In Sellars v Adelaide Petroleum Pty Ltd these principles were held to apply to claims for damages for misleading or deceptive conduct under the Trade Practices Act, and to claims in tort for deprivation for commercial opportunity.
758 The application of these principles in the assessment of damages is sometimes said to involve the evaluation of a lost chance, where the happening of the hypothetical or future events cannot be said to be a certainty. In the course of submissions on the question of loss and the assessment of damages, counsel at times said that the court was required to evaluate chances according to the principles discussed in Malec v J C Hutton Pty Ltd. It was said that the evaluation of whether Westpac Pty Ltd would have gone into possession soon after 9 July 1994, whether the Receivers and Managers could have negotiated a sale late in 1994, whether settlement would have occurred by 25 February 1995, and whether bridge construction would have recommenced quickly had a s 10 declaration not been made, all involve elements of uncertainty and chance the degree of probability of which had to be assessed.
759 I think that these submissions tend to obscure the questions which the court is required to decide. Those questions, at least at the outset when deciding whether the applicants have suffered any loss at all, concern the values which third parties namely, hypothetical purchasers, would have placed on the marina at critical dates in the past.
760 The applicants' case that the making of the s 10 declaration caused a capital loss requires findings on the evidence about the market value of the marina on 9 July 1994 and in the months thereafter had the s 10 declaration not been made, and as to the market value of the marina at 30 September 1997 when it was sold. In each instance, the valuation is to be made according to the state of knowledge and the facts as they would have appeared to a hypothetical purchaser at the time when the value is to be assessed. Those are facts which must be found on the balance of probabilities. Included in the state of knowledge and the facts that would influence a hypothetical purchaser would be the likelihood at that time of events occurring in the future. Forecasts of the likelihood of those events, as they would have been made at that time, are historical facts which must be found on the balance of probabilities. That is so, even though the finding might be that a potential purchaser would have forecast that the risk of an event which would in the future impinge on the success of the marina had a very low probability of happening, or some other event had a high probability of happening. Findings about the assumptions on which a hypothetical purchaser on the valuation dates would have proceeded, including assumptions about future risks and contingencies, are findings that must be made on the balance of probabilities.
761 At the outset it is important to recognise that the losses alleged by the applicants are not concerned with losses that may have been suffered by the Chapman family as a result of them continuing to support Binalong during the years that it struggled to maintain the development in the period leading up to 1994. The claim concerns only losses allegedly suffered by Binalong as a result of the making of the s 10 declaration on 9 July 1994. At that time Binalong was a hopelessly insolvent company in the hands of Receivers and Managers, about to have its assets taken from it by a secured creditor, and about to be placed in liquidation. Notwithstanding these circumstances, it is alleged that Binalong's plight was made worse by the imposition of the s 10 declaration.
762 Evidence received from Mr A G Ayre, the General Manager, Asset Management, of Westpac establishes that Westpac/PPL had by May 1994 the intention to take the necessary steps to enter into possession as mortgagee of the marina, and to put the marina up for sale at the earliest opportunity. That intention however was frustrated first by the s 9 interim declarations, and then by the s 10 declaration. Had the s 10 declaration not been made Mr Ayre says that Westpac/PPL would have placed the marina on the market as soon as possible after the interim declarations expired, and hopefully would have achieved a sale during the latter half of 1994. However, when the s 10 declaration was made, whilst it was still the intention of Westpac/PPL in due course to put the marina up for sale, Westpac/PPL decided to defer that step until after the resolution of the proceedings instituted by the Chapmans and others for judicial review. Then followed a long period of uncertainty and quandary on the part of Westpac/PPL as to the course of action it should adopt as later events unfolded. Westpac/PPL recognised that the future stages of the marina development were dependent on the construction of the bridge, and the value of the marina would increase considerably if the bridge construction went ahead. Westpac/PPL throughout this period maintained the position in its discussions with the State that the State was obliged to construct the bridge, and that failure to do so would entitle Westpac/PPL to damages from the State. By September 1996, although the State maintained that it intended to build the bridge if and when all legal impediments to doing so were finally removed, Westpac/PPL decided that it should proceed to sell the marina, and to proceed with legal action against the State.
763 Westpac/PPL concluded that its interests would be best served by selling the marina to the Chapman family who, it was anticipated, would be well placed to pursue compensation claims against the State and the Commonwealth, and who would be prepared to agree to the bank receiving a percentage, possibly up to 50 per cent, of any compensation payments they might achieve from the State or the Commonwealth. Factors which influenced the decision to sell the marina, apart from the prospect of an agreement with the Chapmans as to the division of any compensation recovered, were that by this process Westpac/PPL would limit holding costs and shorten considerably the time they would be required to continue funding the Receiver and Manager for costs being incurred in running the marina, that significantly less due diligence would be required in preparing the marina for sale, that any attempt to sell to any interest other than the Chapman family would lead to applications for injunctions and other attempts by the Chapman family to stop the sale process resulting in additional legal and holding costs, and that Westpac/PPL would obtain a full release extending also to the Receivers and Managers against damages claims threatened by the Chapmans.
