Sovereign v Bevillesta [2001] NSWSC 369 | Case summary

Sovereign v Bevillesta [2001] NSWSC 369 | Case summary | Zoe

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JUDGMENT (revised to correct typographical errors, 21 January 2002) 1 HIS HONOUR: These two proceedings are aspects of a dispute between the lessor and lessee of a motel in an office building at 220 Pacific Highway, Crows Nest. Sovereign Motor Inns Pty Ltd ('Sovereign'), the lessee which conducted the motel business at the relevant time, is the plaintiff in the 1996 proceeding, and is the defendant in the 1997 proceeding. Bevillesta Pty Ltd ('Bevillesta'), the lessor of the motel, is the defendant in the 1996 proceeding and the plaintiff in the 1997 proceeding. The cases were heard together. 2 In the 1996 proceeding Sovereign seeks damages for breaches of various covenants in the lease. In broad terms, the alleged breaches are failures by Bevillesta: · to use its best endeavours to maintain the air conditioning plant and service the plant to the best of its ability, and to ensure that the air conditioning plant is kept working and reasonably available for use by Sovereign in the demised premises ('the air conditioning claim'); · to service the elevators adequately, and to ensure that they are kept working and reasonably available for use by Sovereign at any particular time ('the elevators claim'); · to maintain the exterior of the building and the common parts of the building to a standard consistent with a quality commercial office building ('the general maintenance claim'); · to allow Sovereign to peacefully possess and enjoy the demised premises during the term of the lease without interruption or disturbance from Bevillesta ('the quiet possession claim'). 3 Sovereign's amended statement of claim in the 1996 proceeding gives particulars of the alleged breaches, in each category, and claims damages calculated by reference to experts' reports. Damages are claimed in respect of the period between 1 September 1991 (when Sovereign commenced occupation under the lease) and 30 June 1996, and also the period between 1 July 1996 and the date of hearing. There is also a claim for permanent injunctions to restrain Bevillesta, its employees, servants and agents (presumably intended to restrain Bevillesta by its employees, servants and agents) from interfering with the air conditioning plant or turning it off, or doing anything to prevent the air conditioning plant from being reasonably available for Sovereign's use. 4 By its amended defence in the 1996 proceeding Bevillesta denies the allegations of breaches of covenant, and challenges Sovereign's entitlement to seek damages in respect of events occurring after the commencement of the 1996 proceeding. In answer to the air conditioning and elevators claims, Bevillesta relies on clause 7.1 (d) of the lease, and claims that because of that clause, Sovereign has no right of action or claim for compensation or damages. 5 In the 1997 proceeding Bevillesta seeks a declaration that the expression 'Area 1 on the roof level', using the description of the demised premises in the lease, means an area (marked red in the plan attached to the summons) limited to the pool and terrace. Bevillesta seeks further, by its amended first cross-claim, a declaration that the expression 'Area 1 on the roof level' used in the description of the demised premises means an area (specified in the diagram annexed to the cross-claim) extending to most of the area of the roof level, including the pool and terrace area and also an area occupied by Telstra Corporation Ltd. Sovereign seeks prohibitory and mandatory injunctions to protect its rights of occupation of the roof level, and an order for an inquiry as to damages. By its second cross-claim Sovereign seeks a similar declaration and injunctions, and an inquiry as to damages, against Telstra. 6 By far the greatest part of the evidence was directed towards the air conditioning claim. There was substantial evidence adduced with respect to the elevators claim, and only limited evidence about the other claims in the 1996 proceeding and the claim in the 1997 proceeding. If Bevillesta is correct about clause 7.1(d), Sovereign must lose on the air conditioning and elevators claims and consequently must lose the bulk of its case. I shall therefore consider the question of construction of clause 7.1(d) first (after setting out the terms of the lease). Since, in my view, clause 7.1(d) does not stand in the way of the air conditioning and elevators claims, I shall then proceed to consider those claims, the other claims in the 1996 and 1997 proceedings and the question of damages.

