EG & J Johnson P/L v Zhithel P/L & ors [1996] QCA 266

Court of Appeal (Qld)|1996-08-09|Before: Before Fitzgerald P, Pincus J, Shepherdson J, Fitzgerald P

These appeals and cross-appeals are brought from judgments of a Judge of the Trial Division on 28 July 1995 in actions 104 and 130 of 1992. Both actions related to a sale by the appellant to the respondent (cross-appellant) of the Post Office Hotel, Queen Street, Chillagoe, in May 1988. The dispute centred upon whether Mr E.G. ("Ted") Johnson had made misrepresentations on behalf of the appellant to Mr Arthur Marosvary on behalf of the respondent, which induced the purchase of the hotel at a price in excess of its value. Her Honour found for the respondent, ordered the appellant to pay the respondent damages in the sum of $327,206.00, set aside a bill of mortgage from the respondent to the appellant to secure an unpaid balance of the purchase price and an associated guarantee executed by Mr Marosvary and one Araceli Marosvary, and ordered the appellant to pay the respondent most of its costs of and incidental to both actions, to be taxed.

Mr Marosvary became interested in leasing an hotel on the Atherton Tableland, and a Mr Hodges approached him with a proposal that Mr Hodges would purchase the Post Office Hotel in Chillagoe and lease it to Mr Marosvary. That transaction did not proceed, according to Mr Marosvary because Mr Hodges was unable to obtain necessary finance.

About late March 1988, Mr Johnson initiated discussions with Mr Marosvary concerning a possible sale and purchase of the hotel. Mr Marosvary had insufficient funds to do so, but Mr Johnson offered to accept some property owned by Mr Marosvary in part payment and Mr Marosvary planned to borrow the balance of the purchase price from the Commonwealth Development Bank, probably with the assistance of his solicitor, Ms Pamela Dickinson.

Mr Marosvary had "walked through" the hotel with Mr Hodges during the earlier negotiations and, to quote from the judgment under appeal, again "visited the hotel to inspect it, probably some three to four weeks after his `walk through' with Mr Hodges and possibly in early May 1988, some one to two weeks before the contract to purchase the hotel was executed". The trial judge accepted Mr Marosvary's evidence that, when he and Mr Johnson were walking from the office on the ground floor of the hotel through the servery area of the public bar, he heard someone make the comment, "Who's the idiot buying the white ant heap?" They then walked upstairs to the first floor which contained a manager's flat and about a dozen or so bedrooms, and Mr Marosvary asked Mr Johnson, "What's this about white ants?" Mr Johnson replied, "Arthur, you know when you're trying to sell something, someone always has got something bad to say to it." Mr Johnson then gestured to the walls and ceiling of the room they were in, a bedroom next to the manager's flat, and said, "You think I would have spent all this money if I knew there was white ants in here?" Her Honour accepted Mr Marosvary's evidence in relation to these matters in preference to that given by Mr Johnson, who said that he did not hear any reference to the "white ant heap" when they were walking through the servery area of the public bar, and denied any conversation with Mr Marosvary concerning white ants at any time prior to the signing of the contract.

This and other critical findings in favour of the respondent to which reference will be made were attacked by the appellant on the basis that her Honour "failed to use, or palpably misused, her advantage or acted on evidence which was inconsistent with facts incontrovertibly established by the evidence, or which was glaringly improbable. ... Further, to the extent that additional findings depended on those findings on credibility, such subsequent findings were also relevantly flawed." This general criticism, based upon Devries v. Australian National Railways Commission (1993) 177 C.L.R. 472, was elaborated upon at some length in the appellant's written outline and oral submissions. I do not think it necessary or useful to discuss the detailed criticisms, such as that there were changes in the nature and specifics of the respondent's claim both at the commencement and during the trial, that Mr Marosvary's evidence contained demonstrated errors and inconsistencies, and that amounts which he claimed as referable to the subject matter of his complaint against the appellant were exaggerated; his evidence, it was submitted, showed that he was "evasive, demonstrated a lack of candour and a willingness to tailor his claims (and evidence) to suit the necessity, as well as a lateness of response which was inconsistent with the serious allegations raised." While the appellant's adverse commentary on Mr Marosvary's evidence is not without substance, at least in respect of some of the complaints made, the trial judge's reasons indicate that she was aware of his imperfections but considered that "Mr Johnson was not an impressive witness either", for reasons which she mentioned. In my opinion, while her Honour might well not have been prepared to accept Mr Marosvary's evidence, it cannot be concluded that she was required to reject his evidence and accept the contrary evidence of Mr Johnson, either in relation to the occasion when Mr Marosvary inspected the hotel with Mr Johnson or otherwise. Although I have discussed that occasion separately, her Honour, quite properly, considered the evidence relating to it in the context of other evidence given by Mr Marosvary and Mr Johnson and another witness, Mr Boneham, whose evidence also conflicted with evidence given by Mr Johnson.

While the chronology of events was not clearly established, her Honour was entitled to find, as she did, that, contrary to his evidence, Mr Johnson had prior knowledge that there were white ants in the hotel. Mr Boneham's evidence was that, in 1988, he was a franchised pest controller with Amalgamated Pest Control and serviced clients in the Chillagoe area and that he informed Mr Johnson that he had a termite problem in the hotel. Again, the appellant criticised Mr Boneham's evidence, but with considerably less justification than it had for its criticisms of the evidence of Mr Marosvary. One point taken related to different estimates given by Mr Boneham in relation to the time in 1988 when he told Mr Johnson of the termite problem. However, the precise date is unimportant, since it is apparent that the discussion with Mr Johnson of which Mr Boneham gave evidence occurred prior to the completion of the sale. The discussion between Mr Boneham and Mr Johnson could not have occurred after completion of the contract and possession of the hotel had been delivered by Mr Johnson to Mr Marosvary, and Mr Boneham identified Mr Johnson as the person whom he informed of the termite problem on his first visit to the hotel. Counsel for the appellant accepted that, if in those circumstances Mr Johnson had earlier represented to Mr Marosvary that there were no white ants in the hotel, Mr Johnson would have been obliged to correct his earlier incorrect statement. In any event, it is improbable that Mr Boneham informed Mr Johnson of the termite problem between signature and completion of the contract since the final contract was signed on 17 May 1988, two days prior to completion on 19 May; it is more likely that the conversation between Mr Boneham and Mr Johnson occurred before the contract was signed. Although unnecessary to decide the point, the comment, "Who's the idiot buying the white ant heap" which Mr Marosvary heard when he first inspected the hotel in company with Mr Johnson might well have been made by a person who had earlier heard Mr Boneham tell Mr Johnson of the white ant problem.

