Kizbeau Pty Ltd v WG & B Pty Ltd

High Court of Australia|1995-10-11|Before: McHugh JJ, Northrop J, Jenkinson JJ, Davies J, Because Northrop J

High Court of Australia Brennan, Deane, Dawson, Gaudron and McHugh JJ Kizbeau Pty Ltd v WG & B Pty Ltd [1995] HCA 4

The parties to provide this Court with short minutes to give effect to the judgment of the Court. [*]

The Court delivered the following written judgment: -

In an action brought under the Trade Practices Act 1974 Cth (the Act) in the Federal Court, Northrop J held that one of the appellants, Kizbeau Pty Ltd (Kizbeau), had bought a motel business and leasehold relying on a false representation by the first respondent (the owner) that an upstairs portion of the premises could lawfully be used for seminars and conferences. Pursuant to the provisions of ss 52, 82 and 87 of the Act, his Honour awarded damages to Kizbeau. He also varied the terms of the lease. His Honour ordered that an additional clause be inserted in the lease to override a clause providing for the rent to be increased annually by 6 per cent or market value, whichever was the higher. He also ordered that the commencing rent payable under the lease be reduced and that after a specified date the rent should be agreed annually or, failing agreement, should be assessed at market value by a valuer. A majority of the Full Court of the Federal Court (Sweeney and Jenkinson JJ, Davies J dissenting) upheld the award of damages made by Northrop J but deleted that part of his Honour's order that varied the terms of the lease. Davies J would have reduced the damages by $100,000 and reinstated the 6 per cent clause, but he agreed to Northrop J's calculation of rent for the period 8 May 1991 to 15 December 1992.

Because Northrop J awarded damages on the basis that the commencing rent under the lease was to be reduced and there was a doubt whether Sweeney and Jenkinson JJ had intended to set aside that part of the order of Northrop J reducing that rent, this Court granted special leave to appeal against the order of the Full Court. Leave was granted to determine whether Kizbeau was entitled to an increase in the award of damages or, alternatively, to a reduction in the rent payable under the lease. The owner was granted leave to cross-appeal on the ground that, if the commencing rent was reduced, the damages should also be reduced. On the hearing of the appeal, Kizbeau sought special leave to appeal against the order of the Full Court reinstating the 6 per cent minimum annual increase clause and the owner sought special leave to appeal against the finding that it was in breach of s 52 of the Act.

On 28 October 1988, Kizbeau, a company controlled by the second appellants, Mr and Mrs Shiels, bought the owner's motel business for $1,110,000 plus stock at valuation. The purchase price was apportioned as follows: (i) goodwill of the business $986,945 (ii) plant, equipment and chattels $113,055 (iii) stock other than food and liquor $ 10,000 The sale agreement required Kizbeau to lease the motel premises for five years, the commencing rent being $480,000 per annum with annual increases of not less than 6 per cent. The lease, which commenced on 16 December 1988, provided for a series of options which, if exercised, would extend the lease for a further seventeen years. The owner also assigned various chattel leases to Kizbeau which undertook to indemnify the owner in respect of the payments under these leases. The owner's property in the chattels was to pass to Kizbeau on completion of the sale. In addition to the execution of the sale and lease agreements, Mr and Mrs Shiels were required to and did execute an agreement guaranteeing the performance by Kizbeau of its obligations under the lease and sale agreements.

The orders made by Northrop J: damages and variation of the lease

As the result of disputes between the parties, Kizbeau and Mr and Mrs Shiels commenced an action in the Federal Court and claimed relief under ss 52, 82 and 87 of the Act. Northrop J found that, prior to the execution of the sale agreement, the owner had represented that part of the upstairs portion of the motel known as the boardroom and the boardroom annex could lawfully be used for conferences, seminars and similar functions. However, condition (p) of the town planning permit that regulated the use of the motel provided that "all seminars shall be conducted within the breakfast/seminar room", an area that did not include the boardroom or boardroom annex. Accordingly, his Honour held that the owner was in breach of s 52 of the Act which provides, so far as is material, that a "corporation shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive".