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Clause 7.1(d) 15 Bevillesta contends that the air conditioning and elevators claims cannot succeed because they are precluded by clause 7.1(d). Clause 7.1(d) is an exclusion clause. It applies if any of the elevators or the air-conditioning plant 'fails to function for any reason'. Where that condition is satisfied, the clause purports to deprive the Lessee of any right of action or claim for compensation or damages against the Lessor in respect of the failure to function. 16 There is now a substantial body of Australian authority dealing with the correct approach to the construction of an exclusion clause in contract between commercial parties. Both sides referred me to a passage from the joint judgment of Mason, Wilson, Brennan, Deane and Dawson JJ in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500, at 510-11, although they sought to use it to reach diametrically opposite conclusions as to the construction of clause 7.1(d). To appreciate the significance of the passage relied upon by the parties, it is necessary to put the Darlington Futures case in the context of previous decisions. 17 The basic problem posed by the construction of an exclusion clause is to reconcile it with the primary contractual undertakings of the parties. Time and again, courts have looked for a way of reading down or limiting the scope of exclusion clauses because, if they are read broadly, one or more of the primary contractual promises will be rendered nugatory or will become no more than pious statements of intention. 18 In England before 1980 a body of case law had developed which seemed to take a special approach to the construction of exclusion clauses, generally to the effect that an exclusion clause will not protect a party to a contract from liability for fundamental breach, or breach of a fundamental term: Suisse Atlantique Societe d'Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361. The House of Lords rejected the doctrine of fundamental breach in Photo Production Ltd v Securicor Ltd [1980] AC 827, in which Lord Diplock observed that the Court was not entitled, at general law, to reject an exclusion clause 'however unreasonable the Court may think it is, if the words are clear and fairly susceptible of one meaning only', and continued (at 851): 'In commercial contracts negotiated between business-men capable of looking after their own interests and deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance), it is, in my view, wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only even after due allowance has been made for the presumption in favour of the implied primary and secondary obligations.' 19 In subsequent cases dealing with commercial contracts, the House of Lords generally followed the 'natural meaning' approach, while observing that the principles applicable to the construction of exclusion clauses do not apply 'in their full rigour' to conditions which merely limit liability: Ailsa Craig Fishing Co Ltd v Malvern Fishing Co Ltd [1983] 1 WLR 964, 970; George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803, 813-4. These cases could be taken to imply that it was no longer permissible to read down the literal effect of an exclusion clause by the application of standard principles of construction, such as the principle that the words of a particular clause should be read in the context of the contract as a whole. That approach, if sustained, would give the drafter of an exclusion clause a very large opportunity to obliterate the primary contractual obligations. 20 The approach to the construction of exclusion and limitation clauses adopted by the High Court of Australia never relied on the doctrine of fundamental breach, nor did it require an exclusion clause to be construed in isolation from the rest of the contract. In Sydney City Council v West (1965) 114 CLR 481 the plaintiff parked his car in the defendant's parking station and received a ticket, which contained a provision that the defendant 'does not accept any responsibility for the loss or damage to any vehicle ... however such loss, damage ... may arise or be caused'. The ticket also contained a provision requiring that the ticket be presented for time-stamping and payment before collection of the vehicle. That provision was taken to imply that the defendant promised not to release vehicles without presentation of the ticket. The plaintiff's car was stolen, and the thief handed the parking station attendant a ticket relating to another car, which he had obtained by false representations. The attendant, whose duty it was to ensure that the appropriate ticket was presented before a vehicle left the parking station, accepted the incorrect ticket and allowed the vehicle to leave. 