Peter A Simon Real Estate Pty. Ltd. v. Ghabash & Ors.; Chung & Anor. v. Ghabash [2004] NSWCA 467

LOWER COURT District Court JURISDICTION : LOWER COURT DC 5356/00 FILE NUMBER(S) : LOWER COURT Certoma ADCJ JUDICIAL OFFICER :

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 41167/03 CA 41105/03 DC 5356/00

MASON P HODGSON JA McCOLL JA

Friday 17 December 2004 PETER A. SIMON REAL ESTATE PTY. LTD. V. GHABASH & ORS. CHUNG & ANOR. V. GHABASH

Judgment 1 MASON P: I agree with Hodgson JA. 2 HODGSON JA: On 14 November 2003, Certoma ADCJ gave reasons for judgment in proceedings in which Mr. Ghabash sued Mr. and Mrs. Chung (the Chungs) and Peter A. Simon Real Estate Pty. Ltd. (PAS) for damages arising out of a fire in premises of which Mr. Ghabash was lessee, the Chungs were the owners and PAS was the managing agent; and in which the Chungs had put on a cross-claim against PAS. Pursuant to those reasons, on 20 November 2003 the primary judge entered judgment for Mr. Ghabash against the Chungs and PAS in the sum of $733,788.00 and costs, and ordered that the cross-claim be dismissed. 3 The Chungs and PAS have appealed from those orders.

CIRCUMSTANCES 4 Mr. Ghabash entered into possession of commercial premises owned by the Chungs on or about 15 November 1994, with a view to establishing a reception/restaurant business. The premises were re-decorated at substantial expense by Mr. Ghabash, and he opened his business on 24 December 1994. 5 A lease of the premises for five years commencing 15 November 1994, and with an option to renew for a further five years, was entered into between Mr. Ghabash and the Chungs on 8 September 1995. The lease was in the Law Society form, in which cl.7.1 provided as follows: 7.1 The landlord must - 7.1.1 maintain in a state of good condition and serviceable repair the roof, the ceiling, the external walls, and the floors of the property and must fix structural defects; 7.1.2 maintain the property in a structurally sound condition; and 7.1.3 maintain essential services. 6 The lease also included additional clauses, among them cl.15: CLAUSE 15. NON-LlABILITY OF LESSOR: Notwithstanding any implication or rule of law to the contrary and unless the landlord has failed within a reasonable time after receiving written notice from the tenant to do something which he is legally liable under this lease to do and the loss, injury or damage hereinafter mentioned in this clause is due to such failure: 15.1 The landlord shall not be under any liability whatsoever for any loss injury or damage: 15.1.1 of or to any property of the tenant or any other person in the demised premises howsoever and by whomsoever caused 15.1.2 sustained or suffered by the tenant or any other person as a result of or arising in any way out of the failure or cessation of any service or facility provided by the landlord or enjoyed by the tenant in conjunction with the demised premises. 15.2 Without affecting the generality of the preceding provisions of this clause, if any merchandise, property or effects which may be in or upon the demised premises during the continuance of this lease shall be injured or destroyed by water or otherwise howsoever no part of the loss or damage occasioned thereby shall be borne by the landlord whether the same shall occur by reason of any fault in the construction of the property or the state of repair thereof or howsoever the same may be caused or arise. 7 On 30 December 1995 the premises were substantially damaged by fire; and although Mr. Ghabash subsequently tried to re-start his business, that attempt was unsuccessful. Mr. Ghabash in these proceedings sued the Chungs and PAS claiming damages for the loss of chattels and fixtures, and for the loss of business earnings and/or goodwill.