764 Westpac/PPL had been advised by Jones Lang Wootten in August 1996 that the marina then had a value in the range of $1 million to $1.2 million, and Westpac/PPL intended to negotiate for a sale price to the Chapman family above this figure.
765 Westpac/PPL entered into negotiations with the Chapmans. The negotiations were protracted, ultimately leading to the Deed of Sale dated 25 September 1997: see par 144 above. As part of the negotiated transaction, full releases were received by Westpac/PPL and by the Receivers and Managers and liquidator of Binalong, and the liquidator of Binalong agreed to assign Binalong's causes of action against respondents in these proceedings to Mr and Mrs Chapman. A term of the assignment requires a percentage of any damages recovered to be paid to Binalong.
766 I accept the evidence of Mr Ayre as to the intentions of Westpac/PPL. I consider that his evidence shows that the consideration for the sale of the marina to Kebaro in 1997 was influenced by many considerations besides the fair market value of the marina at the time. The monetary consideration stated in the Deed of Sale should not be treated as a fair market value negotiated between parties at arm's length.
767 The expert witnesses who have given valuation evidence are agreed that an appropriate method of valuation is to assume the hypothetical development of the marina, and then to discount future cash flows to arrive at a "present value" for the marina as an ongoing project. On this basis potential purchasers would be developers prepared to take over the marina development. The opinions of the experts differ however as to the appropriate values. The differences result from different input assumptions they were instructed to make or made as to establishment and operating expenses, future revenue flows, the timing of outgoings and income, the discount rate, and the form of the development.
768 In the statements filed before trial, the applicants based their claim as pleaded upon a report of Mr J L Kenny from Knight Frank (SA) Pty Ltd. His valuation assumed that the physical construction of the bridge would have recommenced in mid 1994 had the s 10 declaration not been made; that Westpac/PPL would have entered into possession of the marina shortly thereafter; that construction of the bridge would continue to completion without delay; that BFC would have joined with Westpac/PPL in putting the marina up for sale so that the total area, the subject of approval for later stages of the development, could be sold as one; and that income generated from businesses, existing or planned, carried on in conjunction with the marina by MSC would pass on sale with the land.
769 Mr Kenny accepted for the purposes of his valuation information provided to him by a number of other witnesses. Mr E J Bray, a director of Walter Brooke & Associates Pty Ltd, architects, provided estimates for the cost of buildings proposed in the various stages of the development. Mr M G Barnhurst, managing director of Bardavcol Pty Ltd, and officers of PPK Environment and Infrastructure Pty Ltd provided cost estimates for site works and infrastructure development of the remaining stages. Mr P D H Hill, a chartered accountant, provided estimates of ongoing operating expenses for various business activities of MSC, both existing and planned for the future. Mr R G Pride, director of Robert Pride Consultants Pty Ltd, provided market information as to likely future demand for wet berths and residential allotments in the marina. His evidence, together with that from Mr R D Harcourt, general manager of PRD Realty Pty Ltd which had conducted the sale of Stage 1 of the marina for Binalong, provided forecasts of the likely timing and amount of revenue from future residential allotment sales. Mr R J Martini, then the director of Business Development of RCI Australasia Inc, a large timeshare operator, also provided information regarding the proposed timeshare component of the development. These witnesses gave their opinions on the assumption that the construction of the bridge would have recommenced in about mid 1994 and proceeded to timely completion had the s 10 declaration not been made. In preparing his valuation, information from these sources was discussed by Mr Kenny with Mr Chapman who contributed additional information about many aspects of the proposed development and associated business opportunities for MSC. Messrs Kenny, Bray, Barnhurst, Harcourt and Hill had been engaged by Binalong in earlier stages of the development of the marina and were familiar with it in 1994.
770 In his first valuation report prepared in March 1999 Mr Kenny concluded that the property would have achieved a gross sale price of $16.8 million, and that the net sale price after selling expenses would be $16.582 million. Mr Kenny considered that if the marina had been placed on the market in July 1994 it is probable that a contract could have been concluded by December 1994 with settlement on 25 February 1995. Mr Kenny considered that the timeframe for the development and realisation of all stages of the marina would be twelve years, and that a purchaser's cash flow would commence in the March 1995 quarter. Mr Kenny's calculations had three main revenue streams which may conveniently, although loosely, be described as "residential land", "commercial and rental" and "timeshare".
