SOURLOS v LUV A COFFEE LISMORE PTY LIMITED & ANOR

DECISION: (a) Appeal upheld (b) The quantum of damages as determined by the trial judge is set aside (c) The case is remitted to the District Court so that the quantum of damages can be assessed afresh (d) The respondents pay 75 per cent of the costs of the appeal (e) The respondents to have a certificate under the Suitors' Fund Act 1951 (NSW) if otherwise qualified.

CATCHWORDS: COURTS AND JUDGES - judgments and orders - statement of reasons for decision - duty to give - extent of duty - expert evidence - dispute between experts - whether trial judge gave adequate reasons for his decision to accept in its entirety the evidence of one expert over another - the incorporation into a judgment of a party's submissions without recounting them (on the basis that the trial judge has accepted those submissions) is unsatisfactory. D

LEGISLATION CITED: Fair Trading Act 1987 (NSW) Suitors's Fund Act 1951 (NSW)

De Iacovo v Lacanale [1957] VR 553 CASES CITED: Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247 Whalan v Kogarah Municipal Council [2007] NSWCA 5 Wiki Atlantis Relocations (NSW) Pty Ltd (2004) 60 NSWLR 127

Theo Sourlos (Appellant) PARTIES: Luv A Coffee Lismore Pty Limited (First Respondent) Nick Themsen (Second Respondent)

COUNSEL: G W Pulsford (Appellant) J J Young (Respondents)

SOLICITORS: McMahons National Lawyers (Appellant) Harris & Company (Respondents)

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40755/06 DC 5272/04

IPP JA McCOLL JA HOEBEN J

Tuesday 14 August 2007 THEO SOURLOS v LUV A COFFEE LISMORE PTY LIMITED & ANOR Judgment 1 IPP JA: This appeal concerns the adequacy of the trial judge's reasons for judgment. 2 The litigation between the parties arose out of a sale of a coffee shop business. The appellant was the vendor of the business and the first respondent the purchaser. The second respondent (Mr Themsen) controlled the first respondent. 3 The sale occurred by written agreement on 2 July 2004. The purchase price was $360,000. The first respondent alleged that it was induced to purchase the business by a misrepresentation on the part of the appellant as to the turnover of the business. According to the first respondent, the appellant represented that since 1 February 2004 the weekly turnover of the business had been at least $10,000 in each week whereas, in truth, the weekly turnover was substantially less. 4 The respondents brought proceedings in the District Court against the appellant relying on negligence. Alternatively, they relied on the misleading and deceptive conduct provisions of the Fair Trading Act 1987 (NSW). Rolfe DCJ upheld the first respondent's claim. His Honour held that the appellant had, indeed, represented that the weekly turnover of the business was $10,000 per week and found that it was "abundantly clear that the turnover was nothing like $10,000 per week". 5 Rolfe DCJ assessed damages by deducting what he determined to be the "real value" of the business at the date of the purchase from the purchase price. He determined the real value as being $63,137. The judge held that the first respondent was entitled to damages in the amount of $296,863 plus interest and costs. Having regard to the interest that had accrued, he ordered a verdict and judgment for the first respondent in the amount of $359,083. 6 On the question of damages, the first respondent relied on the evidence of an expert, Mr Elliott, and the appellant relied on another expert, Mr Jugmans. Reports by these two witnesses were tendered in evidence. Neither testified orally (and, thus, neither was cross-examined). The judge accepted the evidence of Mr Elliott but not that of Mr Jugmans. 7 In determining the real value of the business, the judge assessed fixed costs at $310,854.77. The fixed costs were essential to the quantification of the profitability of the business. Profitability was a vital element in the assessment of value. 8 The judge found that the appellant commenced the business of the coffee shop on 27 January 2004 and conducted that business until the sale to the first respondent on 2 July 2004. The evidence suggests that the commencement date was 26 January 2004 but nothing turns on this. In order to prove the fixed costs for the purposes of determining the value of the business at the date of purchase, the respondents tendered financial records of the business during the period 26 January 2004 to 1 July 2004. They submitted that individual items of expenses should be extrapolated from this evidence to establish notional "annualised" expenses for the period 27 January 2004 to 26 January 2005. The relevant period seems to have been from 26 January 2004 to 25 January 2005 but, again, nothing turns on this. Mr Elliott and Mr Jugmans were at one about many items making up the fixed costs on this basis but differed in regard to labour, marketing and repair costs. 9 The judge accepted the evidence of Mr Elliott in its entirety. He did not accept the views expressed by Mr Jugmans as to the disputed three items. His Honour determined the fixed costs strictly in accordance with the opinions of Mr Elliott. 10 The extrapolation of expenses was crucial to the damages calculation. The expenses so calculated affected "earnings before taxation and interest" ("the EBIT"). The part played by the EBIT in the formula that both parties adopted in calculating the value of the business was such that a relatively minor difference in the base expenses was capable of making a significant difference to the assessment of the value of the business. Significantly, differences in the base expenses were compounded in the extrapolation process and again in the application of the EBIT. The differences, therefore, were capable of affecting the value of the business to an exponential degree. 11 The judge, in determining that fixed costs should be assessed at $310,854.77 said: "Although Mr Jugmans disagreed with the sort of figures I have referred to, I am not satisfied, just on the face of his report, that I should depart from any of those calculations in findings that I have made."