In describing what had occurred on that occasion, Mr Boneham said that, while in Chillagoe trying to attract business, he parked his van with the name Amalgamated Pest Control painted on it in bright iridescent green lettering outside the open front doors of the hotel and walked into the hotel wearing his green uniform with "Amalgamated Pest Control" marked on it. Her Honour described the subsequent events as follows:

"As he walked into the hotel, he noticed that the timber on the door frame in the lounge area did not look `right'. He pressed it with his finger which went through the timber, and he noticed active termites inside the wood. He got his drink from the barmaid and asked her who the owner was. She pointed to a man talking to some other people. Mr Boneham identified Mr Johnson in the court room as the person who had been pointed out to him. He said that he introduced himself to Mr Johnson, offered his hand and that he responded by saying that his name was `Ted Johnson'. Mr Boneham then said to Mr Johnson, `Do you know you have a termite problem in your hotel here?' Mr Boneham said that Mr Johnson very gruffly told him to mind his own business and would not talk to him thereafter. Mr Boneham finished his drink and left the hotel."

While satisfied that Mr Johnson had misrepresented to Mr Marosvary that the hotel did not have a white ant problem, the trial judge noted that the question whether Mr Marosvary relied upon Mr Johnson's misrepresentation to enter into the contract was not without difficulty. In dealing with this question, her Honour made a number of findings. For example, speaking of the occasion when Mr Marosvary inspected the hotel in Mr Johnson's company and Mr Johnson in effect said that he would not have spent all the money which he had if there were white ants in the appellant's hotel, her Honour said:

"Mr Marosvary said that he had no experience of white ants and that he believed Mr Johnson when he said he would not have expended money doing up the rooms in the hotel had there been white ants present."

In his evidence, Mr Marosvary was asked what he thought when Mr Johnson indicated that he would not have spent money if there were white ants in the hotel and answered, "Well, I naturally believed him because I didn't know anything about white ants. I've never dealt with `em. I've never had any problem in my life. I didn't know what they are actually." The questions and answers continued:

"Well, he'd answered you with a question, hadn't he? -- Well, he did, yes.

How did that strike you? -- Well, I believed him to be true.

What did you think he was saying to you? -- Well, what he was saying to me that those people whatever they were talking, you know, it was wrong and that he - he's right and I sort of believed him that he wouldn't have spent that kind of money or doing the, you know, doing the rooms up without knowing that there was no white ants in it. So I believed him."

Elsewhere, in cross-examination, the following exchange occurred:

And for the purpose of buying it? -- Yes. But then I relied on my solicitor's advice because I didn't know anything about it. That's when I relied on my solicitor because she told me she had a hotel herself and she knew all about hotels and I relied on my solicitor.

So that was really why you entered into it, was it, because you relied on your solicitor? -- More or less, yes.

You thought she'd know a good thing and you relied on her? -- Well, I relied on her to guide me on it because I've never bought a hotel before, naturally."

There was also an incident shortly before the contract was completed which should be noticed in this context. It is convenient to quote from the judgment under appeal. Her Honour said:

"There is a certain amount of confusion in the evidence leading up to Mr Johnson becoming Mr Marosvary's financier to purchase the hotel. As I have mentioned, it appears that Mr Marosvary had obtained finance in principal from the Commonwealth Development Bank. However, when the Bank became aware of requisitions from the Licensing Commission for work to be done on the hotel close to the time of settlement of the contract I infer either than an inspection on behalf of the Bank would be required or quotations were to be obtained from builders in order to carry out the work ordered. It seems most unlikely that any bank would lend on the purchase of such a property without an inspection, but Mr Marosvary was not led in evidence in respect of these matters and his solicitor, upon whom he said he relied extensively, was not called. Mr Marosvary seems to suggest in his evidence that, although his solicitor was informed of the work order earlier, the first he knew of it was when he had arranged to take a telephone call from an officer of the Development Bank at his solicitor's office a week or so before the contract was due to be signed or settled. Mr Marosvary said that he took the telephone call from the bank officer in one of Miss Dickinson's offices and that Mr Johnson was present. He said that he handed the telephone to Mr Johnson so that he could speak to the bank officer. Shortly after that he left the room to attend upon his solicitor and returned a short time later to hear Mr Johnson say into the telephone, `Nobody's going near my hotel,' and saw Mr Johnson put the telephone down. According to Mr Marosvary Mr Johnson then asked him, `Do you want the bloody hotel or don't you?' and Mr Johnson then `explained' the problem about finance from the Development Bank. Mr Marosvary's evidence did not extend to saying what Mr Johnson in fact `explained' to him. ...

Mr Marosvary was apparently upset at the turn of events and although not stated in the evidence he seems to have understood that the finance was no longer available. He had leased his house in Cairns and had disposed of his businesses. Mr Johnson then offered to finance the purchase himself for two years at 15 percent per annum after which Mr Marosvary could seek to refinance it. Miss Dickinson, Mr Marosvary's solicitor, then commenced drawing up a new contract. There were apparently other crises leading up to the settlement of the contract, including the funds for the stamp duty, but the evidence is insufficient to make anything of it."