771 The revenue from the "residential land" comprises income from the sale of subdivided allotments of land including villa allotments, and seventy-five proposed villas to be constructed at a cost of $100,000 each.
772 The "commercial and rental" revenue comprises rental and other income to be received over the twelve year development period from a variety of businesses associated with the development, and from the sale of those businesses as going concerns at the end of the twelve year period. Those businesses included a plant nursery, a marina construction and operations workshops, an earth moving facility and workshop, a heliport, income from managing the timeshare units, boat repair and construction workshops, a fuel dock, a tavern, a convention centre, a retail shop, a slipway, marine dry stand servicing workshops, dry stand rent, undercover boat storage and lockers, a valet service for boats, boat sales, the rental of marina berths, wood lot sales, sewerage charges, a yacht club, a long term boat storage facility, a marine retail sale outlet, water sales, a security service, boat chartering, a property maintenance service, and a weather reporting service. Mr Kenny accepted information given to him by Mr Chapman that the net annual income from such of those businesses as were in existence in mid 1994 was then $100,000 per annum. The only accounts produced to Mr Kenny to support this estimate were trading accounts for MSC for the year ended 30 June 1993 which purported to show an operating profit before tax of $59,538, following an operating loss in the preceding year to 30 June 1992 of $63,359. Partly from his own estimate of rental income for some of the business premises, and partly on information supplied by other witnesses including Mr Chapman, Mr Kenny assumed that the net income at the end of the twelve year period from these businesses would be $2.286 million per annum. He assumed a uniform "straight line" increase in the income to that figure throughout the twelve year period. At the end of the twelve year period Mr Kenny assumed that all these commercial activities would be sold to third parties, and he brought to account anticipated revenue from these sales.
773 Revenue from "timeshare" was anticipated from the development of sixty timeshare apartments that would be constructed and sold in conjunction with the various stages of the development, each apartment leading to the sale of fifty-one separate contracts (shares) entitling one week's accommodation per annum (the remaining week each year being set aside for maintenance).
774 Against these income streams Mr Kenny's calculations set off development and operating costs as and when it was estimated that they would be incurred. The cash flow forecast assumed that the marina basin would be extended in logical stages as demand required. The proposed development allowed lagoon excavation to be undertaken in stages, each stage providing an economical number of allotments for sale and not being dependent upon the next stage being developed for access or services. It is not clear on the evidence whether an outgoing was included in respect of the obligations to the State arising under the Tripartite Agreement for the cost of construction of the bridge.
775 The future cash flows were discounted at a rate of 22.5 per cent, and purchase costs of 4.5 per cent were then deducted. It is possible to extract from the calculations that the net present value of the three components computed as follows:
$'000
Residential land 11,556
Commercial and rental 659
Timeshare 4,585
16,800
776 On the basis that there was in place a s 10 declaration banning the construction of the bridge for twenty-five years Mr Kenny valued the marina at July 1994 at $1.85 million being the discounted future value of net income from the existing operations ($500,000), the sale of remaining allotments in Stage 1 ($850,000), and the balance of the land not utilised by Stages 2 to 6 being sold at farmland value of $2,000 per hectare ($500,000). On the same assumption that a ban was in place, Mr Kenny valued the marina at 30 September 1997 at $1.21 million. He arrived at this figure by assuming that the rental income from the MSC businesses would have substantially reduced, thereby reducing their net present value ($285,000), the remaining allotments of land (none having been sold since 1994) would have reduced in value as there would no longer be in place a marketing structure ($425,000), with the balance of the land still being suitable only for rural purposes ($500,000). It is to be noted that at 30 September 1997 there was not a ban in place, but the challenge to the validity of the Hindmarsh Island Bridge Act in the High Court was still to be argued, and whilst the State was asserting that it had a continuing intention to proceed with the bridge it would not do so until the High Court challenge was determined.
The respondents' case
777 Pre-trial valuation reports were filed by the respondents from Mr D J McArdle, a certified practising valuer, and from Mr W Lonergan, a chartered accountant with PricewaterhouseCoopers who has extensive experience valuing large development projects. Business records of Westpac/PPL admitted into evidence also included a number of letters from Mr R J Aschberger, a licensed valuer with Jones Lang Wootten, which contained valuation advice on aspects of the marina development from time to time, but Mr Aschberger was not called by any party to give evidence. Mr Aschberger's letters provide part of the background against which the actions and intentions of Westpac/PPL must be assessed.