Two events subsequent to the sale made the grant of relief for the breach of s 52 much more difficult than would have been the case if those events had not occurred. First, Kizbeau was unaware of the terms of condition (p) for a considerable period and conducted the business until 8 May 1991 as if condition (p) of the town planning permit did not exist. Second, on 27 March 1991, the Local Council amended condition (p) to allow the boardroom and boardroom annex to be used for seminars, conferences and similar functions but added two further conditions. One of them - condition (s) - provided that at any one time no more than fifty persons could attend a seminar in the areas identified in condition (p). Because those areas had the capacity to provide for more than fifty persons, the value of the business as at 8 May 1991 was less than it would have been if conditions (p) and (s) did not exist. Moreover, the evidence established that seminars and conferences regularly attracted more than fifty persons.

Notwithstanding that Northrop J found that Kizbeau had entered into the lease and sale agreement as the result of a serious misrepresentation concerning the use of the premises, his Honour refused to rescind those agreements. He did so because the commercial use of the boardroom and the annex "formed a part only of the total business of the motel" and because Kizbeau had conducted the business until 8 May 1991 without observing the restriction imposed by that condition. However, his Honour thought that Kizbeau was entitled to damages and to orders under s 87 of the Act which varied the rental provisions of the lease.

His Honour accepted the evidence of Mr Young, a valuer, that, on the basis that the boardroom and the annex had no restrictions on their use, the fair value of the business as at 28 October 1988 would have been $1,100,000. The commencing point of that valuation was estimated revenue of $2,200,000 for the 1988 year. By applying an industry average of 45 per cent gross profit on revenue to the estimated revenue of $2,200,000, Mr Young estimated that the gross profit of the business for the 1988 year would have been $990,000. He then deducted the annual rent of $480,000 from the gross profit of $990,000 to leave a net profit of $510,000. Mr Young then applied a capitalisation rate of 30 per cent to the net profit to give a gross value for the business of $1,700,000. After deducting $600,000 for the estimated payout figure of the leased chattels acquired by Kizbeau, he concluded that the fair value of the business as at 28 October 1988 would have been $1,100,000.

His Honour also accepted the evidence of Mr Young as to the value of the business as at 28 October 1988 on the basis that condition (p) prevented the use of the boardroom and the annex. On the assumption that those parts of the premises returned 15.28 per cent of the revenue of the business, Mr Young estimated that the lawful revenue of the business was $1,863,840 which, based on the 45 per cent industry average, provided a hypothetical profit of $838,728 for the year. From this figure, Mr Young deducted an annual rental of $406,690, which represented 21.82 per cent of the estimate of the modified revenue for the year, the same percentage which the rent of $480,000 bore to the revenue of $2,200,000. Mr Young then applied the capitalisation rate of 30 per cent to derive a gross value of $1,440,127 from which he deducted $600,000 for the estimated payout figure for the leased chattels, leaving a value of $840,127. The difference between this value and the value of $1,100,000, based on the unrestricted use of the boardroom and the annex, was $259,873. Northrop J accepted Mr Young's analysis of the figures and, after rounding off the various figures, held that Kizbeau was entitled to damages of $265,000 for the difference between what it paid for the business and its true value as at that date.

His Honour also held that, as the rent should have been $406,690 at the commencement of the lease, it would have been appropriate under normal circumstances to vary the lease to substitute that figure for the sum of $480,000. However until 8 May 1991, Kizbeau had operated the business on the basis that there was no restriction on the use of the boardroom and the annex. Because of this factor, his Honour held that Kizbeau should obtain no refund for the rent paid prior to 8 May, but that the lease should be varied to provide that as at that date the rent should be the market rent and that there should be reviews of the rent as at 16 December of each year. If the parties failed to reach agreement, the rent should be determined in accordance with market conditions by a valuer. His Honour also varied the lease so as to eliminate the effect of the clause that provided that the rent should be increased each year by not less than 6 per cent.