21 The High Court held that the defendant was not excused by the clause from liability for the loss of the plaintiff's vehicle. Barwick CJ and Taylor J reached this conclusion by a process of construction of the exclusion clause in the context of the contract as a whole, including the provision which required presentation of the ticket for collection of the vehicle. Windeyer J took a similar approach. Barwick CJ and Taylor J said (114 CLR, at 488): 'But we would deny the application of such a clause in those circumstances simply upon the interpretation of the clause itself. Such a clause contemplates that loss or damage may occur by reason of negligence on the part of the warehouseman or his servants in carrying out the obligations created by the contract. But in our view it has no application to negligence in relation to acts done with respect to a bailor's goods which are neither authorised nor permitted by the contract ... . Negligence in these circumstances would be right outside the purview of the clause.' 22 In two later cases concerning commercial contracts, the High Court accepted the approach to construction taken in Sydney City Council v West, but decided that the exclusion clause applied in the circumstances: Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500; Nissho Iwai Australia Ltd v Malaysian International Shipping Corporation, Berhad (1989) 167 CLR 219. A similar approach was taken by the Privy Council, following the dissenting judgment of Barwick CJ, in Port Jackson Stevedoring Pty Ltd v Salmond & Spraggon (Australia) Pty Ltd (1978) 139 CLR 231; on appeal, (1980) 144 CLR 300. 23 In the Darlington Futures case a clause in a contract between a futures broker and its client purported to limit any liability of the broker for damages 'for or in respect of any claim arising out of or in connection with the relationship established by this agreement' to $100. The question was whether that clause protected the broker from liability in an action by the client to recover losses sustained by the client in dealings undertaken by the broker without the client's authorisation. 24 The Full Court of the Supreme Court of South Australia held that the clause had no application to claims arising out of conduct which was outside the scope of the agreement and the relationship between the parties established by it. On appeal, the High Court (Mason, Wilson, Brennan, Deane and Dawson JJ) disagreed with the Full Court, finding that the Full Court had placed a more restrictive interpretation on the clause than its language would naturally bear (at 511). Their Honours found that a claim in respect of an unauthorised transaction may nonetheless have a connection, indeed a substantial connection, with the relationship of broker and client established by the agreement. 25 Their Honours reviewed the English and Australian authorities, agreeing with the 'normal meaning' approach taken by the House of Lords in Photo Production, but disagreeing with the view that exclusion and limitation clauses require different approaches. They emphasised that in Australian law, it is legitimate, and indeed necessary, to construe the language of the exclusion clause in the context of the entire contract of which it forms part (at 509). 26 This is the context of the passage, relied upon by both parties before me, in which their Honours said (at 510-11): 'These decisions clearly establish that the interpretation of an exclusion clause is to be determined by construing the clause according to its natural and ordinary meaning, read in the light of the contract as a whole, thereby giving due weight to the context in which the clause appears including the nature and object of the contract, and, where appropriate, construing the clause contra proferentem in case of ambiguity. Notwithstanding the comments of Lord Fraser in Ailsa Craig, the same principle applies to the construction of limitation clauses. As King CJ noted in his judgment in the Supreme Court, a limitation clause may be so severe in its operation as to make its effect virtually indistinguishable from that of an exclusion clause. And the principle, in the form in which we have expressed it, does no more than express the general approach to the interpretation of contracts and it is of sufficient generality to accommodate the different considerations that may arise in the interpretation of a wide variety of exclusion and limitation clauses in formal commercial contracts between business people when no question of the reasonableness or fairness of the clause arises.' 27 Bevillesta submits that no question of the reasonableness or fairness of the clause arises in this case, since this is a formal commercial contract between business people. I agree. The sole question is as to the proper construction of the clause in its context. 28 Establishing the correct Australian approach to the construction of an exclusion clause does not, unfortunately, dictate a clear solution to the construction of a particular contract. The High Court in Darlington Futures rejected the construction adopted by the Full Court, whose approach was similar to the majority's approach in Sydney City Council v West, while approving the principles enunciated by the majority of the High Court in the West case. The difference between the two High Court decisions must lie in the language used, and in particular, the reach of the words 'claims arising ... in connection with' used in the Darlington Futures case. In the absence of such special words, an exclusion clause may still be construed in the manner adopted by the majority in Sydney City Council v West, however sweeping its language. 