In the segment omitted from the passage quoted, her Honour noted Mr Johnson's denial of material aspects of Mr Marosvary's account of the occasion in question. After completing that passage, she went on to discuss Mr Marosvary and Mr Johnson as witnesses, and continued:

"I think it likely that [Mr Johnson] did speak to an officer of the Commonwealth Development Bank in Miss Dickinson's office and made some comment to do with inspecting his hotel overhead (sic) by Mr Marosvary. The leading of this evidence for the [respondent] was plainly to imply that there was something which Mr Johnson wished to hide, but the paucity of the evidence and its inconclusive nature make it unwise to rely on it for that purpose."

It was argued for the appellant that, on the other hand, what occurred on that occasion was a further indication that the respondent was not induced to enter the contract by Mr Johnson's implicit denial of a white ant problem on the earlier occasion when they had inspected the hotel. However, I do not think that the later incident when both were in Miss Dickinson's office and each spoke to the bank officer casts much light on the issue of inducement. There is nothing to indicate that, on that latter occasion, either Mr Marosvary or the bank officer had any concern with respect to a possible white ant problem; on the contrary, the discussion appears to have centred upon Licensing Commission requisitions. Whether or not that was the first time Mr Marosvary learned of those requisitions, the respondent accepted responsibility for satisfying the Licensing Commission requirements in the final contract.

Correctly, in my opinion, her Honour rejected a submission by the appellant that the respondent was alerted to the necessity of major repairs to the hotel (presumably including repairs to the damage caused by the white ants) when he learned of the Licensing Commission requirements. The Licensing Commission requisitions gave no hint of the white ant damage. Further, the trial judge found that Mr Marosvary discussed the Licensing Commission requisitions with Mr Johnson and was told that "a little work" would satisfy the Commission.

The appellant also relied upon events subsequent to the completion of the contract, and in particular contended that, since the respondent continued to make repayments under its mortgage to the appellant until mid-1992, a period of about four years, after discovering the white ant damage soon after entering into possession of the hotel and Mr Marosvary saw Mr Johnson from time to time without commencing an action, it was unlikely that he had relied upon Mr Johnson's misrepresentation. However, in my opinion, it was open for her Honour to accept, as she did, Mr Marosvary's evidence that he told Mr Johnson quite soon after he became aware of the white ants "and, in due course, as the full extent of the work emerged, that he attempted to negotiate some commercial settlement with him. ...". Later, she said that Mr Marosvary continued to see Mr Johnson from time to time for a number of years, to July 1992, and "attempted to reach some agreement with him to adjust the purchase price of the hotel to take account of the loss sustained by his company due to the condition of the hotel. Mr Johnson was not prepared ... to negotiate". The respondent's action, 104 of 1992, was commenced on 15 October 1992.

In finding inducement, the trial judge relied upon the principles stated by Wilson J. in Gould v. Vaggelas (1985) 157 C.L.R. 215 at p. 236. Counsel for the appellant accepted in the course of argument that it was sufficient for the respondent's purposes that Mr Johnson's misrepresentation to Mr Marosvary when they inspected the hotel together reassured him and caused him not to seek advice about the significance of white ants. Her Honour referred to, and obviously accepted, evidence from Mr Marosvary that had he known of the white ants he would not have bought the hotel. That might have been an overstatement, but it would be difficult to escape a conclusion that, at the least, if Mr Marosvary had known of the white ants he would have ascertained their significance and not bought the hotel for the price which he paid, which, on the evidence, was equal to the value of the property in the absence of a white ant problem.

In summary, the trial judge's conclusions "that in making the representation Mr Johnson intended to induce Mr Marosvary to continue with his proposal to purchase the hotel and Mr Marosvary was so induced" were open to her and should be accepted.

The respondent accordingly established the essential matters necessary for it to recover any damages which it suffered, and loss was certainly proved. However, counsel for both parties accepted that the trial judge's assessment of damages was incorrect; each criticised the approach adopted and not only contended that error had been made to the disadvantage of his client, but conceded further error to his client's benefit. In making these observations, it should be remarked that her Honour did not receive adequate assistance from counsel who appeared at the trial. Extreme positions were adopted, neither of which was correct, and each of which omitted to focus upon matters of detail which were important not only to the quantification of the damage but also to the correct approach to be used.

It is convenient to start with a passage from the judgment below which was not questioned. Her Honour said:

"The contract provided that the purchase price for the land and improvements was $360,000 and the business [licence and goodwill] of the hotel was $50,000. The contract further provided that a payment of $30,000 was made by the vendor on behalf of the purchaser to the National Australia Bank in order to release a mortgage. There was no evidence as to what this concerned. The [respondent] paid $140,000 to the [appellant], made up of the house in Cairns valued at $90,000 towards the hotel property and the taxi license valued at $50,000 for the business, and granted a mortgage over the hotel property in favour of the [appellant] to secure the remaining $270,000 plus the further advance of $30,000 and interest. The monthly instalments were to be $3,750 for the first six months on the expiration of which the [respondent] was to pay $30,000 and thereafter the monthly instalments on the remaining $270,000 were $2,250 per month."

(While the business was not owned by the appellant but by an associated company, Chillagoe Hotels Pty Ltd, which was a party to the contract and entitled to the $50,000 paid by the respondent for the business, the litigation has proceeded on the basis that the sale was made by the appellant to the respondent and that payments were made to the appellant by the respondent.)

Although the incident which alerted Mr Marosvary to the white ant problem in the hotel was somewhat startling, there was doubt about the date on which it occurred and a consequential issue concerning the extent of the white ant problem at the time when the contract was entered into and completed. Mr Marosvary first became aware of the white ant problem in the hotel when an employee fell through the floor of the linen room and, on inspection, Mr Marosvary found that the floor was full of live termites. Mr Marosvary contacted Mr Boneham, who had been recommended to him, and asked Mr Boneham to inspect the hotel and treat it for termites. Mr Boneham said that he had not seen such a severe case of termites before. He found active termites in both the front and back of the building, including the ceiling of the dining room, part of the lounge room adjacent to the kitchen and the ceilings of the first floor. He had difficulty finding the nest, but eventually found that it was in the front part of the building and that the termites had been cut off from it by new timber and had moved to the back of the building. Considerable white ant activity was also found in fence posts. Mr Boneham identified the white ants as mastitermes, the biggest and most destructive termite in Australia. Mastitermes are sensitive to light, live under the ground and travel within timber, eating the wood leaving an outer shell which, on a cursory inspection, can look like normal timber. While the termites are active inside wood it usually remains held together by their trails of mud. They are more active in the wet season than in the dry, and after they leave the wood the mud dries out and the wood falls to pieces.