In the Full Court, Sweeney and Jenkinson JJ upheld the award of damages made by Northrop J. But they ordered "that the orders under appeal providing for variation of the lease be set aside". It may be that their Honours only intended to vary that part of the orders of Northrop J that overrode the effect of the 6 per cent clause. Two matters point to that conclusion. First, so far as their reasons for judgment deal with the variation of the lease, they deal only with the 6 per cent clause. The reasons of their Honours do not expressly discuss the analysis that led Northrop J to conclude that, as from 8 May 1991, the rent should be reduced to market rent. Second, their Honours upheld the award of damages made by Northrop J saying that his Honour "was entitled to accept the evidence of Mr Young and to base his reasoning upon that evidence" and that they could "discern no error in the conclusions which he drew from it". The conclusion to be drawn from these statements and the orders made by their Honours is clear: the learned judges either overlooked that Northrop J had awarded the damages on the basis that as at the date of purchase the fair market rent of the premises was $406,690 and not $480,000 or they did not intend to interfere with his Honour's orders reducing the rent to the fair market value. Whatever be the correct explanation of their Honours' order, it appeared to this Court on the special leave application that there may have been a miscarriage of justice affecting the appellants. It was for that reason that the Court felt bound to grant the appellants special leave to appeal against the orders of the Full Court.

Davies J, who dissented, approached the appeal in a different way. His Honour agreed "that the rent should be recalculated and that an order under s 87 of the Trade Practices Act would be appropriate". However, his Honour did not think that the circumstances of the case justified "an order varying the lease by omitting therefrom the provision for a minimum rental increase of 6 per cent at each subsequent rent review date". The learned judge was also of the opinion that it was "impossible to extract from the evidence a figure which precisely reflects the loss resulting from the imposition of a limit of fifty persons in attendance at seminars at any one time". He went on to say that the "actual numbers attending corporate functions during 1990, before Kizbeau was aware of any restriction, rarely exceeded fifty and then by only a few" [1] . Accordingly, his Honour thought that "justice would be done if, to reflect the difference between the conditions in the original permit as relied upon by his Honour, and those in the permit as amended at 8 May 1991, the assessed damages of $265,000 were reduced by the round figure of $100,000".

On twenty-seven occasions during the twelve month period 1 June 1990 to 31 May 1991, more than fifty persons attended seminars and conferences with the number of attendees ranging between fifty-two and 133 persons. The average number of attendees for these occasions was 67.6 persons. Davies J was in error, therefore, when he said that the "actual numbers attending corporate functions during 1990, before Kizbeau was aware of any restriction, rarely exceeded fifty and then by only a few".

The appeal should be allowed and the cross-appeal should be dismissed

In our opinion the appeal should be allowed, but the cross-appeal should be dismissed. Before setting out our reasons for that conclusion, it is convenient to deal with the owner's application for special leave to appeal.

The owner sought special leave to appeal against that part of the order of the Full Court which upheld the finding of Northrop J that it was in breach of s 52 of the Act. The owner contended that Northrop J could not determine whether its conduct constituted misleading conduct without examining the entire course of dealings between the parties and that his Honour had failed to do so. There is no substance in this contention and, in any event, it raises no question that requires the grant of special leave to appeal. The application for special leave to appeal on the issue of liability must be dismissed.

(1) A person who suffers loss or damage by conduct of another person that was done in contravention of a provision of Part IV or V may recover the amount of the loss or damage by action against that other person or against any person involved in the contravention.

(2) An action under subsection (1) may be commenced at any time within 3 years after the date on which the cause of action accrued.

Actions based on s 52 are analogous to actions for torts. It follows that, in assessing damages under s 82 of the Act, the rules for assessing damages in tort, and not the rules for assessing damages in contract, are the appropriate guide in most, if not all, cases [2] .

Brown v Jam Factory Pty Ltd (1981) 53 FLR 340 at 351; 35 ALR 79 at 88; Mister Figgins Pty Ltd v Centrepoint Freeholds Pty Ltd (1981) 36 ALR 23 at 59; Brown v Southport Motors Pty Ltd (1982) 43 ALR 183 at 186; Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 at 6-7, 14.