DECISION OF PRIMARY JUDGE 8 The primary judge found that the fire was caused by an electrical fault, which in turn was caused by water leaking into the ceiling space above the stage area of the premises and onto electrical apparatus there. There is no challenge to this finding. 9 The primary judge noted evidence led on behalf of Mr. Ghabash: (1) that Mr. Nickolas, the Commercial Property Manager of PAS, told Mr. Ghabash in November or December 1994 that the lessor would not pay to have the power wiring securely fixed to the building; (2) that after heavy rain in February 1995, when water leaked into the premises, particularly in the stage area, Mr. Ghabash went to Mr. Nickolas' office and requested that something be done about the leak; (3) that in about late February 1995, Mr. Chung inspected the premises, Mr. Ghabash complained to him about the leaking ceiling, and Mr. Chung said he would let the agent know and have it fixed; and that Mr. Ghabash informed Mr. Nickolas of this the next day; (4) that in about March 1995, Mr. Chung visited the premises, and Mr. El-Marji informed Mr. Chung of problems with the leaking roof; (5) that in about March or April 1995, Mr. Ghabash found that water had been getting into box structures above the stage containing the air conditioning unit, and reported this to Mr. Nickolas who said he would let the lessor know; (6) that in May 1995, Mr. Ghabash made a further complaint to Mr. Nickolas about water leaking, particularly from the area of the box above the stage; (7) that in July 1995, after further leaking of the ceiling, Mr. Ghabash took Mr. Nickolas onto the roof to show him that most of the leaks were from immediately above the stage area (where the air conditioning box and the sub-main electrical board were located), and then inside the premises to show from where the leaks were coming; and that Mr. Nickolas wrote down his complaints as he requested; (8) that about one month later Mr. Nickolas told Mr. Ghabash that the owner was not willing to spend one penny on the property and that Mr. Ghabash would have to fix it himself; and (9) that in September or October 1995, Mr. Ghabash reported to Mr. Nickolas when smoke was noticed coming from the box above the stage containing the air conditioning unit, and Mr. Nickolas told him that the lessor would not spend any money on the building. 10 The primary judge noted that Mr. Chung denied that Mr. Ghabash or Mr. El-Marji complained to him about leaks in the roof or the ceiling, and denied that Mr. Nickolas ever brought to his attention any such complaints. He also noted a denial by Mr. Nickolas that he ever received complaints about leaks above the stage or electrical wiring, or that he went onto the roof, or that he told Mr. Ghabash that the owners did not want to spend money on the property. 11 The primary judge said that he preferred the evidence of Mr. Ghabash, that he complained about the leaking ceiling to Mr. Chung on the occasion of his visit in February 1995; and preferred the evidence of Mr. Ghabash and his witnesses to that of Mr. Nickolas, and thus was satisfied that Mr. Ghabash did complain to Mr. Nickolas of ongoing problems with the leaks in the ceiling, including leaks above the stage area. 12 On that basis, the primary judge was satisfied that the Chungs and PAS were each and independently aware from late February 1995 of Mr. Ghabash's complaints and the problem of water leaking into the ceiling space; and that if they had investigated this through reputable tradespersons and electricians, this would have disclosed that the state of the premises posed a danger from the contact of water with electrical apparatus. He concluded: I am therefore satisfied that the owners and the managing agent were in breach of their duty of care to the plaintiff as the lessee/occupier of the premises to ensure that the premises were safe and that, in the circumstances, they are equally responsible for any damage suffered by the plaintiff. It follows that, as between the Chungs and the managing agent, even if Mr Nickolas did not refer any complaint of water leaks by the plaintiff to the Chungs, because the Chungs were independently aware of the defect in the property and failed to pursue it that the cross-claim by them against the managing agent should be dismissed. 13 On the question of damages, the primary judge noted that Mr. Ghabash's claims were for the most part based on recollection, unsupported by documentary evidence. He accepted that much of the business records had been destroyed by the fire, and noted that the documents which did survive the fire showed that Mr. Ghabash over-estimated the value of some items and that his recollection was unreliable. He referred to expert evidence as to the value of items lost and as to the goodwill of the business, and in effect found the conclusions of little assistance because of the lack of proof of accuracy of their assumptions; but apparently he accepted the methodologies adopted by these experts. 14 On the value of goodwill, he referred to tax returns covering the relevant period, which were not produced until 2002 after the commencement of these proceedings, and were themselves based on Mr. Ghabash's recollections. Despite evidence that Mr. Ghabash was borrowing funds for the business from friends, even in the latter half of 1995, had his liquor licence suspended in June or July 1995 because of the inability to make licence payments and not restored prior to the fire, and that he was constantly in arrears with telephone, gas and electricity accounts and waste collection accounts, the primary judge accepted that the business was profitable in the second half of 1995 and awarded $200,000.00 for loss of goodwill. 15 As regards the value of items destroyed, he awarded $208,000.00. He held that cl.15 of the lease was not wide enough to protect the lessor (the Chungs) from liability for their negligence.