Extensive timber work renovations had been carried out on the hotel in 1986 and 1987. This included work on upstairs bedrooms, the floor outside the kitchen/dining area on the verandah (which Mr Johnson said had been damaged by weather) and an internal stairway had been shifted to a side verandah to open up the bar area. Mr Johnson said that no sign of white ants was detected when that work was done. Further, in 1987, a Mr Don Parsons installed a covered beer garden which was attached to the front of the hotel. It was necessary to attach battens to that side of the hotel fabric, and he saw no signs of white ant activity. Further, he saw no sign of white ant damage in the fence posts associated with the work which he was doing.

According to Mr Marosvary, the employee who fell through the floor in the linen room did so in July or August 1988 and, shortly afterwards, finished working at the hotel. His evidence was that she took two or three days off, returned to work and gave notice. However, according to his wages book, she did not cease employment until 31 October 1988. Mr Boneham's evidence was that, while he was not clear when he returned to the hotel at Mr Marosvary's request, it was perhaps a month or so after his first visit, when he spoke to Mr Johnson, and certainly not six months later. Mr Marosvary paid Amalgamated Pest Control two cheques totalling $1,000; the first, for $600, was dated 24 August 1988 and the second, for $400, was dated 3 October 1988 and related to an invoice dated 14 September 1988. It was open to her Honour to find, as she did, that Mr Boneham started investigating and treating the termites in the hotel in the first half to mid-August 1988. Mr Marosvary therefore must have found the termites within the first three months after the contract was signed and he took possession of the hotel.

Mr Boneham was unable to state how long the termites had been active in the hotel but suggested that activity had occurred in the rear part of the hotel, cut off from their main nest in the front part of the hotel, for three months or more prior to his first conversation with Mr Johnson.

Similarly, the extent of the white ant damage to the hotel at the time of execution or completion of the contract was not established. However, Mr Boneham's evidence demonstrated that there was some white ant damage at least before the contract was completed, and the appellant did not contend that, if it was liable for damages, its liability did not extend to subsequent additional damage which occurred prior to the problem being discovered and treated not long afterwards.

What has been said to this point substantially corresponds with the findings and approach adopted by the trial judge, and supports her conclusion that the appellant is liable to the respondent in damages. However, her Honour fell into error in the quantification of those damages, probably due to the confusion in the evidence, the changes in the relief sought by the respondent from time to time, and the superficial and erroneous approaches adopted by counsel at the trial.

One critical matter which appears to have been overlooked, or at least not given full significance, was that the respondent remained in the hotel, had repairs carried out and traded profitably. Further, there was no suggestion that, but for the white ant problem, the value of the hotel was less than the price paid by the respondent to the appellant. As I have said, neither party sought to support her Honour's approach to the assessment of damages and, accordingly, there is little purpose in discussing her calculation of the respondent's loss in detail. It is more useful to deal with the respondent's present contention, which seeks to take advantage of the trial judge's finding that the value of what the respondent acquired under its contract with the appellant was limited to the value of the land on which the hotel premises were erected, $20,000, plus a further $20,000 for the hotel licence. Accordingly, subject to one qualification, the respondent contended that it should be repaid the aggregate of all sums it had paid to the appellant less the value of what it received under the contract, $40,000, with interest on the amounts which it had overpaid, in some instances at 12% and in other instances at 10%, from the date of payment to the date of judgment. Consistently with these contentions, the respondent also asserted that no further moneys were payable by it in respect of its acquisition of the hotel from the appellant, and that her Honour was correct in setting aside the mortgage and associated guarantee.

The respondent accepted its liability to repay the appellant the sum of $30,000 lent by the appellant to the respondent and repayable under the contract, but contended that it had done so, a proposition disputed by the appellant. The evidence concerning whether or not the sum of $30,000 had been repaid by the respondent to the appellant is unsatisfactory, but her Honour found that it had been repaid and, in my opinion, that conclusion was open to her, especially since the appellant did not sue the respondent for that amount in the action which it commenced against the respondent and the guarantors, No. 130 of 1992, in which it claimed the balance outstanding under the contract and associated security documents.

The foundation of the respondent's damages claim was that it had paid approximately $75,000 to repair damage caused by the white ants and, according to a quantity surveyor who inspected the hotel in 1994, further repairs necessary to remedy the remaining damage caused by the white ants would cost a similar sum. Thus, it was said by the respondent, that the total damage caused by the white ants necessitated repairs costing approximately $150,000. If that were correct, then an award of that amount, with an appropriate component for interest, would, in the absence of other circumstances, be justified; the value of the hotel at the time of sale would be broadly equivalent to the price agreed to be paid less the cost of repairs where, as here, it was accepted that the value and the price would have been equivalent if the repairs had been unnecessary.

The trial judge also accepted the respondent's claim that it had been forced to borrow part of the amount needed to pay for repairs. Her Honour said:

"The [respondent] has claimed damages additional to the difference between the real value of the property and what [it] paid for it, namely the cost of borrowing money ($58,000) in 1990 from the bank to finance rectification work. Payments were then continuing under the mortgage. This seems to be a loss which flows directly from the misrepresentation and which would not have been taken into account in valuing the property. The amounts are set out in ex.3, p. 6. To the sum of $40,788.30 is to be added continuing interest at a rate of $183 per week from 1 November 1993 to date being approximately $15,900."

While her Honour's conclusion that the appellant was entitled to be reimbursed for interest which it had to pay on the borrowed money was not challenged in this Court, the figure which was arrived at and utilised by her Honour in her calculation of the respondent's damages, $56,688.30, (the 30 cents was omitted in the calculation) was conceded to be incorrect.