In an action for damages for deceit for inducing a person to enter a contract of purchase, which is an action that is closely analogous to an action for damages for breach of s 52, the courts have consistently held that the proper measure of damages is the difference between the real value of the thing acquired as at the date of acquisition and the price paid for it [3] . Nevertheless, although the value is assessed as at the date of the acquisition, subsequent events may be looked at in so far as they illuminate the value of the thing as at that date [4] . A distinction is drawn, however, between subsequent events that arise from the nature or use of the thing itself and subsequent events that affect the value of the thing but arise from sources supervening upon or extraneous to the fraudulent inducement [5] . Events falling into the former category are admissible to prove the value of the thing, those falling into the latter category are inadmissible for that purpose. Thus, the takings of a business subsequent to purchase are generally admissible, not only to prove that a representation concerning the takings was false [6] but also to prove the true value of the business as at the date of purchase [7] . Even when some difference exists between the conditions under which the business was conducted before and after purchase, evidence of subsequent takings may be admissible, "subject to due allowance being made for any differences in relevant conditions" [8] . But if it is established that the decline in takings has been caused by business ineptitude [9] or unexpected competition, evidence of subsequent takings is not admissible to prove the value of the business as at that date, events such as ineptitude and unexpected competition being regarded as supervening events. In some cases of deceit, it may also be proper to compensate the defrauded party not only for the difference between the value of the thing acquired and the price paid for it but also for losses induced by the fraud and directly incurred in conducting the business [10] . All of these principles are appropriate to the assessment of damages under s 82 where a breach of s 52 of the Act has induced a person to purchase a business.

Holmes v Jones (1907) 4 CLR 1692 at 1702-1703; Toteff v Antonas (1952) 87 CLR 647 at 650-651; Gould v Vaggelas (1985) 157 CLR 215 at 220, 255, 265. 2. Gould (1985) 157 CLR 215 at 220. 3. Potts v Miller (1940) 64 CLR 282 at 298; Gould (1985) 157 CLR 215 at 220. 4. R v Lock (1926) 26 SR (NSW) 272 at 273-274; Selman v Minogue (1937) 37 SR (NSW) 280 at 282; McAllister v Richmond Brewing Co (NSW) Pty Ltd (1942) 42 SR (NSW) 187 at 193-194. 5. McAllister (1942) 42 SR (NSW) 187 at 193-194; Gould (1985) 157 CLR 215 at 266. 6. McAllister (1942) 42 SR (NSW) 187 at 193. 7. Gould (1985) 157 CLR 215 at 267. 8. Gould (1985) 157 CLR 215 at 221-222, 241, 255, 266-267.

If there had been no changes to the town planning permit after the sale was concluded and if Kizbeau had complied with the terms of that permit, the principles applicable to the award of damages in this case would not be open to doubt. Kizbeau would have been entitled to the difference, as at the time of purchase, between the value of the business and the price paid for it [11] . But the present case is complicated by the fact that until 8 May 1991 Kizbeau acted as if it was not bound by the restrictions imposed by condition (p), and then from that date, but subject to condition (s), condition (p) allowed the boardroom and the annex to be used for seminars and conferences.

The owner contends that regard can and should be had to the use that Kizbeau made of the premises between the date of the sale and 8 May 1991 and to the amendments to the town planning permit. In our opinion, this contention is correct. The reasons for that conclusion appear most clearly from our rejection of Kizbeau's argument that, where a business has been purchased as the result of a misleading statement, damages are to be assessed by reference to the difference between the value of the business as at the date of purchase and the price paid for the business without reference to events occurring subsequent to the date of purchase.

Kizbeau contends that neither conducting the business in disregard of condition (p) nor the subsequent action of the Local Council in amending the town planning permit affected the value of the business as at 28 October 1988. The principal case upon which Kizbeau relies is McConnel v Wright [12] where the plaintiff applied for shares in a company (Standard) on the faith of a representation in a prospectus that the company had acquired shares in another company (Globe). However, the shares in Globe were not acquired until some days after the allotment of the shares to the plaintiff. The English Court of Appeal held that, as the representation was fraudulent and the value of the plaintiff's shares had to be assessed as at the date of allotment, it was not "the material point" [13] or "not to the point" [14] that Standard subsequently acquired the shares in Globe.

[1903] 1 Ch 546. 2. McConnel [1903] 1 Ch 546 at 553. 3. McConnel [1903] 1 Ch 546 at 557, 559.

No doubt McConnel does support the proposition that the subsequent amendment of condition (p) is not an automatic answer to Kizbeau's claim for damages and would not be an automatic answer even if condition (s) were absent from the conditions. But it does not follow that the possibility, as at the date of sale, of condition (p) being amended was irrelevant or that the action of the Council in amending that condition or adding condition (s) has no evidentiary weight in determining the value of the business acquired by Kizbeau. Nor, in the light of the authorities on post sale takings to which we have referred and to other authorities to which we shall refer, can McConnel be regarded as laying down a universal proposition that, in determining the value of a thing as at a specified date, all events subsequent to that date are irrelevant.

