Club Hotels Operations Pty Limited v CHG Australia Pty Limited

Club Hotels Operations Pty Limited v CHG Australia Pty Limited - [2005] NSWSC 998 - NSWSC 2005 case summary — Zoe

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Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 Bank of Credit and Commerce International SA v Ali [2001] 1 All ER 961 Bowtell v Goldsborough Mort & Co Ltd (1905) 3 CLR 444 Brambles Holdings Limited v Bathurst City Council (2001) 53 NSWLR 153 Burns Philp Hardware Pty Ltd v Howard Chia Pty Ltd (1987) 8 NSWLR 642 Codelfa Construction Pty Ltd v State Rail Authority (NSW) (1982) 149 CLR 337 Commonwealth v Amman Aviation Pty Ltd (1991) 174 CLR 64 Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] 132 CLR 373 Eastgate v Lindsay Morden [2001] Lloyd's Law Reports 511 EW Blanch Pty Ltd v Cooper [2005] NSWCA 217 Hadley v Baxendale (1854) 156 ER 145 Hide and Skin Trading v Oceanic Meat Traders Ltd (1990) 20 NSWLR 310 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 Kelner v Baxter (1866) LR2CP174 L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 Livingstone v Raywards Coal Co (1880) 5 App Cas 25 CASES CITED : Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 76 ALJR 246 Manufacturers' Mutual Insurance Ltd v Withers (1988) 5 ANZ Ins Cas 60-853 McVeigh v National Australia Bank [2000] FCA 187 Minister for Immigration and Ethnic Affairs v Teoh (1995) 183 CLR 273 Natal Land and Colonisation Company Ltd v Pauline Colliery and Development Syndicates Ltd [1904] AC 120 North Sydney Investment and Tramway Company Ltd v Higgins [1899] AC 263 Peppers Hotel Management Pty Ltd v Hotel Capital Partners Ltd [2004] NSWCA 114 Prenn v Simmonds [1971] 1 WLR 1381, [1971] 3 All ER 237 Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989, [1976] 3 All ER 570 Robinson v Harman (1848) 1 Exch 850 Royal Botanic Gardens and Domain Trust v South Sydney City Council (2002) 186 ALR 289 Senate Electrical Wholesalers Ltd v Alcatel Submarine Networks Ltd [1999] 2 Lloyd's Law Reports 422 South Sydney Council v Royal Botanic Gardens [1999] NSWCA 478 Upper Hunter County District Council v Australian Chilling and Freezing Co Ltd (1968) 118 CLR 429 Vodafone Pacific Ltd v Mobile Innovations Ltd [2004] NSWCA 15 Wenham v Ella (1972) 127 CLR 454

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50091/05 Club Hotels Operations Pty Limited & Anor v CHG Australia Pty Limited JUDGMENT The proceedings 1 The proceedings are concerned with the rights of the respective parties concerning the purchase of four hotels situate at Campbelltown, Mt Annan, Leumeah and Wattle Grove in south-western Sydney. The sale contracts relating to the hotel businesses included a number of promises given by the vendors including a "promise, representation and warranty that the information attached as Annexure K (Weekly KPI Summaries) is true and correct, complete and accurate and not misleading in any respect for the period as specified in Annexure K". The matters litigated concern whether or not the contractual warranties were breached. 2 Some significant threshold issues require determination including the entitlement of the plaintiffs to sue in circumstances in which they were not the purchasers as at the time of exchange of contracts. Another significant issue concerns whether even if the plaintiffs had such an entitlement, the damages claim is based upon a misconceived approach to principle. And even if the damages claim falls within accepted principle, there is a causation issue. The purchaser 3 The original purchaser was described in each of the sale contracts as "Macquarie Bank Limited as promoter of the defendant, CHG Australia Pty Ltd [described in the sale contracts by its former name, "Leisure and Entertainment Acquisitions Pty Ltd"] a company to be incorporated". Joint-venture arrangement 4 The evidence disclosed [transcript 231] that the transaction was in essence at its commencement, a joint-venture arrangement, initially between Macquarie Bank and a Westpac equity investment vehicle, 'Quadrant'. The investment was to be fully funded by an external lender ultimately being National Australia Bank. 5 Each of the sale contracts was for material purposes in identical form although the particular clauses sometimes have different numbers. As a matter of convenience only this judgment examines the provisions with respect to the transaction relating to the Wattle Grove Hotel. 6 Likewise as a matter of convenience only, this judgment adopts the present name of companies where changes of name have taken place after entry into the sale contracts. Group - the vendor 7 For overview purposes it suffices to describe CHG as having on 1 March 2004 purchased four hotels from Group.

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Due to the input from MBI Management in determining these normalisations, their significance and the assumptions involved we recommend the normalisations are discussed in detail with MBI Management." [Paragraph 1.4 to be found in PX 3 at 778] The evidence 35 As both parties adduced extensive evidence of what had been said in conversations and meetings leading up to the entry into of the purchase contracts it is necessary to summarise some, but not all, of that evidence. 36 It is easy to become confused as to what is the purpose of the extensive evidence adduced by the respective parties as to these conversations and meetings. To my mind that evidence goes to discerning that which constituted the background facts "known" to both parties consistently with the principles later set out in the judgment. One is looking for the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of contracting. This is because the interpretation of a written contract involves the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of contracting. 37 It has to be acknowledged that several of the persons who gave evidence had difficulties in recalling for certain what it was that had been said in a particular meeting or in a particular conversation on a particular date. Notwithstanding those difficulties evidence was given of the substance of the communication, especially in cross-examination. 38 The findings as to what occurred do not suggest that any particular witness whose recollection is not accepted as correct, did not genuinely believe at the time when the evidence was given that the version of facts was as given. It is a common finding in the Courts that over time witnesses tend sometimes to persuade themselves of a particular version of events [as for example that something had been said] which version of events is ultimately rejected by the Court. That form of rejection of evidence follows a careful examination of all the evidence before the Court, including contemporaneous written materials weighed on the balance of probabilities. This is what occurred in the present proceedings. No witness is found to have deliberately misled the Court. 39 Both senior counsel ultimately acknowledged in final address, that there were very few situations in respect of which critical challenges to the acceptance of particular evidence could be pinpointed. What one really has is versions of fact given on the one hand by the witnesses for CHG and given on the other hand by the witnesses for Group. Not every witness called by a particular party gave consistent evidence to that given by other witnesses called by that party. But the general picture involved a very substantial measure of agreement between witnesses called by CHG as between themselves and witnesses called by Group as between themselves. 40 The most convenient way forward would appear to be:

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Step three · following that exercise to give more precise findings as to a number of particular matters. Mr Bartlett 41 Mr Bartlett had been the Chief Executive Officer of CHG . Whilst involved in the acquisition of particular hotels in Adelaide, the funding for which was eventually provided by the Macquarie Bank, he received information that the hotels the subject of these proceedings may be available for sale. No communicated warranty of accuracy of gross profits 42 Mr Bartlett accepted that Mr Smith could not and did not say to him that Mr Smith was willing to warrant that the gross profit in the weekly KPI summaries and the Ferrier accounts were accurate [transcript 196.10]. This evidence is accepted as reliable. Understanding of Group position re Ferrier's Accounts 43 Mr Bartlett conceded that he had understood that the Club Group were not prepared to stand behind anything in the draft Ferrier Hodgson accounts under the heading of "expenses" this being a matter which the purchaser would have to work out for itself [transcript 174.5 set out in more detail below]. Mr Murdoch Strictly limited retainer of Ernst and Young 44 It is patently clear from Mr Murdoch's evidence and the documents that were created at that time that Ernst & Young was not engaged to perform a full audit of the four hotels. The reason why their due diligence was limited in nature importantly included the fact that they were not given full access to the books and records of the hotels. 45 The result of the due diligence was that Ernst & Young concluded that the "normalised EBITDA" [that is, the EBITDA which had been calculated in the Ferriers' report adjusted by Ernst & Young's due diligence activities] was $9,965,000 per annum. It was this "normalised EBITDA" which was used by Macquarie in determining how much it would be willing to pay for the hotels. 46 In normalising the EBITDA, Ernst & Young took as their starting position the Ferriers' report. They then compared this report against the Weekly KPI Summaries, then the Jetz System Reports.

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Evidence of Mr McMorron 47 Mr James McMorron was a senior consultant with Ernst & Young at the time when the due diligence of the four hotels was being carried out. He attended on site at the hotels and can be accurately described as the senior Ernst & Young person who so attended. Importantly, he was the primary conduit between the hotels and Mr Murdoch. Ferrier report of doubtful validity 48 His evidence, by way of his statement, was that, at the commencement of the due diligence, he was provided with the Ferriers Report. In his evidence he states that he treated this Report as being of doubtful reliability, however, he used it as the starting point from which he would conduct the limited due diligence. KPI, Jetz and Ferrier's report 49 Mr McMorron's evidence was that sometime during the course of the due diligence project, he received weekly KPI summaries in respect of each hotel for the calendar year 2003.. His evidence is that he was told by Mr Smith or Mr Cruger that that the Jetz system contained the most accurate record of sales for the hotels. This is despite Mr McMorron not having been trained/shown how to use the Jetz system by the hotel managers; although he was provided with print-out reports from the Jetz system. 50 Accordingly, on Mr McMorron's evidence, he was provided with three documents, the Ferriers Report, the Weekly KPI Summaries and a Jetz Report with which he was to conduct the limited due diligence exercise. Only limited access was given to the Jetz system, and Mr McMorron's evidence was that it was represented to him that, outside of the general ledger, the KPI summaries gave the most accurate picture of the hotel business. Promotional " Give-aways" 51 With regard to the issue concerning whether or not promotional give-aways were included in sales, Mr McMorron's evidence is that it was not a part of the scope of work which Ernst & Young was engaged to perform to determine this issue one way or the other. Stock Adjustments 52 With regard to the issue concerning whether or not stock adjustments were included in the gross profit percentages, Mr McMorron's evidence is that he had requested information on the gross profit percentage of the hotels from Mr Cruger, and that in light of previous discussions regarding the treatment of stock adjustments in the JETZ system, he had assumed that the gross profit percentage took account of such adjustments. In other words, Mr McMorron's evidence is that he was not told one way or the other as to whether or not the gross profit percentage included stock adjustments, although he assumed it to be the case in light of the previous discussion he had participated in. Mr Russell 53 Mr David Russell was an associate director in Macquarie Bank at the time that the transaction, the subject of these proceedings, was being negotiated and completed. He worked in the investment banking division which was, for want of a better description, the division of the bank which was responsible for discovering new investment opportunities for the bank and performing the requisite work such that the bank could take advantage of those opportunities. Lack of responsibility for drafting clauses in contracts 54 Mr Russell's evidence disclosed that, on the Macquarie Bank side, no single person was responsible for approving its investment in the hotels; nor was any single person responsible for the drafting of the ultimate contract for sale entered into between it and the plaintiffs. 55 His evidence included:

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Evidence of Mr Cruger 68 Mr Cruger was the Group Financial Controller for the Sahben Group of companies which included Club Hotels Operations Pty Ltd and Club Hotels Group Pty Ltd which he collectively referred to as "Club Hotels". He had been the Group financial controller for Club Hotels since June 1998. Systems/requests for information 69 During the course of the due diligence he received numerous requests for information from the due diligence team normally through Mr McMorron seeking the provision of particular reports or documents or information. He had actually personally been primarily responsible for designing and implementing the financial management systems and business records for Club Hotels. He gave very detailed evidence of those systems which included: · detail of the process of recording financial data; · detail of the manner in which the sales aspect of the business involved all sales being operated through the tills which were linked to a computer server within each hotel known as the Jetz server [a software package which operated such that no sales could be processed within any of the hotels unless entered into an electronic till, that is to say no sale could be processed unless recorded in the Jetz data base]; · a detailed description of the functions performed by the respective duty managers leading to the building up of the daily trading sheets; · a detailed description of those daily trading sheets and of each item within the sheets; · a detailed description of the phrases and figures to be found on the cash summary reports; · a description of the data files which were the source of information contained in the weekly KPI figures. The Ernst and Young testing 70 In his first statement he gave evidence that in February 2004 Ernst and Young performed sample testing of the daily and weekly trading sheets choosing the week ending 26 October 2000 for Wattle Grove and Leumeah and the week ending 24 August 2003 for Campbelltown and Mt Annan. Trading sheets 71 He recalled providing to Mr McMorron the weekly trading sheets and related trading sheets and petty cash reports for those periods. GP percent 72 He also gave evidence concerning the "GP percent" figures recorded in the daily trading sheets. He had understood 'GP percent' as meaning the gross profit percent, a term which he used to describe the gross profit of each sale by taking into account the price paid by Club Hotels for the item and the price the item was sold for to the customer. He had always known the phrase as referring to the gross margin per cent for each item sold. He also gave detailed evidence concerning the stock take process. KPI figures 73 He also gave detailed evidence as to the KPI figures which were annexed to each of the sale contracts for the four hotels to compare them with the corresponding data in the Jetz system.

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"I provided the weekly and the daily trading sheets, petty cash vouchers, petty cash summaries and bank statements for the weeks requested by Mr McMorron. Exhibited to me and marked 'GC1' are copies of the weekly and the daily trading sheets, petty cash vouchers, petty cash summaries, bank statements and associated documents for the week ending to November 2003 which I provided to Mr McMorron. 75 Under cross-examination it eventuated that at the time he signed his statement he had not had the two volume exhibit GC1 in front of him at all. Nor had he himself put together the documents which now appear in those volumes. Nor had he looked through those volumes since that time. Nor was he even aware at the time he gave evidence, unless he would look through the documents, whether the two folders were or were not a complete set of the documents which he gave to Mr McMorron. 76 Whilst none of this appeared to augur well for the reliability of his evidence, the matter was satisfactorily clarified in re-examination when he identified three bundles of original material representing daily trading sheets to which were attached the particular vouchers which had been kept under his own supervision. His evidence was that when he provided materials to Mr McMorron for the weeks requested, he had handed over the original daily trading sheets. In the case of the weekly and petty cash summaries and bank statements he had opened up the relevant files on his computer and printed the documents off for Mr McMorron. Before he signed the statement he had sent in to Bruce and Stuart, all of the daily trading sheets and supporting vouchers as bundles. Although he did not have the folders at the time he signed the statement and gave evidence that he could not presently recall precisely for which weeks he had given to Mr McMorron the daily trading sheets and the supporting vouchers, he had no doubt at all that he had provided the daily trading sheets and the supporting vouchers to Mr McMorron for certain weeks. This evidence is accepted. 77 In those circumstances his evidence is regarded as reliable, the crucial parameter being what he had actually provided to Mr McMorron. The finding is that he had provided to Mr McMorron the weekly trading sheets and related daily trading sheets and petty cash reports for the weeks ending 26 October 2003 for Wattle Grove and Leumeah and the week ending 24 August 2003 for Campbelltown and Mt Annan. The end result is that the Court finds on the evidence, that it is more likely than not that Mr McMorron was provided with such documents. Proceeding to endeavour to thumbnail sketch evidence given by witnesses against a general chronological background 78 The following chronicle of the evidence given [which includes sundry segments of witnesses written statements] always requires to be monitored in the light of the cross-examination: some of the witnesses evidence given in the written statements did not stand up to cross-examination. Where possible the judgment endeavours to identify these occurrences. 6 January 2004 Evidence of Mr Bartlett 79 Mr Bartlett gave evidence that on 6 January 2004 he met with Mr Ben Smith. On his evidence the conversation was as follows:

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"[69] If the words used [in a written contract] are unambiguous the Court must give effect to them, notwithstanding that the result may appear capricious or unreasonable, and notwithstanding that it may be guessed or suspected that the parties intended something different. The Court has no power to remake or amend a contract for the purpose of avoiding a result which is considered to be inconvenient or unjust. On the other hand, if the language is open to two constructions, that will be preferred which will avoid consequences which appear to be capricious, unreasonable, inconvenient or unjust, 'even though the construction adopted is not the most obvious, or the most grammatically accurate': Australian Broadcasting Commission v Australasian Performing Right Association Ltd (1973) 129 CLR 99 at 109-110 per Gibbs J (as he then was). However, in construing written contracts it should be presumed that the parties did not intend their terms to operate unreasonably. The more unreasonable the result a party's construction would produce, the more unlikely it is that the parties would have intended it. If the parties did intend an unreasonable result, it is essential that that intention be made "abundantly clear": L Schuler AG v Wickman Machine Tool Sales Ltd [1974] AC 235 at 251 per Lord Reid. The meaning to be conveyed to a reasonable person 116 In Maggbury Pty Limited v Hafele Australia Pty Limited (2001) 76 ALJR 246 Gleeson CJ, Gummow and Hayne JJ at 248 [11], quoted with approval Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912-913, to the effect that interpretation of a written contract involves "the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of contracting". [emphasis added] 117 In Investors Compensation Scheme at 912 - 913, it had been said that;