GROUNDS OF APPEAL 16 PAS put on a very lengthy Notice of Appeal. As pursued, it appears that they relied on the following grounds: 11. His Honour erred in concluding that such takings as the First Respondent's business enjoyed were "ploughed straight back into the business", in that: (a) There was no evidence of that fact; and (b) It was against the weight or the evidence. 12. His Honour erred in not appreciating that the assertion by the First Respondent as to the level of profit derived from the business was inconsistent with the objectively established facts concerning his failure, refusal or inability to pay the ordinary accounts of the business as and when they fell due. 13. His Honour failed to appreciate the significance of the difference between those items claimed for which records existed and the assessment of their value for which the First Respondent was responsible. …

25. His Honour erred in concluding that the First Respondent had plausibly explained his circumstances such that it was open to conclude that the business had steadily improved to reach its peak in the second half of 1995, a time at which the First Respondent had been unable to pay his accounts as and when they fell due. 26. His Honour overlooked the First Respondent's inability to pay his accounts as and when they fell due as an objective indicator of the likely health of the business. …

35. His Honour failed to address the question of causation between the alleged failure of the Appellant to respond to the complaints of the First Respondent. 36. His Honour should have found in relation to causation that: (a) since the owners would do nothing about the property (which His Honour found); (b) there was nothing Mr Nickolas could or should have done that would have demanded of the owners that they repair the property; and (c) therefore there was nothing Mr Nickolas could have done on the findings made by His Honour. 37. His Honour found, at page 41, that the First Respondent's figures were arrived out (sic) by pure conjecture or estimation and were unsupported by any documentation, from which His Honour should have found that the First Respondent did not discharge the burden of proof upon him with respect to the proof of damage and that his credit was adversely affected, in terms, by this finding. 38. His Honour found, (at page 41) the evidence of patronage on a Saturday night to be inconsistent, but did not explain how this inconsistency did not adversely affect the First Respondent's credit and used the evidence to fix damages. 39. His Honour should have found that there was no negligence on the part of Nickolas because nothing he could have done would have overcome the found reluctance of the Second Respondent to do anything to maintain the premises. 17 The Chungs relied on the following grounds: 1. The assessment by the Trial Judge of the Respondent's damages was based upon speculation not evidence. 2. There was no or insufficient evidence before the Trial Judge for the Respondent to have proved his damage, if any. 3. In the events which have happened and upon its proper construction Clause 15 of the lease between the Appellants and the Respondent precludes any legal liability in negligence arising in the Appellants to pay damages to the Respondent for the loss of or damage to the Respondent's merchandise, property and/or effects in the demised premises at the time of the fire on 30 December 1995. 18 Mr. Ghabash relied on the following grounds in a Notice of Contention: As against the Appellants 1. That on the evidence and having regard to his Honour's findings his Honour was entitled to have found that the Appellants were in breach of the duty of care they owed the respondent.

As against the First and Second Appellants 2. That the obligations of the First and Second Appellants pursuant to clause 7.1 of the Lease that they must maintain in a good state of repair the roof is a fundamental obligation and is inconsistent with clause 15. 3. That on the evidence and having regard to the findings of the trial Judge the Third Defendant on two separate occasions had made notes of the defective roof. The Respondent says that the notes taken down and reduced to writing by the Third Defendant constituted a written notice within the meaning of clause 15 of the Lease and that the First and Second Appellants failed within a reasonable time to repair the roof. 4. The obligations under the lease were contractual obligations and could not be described as "legal liability" under the lease for the purposes of clause 15. 5. That goodwill is not property within the meaning of clause 15.1 of the Lease and nor was the damage occasioned to goodwill as a result of or arising in any way out of a failure or cessation of any service or facility provided by the landlord. 6. That the requirement for written notice was merely procedural and not required in circumstances where a landlord had in fact been made aware of the relevant defect by the respondent and had in fact had a reasonable opportunity to remedy the defect. 19 I will deal in turn with the liability of PAS, the effect of cl.15 and the valuation of goodwill.