Although the Court of Appeal held in McConnel that the subsequent acquisition of the shares in Globe was not an answer to the plaintiff's case, their Lordships accepted that the likelihood, as at the date of the allotment, of the shares being subsequently acquired was a relevant matter to consider in assessing the value of the shares allotted to the plaintiff. Thus Collins MR said [15] :

[T]he position is this, and anybody assessing the damages will have to consider it: What is the difference between the value of the property as it was represented and the property without this large asset in it, having regard to the possibility, certainty, or uncertainty of that asset ever being in fact acquired? Romer LJ pointed out [16] that, if there was a substantial risk that the shares in Globe would not be acquired, the value of the shares in Standard allotted to the plaintiff "were not worth what they were represented to be worth by the prospectus, which was the price paid for them by the plaintiff". Cozens-Hardy LJ referred [17] to the "material risk at the date when the plaintiff acquired his shares that the statement [in the prospectus] would not be made good". 1. McConnel [1903] 1 Ch 546 at 553. 2. McConnel [1903] 1 Ch 546 at 557-558. 3. McConnel [1903] 1 Ch 546 at 559.

Thus, McConnel does not support the contention of Kizbeau that Northrop J was correct in assessing damages on the basis that condition (p) would remain unaltered during the business relationship of the parties. On the contrary, McConnel establishes that his Honour should at least have considered the likelihood, as at the date of purchase, that condition (p) might be amended during the lease or one of its renewals.

Although in McConnel the Court of Appeal held that the value of the plaintiff's shares was not to be assessed as if the shares in Globe had been acquired as at the date of the allotment to the plaintiff, courts frequently assess value [18] or damages [19] on the basis that "where facts are available they are to be preferred to prophecies" [20] even though those facts occur after the date at which the value or damages will be assessed. In accordance with this principle, the common law courts have held that, although the damages to a dependent husband or wife under the Fatal Accidents Act 1946 UK (Lord Campbell's Act) are assessed at the date of the supporting spouse's death, any remarriage or death of the dependent before trial must be taken into account in determining the dependent's loss. Thus, in Willis v The Commonwealth [21] this Court rejected the argument that the trial judge "should have taken his stand as at the date of such death and considered only the probabilities then existing of the plaintiff's remarrying" [22] . Latham CJ said [23] that "where actual facts are known, speculation as to the probability of those facts occurring is surely an unnecessary second-best". In Williamson v John I Thornycroft & Co Ltd [24] , the English Court of Appeal held that, where a widow died before the trial of an action she had brought under Lord Campbell's Act and the Law Reform (Miscellaneous Provisions) Act 1934 UK, her executors could only recover damages for loss of support to the date of death and not for the period of her expectation of life existing at the time that the causes of action arose.

Bwllfa & Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [1903] AC 426; In re West; Denton v West [1921] 1 Ch 533; In re Bradberry; National Provincial Bank Ltd v Bradberry [1943] Ch 35. 2. Roper v Johnson (1873) LR 8 CP 167; Williamson v John I Thornycroft & Co Ltd [1940] 2 KB 658; Willis v The Commonwealth (1946) 73 CLR 105; Jaksic v Cossar [1966] 2 NSWR 581; A A Tegel Pty Ltd v Madden (1985) 2 NSWLR 591; Moore v Limb [1994] Aust Torts Rep 61,571. 3. National Provincial Bank Ltd [1943] Ch 35 at 45, per Uthwatt J; Willis (1946) 73 CLR 105 at 116, per Dixon J. 4. (1946) 73 CLR 105. 5. Willis (1946) 73 CLR 105 at 116, per Dixon J. 6. Willis (1946) 73 CLR 105 at 109. 7. [1940] 2 KB 658.

A similar approach to that taken in damages cases has been taken in valuation cases. Thus, in Bwllfa & Merthyr Dare Steam Collieries (1891) Ltd v Pontypridd Waterworks Co [25] , the House of Lords held that, in determining the compensation payable to mine owners who had been given notice not to work their mine, evidence was admissible that the price of coal rose after the notice was given. The Earl of Halsbury LC said [26] :

[T]he person who had to make the calculation of what was the compensation ought to have arrived at the sum which experience has now shewn to be the correct amount.

