74 Finally, while Mr Vains' evidence in cross-examination has destroyed the credibility of the quantifications of the new HAP report, my opinion is that the approach and methodology of the first and second reports have survived. I decided to accept the approach and methodology of those reports in my judgment of 7 May 2001, and nothing has happened during the hearing of assessment of damages that has led me to resile from that decision. I shall elaborate on the significance of this point under the next heading." 49 After referring to several authorities dealing with how damages should be assessed and in particular to the principle that the fact that the assessment of damages is difficult and requires the Court to make estimations is no bar to recovery and that the Court must do its best to make an assessment upon the evidence before it; see Pennant Hills Restaurants Pty Ltd v Barrell Insurances Pty Ltd (1981) 145 CLR 625 at 636 and Commonwealth v Amman Aviation Pty Ltd (1991) 174 CLR 64 at 138, his Honour proceeded to assess damages as follows: "81 Here the course of the trial, including my decisions on the admissibility of evidence and the course of Mr Vains' cross-examination, have left me with only a little acceptable evidence from the plaintiff, going to the assessment of damages. The evidentiary thinness of the plaintiff's case is not simply a product of the difficulty of making an assessment. In my opinion a rigorous and clearly thought out application of the approach and methodology in the first two HAP reports could have produced robust conclusions that would have survived challenge. It is the inadequacy of the plaintiff's evidence, rather than the sheer difficulty of the task to be performed, that has left the Court with very slim evidence upon which to base its decision. 82 Nevertheless, in my opinion the evidence on the plaintiff's part that has survived (summarised above) gives the Court a sufficient basis for making an assessment of substantial and not merely nominal damages in this case. An award of damages based on the plaintiff's surviving evidence would not be 'pure speculation' (see Tate & Lyle Food & Distribution Ltd v Greater London Council [1982] 1 WLR 149, 152), and I believe the Court is able to make a proper and reasonable assessment which, while based on estimation, will not fairly be open to the attack that the Court is 'simply plucking a figure from the air' (see Ashcroft v Curtin [1971] 1 WLR 1731). 83 The defendant submitted that this is a proper case for an award of nominal damages, because the plaintiff's difficulty in proving the extent of its loss was derived from the manner in which the plaintiff sought to prove its case. Apart from the inadequacies of the new HAP report and the evidence of Mr Vains, the defendant referred to the plaintiff's decision not to call evidence from its customers who had experienced the air-conditioning problems of the hotel. 84 There was, as I have said, some evidence, which I summarised in paragraph 55 of my judgment of 7 May 2001. The defendant submitted that the evidence before the Court, which had led me to conclude that some loss must have been caused by the breach of the lease, was of relatively little assistance in determining the amount [of] that loss. It is, however, of assistance to the degree that I have indicated. I very much doubt that further evidence from customers, complaining about the air-conditioning problems, would have done anything more than confirm my conclusions. 85 I do not believe that it would be justifiable to infer, in the absence of that further evidence, that there were in fact no other identifiable complaints about the air-conditioning. Even Mr Ramian gave evidence (first Transcript p225) that from his personal experience, on the occasion of complaints the temperature level was consistent with the complaint. 86 My conclusion is that, although the plaintiff may have made the Court's task considerably easier if the expert evidence had been more rigorous and helpful, there is sufficient evidence before me to make an assessment and I should proceed to do so. 87 Counsel for the defendant submitted that if that were my view, my award should reflect the notion that any harm caused by the air-conditioning problems would be expected to manifest itself gradually and in an increasing fashion. He contended that Mr Vains' acceptance of the 'progressive manifestation theory' carried the corollary that if the effect of the air-conditioning was worst in the final year and had no effect on the opening day of the hotel, a line could be drawn between these two points for the purpose of assessing damages. Since, according to the new HAP report, the loss in the final year was $57,000, loss for each previous year should be calculated by reducing that figure by $8,000 per year. That would give a maximum claim for damages of $232,000. 88 Then the defendant submitted that this amount should be heavily discounted because of the uncertainty of the exercise, and because even in the last year the assertion of damages by Mr Vains was (in the defendant's submission) significantly exaggerated. The defendant suggested a 25% discount to $174,000, or a 50% discount to $116,000. 