29 That is illustrated by Glebe Island Terminals Pty Ltd v Continental Seagram Pty Ltd (1993) 40 NSWLR 206. In that case thieves stole some whisky from a container terminal in Sydney, aided by the connivance of some employees of the terminal operator. The consignee sued the carrier and its sub-contractor, the terminal operator, for damages resulting from the loss, and the terminal operator cross-claimed for an indemnity from the carrier for any liability to the consignee. The bill of lading under which the goods were carried contained an exemption clause (clause 4) protecting the carrier from liability for the loss of goods after they were unloaded, 'in any circumstances whatsoever' and 'howsoever caused'. It also contained a provision (clause 8 (3)) which stated that the exemption applied whether or not the loss was caused by negligence or actions constituting a fundamental breach of the contract. By virtue of a Himalaya clause, these exemptions were extended to the terminal operator as a sub-contractor of the carrier. 30 All members of the Court of Appeal of New South Wales took the view that clause 4 standing alone would not have exempted the carrier. Sheller JA (with whom Cripps JA agreed) held (at 239) that if clause 4 stood alone, the Court would be obliged (applying Sydney City Council v West) to hold that the exemption did not extend to an unauthorised delivery amounting to conversion of the goods, such as occurred in the case at hand. Handley JA agreed on this point (at 210). This was so, even though clause 4 used the broad language 'in any circumstances whatsoever' and 'howsoever caused'. 31 However, clause 8(3) specifically stated that the exemption was to apply whether or not the loss or damage was caused by an action constituting a fundamental breach of contract. The actions of the employees of the terminal operator who connived with the thieves were in fundamental breach of the contract evidenced by the bill of lading. In Sheller JA's view, the terms of clause 8(3) were plain and consequently an exemption from liability in clause 4 applied (at 240). Handley JA, dissenting on this point, was influenced by Sydney City Council v West to prefer the view that clause 8(3) did not protect the carrier because delivery to the thief was not authorised by the contract, was in breach of an express provision relating to delivery, and was a conversion (at 215). He based his judgment on the ground that an exclusion clause such as the one before him, and also the clause in West's case, does not protect a bailee against deliberate damage or conversion (at 216). 32 In the present case Sovereign contends that Bevillesta failed to use its best endeavours to maintain and service the air-conditioning plant, by non-feasance and by deliberate intervention in turning off the system. It contends that Bevillesta failed to use its best endeavours to maintain and service the elevators, by non-feasance. Sovereign's complaints relate to Bevillesta's performance of its contractual obligations, rather than to some extraneous event which might be treated as unauthorised by the contract, such as conniving in the theft of goods. Therefore, the point of distinction between, say, Sydney City Council v West and the Darlington Futures case is not before the Court in the present case. 33 Nevertheless, the earlier cases are helpful because they show the kind of specific language in an exclusion clause which has been held sufficient to override primary contractual obligations. Here there is nothing equivalent to the stipulation in the Darlington Futures case excluding liability for damages in respect of a claim 'in connection with' the relationship established by the agreement, and there is no equivalent to the specific stipulation of clause 8(3) in the Glebe Island Terminals case. Here, the question is whether the words 'fails to function for any reason', which are literally quite general but which appear proximately to the 'best endeavours' undertaking in clause 7.1(a), should be taken to prevent a claim for damages for non-performance of the 'best endeavours' undertaking. It appears to me that, just as clause 4 would not (had it stood alone) have excluded all liability for damages in the Glebe Island Terminals case, notwithstanding its broad language, so clause 7.1(d) should not be construed to exclude all liability for damages in this case. 34 It seems to me that some specific textual considerations support the conclusion to which the case law has guided me. One is, as I have said, the proximity of the exclusion clause to the 'best endeavours' clause. It seems unlikely that the drafter would have intended that the 'best endeavours' clause, which is after all the first sub-provision on the subject of air-conditioning and elevators, designated an obligation which would then be substantially overridden by a later sub-clause of the same provision. The proximity of the two provisions demands that they be read together and each given a sensible sphere of operation. 35 Secondly, clause 7.1(a) is expressly a 'best endeavours' provision rather than an absolute obligation. The fact that it is limited to best endeavours suggests that clause 7.1(a) is intended to have binding and enforceable effect to that extent. 