This was the sum total of the judge's reasons for preferring Mr Elliott's testimony in regard to the labour, marketing and repair costs (these being, as I have said, the only items in dispute). On appeal, the appellant submitted that the judge failed to give adequate reasons for accepting Mr Elliott's evidence in regard to these three items of fixed costs. 12 The judge found that, for the period 27 January 2004 to 2 July 2004, labour costs amounted to $65,009. There was evidence from Mr Themsen that supported this finding. His Honour then extrapolated this figure to $151,386.83 for the year from 27 January 2004 to 26 January 2005. This sum, as I have mentioned, formed part of the fixed costs found by his Honour to be $310,854.77. 13 Mr Jugmans asserted that he had been provided with material that established that the total wages of "around $100,000" were paid to the employees of the business during the year ended 30 June 2005. He said that, taking into account superannuation, labour costs should be assessed at $109,000. According to Mr Jugmans, this gave rise to an overstatement on the part of Mr Elliott by about $42,000. 14 There was in evidence an affidavit by Ms Karen Lang, an accountant and tax agent for the first respondent. According to Ms Lang's affidavit, the wages of the business for the period from 1 July 2004 to 31 May 2005 amounted to $165,167. The actual evidence, therefore, demonstrated that Mr Elliott's assessment of labour costs of about $150,000 for the relevant period was more or less correct (if not unduly conservative). 15 Ms Lang's evidence of what actually occurred in regard to labour costs is of far greater cogency than the opinion evidence of Mr Jugmans (that relied on a process of extrapolation for determining the appropriate amounts to be taken into account). The evidence supporting Mr Elliott's opinion that labour costs amounted to about $150,000 was so strong that the judge's acceptance of labour costs of this order was self-explanatory. In other words, in the light of Ms Lang's testimony, Mr Jugmans' opinion evidence on the issue of labour costs did not call for rebuttal. Mr Pulsford, counsel for the appellant, quite properly conceded this. Thus, the appellant can have no complaint about the judge's reasons concerning the labour costs. 16 There was evidence that, for the relevant period, marketing expenses amounted to $12,132.45 and Mr Elliott extrapolated that amount to $28,253. The judge accepted Mr Elliott's evidence in this regard and assessed the marketing expenses of the business as being $28,000. 17 Mr Jugmans expressed the opinion that it would be appropriate to use the extrapolated amount of $28,253 for marketing expenses only if the business "would continue to incur local marketing expenses on the same basis as it did prior to the purchase". He pointed out: "This is clearly not the case because in the 11 months to 31 May 2005, the Business incurred advertising expenses of $8,554".

And went on to say: "[I]t is likely that the business would have incurred higher local marketing expenses during its initial operating period, which would reduce once the Business became established".