89 I reject the method of calculation proposed by the defendant, because of the findings I have made on the evidence of Mr Vains and the HAP reports. I regard the approach and methodology adopted in the reports as a suitable means of assessing damages in this case. It has produced, in the first and second HAP reports, an assessment of loss attributable to the three elements, which fluctuates from year to year, because of fluctuations in the actual net results of the hotel. I have found that, while the explanation of the fluctuations offered by Mr Vains in Exhibit D11 is not supported by data or strong reasoning, it is the only available expert explanation and it is not so lacking in plausibility that I should substitute my opinion for the expert's. 90 Given these findings, my view is that an assessment of damages along the lines proposed by the defendant would not be supported by the evidence, and I should therefore not proceed in that fashion." 50 Austin J considered that in light of the evidence Sovereign's damages could properly be assessed by: · employing the approach and methodology of the first and second HAP reports to reach a figure for the variance between actual net results and the estimated net results that would have been derived if there were no problems with respect to air-conditioning, elevators or building presentation; · estimating, as best one can in light of the evidence that has survived challenge, the proportion of the total variance which is properly attributable to the air-conditioning problems, rather than the elevators and building presentation problems; and · treating the figure so calculated as the loss suffered by the plaintiff due to the defendant's breach. 51 His Honour then said: "92 Proceeding in this way implies a finding not articulated in my previous judgment, though supported by the evidence adduced at the original hearing, and by the evidence of Mr Vains in cross-examination at the assessment of damages hearing. The finding is that, for the purpose of assessing damages, the assumptions made in the first and second HAP reports, as the basis for making projections of estimated re-forecast net results, were reasonable and appropriate. Those assumptions were not only to the effect that the air-conditioning and elevators performed adequately and the external physical appearance of the building was properly maintained, but also that · there were no other physical impediments affecting the trading performance of the hotel, to prevent guests and patrons from assessing the hotel and its facilities in accordance with the plaintiff's reasonable expectations; and · the hotel was professionally managed and marketed throughout the projection period. 93 The effect of those assumptions is to take away the possibility that the variance between actual and estimated net results might have been caused wholly or partly by factors other than the three elements identified by the evidence. Mr Robertson said in his report, and counsel for the defendant submitted at the original hearing, that the approach and methodology of the HAP reports were deficient because they did not allow for the possibility that extraneous influences may have contributed to the underperformance of the plaintiff's hotel. However, such evidence as was adduced as to extraneous influences (including matters such as the size and location of the hotel and its potential market, and matters going to the 'competitive disadvantages' and relaunching of the hotel) indicates that all of the extraneous factors identified by the defendant in its evidence, cross-examination and submissions have been catered for in the approach and methodology used in the three HAP reports. The matter was canvassed in the cross-examination of Mr Vains (Transcript, pp46-50). It appears to me reasonable to infer, and I do infer, that there were no influences upon the performance of the plaintiff's hotel other than those identified, and taken into account, in the HAP reports. This enables me to say that the assumptions set out in those reports were reasonable assumptions to make, and that if the variance between estimated and actual results were to be accurately assessed, that variance could be used towards the assessment of damages, in the manner I have outlined." 52 The calculation of damages was done in the following way: "94 Taking the approach and applying the methodology set out in the first and second HAP reports, Mr Vains and Mr Zographou concluded that the variation between the actual and estimated results for the period from 1 July 1992 to 31 May 2000 was $2.941 million. Although I did not accept this numerical assessment in my judgment of 7 May 2001, it is open to me to do so now if the evidence supports it. 95 As I have indicated, my view is that the approach and methodology in the first and second HAP reports have survived the cross-examination of Mr Vains and the submissions of the defendants. While the application of that approach and methodology has produced wide fluctuations in losses assessed from year to year, Mr Vains has offered in Exhibit D11 an explanation as an expert, which I have accepted. Therefore the fact that the assessed annual losses fluctuate widely is not itself a ground for rejecting the numerical conclusions expressed in the first and second HAP reports. 96 The defendant submitted that it would be inherently outlandish for me to assess the damages caused by the air-conditioning problems at $2.941 million, given that the total profit of the plaintiff's business for the eight years from 1993 to 2000 was in fact only $1,262 million. This means, said the defendant, that if the HAP estimate were accepted, the profit figure would have more than tripled to $4.2 million. 