36 Thirdly, if clause 7.1(b) removes any cause of action for damages for breach of clause 7.1(a), the only way to give clause 7.1(a) any effect at all is to say that it creates an obligation enforceable by injunction. This, indeed, is Bevillesta's submission. Bevillesta submits that it is permissible for the parties to a contract to agree to limit the remedies that may be available in respect of breach of any term of the contract, citing J Carter and D Harland, Contract Law in Australia (3rd ed, 1996), at [748]; Geo Mitchell Ltd v Finney Lock [1983] 2 AC 803, and noting a statutory example in 68A of the Trade Practices Act 1974 (Cth). Bevillesta argues that in the present case the parties have agreed by clause 7.1(d) to exclude the remedies of damages and compensation, effectively leaving Sovereign with only the remedy of injunction. 37 While accepting the principle upon which Bevillesta relies, I find it implausible that the parties in this case would have intended that Sovereign's remedies for breach of clause 7.1(a) should be limited to injunctive orders. Clause 7.1(a) is not the kind of provision that would be readily enforceable by injunction. It is unspecific in its terms, and its enforcement would fall foul of the principle that an injunction will not lie if the making of the order would entail continual superintendence of the contractual obligations by the Court. Breach of a promise to use best endeavours to maintain and service equipment most naturally sounds in damages. 38 Bevillesta submits that it would make commercial sense for the parties to agree to exclude the remedy of damages and leave the Lessee to injunctive relief if problems with the air-conditioning plant and elevators occur. This is because, says Bevillesta, problems with this equipment should be resolved in matter of hours, days, or weeks, rather than months or years, and so urgent equitable relief is more appropriate than proceedings for damages. Bevillesta points out that in proceedings for equitable relief, the Court could appoint an expert to advise as to what steps need to be taken, and in a sufficiently serious case, the Court might even appoint a receiver. In contrast, an action for damages might not come on for several years, there will be issues associated with causation and assessment of damages, and consequent costs to both parties. 39 I reject this submission. The fact that remedial work on the air-conditioning plant or the elevators should be undertaken very quickly after they fail to function does not mean that damages cannot also be an appropriate remedy. Moreover, to obtain an injunction the Lessee would have to overcome the Court's reluctance to become involved in constant superintendence of the performance of contractual obligations, even if the parties had effectively agreed to exclude the remedy of damages. 40 All of these considerations point to the view that clause 7.1(d) does not completely prevent Sovereign from ever making any claim for damages in any circumstances. The question is: what boundaries does clause 7.1(d) set to the making of a claim for compensation for breach of clause 7.1(a)? Sovereign submits that the combined effect of clause 7.1(a) and clause 7.1(d) is that Bevillesta is obliged to use its best endeavours to maintain and service the air-conditioning plant and elevators to ensure they are kept working and reasonably available for use by Sovereign, but if notwithstanding the use of Bevillesta's best endeavours the air-conditioning plant or elevators fail to function for any reason, Sovereign does not by reason of that failure have any right of action or claim for compensation or damages against Bevillesta. This construction requires, in effect, the insertion of the italicised words into clause 7.1(d) - words which might readily have been, but were not, inserted by the drafter. In my view, Sovereign's preferred construction is not authorised by the wording of the clause. The limitations imposed by clause 7.1(d) are to be found in a close analysis of the wording of the clause itself, rather than by the insertion of words not literally there. 41 Clause 7.1(d) does not purport on its face to remove all claims for compensation for breach of clause 7.1(a), but only applies where the air-conditioning plant or elevators 'fail to function' for any reason. The concept of 'failure', when applied to the failure of a natural person to do something, is highly ambiguous. In Ingram v Ingram (1938) 38 SR (NSW) 407, 410 Jordan CJ said: '[W]here it is provided by statute that certain consequences shall follow if a person fails to do something which is directed to be done, the meaning of the word 'fail' depends on the context in which it is found. In some contexts it may mean simply the omission to do the thing in question, irrespective of any reason which may have existed for his not doing it ... . In other cases it may mean an omission to do the thing by reason of some carelessness or delinquency on his part, but not omission caused by impossibility for which the person in question is not responsible ... . In other cases, it may mean omission to do the thing, but so that omission caused by impossibility arising from some causes is included and from others is excluded ... .'