It is true that he probably would not have been able to arrive at that sum accurately, but he ought to have contemplated upon such material as he had what would be the true sum. He ought to have considered the possible rise or fall of prices; but, as I have said, he probably would have made a mistake. We now know what would have been the true sum, and the proposition baldly stated appears to be that, because you could not arrive at the true sum when the notice was given, you should shut your eyes to the true sum now you do know it, because you could not have guessed it then.

Lord Macnaghten said [27] : [T]he arbitrator's duty is to determine the amount of compensation payable. In order to enable him to come to a just and true conclusion it is his duty, I think, to avail himself of all information at hand at the time of making his award which may be laid before him. Why should he listen to conjecture on a matter which has become an accomplished fact? Why should he guess when he can calculate? With the light before him, why should he shut his eyes and grope in the dark? 1. [1903] AC 426. 2. Bwllfa & Merthyr Dare Steam Collieries [1903] AC 426 at 428-429. 3. Bwllfa & Merthyr Dare Steam Collieries [1903] AC 426 at 431.

When these principles are applied to the present case, the owner must succeed in its contention that the conduct of the business after 28 October 1988 and the amendments to the town planning permit on 8 May 1991 are relevant in awarding damages. Mr Young assessed the value of the business by capitalising its estimated profits on the implicit assumption that condition (p) would continue to operate unchanged. As McConnel and Bwllfa & Merthyr Dare Steam Collieries and many other cases show, however, he should have considered the likelihood that that condition might change even if it had not been changed when he valued the business. When the Federal Court came to determine the value of the business for the purpose of assessing damages, it was bound "to avail [itself] of all information at hand at the time of making [its] award". The information that the Court was bound to consider included the addition of condition (s) on 8 May 1991 as well as the alteration of condition (p) on that date. The imposition of condition (s) was not a supervening event; it was directly related to the amendment of condition (p) and had to be taken into account. Armed with the knowledge that the conditions in the town planning permit had been changed, the Federal Court was bound to act upon that knowledge even though the change in the conditions occurred after the date of sale. Whatever method of valuation is used, it would be erroneous to value the business on the basis that condition (p) would prevent the use of the boardroom and the annex for the whole of the lease and its renewals.

This case falls into the class of case of which Willis and Bwllfa & Merthyr Dare Steam Collieries are examples. McConnel is distinguishable. In McConnel, the value of the plaintiff's shares in Standard had to be determined as at the date of allotment. But that value could not have been determined by reference merely to the value which those shares would have had if the Globe acquisition had been completed before the Standard shares were allotted to the plaintiff. Nor was it appropriate to determine the value of the Standard shares by reference merely to the benefit obtained when the Globe shares were subsequently acquired: on that date, the general financial position of Standard may have changed, as Romer LJ pointed out [28] :

To shew what was the value of the shares later on, after the company had got these 200,000 Globe shares, is not to the point, nor indeed is it relevant to inquire, because if one went on to inquire what was the condition of the shares some days later, when the 200,000 Globe shares were acquired, one ought also to inquire what were the other circumstances of the company at that time; for it would not follow of necessity that there were no other counterbalancing disadvantages at that later date. 1. McConnel [1903] 1 Ch 546 at 557-558.

In all of these cases, although the court has valued the assessed damages at the date when the plaintiff suffered the relevant loss, it has had to consider whether a subsequent event truly indicates or reflects the measure of the loss earlier suffered. Whether the subsequent event gives a reliable indication or reflection of the loss depends on all the circumstances. In this case, the valuation process required an assessment of the future revenues of the business and that in turn depended in part upon the scope of the conditions in the town planning permit. As at the date of purchase, the possibility of changes to those conditions may have seemed remote, and not every addition or modification of them would necessarily be relevant in assessing the damages suffered by Kizbeau. But the changes that were made to the conditions in March 1991 were not irrelevant to that assessment, nor could they fairly be regarded as the result of a supervening or extraneous event. It is true that an outside agency - the Council - brought about the amendment to condition (p) and the addition of condition (s). But they were changes to the conditions that regulated the use of the premises at the time of purchase and they undoubtedly flowed from a reconsideration by the Council of the nature of the business conducted on the premises and the use to which each part of the premises could be put for the purpose of that business. Once those changes occurred, they affected the future revenues and, consequently, the value of the business. The changes in conditions, once they occurred, gave the best indication or reflection of the revenue-earning capacity of the business to be conducted on the leased premises.