97 There is no direct evidence, expert or otherwise, to support the defendant's assertion that the figure advocated in the first and second HAP reports is inherently outlandish. I must make my decision based on the evidence before me. The evidence indicates that the air-conditioning and elevator problems were serious problems. I am able to infer from the evidence that hotels have substantial fixed costs, so that increasing the occupancy beyond an occupancy level that covers fixed costs will have an exponential effect on net results. I am unable to say, on the evidence, it is inherently outlandish or even implausible to conclude that the variance between actual net results, and estimated net results assuming the absence of the three elements, would be as high as $2.941 million. 98 However, in one respect the evidence indicates that the estimate of $2.941 million should be revised. In calculating average daily rates and in other respects, the authors of the first and second HAP reports made consumer price index adjustments. It seems to me more appropriate, in the assessment of damages for breach of contract, for the loss to be calculated using the value of currency in the relevant years, rather than a current value after consumer price adjustments. The effect of a decline in the value of money should be addressed by the award of interest, at the rates set out in Schedule J to the Supreme Court Rules. This point was acknowledged by the authors in the new HAP report, and the figures they calculated for the purposes of that report excluded consumer price index adjustments. 99 My conclusions are that the expert assessment of the amount of variance between actual net results and estimated net results excluding the impact of the three elements, as contained in the first and second HAP reports, has survived the defendant's challenges and should be accepted, subject to one point. That point is that the calculations of the variances should be revised to exclude adjustments based on the consumer price index, along the lines of the revisions made in the new HAP report. That will presumably produce a figure lower, but not very much lower, than $2.941 million." 53 In determining the proportion attributable to the air-conditioning problems his Honour said that he had derived no assistance from the calculations in the fourth report. He next said: "101 The plaintiff's evidence supports the conclusion that the air-conditioning problems were the most significant of the three elements in contributing to the plaintiff's financial loss and therefore to the variance that I have assessed; that the building presentation problems were not a significant component; and that the elevator problems were an important but not the most significant component. Estimation in these circumstances is not a precise science, but the plaintiff's evidence suggests or implies that the air-conditioning problems were more significant than the combined effect of the elevator and building presentation problems, though not very much more significant, since the elevator problems were important. Given that the plaintiff might have adduced more convincing evidence but failed to do so, but on the basis of such evidence as I have accepted, I have decided that I should go as far as, but no further than, to find that the proportion of the variance attributable to the air-conditioning problems was 50.01%." 54 In conclusion his Honour summarised his findings as follows: "(1) based upon the approach and methodology used in the first and second HAP reports, the variance between the plaintiff's actual net results in the period from 1 July 1992 to 31 May 2000, and the net results that would have been achieved during that period were it not for the air-conditioning, elevators and building presentation problems, is $2,941,000, adjusted to exclude consumer price index variations; (2) there were no factors other than the air-conditioning, elevators and building presentation problems, affecting the underperformance of the plaintiff's hotel during that period, not properly taken into account in the approach and methodology adopted to calculate that variance; (3) in light of the plaintiff's evidence, such as it is, the proportion of that variance properly attributable to the air-conditioning problems, and hence to the defendant's breach of clause 7.1(a) the lease, is 50.01%." 55 Consequently, Sovereign was entitled to recover damages for its loss of revenue due to Bevillesta's breach of contract measured as 50.01% of $2,941,000 adjusted to exclude consumer price index variations. Sovereign was also entitled to recover simple interest on that sum. The method of calculation was that employed in the fourth report. It was adopted and applied to figures calculated as the annual variances dividing each annual loss into twelve equal monthly amounts. The parties were given the opportunity to calculate these amounts. This produced the verdict and judgment for Sovereign in the sum of $1,939.888. Bevillesta was to pay Sovereign's costs and to pay on an indemnity basis any additional costs incurred by Sovereign in consequence of the non-compliance, by Bevillesta, with the orders of the Registrar for the filing by Bevillesta of its affidavits by 24 January 2000. This order was made on 11 February 2002.