Mr Jugmans expressed the opinion, on the grounds stated, that the marketing expenses adopted by Mr Elliott were overstated. 18 The evidence of Ms Lang supported Mr Jugmans statement that, in the 11 months to 31 May 2005, the business incurred advertising expenses of $8,554. 19 There was, thus, a material dispute between Mr Elliott and Mr Jugmans crystallised by the differing views that I have set out. The judge, however, accepted that marketing expenses should be assessed at $28,000 without any reference to the differing opinion of Mr Jugmans, supported as it was by the testimony of Ms Lang. The judge did not examine this question and gave no rational reason for his decision on this issue. 20 According to Mr Elliott, repair and maintenance expenses for the period 26 January 2004 to 1 July 2004 amounted to about $9,740. This, Rolfe DCJ extrapolated to $22,683.97. 21 Mr Elliott, however, had accepted that some of the items making up the repair and maintenance expenses of about $9,740 were not recurrent expenses. He estimated the recurrent expenses for the period 1 July 2004 to 31 May 2005 at an amount "in excess of $400 per month according to the accounts prepared by Karen Lang". Ms Lang's accounts did not support this statement. Her affidavit showed repairs and maintenance for the period 1 July 2004 to 31 May 2005 as being $995. Mr Young, who appeared for the respondents, submitted that an item of $4,849 in Ms Lang's affidavit relating to "assets less than $100" was part of "repairs and maintenance", but there was no evidence to this effect and this proposition is mere speculation. 22 Mr Jugmans pointed out that Mr Elliott acknowledged that the amount of $9,741 included non-recurrent expenses and asserted that "an extrapolation of an amount that includes non-recurring items will overstate the expected annual expense". 23 Rolfe DCJ made no reference to the issue concerning the non-recurring expenses and the differing views in this respect. His Honour simply extrapolated on a straight-line basis. As was the case with marketing expenses, the judge gave no rational reason for his decision on this issue. 24 For the reasons I have earlier given, Mr Jugmans' opinions in regard to marketing and repairs, had they been upheld, were capable of having an exponential effect on the damages. During the course of argument on appeal, Mr Young correctly accepted that, had the judge adopted Mr Jungmans figures in regard to marketing and repairs, the value of the business would have increased to "something around $125,000". That would have had a concomitantly significant effect on the damages awarded. 25 Mr Young pointed out that the appellant, in his concluding written submissions at the trial, did not expressly raise issues concerning the items relating to marketing and repair expenses. The appellant was then unrepresented and this may explain this omission. It is apparent, in any event, from the judge's reasons, that Mr Jugmans, on the appellant's behalf, had taken issue with Mr Elliott in regard to these items and the differences between them in this regard needed to be resolved. The only basis given by the judge for resolving these issues was that he was not satisfied that he should depart from what, in effect, amounted to an acceptance of the opinions expressed by Mr Elliott. This is not an appropriate way of dealing with disputes of this kind. They required rational examination and analysis: Wiki v Atlantis Relocations (NSW) Pty Ltd (2004) 60 NSWLR 127. 26 Mr Young made various submissions as to the weight that should be attributed to the amounts stated in Ms Lang's affidavit. The matters so raised, however, do not affect the judge's duty to deal with the appellant's contentions concerning the damages. Matters going to weight are matters that his Honour should have dealt with but did not. 27 Mr Young drew attention to the reference made in his Honour's reasons to the written submissions that he had made at trial. He submitted that the judge's reasons should be understood as meaning that he accepted those submissions and this was an appropriate way of giving reasons for judgment. In other words, he submitted that it was permissible for the judge, without recounting the detailed submissions of counsel for the respondents in his judgment, to give, as his reason for finding for the respondents, that he accepted those submissions. 28 At the outset I should say that his Honour did not say that, because he accepted Mr Young's submissions, he upheld the opinions of Mr Elliott and rejected those of Mr Jugmans on the relevant issues. He stated merely that he had taken those submissions into account. This, of course, is something that, in the normal course, one would expect. 29 In any event, the argument so advanced is untenable. In certain situations, particularly in interlocutory matters of a certain kind, it is sufficient for judges, when giving brief reasons for their decisions, to say that their reasons appear sufficiently from the transcript of the argument, or from the submissions advanced by counsel for one of the parties. But that is not the general rule when a final judgment is given after a trial. 30 Reasons for judgment disposing finally of a trial must contain the facts found and the judge's entire reasoning process. Any departure from this rule (by allowing the incorporation by reference to the submissions of counsel without setting those submissions out) would contravene the rule that justice must not only be done but must be seen to be done. There are many other objections in principle to such a practice. It could give rise to an impression that the judge has not properly grappled with the issues in the case (see Whalan v Kogarah Municipal Council [2007] NSWCA 5 at [1]). It would tend to frustrate the losing party's right of appeal, particularly if the parts of counsel's submissions on which the judge accepted were not identified with precision. It would diminish the capacity of the reasons to indicate to the parties the extent to which their arguments have been understood and accepted, it would detract from judicial accountability, and it would prevent the public from understanding properly the basis on which the decision was given (see Soulemezis v Dudley (Holdings) Pty Ltd (1987) 10 NSWLR 247 (at 279 to 280) per McHugh JA). As long ago as in 1866 it was said in Broom's Constitutional Law (1st ed) at 152 to 153 (quoted in De Iacovo v Lacanale [1957] VR 553 at 557 per Monahan J) that: "A public statement of the reasons for a judgment is due to the suitors and to the community at large". Such a practice would not comply with this long-established precept. 31 As I have indicated, the judge has given inadequate reasons for his decision to accept the approach of Mr Elliott in regard to marketing and repairs and to reject that propounded by Mr Jugmans. His Honour's failure to address the disputes on these issues on a rational and reasoned basis gives rise to a material error of law and, through no fault on the part of the respondents, the appeal must succeed. The case needs to be remitted to the District Court so that the quantum can be determined afresh. 32 There are two matters that affect the costs order that should be made. Firstly, the appellant failed in regard to one of the three items of fixed costs that he challenged. Secondly, the appeal books were filed late and this led to the parties being unable to identify the particular pages of the appeal books on which they relied when preparing their written submissions. In fact, even during the hearing of the argument on appeal, Mr Pulsford had difficulty in finding and identifying the particular material on which he sought, from time-to-time, to rely. Mr Young helpfully assisted the Court in this respect by quite properly drawing attention to relevant evidence without regard to the party it favoured. Delay and complications ensued which, had the appellant complied with his obligations in relation to the appeal books, would not otherwise have occurred. In all the circumstances, I propose that the respondents be ordered to pay 75 per cent of the appellant's costs of the appeal. I would not make any order affecting the costs orders made in respect of the trial. 33 I propose the following orders:

(b) The quantum of damages as determined by the trial judge is set aside.

(c) The case is remitted to the District Court so that the quantum of damages can be assessed afresh.

(d) The respondents pay 75 per cent of the costs of the appeal.

(e) The respondents to have a certificate under the Suitors' Fund Act 1951 (NSW) if otherwise qualified. 34 McCOLL JA: I agree with Ipp JA. 35 HOEBEN J: I agree with Ipp JA. **********

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