The assessment of damages in this case therefore required the Federal Court to determine the value of the business as at 28 October 1988 on the basis that after 8 May 1991 condition (p) had no effect on the use of the boardroom or annex and that after that date condition (s) imposed a restriction on the number of persons who could attend seminars, conferences and similar functions at the motel. Only by taking those alterations to the conditions into account could the Federal Court determine the loss that Kizbeau had suffered by relying on the misleading conduct of the owner. In addition, the fact that the business had been conducted until 8 May 1991 in disregard of condition (p) had to be taken into account in assessing damages. Ordinarily when a court assesses damages, it acts on the basis that the law will be or ought to have been obeyed. But it would be quite unjust to the owner in this case to award damages to Kizbeau on the basis that the boardroom and the annex could not lawfully be used during the period 28 October 1988 to 8 May 1991. Damages are assessed as compensation for loss actually suffered and, as condition (p) caused no loss of revenue to Kizbeau during this period, it cause no diminution in the value of the business acquired by Kizbeau so far as that value is to be assessed by reference to the revenue earned.

Evidence given by Mr Young established that the imposition of condition (s) would bring about a maximum decline of 5.17 per cent in revenue. As a result, he estimated that the revenue for the 1988 year would have been $2,086,260 if condition (s) and the amended condition (p) had applied and the correct commencing rent for the business would have been $455,000. The profit margin on that lost revenue was 70 per cent which was much better than the industry average of 45 per cent. Mr Young, therefore, estimated that the profit for the 1988 year would have been $910,382 if the March 1991 amendments to the conditions had applied. After deducting the deemed rent of $455,000, he estimated that the net profit of the business would have been $455,382 for that year giving the business a value of $1,517,940. After deducting $600,000 for the future payout of the leased chattels, Mr Young estimated that the value of the business, as at the date of purchase, was $917,940 which meant that, if the amended conditions had applied at that date, Kizbeau had paid $182,060 more than the business was worth.

In our opinion, this figure of $182,060 should be accepted as the difference between what the business was worth and what Kizbeau was induced to pay as the result of the owner's misrepresentation that the boardroom and the annex could be used without restriction for seminars, conferences and similar functions. It is true that the amendments were not made until more than two years after the sale date. But during that period, Kizbeau conducted the business as if there were no conditions applicable to the business. Its real damage, therefore, did not become manifest until 8 May 1991. That being so, there is no reason to assume, for the purposes of a valuation of the business as at 28 October 1988, the sale date, that a planning restriction would affect the revenue of the business prior to 8 May 1991.

Accordingly, in the light of the facts, as we now know them, it should be held that Kizbeau paid $182,060 more than it should have paid for the business. That figure together with interest under s 51A of the Federal Court of Australia Act 1976 Cth, and not the sum of $265,000, is the amount of damages that Kizbeau should receive.

It is convenient at this stage to deal with an argument that was raised for the first time on the hearing of the appeal in this Court. The owner contended that any damages awarded for the loss suffered in buying the business should be reduced by the sum of $113,055 because under the sale agreement Kizbeau acquired plant, equipment and chattels of that value. During his argument in chief, Mr Jackson QC, who appeared for Kizbeau, felt compelled to concede that Northrop J had erred in not deducting the sum of $113,055 from the damages that he awarded to Kizbeau. In his reply, however, Mr Jackson convincingly demonstrated that the figures put forward by Mr Young were based on the assumption that what was being sold was a motel business that consisted of certain plant, equipment and chattels as well as goodwill and that the valuation formulas put forward by Mr Young were all intended to value that business and not merely its goodwill. No deduction for the plant, equipment and chattels acquired is therefore required.