Bevillesta's submissions on appeal 56 Mr Walker SC, who appeared for Bevillesta both at the trial and on this appeal, submitted that the evidence Austin J relied upon to assess damages was not sufficient for the task and that Sovereign was entitled to no more than nominal damages. Austin J accepted the methodology adopted in the first and second reports, that is to say the comparison made between the relevant yearly actual net results, as defined, and the estimated re-forecast net results if the "physical restraints" of air-conditioning, elevator and physical appearance problems had been removed. Bevillesta did not in argument on the appeal challenge this methodology. It is important that in the first report it was noted that Sovereign alleged that the hotel was not able to perform to its maximum potential due to "the collective detrimental impact" of these problems. It is also important that in the second judgment Austin J emphasised in a passage I have quoted that he had not adopted the numerical figures reached in the first and second reports which produced the total of $2,941,000. 57 Austin J ruled as inadmissible quotations from "various statements and/or findings" set out in the fourth report and said to support the significant importance attributed to the satisfactory functioning of the air-conditioning system in a hotel. In para 47 of the second judgment he concluded that the column "Revised occupancy (this Report) Air-conditioning impact only" in the first table of that report was unreliable and in para 52 said it should not be accepted. Austin J acknowledged in para 55 that Mr Vains' explanation in his oral evidence for the extreme fluctuations in the variances in the second table at page 13 and set out in para 54 of the second judgment did not do so. The explanation Mr Vains proffered in D11 for fluctuations in the hotel's actual net results, was not based, as Austin J pointed out in para 59 of the second judgment, on any hard facts and was a generalised and incomplete impression from his understanding of other hotels at other times and other places. Austin J accepted that the document did not explain its own limitations and as such was not a fully reasoned expression of opinion. 58 Even so, in para 60 his Honour said that the cross examination did not destroy the evidence given in terms of D11 completely. The Court was left with an explanation, by a person who had expertise in the hotel industry, not contradicted by other evidence and not so implausible or weakly reasoned that the judge would be justified in substituting his opinion for that of the expert. In his Honour's opinion "that evidence stands". This conclusion was important because the criticism of the fluctuations in the variances in the second table at page 13 of the fourth report was matched by criticism of comparable fluctuations in the variances in the first and second reports. If these criticisms were valid they would undermine the approach and methodology taken in these earlier reports which Austin J had decided to adopt in the first judgment. His Honour saw no need to revisit that decision. 59 Mr Walker submitted that D11, which was an overnight fresh attempt to justify the fourth report and the only set of figures Sovereign put forward for Bevillesta to test, effectively "went". What was left was a witness whose answers clearly left the Judge unimpressed and a witness whose written expert evidence failed except for one aspect, that the air-conditioning problem troubled customers. For that the trial Judge had reached back to the first two reports and the material which I have quoted and which was referred to in para 117 of the first judgment. This evidence was not directed in any way to comparing the importance of the air-conditioning problem with that of the elevators and external appearance problems. 60 Mr Walker referred to the statement, under the heading "Research findings in respect of the three physical elements", in the fourth report that research undertaken by HAP of those elements established that the satisfactory operation of the air-conditioning plant and equipment was by far the most significant component when considered along with the elevator function and the condition and state of repair of a building/hotel. He pointed out that that statement was not based upon or the subject of any research at all. 61 The thrust of Mr Walker's attack went to para 86 of the second judgment where Austin J said that although Sovereign may have made the Court's task considerably easier if the expert evidence had been more rigorous and helpful, there was sufficient evidence to make an assessment. The difficulty was not that the expert evidence could have been more rigorous or helpful. In truth the expert evidence directed to the remaining matter to be decided, namely apportionment, carried no weight whatever.