LIABILITY OF PAS 20 Before considering the submissions of the parties, it is appropriate to record certain evidence concerning the relationship between PAS and the Chungs. 21 There was no written agreement between them for the management of these premises, but there was such an agreement in relation to adjoining premises which the Chungs had purchased earlier. Clause 13 of that agreement provided as follows: The Agent is authorised to arrange repairs and maintenance to be done in accordance with the Principal's obligations to repair (if any) or as otherwise instructed or to engage skilled tradesmen to effect repairs and maintenance, provided that expenditure in excess of $N.A. for any one item shall not be incurred without the prior approval of the Principal except where it is the Agent's opinion that because of an emergency, repairs are necessary for the protection of the premises or the supply of essential services to tenants. 22 Mr. Chung gave evidence that he left repairs and maintenance to the Managing Agent, who would be expected to attend to them, and that he would be aware of them only if there had been deductions for repairs in the rental statements. However, he did concede that if the cost was "too big" the agent would notify him and he would normally approve the work. 23 Mr. Nickolas gave evidence that, whilst in relation to minor matters tradespersons would be engaged by the agent to do work, in the case of major matters he would have consulted the Chungs. 24 The primary judge made no particular finding about these matters. 25 Mr. Donaldson SC for PAS submitted that the primary judge did not determine what the duty of the agent was, and accordingly made no proper determination as to whether there had been any breach of that duty; and furthermore made no proper determination as to whether any damage to Mr. Ghabash flowed from any such breach of duty. He submitted that the agent's duty could conceivably be either to exercise some authority to effect repairs, or alternatively to report complaints to the owner. As regards the former possibility, Mr. Donaldson submitted that it was not shown that relevant repairs in this case were within the scope of what the agent could do of its own initiative; and as regards the latter duty, there was no finding that the agent did not report complaints to the owner. Furthermore, causation of loss was not shown in relation to any breach of the duty to report: if the agent had reported complaints, it would have been doing no more than telling Mr. Chung what he knew already. 26 Mr. Kennedy SC for Mr. Ghabash relied principally on the submission that Mr. Nickolas had, in breach of duty of care, failed to pass on complaints to Mr. Chung. Both Mr. Nickolas and Mr. Chung gave evidence that no such complaints were passed on, and the primary judge accepted Mr. Ghabash's evidence that he had made complaints to Mr. Nickolas on a number of occasions. Mr. Nickolas' failure to pass on the complaints guaranteed that nothing would be done. Mr. Kennedy submitted that Mr. Chung's evidence was that if he had been told about the problem, he would have done something about it. Although the primary judge did not expressly find that Mr. Nickolas did not pass the complaints on or that, if he had done so, Mr. Chung would have attended to them, the Court of Appeal can and should make those findings. At the very least, there should be a new trial. 27 In my opinion, in circumstances where the required repairs were on the face of them quite major repairs and it was not shown what their cost would be, it was not shown that the problem was one which, according to the arrangement existing between PAS and the Chungs, the necessary repairs could or should have been undertaken by PAS on its own initiative. Accordingly, even if there could be liability of an agent in those circumstances, as to which I express no view, no such liability was shown here. 28 Accordingly, PAS's liability would require findings, firstly, that PAS failed to pass on complaints made to it, and secondly, that if these complaints had been passed on, the necessary repairs would have been done. 29 In my opinion, the first finding was certainly not made by the primary judge, nor in my opinion does it follow from the findings that he did make. Mr. Ghabash gave evidence that in 1995 Mr. Nickolas told him he would pass on his complaints (for example, in March or April 1995) and that Mr. Nickolas told him in about August 1995 that the owner was not willing to spend money. The primary judge did not specifically accept this evidence, but his preference of the evidence of Mr. Ghabash over that of Mr. Nickolas implies that he did. The primary judge rejected evidence both of Mr. Nickolas and Mr. Chung, given in 2003 about events that occurred around eight years earlier. In my opinion, that gives no sound basis for finding that, contrary to what Mr. Nickolas said at the time, he did not report complaints to Mr. Chung as (on the primary judge's view of the evidence before him) he then said he would, and did not have the instructions from Mr. Chung about not spending money that Mr. Nickolas then said he had. 30 In my opinion, the primary judge's finding that Mr. Nickolas and Mr. Chung were wrong in 2003 in what they said happened in 1995 does not of itself justify a finding that Mr. Nickolas did not at the time in 1995 do what he said he would do or that he subsequently reported dishonestly concerning the owner's intentions. In my opinion, there is no sound basis for this Court to make a finding that the complaints were not reported to Mr. Chung; nor in my opinion should the matter be sent back to the primary judge. It is true that, in the submissions to the primary judge, Counsel for PAS concentrated on the factual issues between Mr. Ghabash and Mr. Nickolas and did not specifically address the nature of PAS's duty of care and what was required to prove breach of duty and causation of loss; but in my opinion, that did not absolve Mr. Ghabash from the necessity of establishing what PAS's duty was, that there was a breach of such duty and that this caused loss; nor did it in my opinion absolve the judge from the necessity of addressing those fundamental questions. 31 As regards the second matter, the primary judge did not find that Mr. Ghabash was caused loss by reason of Mr. Nickolas' failure to report matters to Mr. Chung. In my opinion, such a finding does not follow from the conclusions that the primary judge made. That is, even if there were a finding that Mr. Nickolas did not report complaints to Mr. Chung, that does not affect the primary judge's finding that Mr. Chung himself already knew enough that he should, as a reasonable lessor, have attended to the problem. I do not think the findings of the primary judge are such that this Court should find that causation was established in this way, nor do I think the matter should be sent back to the primary judge. 32 It could be submitted in the alternative that Mr. Ghabash lost a chance that, if his complaints had been reported, this may have changed Mr. Chung's attitude. I do not think this is the kind of commercial chance for which compensation is available on the principles discussed in Sellars v. Adelaide Petroleum NL (1994) 179 CLR 332.