An order for the payment of damages of $182,060 and interest is not sufficient to compensate Kizbeau for the loss that it suffered as the result of the misleading conduct of the owner. The sum of $182,060 is assessed on the assumption that the rent bears the same proportion to the revenue of the business as the stipulated rent of $480,000 bore to the revenue of $2,200,000 which the business would have produced in the absence of conditions limiting the use of the premises. If Kizbeau is to be fairly compensated for its loss, the rent provisions of the lease will have to be varied. Under the lease, Kizbeau agreed to pay a commencing rent of $480,000 which was $74,000 higher than it should have been, having regard to the then restrictions on the use of the boardroom and the annex, and $25,000 higher than it should have been if the amended conditions are treated as notionally applying on the day that the lease commenced. Moreover the difference of $25,000 will compound at the rate of not less than 6 per cent for the rest of the lease and any renewals.

Section 87 of the Act confers a wide discretionary power on courts to make remedial orders in appropriate cases to ensure a fair result. Section 87(2) sets out the orders a court can make including an order varying any contract or arrangement in such a manner and from such a date as the court thinks fit: s 87(2)(b). An order should be made under s 87 varying the lease so as to reflect the fact that the commencing rent should have been $455,000 and not $480,000.

Fairness does not require, however, that the rent should be varied as from the commencement of the lease. Until 8 May 1991 Kizbeau traded as if the restrictions imposed by condition (p) did not apply. It is not entitled to any rebate of rent for that period. The commencing rent of $480,000 together with the increases under the rent review clause should operate in accordance with the lease until 8 May 1991. From that date until 16 December 1991, the rent should be varied to $455,000. Arguably, the rent for the period commencing on 8 May 1991 should be the sum that represents what the rent would have been as at 16 December 1990 in accordance with the rent review clause, if the commencing rent had been $455,000. But since the amended conditions did not operate until 8 May 1991 and the commencing rate in accordance with the conditions in force on 28 October 1988 should have been $406,690, the figure of $455,000 should be the rent for the period that commences on 8 May 1991. It should also be the "commencing" rent for the purpose of the rent review on 16 December 1991. For the remainder of the lease and any renewal, the rent as determined on 16 December 1991, and not the sum of $480,000 or any variation, should be the starting point of any review in accordance with the rent review clause.

Kizbeau also contended that not only should the commencing rent be varied but that that part of the rent review clause providing for minimum increases of 6 per cent per annum should be deleted. It sought special leave to appeal against the order of the Full Court reinstating the 6 per cent clause. But the Full Court was clearly correct in reinstating that clause.

The 6 per cent clause was not the product of the misleading conduct of the owner. With the benefit of hindsight, it can now be seen that, unless there is a sharp increase in Australia's rate of inflation, the 6 per cent annual increases must eventually render the business unprofitable. On Mr Young's figures, the annual net profit of the business in the first year, having regard to condition (s) is about equivalent to the first year's rent. After nineteen years, the rent will have trebled even if the market rental never exceeds 6 per cent in any year. In the absence of a significant increase in inflation, no increase in revenue or cut in expenditure seems likely to be able to overcome the effect of the 6 per cent clause on the profits of the business which must decline until eventually the business runs at a loss. But this result, if it be the result, arises from the voluntary agreement of Kizbeau and not from the misleading conduct of the owner. If there had been no misleading conduct, the 6 per cent clause would certainly have been part of the bargain that the parties struck. Mr Shiels, who negotiated the purchase on behalf of Kizbeau, conceded that a provision requiring a minimum annual increase of 6 per cent in the rent was a reasonable provision at the time of the purchase. He was a very experienced and successful businessman and was well aware of the escalating effect that the review clause would have on the commencing rent.

No doubt in some cases, it may be appropriate for a court, when making an order under s 87, to rewrite a contractual term that was not brought about by the misleading conduct of a defendant. Thus, in a case where a court would wish to, but cannot for practical reasons, grant rescission, it might be proper to rewrite an unfair provision in an agreement even though it was not induced by the defendant's conduct. But this case is not in that category. The case is not one for rescission, and once Kizbeau is awarded damages and has the rent varied in the manner that we have indicated, it is in the same position that it would have been if there had been no misrepresentation. The appellants' application for special leave must be refused.

It follows that the appeal should be allowed to the extent that we have indicated and the cross-appeal should be dismissed.

The appeal should be allowed; the cross-appeal should be dismissed. Having regard to the success of the parties on the various issues, the appropriate order for costs is that the respondents pay four-fifths of the appellants' costs in this Court and the Full Court. The parties should bring in short minutes to give effect to this judgment.

At a glance

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Judgment (57 paragraphs)

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Cases Cited (10)