Discussion 62 It is here useful to quote two passages from the judgment of Heydon JA in Makita (Australia) Pty Ltd v Sprowles (2001) 52 NSWLR 705. Heydon JA, after a careful review of authority and learned commentary, in para 82 quoted from Callaway JA's judgment in R v Kotzmann [1999] 2 VR 123 at 135 that it was desirable for juries to be directed that "expert evidence is no better than the facts on which it is based". At para 85 Heydon JA enumerated among matters necessary to the admissibility of expert opinion evidence, the following: "[S]o far as the opinion is based on facts 'observed' by the expert, they must be identified and admissibly proved by the expert, and so far as the opinion is based on 'assumed' or 'accepted' facts, they must be identified and proved in some other way; it must be established that the facts on which the opinion is based form a proper foundation for it; and the opinion of an expert requires demonstration or examination of the scientific or other intellectual basis of the conclusions reached: that is, the expert's evidence must explain how the field of 'specialised knowledge' in which the witness is expert by reason of 'training, study or experience', and on which the opinion is 'wholly or substantially based', applies to the facts assumed or observed so as to produce the opinion propounded. If all these matters are not made explicit, it is not possible to be sure whether the opinion is based wholly or substantially on the expert's specialised knowledge. If the court cannot be sure of that, the evidence is strictly speaking not admissible, and, so far as it is admissible, of diminished weight. And an attempt to make the basis of the opinion explicit may reveal that it is not based on specialised expert knowledge, but, to use Gleeson CJ's characterisation of the evidence in HG v The Queen (1999) 197 CLR 414, on 'a combination of speculation, inference, personal and second-hand views as to the credibility of the complainant, and a process of reasoning which went well beyond the field of expertise' (at para 41)." 63 In the fourth report the author refers to the first judgment and notes the request in preparing the statement of operating performance and cash flow "that we confine our consideration(s) only to the impact that the ineffective operation of the air-conditioning system had upon the trade and performance of the Hotel. Accordingly, in order to comply with this request, the preparation of the revised operating performance and cash flow report will need to disregard the impact associated with the problems/issues associated with the elevators and the appearance of the building ". (my emphasis) 64 It is possible that this demonstrated a confusion about instructions. It is possible that the table was prepared on the assumption that there was no problem with the elevators or external maintenance and only a problem with the air-conditioning. Some of Mr Vains' cross-examination suggests this may have been the approach. At least such statements may explain his confusion when giving evidence. In truth the question was what was the impact of the air-conditioning problem on the cash flow or results of the hotel, as it was, with an elevator problem and an external presentation problem. The terms of the fourth report leave some doubt in my mind as to how this was pursued. The Judge was of the view that Mr Vains was simply muddled during cross examination. 65 Nothing, to adapt the language of Heydon JA, demonstrated any scientific or other intellectual basis for the conclusions the expert reports or Mr Vains' evidence expressed. All the Judge had were general references to unparticularised research which led to the statement that the satisfactory functioning of the air-conditioning system was the most significant physical component, when considered against · poor elevator function, and · the condition and state of repair of a building/hotel and the statement "we have exercised our professional judgment in determining the following revised estimated indicative occupancies applicable to the analysis period which has regard for a satisfactorily operating air-conditioning system but disregards the problem/issues associated with elevator function and the condition and state of repair of the building/hotel".