CLAUSE 15 33 The decision of the primary judge that this clause did not apply appears to depend upon his view that it only excludes liability in relation to "something which he is legally liable under the lease to do"; and that view was pressed upon us by Mr. Kennedy SC. 34 However, in my opinion those quoted words apply only to the exception to the exemption from liability, not to the exemption itself. In my opinion the words of cl.15.1 are plainly wide enough to exclude liability for loss or damage to the tenant's property caused by fire, even if the fire is due to the negligence of the landlord. In my opinion, Darlington Futures Ltd. v. Delco Australia Pty. Ltd. (1986) 161 CLR 500 indicates that the contra proferentem rule would not operate to prevent the words of this clause being given their clear meaning. 35 Mr. Kennedy submitted that the case fell within the exception, because the notes made by Mr. Nickolas of complaints made in July 1995 amounted to written notice from the tenant of something that the landlord was legally liable to do under cl.7 of the lease, namely, to maintain the roof in a state of good condition and service or repair, and maintain essential services. 36 The primary judge made no specific finding that Mr. Nickolas did make those notes, although it is probably implicit in his preference of the evidence of Mr. Ghabash over that of Mr. Nickolas. 37 However, the notes made by Mr. Nickolas could not in my opinion amount to written notice given by the tenant to Mr. Nickolas as the landlord's agent. The only possibility that could assist Mr. Ghabash is if the notes were regarded as being created by Mr. Nickolas as Mr. Ghabash's agent and then submitted to the landlord. 38 However, in my opinion it is impossible to find that what Mr. Nicholas wrote on this occasion was sufficiently explicit to amount to a written notice from the tenant to do something that the landlord was legally liable to do under the lease. Furthermore, although I have previously held that it could not be inferred that Mr. Nickolas did not pass on complaints, I have not said that it should be found that Mr. Nickolas did pass on complaints. Even accepting that this could and should be inferred, it would in my opinion be mere speculation whether Mr. Nickolas passed on these particular complaints by orally conveying the effect of his notes to Mr. Chung, or by actually passing the actual document he had created to Mr. Chung. 39 For those reasons, I do not think that the notes made by Mr. Nickolas could bring this case within the exception to cl.15; and in my opinion Mr. Ghabash cannot retain the amount awarded in respect of damage to his property situated in the demised premises.