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"[R]eference was made in argument to several decisions of the House of Lords, delivered since Codelfa but without reference to it. Particular reference was made to passages in the speeches of Lord Hoffmann in Investors Compensation Scheme Ltd v West Bromwich Building Society and of Lord Bingham of Cornhill and Lord Hoffmann in Bank of Credit and Commerce International SA v Ali , in which the principles of contractual construction are discussed. It is unnecessary to determine whether their Lordships there took a broader view of the admissible "background" than was taken in Codelfa or, if so, whether those views should be preferred to those of this Court. Until that determination is made by this Court, other Australian courts, if they discern any inconsistency with Codelfa , should continue to follow Codelfa …" [emphasis added] 119 An issue presently before this Court in these proceedings involves whether or not Lord Hoffmann's observations made in Investors Compensation Scheme which had apparently received affirmation in the majority judgment in Maggbury may be followed at first instance. The question involves whether or not this Court can discern any inconsistency between on one hand, the approach to the principles of contractual construction taken in the United Kingdom decisions referred to [in the passage cited from Royal Botanic Gardens], and on the other hand, the decision in Codelfa. 120 I have been unable to discern any such inconsistency insofar as concerns the proposition that the interpretation of a written contract involves the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to a reasonable person in the position of the parties in the situation in which they were at the time of contracting. That was the approach taken in the majority judgement in Maggbury. 121 The material background knowledge which informs the relevant interpretation involves the fact that particular documents had been provided by one party to the other for examination. This parameter was not the subject of the focus given by Mason J in Codelfa. 122 An important consideration concerns the fact that in the instant proceedings Group knew that the material documents had been sent across to Ernst and Young and are taken to have reasonably inferred that the documents would have been duly inspected. 123 None of the above is inconsistent with the decision in Codelfa. 124 Whilst it is unnecessary to approach the issue in terms of constructive knowledge principle, it seems to me to be arguable that in this field of discourse a failure to make inquiries in terms of a proper examination of documents provided by one party to another, [provision of those documents constituting facts known to both parties], may also be analysed in terms of denying to the party who fails to conduct the necessary examination, constructive knowledge of that which was discernible from those documents: cf Consul Development Pty Ltd v DPC Estates Pty Ltd [1975] 132 CLR 373 where Stephen J (at 412) recognized that, in certain classes of cases, negligence in making inquiries may constitute constructive notice. Sophistication of parties 125 I approach the question of construction accepting as part of the background that the parties to the contract can readily be described as sophisticated and experienced, and in the case of Macquarie Bank, a party which was advised by both external and internal accountants.

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(iv) Those mutually known facts, and the wording of the Warranty itself, make clear that what the Plaintiff was warranting was that, as a matter of fact, the "information" contained in the KPI summaries was "true and correct, complete and accurate and not misleading in any respect". The warranty was given "for the period specified" in the KPI document, that is to say for the calendar year 2003. (v) Thus, whatever use the Plaintiff's management may have made of the KPI Summaries, and regardless of the provenance of the information in them and the manner in which they were created, the Plaintiff was promising that, as a matter of fact, the "sales" in the Main Bar, Bottle Shop and Bistro of each hotel for 2003, and the Gross Profit generated by the Main Bar and Bottle Shop for each hotel for 2003, were as is stated in the KPI Summaries." No audit by Ernst & Young 130 I am satisfied from the whole of the evidence that whilst the Ernst & Young report noted that there were some risks in relying upon the KPI figures, it is clear that the report did not purport to perform any audit by which the reliability of those KPI figures were analysed in detail and necessary adjustments made. Macquarie Bank had given no instructions to perform such an audit, nor did Operation/Group believe that any such audit was to take place or had taken place. 131 The evidence clearly established that the Ernst and Young report used the KPI figures in coming to their own conclusions in regard to EBITDA. 132 It must be remembered that the contracts for sale certainly did not in terms, warrant the accuracy of the conclusions of either the Ferriers' report or the Ernst & Young report as to EBITDA. The evidence clearly establishes that the Ernst & Young Report used the KPI figures in coming to their own conclusions in regard to EBITDA. Dealing with the matter 133 In what follows I accept as of substance and adopt the submissions advanced by Mr Foster SC leading counsel appearing for Group. What were the KPI figures? 134 As will appear from what follows, the KPI figures were built up as a management document. They were not 'accounting' documents as would have been Profit and Loss accounts. What was not warranted 135 Group did not warrant that the expressions "Sales" or "GP%" in the Weekly KPI Summaries had any particular meanings. 136 Group clearly did not expressly warrant that the "Sales" figures recorded in the Weekly KPI Summaries did not include promotional, staff and discount meals and beverages and other transactions for which no payment was received or receivable from the customer. 137 Group did not expressly warrant that the "GP%" figures recorded in the Weekly KPI Summaries did take into account stock adjustments made in the ordinary course of business. Group did not give any express warranty that any particular expression in the Weekly KPI Summaries had any particular meaning. What was warranted 138 What Group did warrant was the accuracy of "the information attached as Annexure "K" (Weekly KPI Summaries)". It is significant that the annexure is expressly identified in the warranty as "Weekly KPI Summaries". This makes plain that the parties intentionally annexed that particular document and that the information was being warranted as being accurate as information contained in that particular document. 139 This construction is reinforced by the fact that the coversheet to annexure "K" in each of the contracts is headed "Weekly KPI Summaries". The document annexed is itself headed "Weekly KPI Summary". The word "information" 140 In order to ascertain what is meant by the word "information" in the warranty, the form and terms of Annexure "K" require to be considered. 141 The annexure is described both in the text of the warranty and in the coversheet to the annexure as Weekly KPI Summaries. The expression "Weekly KPI Summary" is not a term of art; does not have an ordinary English meaning; and is peculiar to the business being sold. Evidence was admissible in order to establish what the document is - ie what a "Weekly KPI Summary" is. 142 Included within the body of admissible evidence going to determining the nature of the document, was evidence explaining how it was compiled. Many of the terms used in the document require explanation. "Sales" and "GP%" 143 The two terms germane to the present case ("Sales" and "GP%") have different meanings depending on the context in which they are used. 144 Hence, regard must be had to the background knowledge which the parties had as to the Weekly KPI Summary to properly construe the warranty. The finding is that CHG knew at least the following matters about the Weekly KPI Summaries:

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iv. CHG knew that, in respect of the "GP%" figures recorded in the Weekly KPI Summaries, those figures were entered into the Weekly KPI Summaries each week by Mr Buffier from corresponding figures appearing in weekly trading sheets prepared by the managers of the respective hotels, which figures were ultimately derived from and calculated by the Jetz point of sale system (Smith, 1 Aril 2005, para 8, 9, 11). 145 The finding is that CHG knew that, in respect of the figures for "Sales" and "GP%", the Weekly KPI Summaries recorded Key Performance Indicators produced as a result of following a particular accounting process and as ultimately derived from and calculated by the Jetz system. 146 As the parties to the contracts both knew these background facts about the Weekly KPI Summaries, by warranting the accuracy of the information in the Weekly KPI Summaries, Group relevantly warranted that the information in the Weekly KPI Summaries accurately recorded the Key Performance Indicators produced week by week during 2003 in accordance with its usual accounting processes. 147 Group did not warrant that if some external accounting standard was applied to the information in the Weekly KPI Summaries, then that information was true and accurate. Rather, Group warranted that the information contained in the Weekly KPI Summaries was accurate as a record of the Key Performance Indicators produced within the system operated by the Cross-Defendants. 148 Group did not warrant that the true earnings of the business for 2003 or the EBITDA of the business for 2003 was any particular figure. Nor did they warrant that the GP% for the business was any particular figure. 149 Hence, by warranting that the information in the Weekly KPI Summary was true and correct, complete and accurate and not misleading, Group was relevantly warranting that the "Sales" and "GP%" figures - as Key Performance Indicators recorded in accordance with the usual accounting processes and ultimately calculated by the Jetz system - were true and correct, complete and accurate and not misleading.

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Finding as to what was warranted 150 The defendant's proposition that it was appropriate to treat the word "sales" appearing in the KPI figures in the same way as one would have treated that word had the warranty been concerned with conventional profit and loss accounts, is rejected. [cf Gower cross examination [transcript 429.45] 151 Hence a proper understanding of the very precise manner in which the hotel business operations had been fed into the KPI figures would seem to have been essential if reliance was to be placed upon those figures. 152 The finding is that for the above reasons there has been no breach of the warranty. Alternative Finding 153 The following section deals with the circumstance that my approach to the question as to how one should interpret the KPI Summaries is incorrect. In other words, what would be the result in the event that the correct approach is to read the KPI Summaries independently of what was specifically said or communicated by each party to the other in the time leading up to the eventual signing of the contract. Sales 154 Even if one is able to accept (without more) that both parties knew that the KPI document was a tool for internal management, there is no firm indication that the term sales or GP% should be interpreted in one way or another. 155 The experts agree that there is no prescribed meaning of the term "sale" in the Australian Accounting Standards. There are definitions of the terms "sales revenue" and "revenue from sales", although these terms were not used in the KPI summaries. That the Australian Accounting Standards do not prescribe a definition of the term "sales" suggests that there is no agreed industry usage of this term. 156 The experts, Ms Lindsay and Mr Gower approach the question from different bases. Ms Lindsay asked what a reasonable person (who is involved in preparing and using financial documents) would take the terms "sales" to mean; whereas Mr Gower asks what an accountant would take the term "sales" to mean. 157 In my view, the correct approach is to ask what a reasonable person (who is involved in preparing and using financial documents) would take the terms "sales" to mean. The parties to the contract can readily be described as sophisticated and experienced, and in the case of Macquarie Bank, a party which was advised by both external and internal accountants. 158 It is the recognition of what the KPI Summaries were intended to achieve (that is to be a tool by which the management of the hotels could run the business) by which the Court can determine what the term "sales" objectively means. 159 The KPI Summaries are divided into the different businesses of the hotels, relevantly, the Main Bar, Bottle Shop and Bistro. The issue regarding promotional give-aways affects these three areas of the business. The KPI Summaries list, for each area of the business, "Sales" and "Gross Profits percentage". It is agreed between the experts that the gross profit percentage is calculated by:

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"Sales" less" Cost of Sales" x 100 "Sales" 160 As described by Mr Gower in his evidence, there is no difference in absolute terms between the method which he proposes and the method which Ms Lindsay proposes. It is convenient to set out the methods which each proposes by way of an example showing a two-for-one promotion assuming that the retail price of a steak is $15, it was purchased by the business for $6 (that is the raw piece of meat): · Mr Gower's approach The customer pays $15 which is recorded as a sale. The business loses two steaks, recorded as a $12 cost of goods sold. The net effect is a $3 profit. [$15 sale less $12 cost of goods]. · Ms Lindsay's approach The customer pays $15, but a sale of $30 is recorded being the retail value of two steaks. The cost of goods sold is $12, being the purchase price of the two steaks. A promotional expense of $15 is also recorded representing the fact that the retail price of one steak was not actually paid by the customer. The net effect is a $3 profit [$30 sale less $12 cost of goods sold less $15 promotion] 161 Clearly, as the example shows, the absolute difference is the same. However, the relative difference (that is, the gross profit margin) is not the same. Under the Gower approach, the gross profit margin is 20% whereas under the Lindsay approach the gross profit margin 60%. 162 Ms Lindsay discloses in her report that the components of the gross profit margin percentage are largely dependent on the "source of the underlying data, the context in which the resultant GP% appears and the purpose of the document in which it appears." There is nothing in the KPI summaries to suggest that anything apart from sales and cost of goods sold was taken into account in determining the gross profit percentage margin. Significantly, there is no line item that describes the promotional expenses of the business. And Mr Gower's expert report at Annexure J appears to show that no other factor is taken into account in determining the gross profit margin percentage in the KPI summaries. 163 Seen in this light, it might be said that the GP% under the Gower model is representative of a different outcome than the Lindsay model. Under the Lindsay model, the GP% represents the gross margin at which the goods are marketed to the public. Under the Gower model, the GP% represents the gross margin that is actually achieved by the business. A bare reading of Annexure K does not disclose which of these two outcomes the GP% represents as it is not disclosed whether the Gower approach or the Lindsay approach is adopted when the "sales" figure was formulated. However, understanding the differences between the GP% in the two approaches sheds light on how an objective reading of the term "sales" was intended to be used. 164 In my view, based on the known purpose of the KPI summaries as a management tool, the Gower approach is preferred in accounting for promotional give-aways, and as such, these give-aways should not have been included in the "sales" figure. 165 This is largely because of the lack of disclosure in the KPI summary regarding "promotional expenses". As such, a reader of the KPI summary would not be made aware that the "sales" figure included monetary amounts which were not actually received. The fact that "promotional expenses" are not shown in the KPI summaries (nor were they warranted under the Sale Contracts) also leads to that conclusion that, if one adopts the Lindsay approach, the utility of the KPI summaries as a management tool is drastically diminished. Otherwise management would not know if the sales figure actually represented goods paid for, or goods given-away. Gross Profit Percentage 166 Although both experts clearly agreed on how gross profit is calculated, they did not express an opinion as to what amounts should be included in the "costs" side of the formula. Ms Lindsay states that the only cost to be taken into account is the actual cost to the business of purchasing the product. Mr Gower states that the costs to be taken into account is the purchasing cost plus costs associated with stock losses. 167 In light of the above finding, on the alternate ground, that the objective reading of the term sales (divorced from what the parties may have communicated with one another) is that it does not include give-aways, the finding in regard to the gross profit percentage must necessarily be that which Ms Lindsay has put forward. 168 For the same reason that the term "sales" should not be read so as to include give-aways because there is no discrete disclosure in the KPI summary as to what the value of these give-aways are; so the gross-profit figure should not be read as including stock adjustments, where there is no otherwise indication that such stock adjustments have been included. 169 Moreover, the use of the term "gross" as opposed to using no qualifying term or the term "net", to my mind, strongly suggests that what is being shown is the surplus that is being realised by the business in the sale of the product, ignoring all other costs involved in the actual sale of the product. That is, the term "gross" suggests that only invoiced costs are taken into account. An otherwise reading of this phrase to include costs associated with stock losses would result in the reader of the KPI Summary being unaware of whether other costs (above the invoiced costs) were being taken into account. What comes immediately to mind are the costs associated with the performing of stock-takes and other revaluations of stock which result, for example, from increases/decreases or the writing off of stock. 170 During the due diligence process, Mr Buffier took Mr McMorron through an actual example of calculating the GP% figure from the figures in the Jetz system and comparing it to the result calculated by the Jetz system. In the course of performing that calculation, Mr Buffier showed Mr McMorron that the Jetz system calculated GP% on each individual item by using the invoiced cost of that item as the cost of goods sold. Mr Buffier then explained that the "GP% figure listed on the trading sheets and the KPI are just an aggregation of the gross margin on all the products sold during any given week. So to answer your question, that is where it comes from." (Buffier, 21 October 2004, para 13). 171 That explanation made plain that the "GP%" figures in the Weekly KPI Summaries did not involve calculating cost of goods sold by reference to opening stock or any stock adjustments. Mr McMorron stated that "inasmuch as the [Buffier] affidavit refers to E&Y's work and my conversations with Jason Buffier, I would not disagree with its contents" (Ex D6, para 22). 172 Further, Mr Green explained and demonstrated the operation of the Jetz system to Mr McMorron and Mr Bartlett (Green, 1 November 2004, para 4-20), including the fact that ".. The system reports to you a GP percent figure for any period which you select. The system calculates on the sale of each item a gross profit margin by taking the sale price of the item, less the purchase cost for the item on the assumption that stock is sold on the "first in, first-out" basis." (Green, 1 November 2004, para 16). Mr McMorron confirms that he attended the meeting and says that his recollection of the meeting accords with Mr Green's (Ex D6, para 23). 173 Hence I accept that taking into account what was explained directly and expressly to the accountants acting for Macquarie Bank and to Mr Bartlett, a reasonable person in the position of Macquarie Bank would have understood that the "GP%" figures in the Weekly KPI Summaries did not take into account stock loss adjustments.

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"I don't care how you work your price out. Our price is X and that's that". [transcript p.203 at line 39-43] 175 Mr Bartlett then went on to accept the propositions: · that as far as Mr Bartlett was concerned Mr Smith was not interested in multiples or EBITDA but was just interested in the price [transcript 203.52]; · that Mr Bartlett did not himself know whether whatever was said about price and multiples by Macquarie Bank personnel was genuinely their position [his evidence was that he never knew what they were thinking] [transcript 204.5]; · that it would not have surprised Mr Bartlett if the negotiations by Macquarie Bank included its making observations about multiples and EBITDA simply in order to 'chisel' the price down [transcript 205.26]. Finding 176 In my view the evidence establishes that the price negotiations, at least in so far as the Group were concerned, did not purport to be conducted as an arrangement that a set formula was to be complied with. This shows that, at the very least, both parties were conducting their negotiations with different principles in mind. The parties did not reach any consensus tying the ultimate purchase price to a formula under which the earnings multiplier was static. 177 This finding rejects the foundational underpinning of CHG's case. The arms length nature of the negotiations, the limited access provided to CHG in terms of financial records, the nature of the limited due diligence conducted by Ernst and Young, the detail of the evidence accepted as reliable as to the anterior communications and the actual terms of the express warranty combine to mandate this finding which is reached on the balance of possibilities. 178 The evidence that the plaintiffs were aware, at the very least, of the method by which Macquarie Bank said it was determining what it would offer for the hotels, does not alter this finding. Damages 179 Bearing in mind the above findings it is strictly unnecessary to deal with damages. I propose however to examine how CHG put its case and to briefly treat with what I regard as the misconceptions which underpin that case as presented. CHG's case as presented 180 CHG's cross claim, in regard to the Annexure K and the KPI figures, is that by reason of the plaintiffs breach of warranty, it paid too much for the four hotels. The argument proceeds along the following line: · first, the purchase price was determined by a certain formula [this formula being known by Group]; · the formula was comprised of one variable and one constant; · the variable was the EBITDA for the four hotels; · the constant was an earnings multiplier; · the EBITDA was a variable because its value was determined by the actual financial performance of the hotels; · the earnings multiplier was a constant because it was an arbitrary figure determined by the purchaser according to its own financial needs and did not vary according to the value of the EBITDA; · because Group overstated the EBITDA, this flowed on, through the formula, such that the purchase price was also overstated; · accordingly, the loss to CHG is the difference between the purchase price actually paid, and that which ought to have been paid under the formula. 181 In final address [transcript 750] Mr Stevenson put the following particular submissions: · Damages are the difference between the value of the hotels as warranted and their true value to the Defendant. The test includes an element of subjectivity: the issue is as to the Defendant's loss. · Prima facie, the value of the hotels as warranted is the purchase price of $73 million. That prima facie position should be accepted as the fact in this case. · As to the value of the hotels to the Defendant: (a) Macquarie, as promoter of the Defendant, made an indicative offer of $74.5 million for the hotels. (b) That indicative offer was made on the assumption that the EBITDA for the hotels was $10.43 million and that it would achieve a 14% yield. (c) The purpose of the Ernst & Young due diligence was to test the assumption as to EBITDA. (d) On the basis that the KPI figures were true, Ernst & Young determined that the "normalised" EBITDA was $9.965 million. (e) On the basis of Ernst & Young's determination, Macquarie assumed that the EBITA for the hotels was $9.956 million. (f) On that basis Macquarie negotiated an "adjustment" of the price from the indicative offer of $74.5 million to $73 million. (g) Macquarie thus purchased the hotels on the basis of a 13.65% yield on EBITDA (or 7.326 multiple) (rather than the 14% yield (or 7.1428 multiple) originally sought). (h) If the Ernst & Young methodology for assessing EBITDA had been applied using the true KPI figures for sales and GP%, have a lower EBITDA would have been produced, as calculated by Gower. (i) Macquarie would have sought a price adjustment on the basis of that lower EBITDA. (j) The Defendant's loss should be assessed by applying the 13.65% yield in fact obtained in negotiation with the Plaintiff to the shortfall in the EBITDA. That involves calculating the damages on the same basis as the price was calculated. (k) On that basis the Defendant's loss is $3.432million (Gower Scenario 1) or $2.6192 million (Gower Scenario 13). The principles 182 The basic rule is that stated in Hadley v Baxendale (1854) 156 ER 145 at 151:

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"…if he has suffered no loss, has sometimes happens, he can recover no more than nominal damages…." 187 The Court of Appeal then (at [32]) referred to the assessment of damages as being subjective in the sense that the loss is loss sustained by the actual plaintiff, not some hypothetical plaintiff. 188 The primary and well established measure of damages for breach of warranty are such sum as will put the plaintiff in the position in which it would have been if the warranty were correct: an immediate measure of damages being the difference between the price paid for that which is purchased and the true value of that which is purchased at the time: EW Blanch Pty Ltd v Cooper [2005] NSWCA 217 per Giles JA (at [118]). 189 Hence absent an appropriate factual matrix which demonstrates the propriety of moving away from the conventional measure of damages for breach of warranty, that measure of damages will be the difference (if any) between the value of the assets sold as warranted and their market or actual value in fact. 190 I accept that there could be a case where, for example, the value to a purchaser of the asset being purchased was dependent upon synergies associated with the purchaser's existing other business interests: cf Eastgate v Lindsay Morden [2001] Lloyd's Law Reports 511 (at [33]). In that sense the loss may be described as loss sustained by the actual plaintiff, not some hypothetical plaintiff. However notwithstanding the attempts by CHG to establish a case to this effect, no such case was made out. CHG's case on damages would have failed 191 The short position is that CHG's case on damages would have failed by reason of the finding that the price negotiations were not conducted in terms of any consensus tying the ultimate purchase price to a formula under which the earnings multiplier was static. The finding rejecting the foundational underpinning of CHG's case has already been set out. At the very least, both parties were conducting their negotiations with different principles in mind. The finding is not affected by the evidence that the plaintiffs were aware, at the very least, of the method by which Macquarie Bank said it was determining what it would offer for the hotels. 192 However there are other answers to CHG's case on damages. In the circumstances these can be dealt with fairly shortly. In what follows the submissions of Group are generally accepted and adopted. Causation 193 Principally, the alternate ground on which CHG fails concerns causation. The search is to determine whether or not the loss claimed resulted from the breach as found. This is because where there is found to be a breach of contract and a loss suffered, the latter is not necessarily caused by the earlier: cf the fallacy post hoc ergo procter hoc - "a thing which follows another is therefore caused by it". 194 On CHG's case, the loss which is claimed to have been suffered is directly referable, to the EBITDA figures which were presented in the Ernst & Young due diligence report. CHG's case, it should be remembered, is that the sale price which was agreed upon was the product of a mathematical calculation, the two integers being the EBITDA figure and an independent number representing the yield to be made on the investment. 195 The breach which it has put forward was the misstatement of the sales and GP% figures in the KPI summary document. 196 The causation issue looks at, first, whether the mis-statement in the KPI figures led to the EBITDA figures in the Ernst & Young due diligence report being incorrect; and if so, whether this incorrect EBITDA figure led to CHG paying too much for its investment as alleged. 197 Although Mr Murdoch and Mr McMorron of Ernst & Young gave evidence, it was never actually put to them whether the EBITDA conclusion, which they set out in their due diligence report, would have been different had they been aware of the true sales and gross profit percentage figures. However, the appropriate inference to be drawn from the due diligence report itself read in the light of the evidence accepted as reliable is, that a change in the KPI figures would more likely than not have led to a change in the Ernst & Young calculations and accordingly its EBITDA conclusion. 198 This inference is drawn for two reasons. First, evidence accepted as reliable was given to the effect that the KPI figures were more reliable that the Ferrier Hodgson report, and/or that the KPI documents represented the information from which the continued business was run. Secondly, the due diligence report itself states that the process by which Ernst & Young conducted its due diligence was to "compar(e) revenue, gross margin (excluding bistro) and gross salaries and wages) [sic] included in the Ferrier Hodgson abridged financial information to week-by-week KPI Reports (represented to be "actual" results for 2003) and where available certain underlying business systems and supporting information". These reasons strongly suggest that where the Ferrier Hodgson report and the KPI documents presented different results, Ernst & Young preferred the KPI documents. 199 The second step in treating with the causation issue is to discover whether a change in the EBITDA figure, as found by Ernst & Young, would on the balance of probabilities have resulted in a change to the purchase price ultimately agreed upon. 200 Several hurdles stand in the way of CHG establishing an answer to this question in its favour. First, although the purchase price negotiations took account of the past EBITDA of the hotels, it also took projected EBITDA into account (as demonstrated by the several Macquarie Bank internal reports). Moreover, it appears that whilst the EBITDA figures changed in the Macquarie Bank internal reports, the purchase price did not. That is, the purchase price was not a function of an independent yield multiplier. [See Ex P17 and 21]. Indeed, some of the multiples disclosed in the different proposition summaries disclose that the earnings multiplier would be greater than that which was ultimately adopted. 201 Macquarie Bank did not treat the EBITDA as a defining factor in negotiating the purchase price, although it did clearly treat the EBITDA as a measure of the appropriateness of its investment. What this evidence suggests is that the earnings multiple/yield was only used as a measure of the appropriateness of the purchase price. 202 Importantly, no objection was taken to the purchase price in any of the proposition summaries on the basis of the EBITDA. Moreover, the final earnings multiple [and the one which results when CHG's true EBITDA is used], falls within the range of earnings multiples disclosed in the numerous proposition summaries. 203 Further evidence, by way of an email, [Ex P18] strongly suggests that Macquarie Bank was using the Ernst & Young due diligence report (and importantly its EBITDA conclusion) to justify to external parties the price it was paying for the hotels. It would indeed be curious to find the purchaser being willing to drag the purchase price upwards: however this is explicable if reference is made to external third parties. 204 In addition to all of this, the result of the parties actual negotiations was a purchase price which represented a yield to Macquarie Bank which was less than the 14% yield. 205 These factors justify a finding that whilst the EBITDA played some role in the parties determining what the purchase price would be, it was not the only factor which was taken into account. I reject CHG's submission that it was the only variable in a formula which determined the ultimate purchase price. 206 The causation issue resembles the question "which came first the chicken or the egg?" However the evidence suggests that the purchase price was determined, and that only then was the multiple determined [as opposed to the converse]. Of course if the multiple were a number that Macquarie Bank considered was too high, it would revisit the purchase price. However, what the proposition summaries show is that what Macquarie Bank had in mind was not any precise multiple figure, but rather a range in which the multiple could fall and still be seen as appropriate. The ultimate multiple fell within this range, and the multiple calculated by reference to the EBITDA propounded by CHG also falls within that range. 207 Accordingly, CHG fails to establish that it has suffered any loss which can be legally attributed to a misstatement in the KPI/EBITDA figures. Actual Market Value 208 Finally it is pertinent to note that CHG's proposition can only have validity if the process of applying a multiple to the 2003 EBITDA figure is a legitimate way of determining the true value of these businesses, yet there was simply no evidence that this process is an appropriate way to determine their true value. 209 Even if it be accepted that the method has some validity, there is no evidence that 7.326 was an appropriate multiple to apply to the 2003 EBITDA so as to arrive at a true valuation of the business. Mr Gower expresses no opinion on the appropriateness of the multiple (Ex. D7 para 49). 210 No evidence was led as to what the actual market value of the hotels was. Security expenses 211 There is no substance to CHG's case in this regard. CHG's submissions 212 CHG's submissions in relation to this issue were as follows: · "The Vendors disclosed to CHG prior to the Contracts the existence of a weekly security expense of $3,700 per week. In fact, the true security expense was $9,110 per week. · In the contracts relating to the hotel businesses, Group gave a "promise, representation and warranty" that the Vendor has disclosed to CHG the particulars of each contract material to the property and the business [clause 56.8 of the Purchase Contracts relating to Campbelltown Club Hotel and Mount Annan Club Hotel, and clause 53.8, 48.9 and 47.9 respectively of the Purchase Contracts relating to Leumeah Club Hotel and Wattle Grove Club Hotel]. · The disclosure of a weekly security expense of $3,700, when the actual weekly expense was $9,110 (see Mr Gower's report of 10 June 2005 Ex D7 para 31) constituted a breach of that warranty." Decision 213 The starting point in terms of this question is the actual words of the contract. The relevant term states:

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"see what the circumstances were with reference to which the words were used, and the object appearing from those circumstances, which the person using them had in view": [ Prenn v Simmonds [1971] WLR 1381 at 1384 per Lord Wilberforce] Rejection of Group's foundational submission 242 That exercise results in the rejection of Group's foundational submission that the rights arising out of any breach of the subject warranties given by it in the sale contracts were expressly retained by Macquarie Bank and were not novated to CHG under clause 2 (c) of the novation deeds. CHG's rights against Operations 243 In any event and even if the above approach be incorrect, there is an alternative analysis of substance which however would deal only with CHG's rights against Operations under the guarantee (which in turn is secured by the charge and mortgage). The analysis is as follows: · even if the deed of novation has the meaning contended for by Group and Operations, the deed of guarantee is not dependent upon the warranties being novated to CHG, and so long as CHG paid money or suffered a loss "arising out of or in connection with" any warranty being or becoming false, those monies and/or losses fall within the definition of guaranteed monies in the guarantee. · There is no requirement under the terms of the guarantee that the warranties in the sale contracts be made to CHG, only a requirement that CHG suffers a loss arising out of or in connection with a warranty being or becoming false. · Given that CHG paid the purchase price which had been negotiated based upon the warranties set out in the contract, then CHG would, and warranties been false, have suffered a loss arising out of or in connection with that falsity. · Further, clause 11.11 of the guarantee, which imposes time limits on CHG making a demand on Operations in respect of a breach by Group of the contractual warranties, similarly makes it plain that CHG is entitled to make a demand on Operations under the guarantee in respect of a breach by Group of the warranties in the sale contracts.

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