Other criticisms can rightly be made about the expert evidence such as the unexplained fluctuations. I do not think it necessary for present purposes to dwell on those matters. 66 The second hearing was intended to determine the extent of the impact of the air-conditioning problem and the amount of the loss the consequence of that problem by using HAP's methodology. Evidence that inefficient air-conditioning would create problems with hotel guests is to state an obvious matter of commonsense but does not help to determine what loss is attributable to that inefficiency. The difficulty is to relate the evidence to an amount of loss or variance attributable to that problem as distinct from the elevator and external maintenance problems so as to produce what was described in the second table at page 13 of the fourth report as the "estimated re-forecasted net result". The attempt to do this in the first table at page 7 in the fourth report was rejected. It was arrived at without the benefit of any explanation beyond reference to research which never took place and a statement of the report writer's expertise. 67 A patent oddity about the fourth report was the fluctuations in the variances in the second table. In D11 which was intended to explain them Mr Vains asserted the fluctuations and variances were due to fluctuations in the hotel's actual results rather than significant fluctuations in HAP's projections. His Honour said: "That is true". Exhibit D11 offered the explanation that the fluctuations in the hotel's actual net results were "predominantly due to the expected varying behavioural patterns of different market segments and their different tolerance levels of the air-conditioning problems." Although Mr Vains agreed it was not based on hard facts and was a generalised and incomplete impression he insisted the document presented an expert opinion based on his experience and understanding of the hotel market. He agreed he had made an assumption in the document that there were no differences between the present hotel and other hotels of which he was aware, that it was a truism of his profession that there are particular aspects of particular hotels which will influence trading performance and that this invalidated his expert opinion. The cross-examination makes it difficult to understand how Austin J held that the evidence stood. 68 Austin J accepted $2,941,000 as the variation between the actual and estimated results for the period from 1 July 1992 to 31 May 2000. His Honour rejected the submission that this sum was outlandish or implausible. The calculation should only be revised to exclude adjustments based on the Consumer Price Index. His Honour was satisfied that the fluctuations in the variance columns were explained by D11. The trial Judge felt able to conclude on the basis of Mr Vains' evidence that the air-conditioning problems were more significant than the combined effect of the elevator and building presentation problems though not very much more significant. This enabled his Honour to accept the projections of loss from the first and second reports as a base and allow 50.01 percent as attributable to the air-conditioning problems.

Conclusion 69 Bevillesta did not challenge the finding that in breach of cl 7.1(a) it had failed to use its best endeavours to maintain and service to the best of its ability the air-conditioning plant. Mr Walker agreed that the starting point in considering what damages should be awarded was the obvious conclusion that this continued breach over the years in question would have caused a loss in trade to Sovereign. Austin J found that the three contributing influences on the hotel's reduced net results, as compared with what might otherwise have been earned, were the problems with the air-conditioning, with the elevators and with the external maintenance. Austin J had accepted HAP's methodology for measuring the effect of these three problems combined. 70 Austin J quoted from Mr Vains' oral evidence in which he said that in comparison with problems about elevators and presentation of the building problems about air-conditioning "would have the greatest impact on the operation of the hotel" and that the presentation of a façade of the building was "not a significant component" in bringing about financial loss. "The air-conditioning was the most significant component" although the problem about elevators "was an important component" in bringing about financial loss. His Honour said this accorded with ordinary commonsense and experience and was evidence based upon the expert experience and knowledge of Mr Vains with respect to the hotel industry. 71 Austin J was of the view that the approach and methodology in the first and second HAP reports survived the cross-examination of Mr Vains and the submissions of the defendant. He accepted Mr Vains' explanation in D11 of the wide fluctuations in losses assessed from year to year and found that those fluctuations were not a ground for rejecting the numerical conclusions expressed in the first and second HAP reports. 72 In Ratcliffe v Evans [1892] 2 QB 524, where the plaintiff claimed damages for an untrue statement maliciously published about his business, the Court of Appeal held admissible evidence of a general loss of business as distinct from the loss of particular known customers. In that context, at 532-3, Bowen LJ said: "As much certainty and particularity must be insisted on, both in pleading and proof of damage, as is reasonable, having regard to the circumstances and to the nature of the acts themselves by which the damage is done. To insist upon less would be to relax old and intelligible principles. To insist upon more would be the vainest pedantry. … The nature and circumstances of the publication of a falsehood may accordingly require the admission of evidence of general loss of business as the natural and direct result produced, and perhaps intended to be produced."