Further, the figure of $75,000 claimed by the respondent for repairs already carried out was plainly excessive. So much was conceded by the respondent before this Court, where at the hearing it substituted a figure of $52,000 for the $75,000 asserted at the trial. According to the appellant, the respondent had not even proved that lesser amount, and one of the matters relied upon in its attack on the credibility of Mr Marosvary was that he had deliberately exaggerated the amounts so far spent on repairing white ant damage. Although (as I have said) I do not consider that Mr Marosvary's evidence on this aspect of the matter taken with other criticisms of his evidence required the trial judge to reject it, there is substance in the appellant's allegation that Mr Marosvary overstated what he had paid to repair the white ant damage. Given that Mr Marosvary did not become aware of the termite problem until July or August 1988 and, as her Honour found, Mr Boneham did not commence to investigate the problem and treat it until early to mid-August, it is difficult to credit Mr Marosvary's claim that expenditures which he had made prior to that time related to repairs necessitated by white ant damage. Further, the figure of $75,000 (at the trial) or $52,000 (at the hearing in this Court) was based upon records maintained by Mr Marosvary which, under cross examination, were shown to relate to a variety of matters, including, for example, food, which he claimed was needed to feed the workmen, accommodation at the hotel, which he claimed he was required to supply to the workmen, garbage bags, newspaper, gloves, milk, etc., and, it seems likely, also involved compliance with Licencing Commission requisitions which, under the contract, were the respondent's responsibility.

One consequence of what has been said is that the sum recoverable by the respondent for the cost of repairs would have to be reduced if that were the basis of its claim. However, it was not. The respondent called a valuer who expressed an opinion that the hotel buildings and the business (apart from the hotel licence) were worthless when the contract was signed. He based this opinion on Mr Marosvary's exaggerated claim concerning the cost of repairs of white ant damage already carried out and the quantity surveyor's estimate of the cost of the additional repairs of the remaining damage, which was in turn influenced to a limited extent by information supplied by Mr Marosvary. On the assumption that the damage substantially existed at the time of the contract - which derives a degree of support from Mr Boneham's opinion concerning the likely age of the damage at the rear of the hotel when he inspected it and treated the termites in July/August 1988 - the valuer concluded, and her Honour found, that any purchaser "aware of the extent of the white ant damage at the date of purchase might either not have purchased the property or would have paid a price for the land and liquor licence on the basis that the existing premises would have to be demolished and new premises erected".

It is perhaps sufficient to vitiate that opinion that it was based on an excessive view of the cost of repairs. However, that aside, it was hardly a rational exercise of valuation expertise in the circumstances; the valuer did not question that the value of the building once the damage was repaired would be the price agreed to be paid for it, which was more than double the repair cost, or that, in that event, there was goodwill attached to the business which was worth the agreed price paid for it. The approach adopted is even less explicable when, as the valuer knew, the respondent did not demolish the building but partially repaired it - with the remaining repairs intended - and operated the business profitably, at least until a downturn in tourism in the area for reasons of no present relevance. Indeed, in its final pleading, a set of Amended Further and Better Particulars dated 11 August 1994, the respondent described the "true value of the hotel" at the time of purchase as $217,500 (para. 5(e)). It was only later, presumably after the valuation relied on by the respondent had been obtained, that that figure was dropped to $40,000. I am unable to comprehend how, in these circumstances, the respondent's loss could properly be quantified on the demonstrably false basis that it received nothing of value under the contract except the bare land and the hotel licence.

It follows from the concessions made by both parties that the amount awarded by the trial judge cannot stand, and from what has been said to this point that the respondent's damages are limited to the cost of repairs and that the orders setting aside the mortgage and guarantee must be quashed, at least unless the cost of repairs equals or exceeds the amount still secured which is unpaid. No other basis for setting aside the securities was advanced by the respondent. Indeed, it did not include a claim for the rescission of the securities and its claim for rescission of the contract was abandoned at or prior to trial.

Consideration must also be given to the appellant's claim against the respondent in action 130 of 1992, in which the appellant sought judgment for that amount on the basis that - as appears undisputed - the respondent has not made any payment under the bill of mortgage (and nor has payment been made by the guarantors) since 29 July 1992. In its notice of appeal in that action, the appellant has sought an order for the sum of $292,109.15, together with interest. The source of that figure is unclear, and the matter was not dealt with by the trial judge because she considered it unnecessary to do so having regard to her other conclusions. Whether or not that figure is correct, it is unclear whether the overall result will be a net liability from the respondent to the appellant when the cost of repairs of the damage caused by the white ants, and any associated interest, is deducted from the unpaid balance and interest secured by the bill of mortgage and guarantee, or whether the position, after set-off, will favour the respondent.

The issues which must be resolved in accordance with what has been said were not addressed by the parties in either their written or oral submissions to this Court. The respondent not only sought to maintain the judgments in its favour but to have the damages increased, a course which is plainly at odds with the conclusions reached in this judgment. The appellant, inconsistently with the orders sought in its notices of appeal, sought a new trial in the respondent's action, 104 of 1992, "even if it is limited to the issue of damages", and, in its own action, 130 of 1992, asked for judgment against the respondent "for the amount proved at trial, with interest", without specifying that amount or indicating how it could be identified or calculated.

A final complication to be noted concerns the costs of the actions, most of which the trial judge awarded to the respondent. Her Honour stated:

There are two matters to consider. The conduct of the [respondent's] case was not satisfactory. As I have mentioned two heads of damages were discontinued at trial and the particulars of damage were amended at trial so that items in respect of which cross-examination had been prepared were no longer claimed or in a lesser amount. The quantum of the [respondent's] expenditure had changed many times and the process of simply putting Mr Marosvary in the witness box with the particulars and inviting cross-examination against the known background of the inconsistent documents and disorganised records was quite inappropriate. I am satisfied that as a consequence of this the [appellant] was put to unnecessary and no doubt expensive effort in preparing for trial. The trial was possibly extended by half a day as a result.

The second matter is the commencement of a fresh action by the [appellant] to sue on the mortgage and guarantee. The purpose may have been to force summary judgment. If so it was quite inappropriate given that action No. 104 was on foot."