VALUATION OF GOODWILL 40 As noted previously, the primary judge selected a figure of $200,000.00. If one adopts a figure of about $200,000.00 as the value of plant and equipment, that would give a total of about $400,000.00 for the value of the business; and applying the methodology of the valuer, which was apparently accepted by the primary judge, that would suggest an income of the business of about $133,000.00 per annum before tax. If one then adds back the proprietor's wages, that suggests a figure for the yearly profit of the business, including proprietor's wages, in the order of $200,000.00. 41 If the business had made a profit of that order over (say) the last six months of its operation, thus averaging about $4,000.00 per week, it seems inexplicable why Mr. Ghabash found it necessary, in September 1995, to borrow $9,000.00 from Ms. Alamaddine and $6,500.00 from Mr. Marji, and in October 1995 to borrow a further $16,000.00 from Mr. Marji; while at the same time having been unable to make licence payments in the middle of 1995 and being constantly in arrears with telephone, gas, electricity payments and waste collection payments, and also, apparently, with lease payments. 42 In my opinion, the tax returns were virtually valueless as evidence supporting the income of the business, having been prepared in 2002 entirely based on estimates then given by Mr. Ghabash. They could not take the matter any further than Mr. Ghabash's sworn evidence as to the financial operation of the business given in Court. As regards that sworn evidence, and as submitted by Mr. Donaldson, there was some basis on which some estimate could be made of income of the business, but no useful evidence as to the expenses of the business. 43 I do accept, however, that it was open to the primary judge to find, as he did, that prior to the fire the business was a viable one and was improving; and that therefore Mr. Ghabash was entitled to more than nominal damages; and that the case was one where, in the absence of satisfactory evidence, the Court just had to do its best. There is some force in the consideration that the lack of supporting material from Mr. Ghabash was partly due to the fire itself, and thus the estimate to be made by the Court should not be overly favourable to PAS. On the other hand, Mr. Ghabash's difficulties in proof also arose from his practice in dealing largely in cash, ignoring the requirements of tax law in payment of wages, and otherwise conducting the business in an unbusiness-like manner. 44 In my opinion, the primary judge's figure of $200,000.00, translating to an approximate before-tax profit figure for the business of $200,000.00 per annum, was much too generous to Mr. Ghabash and was such as to justify appellate intervention. I would propose a figure of $50,000.00. That would, adopting the valuer's methodology, suggest an overall value of the business including plant and equipment of $250,000.00, and would translate to a before-tax profit figure for the business of about $80,000.00 per annum, or something like $140,000.00 after adding back proprietor's wages. In my opinion, that is an estimate that recognises that Mr. Ghabash did suffer a substantial loss, without being over-generous either to Mr. Ghabash or to the Chungs.

CONCLUSION 45 For those reasons, in my opinion the following orders should be made. 46 In the PAS appeal (CA41167/03): 1. Appeal allowed. 2. Mr. Ghabash to pay PAS's costs of the appeal and to have a Suitors Fund certificate if otherwise entitled. 3. No order as to the costs of Mr. and Mr. Chung. 4. Judgment against PAS set aside, and in lieu thereof judgment for PAS in the proceedings. 47 I have not included an order that Mr. Ghabash pay PAS's costs of the proceedings, because it is not clear what would have happened below if the point on which PAS succeeded had been clearly raised and contested. PAS may provide written submissions in support of an order for costs within 7 days, and Mr. Ghabash can respond with written submissions within a further 7 days. 48 In the Chungs' appeal (CA41105/03): 1. Appeal allowed. 2. Mr. Ghabash to pay the Chungs' costs of the appeal, and to have a Suitors Fund certificate if otherwise entitled. 3. Judgment below set aside, and in lieu thereof judgment for Mr. Ghabash against the Chungs for $50,000.00 plus interest at Supreme Court rates from 30 December 1995, and the Chungs to pay Mr. Ghabash's costs of the proceedings against them. 49 There may be required orders for repayment of money. I give leave for PAS and the Chungs to apply by written submissions within 7 days for such orders, and if such orders are not agreed to, Mr. Ghabash can respond with written submissions within a further 7 days. 50 McCOLL JA: I agree with Hodgson JA. **********

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