In that case the damage actually done was the gist of the action but I see no reason why the principle stated should not apply in a case such as the present. 73 In Silver v Ocean Steamship Company [1930] 1 KB 416, a case to which neither counsel referred, a shipowner had negligently discharged cargo from the ship. However, some damage had been done to the goods before discharge and some done to them after discharge. The shipowner was liable only for the damages caused during the negligent discharge. Roche J at first instance said that only 10 per cent of the actual damage was attributable to actual discharge. After reviewing the evidence, Scrutton LJ said at 429-430: "I have considered the evidence and come to the same conclusion as the judge below that this was a negligent method of discharge, for damage done by which the ship is liable. I am satisfied that a very considerable part of the actual damage was caused by this negligence. I do not understand how the judge can have arrived at so small a figure as 10 per cent of the actual damage being attributable to actual discharge. If, as he finds, 50 per cent of the actual damage was caused before discharge, and 10 per cent by negligence in discharge, this leaves 40 per cent to be caused after discharge. While there is some slight evidence of rough handling at the wharf, on the other hand this work was done by men on time work, with no inducement to hurry, with special wooden trays with high sides. I am quite unable to discover the evidence that would justify the judge in the division of this damage into 10 per cent ship and 40 per cent after ship. Endeavouring to assess the damage on the figures which I have gone carefully into, somewhat as a jury would, I am of opinion that if 25 per cent of the actual damage is assigned to the period before discharge, 50 per cent to discharge and 25 percent after discharge, the ship is being treated very generously. It may be that the learned judge below has arrived at his figure of 10 per cent by deducting from the actual damage some percentage as due to insufficient packing. In my view he is not entitled to do this, first, because of the estoppel and, secondly, because in my view a man who discharges cargo negligently is not entitled to say: 'If I had discharged the cargo properly there would have been some damage, which I can deduct from the damage caused by my negligence.' Further, in my view of the estoppel, the ship cannot claim that some tins were delivered to it gashed and some damaged by insufficient packing. I assess these two classes of damage before discharge at 10 per cent, as compared to 15 per cent due to non-apparent pin-prick damage before discharge and ordinary wear and tear on voyage. I have stated these figures in order that if any part of my assessment should be dissented from my resultant total may be modified. The percentages I have given are of the total money value. I am conscious that they are rough and ready estimates; but I think if they were arrived at by a jury they could not be upset. As I have said, I think they err on the side of generosity to the shipowners, and I am influenced to some extent by the improper refusal of the shipowners' servants to take or agree tallies of actual damage on discharge protecting them by a reference to 'old damage.' In my view therefore the damage for which the shipowner is liable should be roughly assessed at 60 per cent of the actual damage, and judgment for 2100 l . with costs should be entered for the plaintiff, the judgment of the learned judge as to amount and costs being set aside."

74 Greer LJ at 436 said: "The damage for which I hold that the plaintiff is entitled to be compensated is comprised under two heads: (1) damage which in fact occurred before the goods were received for shipment under the bill of lading and was of such a character as to be apparent on a reasonable examination. The defendants are precluded by the estoppel from alleging that this damage was not caused while the goods were in their custody. They cannot rely on the exception of insufficiency of packing as the cause of the damage, because the exception only applies to damage arising during the carriage of the goods; (2) damage occasioned by negligence in the discharge of the cans. I cannot think that Roche J was right in his finding that the 350 l. paid into Court is sufficient to satisfy the damages for which the defendants are liable. I think on the contrary that a very considerable part of the damage ultimately found was due to causes for which the defendants are responsible. The goods were discharged by casual labour paid by the piece. I think it very improbable that any large amount of damage was done after the goods were discharged from the ship, but no doubt some of the ultimate damage ought to be attributed to this stage in the journey from Shanghai to the London stores. This appeal, like all appeals from judgments given on a trial before a judge alone, is a re-hearing. The judge's findings do not depend on the relative value he attached to the oral evidence of witnesses at the trial. He had to make an estimate based on the general facts of the case and on probability. In my judgment a fair estimate of the damage for which the defendants are liable is 50 per cent of the total damages, and if the result of this appeal depended on my judgment the appeal would be allowed and judgment entered for the plaintiff for half their claim, that is to say for 1772 l. , and with costs here and below."