After providing the parties with an opportunity - apparently not availed of - to submit why she should not do so, the costs orders made were as follows:

"... Order that the [appellant] pay _ of the [respondent's] costs of and incidental to the action to be taxed.

... Order that the [appellant] in action No. 130 of 1992 pay the [respondent's] costs of and incidental to the action to be taxed but not including the costs of preparation for trial and trial which costs are to be taken to have been incurred in action No. 104 of 1992."

Her Honour mentioned only two heads of damage claimed by the respondent which were discontinued at trial, earlier identified as "a claim for damages arising out of an encroachment by the hotel along its frontage into the road reserve said to have been undisclosed" and "a claim for loss of profit incurred during the repair work to the hotel particularly while excavation works were being undertaken and work on the upstairs bedrooms". At least two other allegations in the final version of the Further Amended Further and Better Particulars of the respondent's claim which were not pursued by the respondent, at least in this Court, were those contained in paras. 5(b) and (d), which were as follows:

"(b) Default interest on E.G. & J. Johnson Pty. Ltd. loan. Because of additional financial burdens incurred by the [respondent] on account of ongoing rectification costs, the [respondent] has been compelled to default on an advance from E.G. & J. Johnson Pty. Ltd., the [appellant] in these proceedings. Had the [appellant's] representation (to the effect that the Hotel did not suffer a whiteant problem) been true, the [respondent] would not have been compelled to default on repayments owing on the loan from E.G. & J. Johnson Pty. Ltd. The [respondent], in that event would have continued to make repayments on the loan and would not have incurred default interest. A Schedule setting out the default interest to be claimed is currently being prepared."

"(d) Loss of rental earnings from rooms. On account of severe whiteant damage to floorboards in some upstairs bedrooms accidents involving staff and others falling through the floorboards have occurred. In consequence the [respondent] has been unable to hire out particularly dangerous rooms (No.s 1 and 2). The [respondent] claims for loss of earnings incurred since the closure of those rooms over the part 18 months assessed as follows:-

(i) average daily tariff rate for Rooms 1 and 2 for period 01/01/89 to 01/11/93 - $30.00;

(ii) average number of days per years of lost bookings/hirings 30;

(iii) number of years of lost bookings/hirings - 1.5;

While it is obvious from what has been said that the appeals must be allowed and the cross-appeals dismissed, in each instance with costs to be taxed, this Court is not in a position to make the findings essential to the further orders needed to dispose of the dispute. Regrettably, therefore, the actions must be returned to the trial judge to make further findings required in conformity with these reasons, hearing further evidence for that purpose if appropriate, and to enter judgment in each action accordingly. I agree with the order proposed by Shepherdson J. in relation to the costs of the further hearing.

I have had the advantage of reading the President's reasons. A number of criticisms were made, in argument, of the judge's findings with respect to liability; it was said in particular that her Honour should not have accepted the two critical witnesses for the respondent on this point, Messrs Marosvary and Boneham. Having studied the relevant parts of the record I have come to the conclusion that, although the appellants' arguments have substance, the primary judge was well justified in her findings on this aspect of the case; I have done so substantially for the reasons given by the President.

There remains the question of the relief granted by the primary judge. There were two actions. In that brought by the respondent it ultimately claimed damages only; the judge not only awarded damages but, as well, set aside securities for payment of sums due by the respondent to the appellant. In the other action the appellant claimed sums said to be due under those securities; the judgment given ordered that the appellant's action be dismissed and, again, set aside the securities I have mentioned. It should be added that the orders setting aside the securities had attached to them the expression "unless submissions are made to the contrary within 14 days of receipt of judgment". No such submissions were made. Counsel for the respondent complained of that but did not contend that the appellant was precluded from attacking the making of those orders the claims for which, I reiterate, were not pursued at the trial. Counsel for the respondent emphasised that all he had sought before the primary judge was damages, but the orders the primary judge made setting aside the securities were defended before us and the respondent's counsel argued that subject to certain adjustments, the orders made for damages and otherwise were correct.

It should be noted that what counsel told us about the respondent's claim, as ultimately advanced at the trial, does not completely accord with the state of the pleadings. In the respondent's action, according to the last set of particulars delivered (dated 11 August 1994), various claims for damages were made including rectification costs, loss of earnings and "damages equivalent to the difference between the purchase price paid for the hotel ($410,000.00) and the true value of the hotel ($217,500.00) namely $192,500.00". The claim for rectification costs has not been deleted from the pleading. In the other action, that brought by the appellant, the respondent's defence sets up that the contract for purchase had been rescinded and that the securities I have mentioned "are void and have no effect". We were told, and there is no reason to doubt, that in fact counsel for the respondent abandoned any claim based on rescission. The lack of correspondence between what was ultimately claimed and what was granted by the primary judge may be in part due to the circumstance that appropriate amendments to the pleading were not made, nor was the precise nature of the claim ultimately intended to be put forward on behalf of the respondent ever, so far as appears from the record, reduced to writing.

But apart from the remarkable fact that the respondent's pleading sought damages on the basis of an allegation that the hotel the respondent had bought was worth $217,500 and the judge assessed on the basis that its true value was only $40,000, the main present significance of the form of the pleadings is merely that they help to explain how it was that the relief granted went beyond that which, we are assured by counsel for the respondent, was asked for.

Counsel raised a number of issues about the relief granted, not all of which is it necessary to discuss. One which was not raised deserves mention. The judge awarded damages consisting in the cost of borrowing money to finance rectification work; that amounted to over $40,000, and her Honour allowed additional interest, taking the claim up to the date of judgment to a total of $56,688. Since the claim for the cost of rectification was abandoned, this element in those costs should not have been allowed.

One comes, in my opinion, to two issues; whether the judge's treatment of the valuation evidence was right, and if it was not, what should be done.