778 Mr McArdle valued the marina as at July 1994 on the hypothesis that a s 10 declaration had not been made, at $4.5 million. This valuation reflected his opinion that the appropriate discount rate should be in the order of 30 per cent; that allowance should be made for obligations arising under the Tripartite Agreement in respect of the cost of the bridge; that the risks associated with the proposed timeshare component of the marina development was such that potential revenue from that source added no value to the project and should be ignored; and that the infrastructure costs on the residential land components of the development were underestimated. Mr McArdle noted that the "commercial and rental" component of Mr Kenny's valuation was not supported by appropriate evidence to substantiate forecasted revenue and expenses. Mr McArdle subjected the input data used by Mr Kenny to a range of variations in a "sensitivity analysis", which gave a median net present value as at 8 July 1994 to the marina development at a 30 per cent discount rate of $4.142 million. On a similar analysis using discount rates varying between 27.5 per cent and 32.5 per cent, the median net present value was only marginally higher. These calculations excluded the proposed timeshare scheme. The valuation of $4.5 million, which exceeds the median net present value calculations, takes into account the underlying potential of the land otherwise committed to the timeshare.
779 Mr McArdle considered that in the economic climate in 1994, and having regard to the barriers which the construction of the bridge would have faced from opponents in the community even if no s 10 declaration had been made, the marina would have been difficult to sell. He considered that the vendor would have needed to allow six months implementing a range of actions to prepare for sale, and a further twelve months to achieve a sale. Even then, he thought a sale would have been difficult and the marina could have remained unsold after two years.
780 Mr McArdle considered the marina development at 30 September 1997 was worth more than the hypothetical value in July 1994. As at 30 September 1997 he valued the marina at $5 million. The difference in value in his opinion was due to an improved economic climate and escalation in land prices and costs that had occurred in the meantime. His valuation at both these dates assumed that the bridge would be constructed but that a purchaser in choosing a discount rate would allow for the possibility that construction might be delayed for a time by the actions of those opposed to the bridge.
781 Mr Lonergan undertook a critical review of the valuation reports of Mr Kenny and Mr McArdle, and also considered the action which Westpac/PPL had taken leading up to July 1994 in light of Mr Aschberger's advice. On the assumption that the s 10 declaration had not been made, he agreed with Mr McArdle that the valuation of the marina in the period July to December 1994 was $4.5 million. He considered a sale within six months was unlikely. As I understand his evidence, he considered that the marina had the same value at 30 September 1997, there being no material change in circumstances in the meantime. He too gave his estimates of value on the assumption that a hypothetical developer considering purchase would value the marina at each of these times on the basis that after a period of delay a bridge would be built.
The applicants' further evidence
782 As the applicants' witnesses in support of Mr Kenny's input assumptions were cross-examined, it became clear that many of the infrastructure items were seriously under-costed, or had been omitted from the cost estimates, and that there was no solid basis for many of the estimates of revenue and expenses relating to the commercial and rental components of the development.
783 The applicants then sought to support their damages claim with an opinion on value from Mr B Ellery, a chartered accountant. Mr Ellery adopted for his net present value calculations much of the information used by Mr Kenny, but endeavoured to make adjustments that reflected the additional infrastructure costs disclosed by the oral evidence of the applicants' witnesses. Mr Ellery reached the conclusion that the capital costs of a number of the ventures included in the commercial and rental component exceeded likely returns and should be eliminated in the valuation exercise. For the remaining proposed ventures that were incorporated into his cash flow calculations, Mr Ellery made a number of adjustments to the estimates of revenue and expenses used by Mr Kenny. Further, for sales of residential land Mr Ellery incorporated information which he had received as to likely sale prices and to the timing of sales from Mr B P Martin, who in due course the applicants called as a witness. Mr Martin is a former managing director of the Delfin Property Group (Delfin) that has successfully carried out major urban development projects in Australia, and in particular the Westlakes and Mawson Lakes projects in South Australia. He is presently deputy chairman of that company. Mr Martin, in the course of obtaining information to give advice to Mr Ellery, discussed land prices and a sales program with Mr Harcourt. The proposed sale prices ultimately adopted by Mr Ellery are significantly above those used by Mr Kenny, and the rate of sales is slightly quicker. The number of allotments also differs in Mr Ellery's calculations from those of Mr Kenny, as he has included extra allotments likely to have been contemplated by a new developer in 1994 to reflect design concepts that had emerged since the planning application for the marina had been lodged.
784 Mr Ellery omitted the proposed seventy-five villas from his calculations as the construction costs were not economically feasible. He included the allotments that would have been used for this purpose in the land sales.
785 Mr Ellery adopted a discount rate of 25 per cent, again relying on advice given to him by Mr Martin, and also used escalating cash flows to reflect estimated inflation of 2 per cent per annum and increasing sale prices for allotments as each stage of the development reached maturity.
786 Mr Ellery's calculations produced the following results:
$'000
Residential land 9,461
Commercial and rental (440)
Timeshare 5,061
14,081