Slesser LJ at 442 agreed with the amount advanced by Scrutton LJ. 75 The reasoning in Silver v Ocean Steamship Company demonstrates that when the total damage done to goods can be assessed, but it remains necessary to do an apportionment to assess the damages payable by the defendant, this apportionment can, in the absence of better evidence, be done by estimate. So too can it be done in the present case. But critically in this case the total damage is itself of doubtful weight because of the fluctuations in the variances in the first and second reports. I have given this careful consideration. 76 The total of nearly $3,000,000, the starting point for Austin J's calculations, was the product of variances for each year from mid 1993 to mid 2000. As Austin J acknowledged an explanation was required for the unexplained ups and downs in the variances, in one year (1994) as high as $720,000 and in another (2000) as low as $93,000. Austin J was prepared to accept the total amount because he was satisfied by Mr Vains' explanation for the fluctuations in D11. Despite my difficulty in accepting this explanation, I am not persuaded that any sufficient ground has been shown for this Court to interfere. D11 proffered an explanation which, despite the weakness of Mr Vains' evidence, it was open to Austin J to accept. 77 Again his Honour found on the evidence, and it was open to him to do so, that the contribution to the loss made by the failure to maintain the air-conditioning was more significant than the combination of the elevator and external appearance problems. The apportionment of 50.01 per cent which followed was one based on a commonsense approach and it seems to me was a justifiable estimate. 78 Where a carrier in breach of contract claims that part only of the damage suffered by the owner of the goods was recoverable because of an exception, there has been discussion about where the onus lies to show how much of the damage was caused otherwise than by the breach of contract sued on; see generally Government of Ceylon v Chandris [1965] 2 Lloyds Rep 204 at 216; (1965) 3 All ER 48 at 56-7. If the carrier fails to establish how much of the damage was due to the cause within the exception the carrier is liable for the whole; Gosse Millerd Ltd v Canadian Government Merchant Marine Ltd [1929] AC 223 at 241. However, an argument so based was not advanced at trial or on the appeal by Sovereign.

Costs 79 Austin J ordered Bevillesta to pay Sovereign's costs of the 1996 proceedings. Bevillesta in its grounds of appeal did not separately challenge that order in the circumstance that its substantive grounds of appeal failed. However, during argument it was put to counsel for Sovereign that on one view Austin J could have reached the decision he did and made the orders he did on the material before him at the end of the first hearing and without the further hearing which began on 23 October 2001. As I have said, the second hearing was intended to determine the extent of the impact of the air-conditioning problem and the amount of the loss the consequence of that problem by using HAP's methodology. None of the evidence Sovereign led at that further hearing assisted in making that determination either because it was rejected or carried no weight or simply repeated evidence given during the earlier hearing. The Court indicated to Sovereign's counsel that at the very least Sovereign should have no costs of the further hearing and should pay Bevillesta's costs of the further hearing. Nothing that was put by counsel persuades me that the further hearing was not an occasion of complete waste of the Court's time. Because of the unacceptable nature of the evidence Sovereign advanced the Court received no assistance and Bevillesta was put to unnecessary legal expense. Accordingly, Sovereign should pay Bevillesta's costs of the further hearing.

Order 80 In my opinion, the following orders should be made: 1. The appeal should be allowed for the limited purpose of varying Austin J's costs order; 2. Set aside order 2 made on 11 February 2002 and in lieu thereof, order that the plaintiff pay the defendant's costs of the further hearing which began on 23 October 2001 but that otherwise the defendant should pay the plaintiff's costs of the proceedings; 3. Confirm orders 1 and 3 of the orders made on 11 February 2002; 4. Bevillesta to pay Sovereign's costs of this appeal.

81 FOSTER AJA: I agree with Sheller JA. **********

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