The central point of the appeal is the submission that the primary judge should not have accepted the opinion of the valuer, Mr N V Teves. No other valuer was called, but this did not necessarily make the Teves valuation one which the Court was obliged to accept: Ted Brown Quarries Pty Ltd v. General Quarries (Gilston) Pty Ltd (1977) 16 A.L.R. 23 at 36. The valuation report said that the hotel had suffered considerable damage due to white ant infestation, that substantial remedial works had been done, but "it was apparent on inspection that considerable (sic) more work would be required to bring the building up to good serviceable condition". The valuer said that he had been told that "about $70,000 to $75,000 had been expected (sic) on the property by the present owner to partly rectify white ant infestation which has badly damage (sic) the building". We were told by counsel for the respondent that he thought the claim for rectification up to trial was about $52,000; he said in effect that it was initially $75,000, but that was reduced. He explained further that although the rectification claim was not pursued, the issue of the expense of rectification was gone into for the purpose of supporting the valuer's opinion. That purpose was not achieved, not only because the rectification claim was reduced by about $23,000, but because the reduced amount was, it seems clear, not proved.

The primary judge, on this question of the cost of rectification, referred to in her reasons to evidence that the cost of carrying out future work in respect of termite infested parts of the building would be in the vicinity of $75,265; her Honour accepted that figure. Reference was made, in the reasons, to the valuer's statement as to what he was told about the cost of rectification to date; her Honour did not mention the reduction in the amount claimed to have been spent on rectification to which I have referred above, nor make any finding as to what sum had been so spent. There was evidence from the valuer as to the relation between the price of the hotel and its value, assuming there was little to be done by way of rectification; he expected that on that basis the price would be indicative of real value. Counsel for the respondent contended that the price was irrelevant to value, but on this evidence that is incorrect.

The valuer did not say that any wooden building with a substantial amount of termite infestation would be valueless; had he done so, that could hardly have stood with the evidence that it is possible to eradicate the termites and repair the damage they have done. This was the course on which the respondent determined in the present case. Although the valuer did not express his opinion in this way, he must have intended to convey that in this instance the likely cost of complete rectification of the damage done would be so high that no-one would give anything for the building.

One consideration in favour of the valuer's conclusion is that the quantity surveyor called could give no precise estimate of the likely cost of complete rectification; this was so because one could not ascertain the full extent of the damage without a great deal more investigation than was done. A purchaser who intended to use the building would run the risk that the estimate of a cost of future work would turn out to be too low. But it does not appear that the primary judge used that reasoning; her Honour accepted the expert's estimate given for the cost of future rectification work, at a little over $75,000.

I have come to the conclusion that it was not open to the primary judge to accept the valuer's opinion; the figure he gave for past rectification work was overstated, on the concession made by the respondent, and no other figure was found or indeed attempted to be proved in substitution for it. Further, even if the reduced claim of about $52,000 had been established, that would have taken the total cost of repair necessary because of infestation to under $130,000, which may be compared with the sum of $320,000 implicitly ascribed to the value of the building, in repaired condition, by the valuer. The difference is nearly $200,000.

Another way of putting this is to say that, depending on how much of the $52,000 alleged cost of repair of past infestation was proved, the total cost of repair was (adding in the estimate for future repairs) somewhere between 25% and 40% of the value the building would have when repaired. Either percentage would involve a purchaser in a daunting amount of expenditure and one can understand the valuer saying, as he did, that a purchaser would in these circumstances be inclined to "look at other properties instead of buying this one". But if one assumes a purchaser with the financial resources to do the repairs, it seems to me impossible to accept that the building would necessarily been torn down after purchase and the land sold, or put to some other use. As counsel for the appellant before us reiterated, that is not what the respondent purchaser did; at the time of the trial, six years after the purchase, the hotel was still in operation.

I have therefore come to the same conclusion as the President on this point: the valuation of the property sold, attributing no value to the building, must be rejected. It follows that the judge's assessment of damages cannot stand.

I note that the President would remit the matter to the trial judge. I do not favour this course.

The two critical deficiencies in the respondent's damages case below were the irrationality of the valuation which was put forward, and that the evidence of the cost of rectification was very unsatisfactory; as to the latter, the course taken did not, as counsel explained to the trial judge, involve treating the cost of rectification as something which was set out to be proved as a definite figure; the judge was told that: "This tabulation [of rectification costs] has only indirect relevance in that the classical measure of damages being as I've already mentioned. All this does is corroborate what the valuer says". It appears to me that counsel was making a virtue of necessity, because the evidence about rectification costs was, so far as the issue was gone into, not such as to enable the judge to make any more than a guess at the proper figure; one difficulty was that, as Mr Marosvary conceded, there was a great deal of work necessary due to defects unconnected with termite infestation. In my view this Court should not make such a guess. The respondent, having chosen to run its case in a way which was not designed to lead to the establishment of a proper figure for rectification costs, must be bound by the way in which the case was conducted.

But there is no reason to reject the judge's acceptance of the estimate made of future rectification costs by the quantity surveyor Mr Tucker, the amount being $75,265. I would allow that sum as damages, despite the abandonment below of the claim for rectification costs. I omit any amount for rectification already done at the time of Mr Tucker's inspection, for the reason just explained. In the alternative, it might be contended that the sum I have mentioned should be treated as damages in what counsel for the respondent below described as the "classical" measure - i.e. the difference between price and value; the way in which the sum is treated may make a difference, with respect to interest.

I favour this course, rather than giving the respondent an opportunity to reopen its case in order to prove damages, because it is my opinion that the practice is not to give a party which has failed on an issue a new trial, or a reopening of its case, allowing a further attempt to prove its claim.

Two other matters require mention. One is that, as I read the record, there was never any issue about the amount claimed in the second action, by the appellant, except insofar as a set-off was pleaded. I would therefore treat the debt claimed by the appellant as proved. The second issue relates to a sum of $30,000, dealt with in the reasons of the President; I agree with the conclusion there stated, that the finding of the primary judge that the respondent had repaid that sum should not be interfered with.

In summary, I would not return the matter to the trial judge, but would assess damages on the basis that the only amount properly proved in respect of rectification was that mentioned in the evidence of Mr Tucker, $75,265; I have referred above to the two different ways in which that sum could be treated. I would invite the parties to make written submissions to this Court as to the orders which should follow, including of course those with respect to costs, and would allow the appellant 14 days within which to file its submission and the respondent 14 days in which to reply.

I have had the benefit of reading the reasons for judgment of the President and Mr Justice Pincus. I agree with their reasons for allowing the appeals and dismissing the cross appeals. On the future conduct of the matter now before this Court I must say that I have considerable sympathy for the course for which Mr Justice Pincus contends. Quite obviously if the matter of damages is retried the plaintiff is being permitted in effect, to reopen its case. The court's guiding principle in deciding "whether to grant an application for leave to reopen is whether the interests of justice are better served by allowing or rejecting the application as the case may be" Urban Transport Authority v. Nweiser (1992) 28 NSW LR 471 at 478.

The cases show a distinction between those where application for leave to reopen is made before and after judgment. The guiding principle to which I have referred is a broad one. It appears that the New South Wales Court of Appeal in GSA Industries Pty Ltd v. NT Gas Limited (1990) 24 N.S.W. L.R. 710 and the Full Court of the Federal Court of Australia in Federal Commissioner of Taxation v. Brambles Holdings Ltd (1991) 99 A.L.R. 523 have adopted all or part of the following statement by Lord Griffiths in Ketteman v. Hansel Properties (1987) 1 A.C. 189 at p. 220:-

"Whether an amendment should be granted is a matter for the discretion of the trial judge and he should be guided in the exercise of the discretion by his assessment of where justice lies. Many and diverse factors will bear upon the exercise of this discretion. I do not think it possible to enumerate them all or wise to attempt to do so. But justice cannot always be measured in terms of money and in my view a judge is entitled to weigh in the balance the strain the litigation imposes on litigants, particularly if they are personal litigants rather than business corporations, the anxieties occasioned by facing new issues, the raising of false hopes, and the legitimate expectation that the trial will determine the issue one way or the other. Furthermore to allow an amendment before a trial begins is quite different from allowing it at the end of the trial to give an apparently unsuccessful defendant an opportunity to renew the fight on an entirely different defence.

Another factor that a judge must weigh in the balance is the pressure on the courts caused by the great increase in litigation and the consequent necessity that, in the interest of the whole community, legal business should be conducted efficiently. We can no longer afford to show the same indulgence towards the negligent conduct of litigation as was perhaps possible in a more leisured age. There will be cases in which justice will be better served by allowing the consequences of the negligence of the lawyers to fall upon their own heads rather than by allowing an amendment at a very late stage of the proceedings." (The underlining is mine.)

The Brambles Holdings case was a revenue matter but it is worth recording and noting with approval the following remarks of Sheppard J. at pp. 528-9:-

"Lord Griffiths was dealing with a situation different from the present involving as it did the seeking of leave to amend during a trial. But whether an amendment is allowed during a trial, or a new ground of appeal is added during the hearing of an appeal, is a matter within the discretion of the primary judge or the court which hears the appeal as the case may be. Obviously the discretion is a wide one and each case will depend upon its own facts and circumstances. Nevertheless, I would adopt, with respect, what Lord Griffiths has said about the strain that litigation imposes on litigants, anxiety occasioned by the need to face new issues and the legitimate expectation that the trial will determine the issues which have been raised by the pleadings when the hearing commences. I would also respectfully adopt his remarks concerning the pressure on courts caused by the great increase in litigation and the public interest that there is in the business of the courts and of the legal profession being conducted efficiently. The public costs of maintaining the system of courts which this country has is considerable. Those who are privileged to practise before the courts should understand that the days when careless work will usually be overlooked are over. The profession charges high fees for the work which it does. It has a responsibility to see that the work is done well. The day has come when failure to discharge professional obligations efficiently will not be to the account of the community or of the parties but to the account of the profession itself."

In GSA Industries (supra) Samuels J.A. (at p. 715) referred to the second paragraph from Ketteman's case quoted above and went on to say at p. 716:-

"I might interpolate that in that more leisured age an order for costs was generally regarded as complete compensation for delay occasioned either by the grant of an amendment or the grant of an adjournment. However the emollient of an order for costs as a panacea may now be assigned to the Aladdin's cave which Lord Reid rejected as one of the fairy tales in which we no longer believe."

"Justice, procedural justice that is, in the conduct of litigation depends very largely upon establishing and then fulfilling the reasonable expectations of the litigants. Those expectations in turn depend very largely upon the parties' ability to accept that certain things will happen in the times laid down by the court after the parties have had full opportunity to put their points of view."

I would with respect adopt what has been said by Sheppard J. and Samuels J.A.

In Nweiser (supra) Clarke J.A. with whose reasons the other members of the court agreed said (at p. 476):-

"The primary purpose for the rules pursuant to which cases are contested in this State is the furtherance of the interests of justice. For this reason the exercise of the discretion to allow an application to reopen depends essentially upon the trial judge's view as to whether the interests of justice are served better by granting than refusing the application. Of course, there needs to be finality in litigation and a limit upon the number of issues which it is open to the parties to contest at a hearing." (the underlining is mine)

As stated, there needs to be finality in litigation and if this Court were able satisfactorily to assess the damages in this case then I strongly favour the approach taken by Mr Justice Pincus.

However, as the President has pointed out in his reasons the issues which in his view must be resolved in accordance with what the President has said were not addressed by the parties in either their written or oral submissions to this Court.

It is unfortunate that this state of affairs has arisen. It is with some reluctance that I favour on balance the orders proposed by the President. Were this Court to do otherwise it would in my respectful view be denying the parties an opportunity to present their respective cases on damages. However, in my view the trial judge who will be familiar with the conduct of the case before her, should consider whether the respondent - plaintiff has, in the circumstances, been granted an indulgence such that it should bear all or at least part of the costs of the further hearing.

(1992) 28 NSW LR 471

At a glance

Court

Decision date

Before

Source

Judgment (97 paragraphs)

Parties

Cases Cited (1)