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(See also CBS Productions Pty Ltd v O'Neill (1985) 1 NSWLR 601, 608-9 per Kirby P, 615-16 per Mahoney JA; Claro v Minister for Immigration (1993) 46 FCR 494, 503-4 per Birchett J.) 42 When the word 'fail' is applied to mechanical equipment, it seems to me that the ambiguity is less acute. In most contexts the word 'fail' is likely to be used in the first of Jordan CJ's senses, so that there is a 'failure' by the equipment whenever it does not do what it should do when activated, whatever the cause. In the present case the words 'for any reason' reinforce that construction. Consequently, clause 7.1(d) lays its cloak of protection over every non-functioning of the air-conditioning plant or elevators, whatever the cause. In my opinion, moreover, the words 'fails to function' apply both where the equipment does not operate at all, and where it does not operate adequately. Thus, an air-conditioning plant fails to function if it does not heat or cool the air to the required temperature, even though it heats or cools the air, as the case may be, to some extent. 43 However, mechanical equipment only 'fails to function' if it does not respond as it should when activated. If the reason for the non-functioning of the equipment is that it has not been turned on, or its normal operations have been interfered with, one could hardly say that the equipment has failed to function. It has been prevented from functioning by human intervention. This is significant in the present case because an important part of Sovereign's claim is its allegation that Bevillesta interfered with the settings of the air-conditioning plant and sometimes turned it off altogether. 44 Clause 7.1(d) only prevents claims for compensation 'by reason of' the elevators or the air-conditioning plant failing to function. When clauses 7.1(a) and 7.1(d) are read together, they can be seen to envisage a sequence. First, the equipment fails. No right of compensation flows from that, whatever the reason for the failure. But Bevillesta must use its best endeavours to fix the problem 'to ensure that the same are kept working ...'. If, notwithstanding its best endeavours, the equipment continues to fail to function, there is still no right of compensation. However, if Bevillesta does not use its best endeavours, Sovereign may claim compensation for loss caused by the failure to use best endeavours, though it cannot claim compensation in respect of the failure to function as such. 45 In my opinion, an instructive analogy to clause 7.1(d) can be found in clause 13.13, which is in the following terms:

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'[Lessor under no liability for failure of facilities and services] 13.13 The Lessor will not be under any liability for any loss injury or damage sustained by the Lessee or any other person at any time as a result of or arising in any way out of the failure of the electricity or water supply or any other services or facilities provided by the Lessor or enjoyed by the Lessee in conjunction with the Demised Premises. If any such supply, service or facility fails because of the fault of the Lessor then the Lessor shall use its best endeavours to have the supply service or facility restored as soon as possible.' 46 There are dangers in construing one clause of a commercial agreement by recourse to another clause, necessarily worded differently. However, the Court should presume that the same words are meant the same way in various parts of a contract: Re Birks [1900] 1 Ch 417, 418 per Lord Lindley. In this case I would go further. Although the 'facilities and services' to which clause 13.13 apply do not, in my opinion, include the air-conditioning plant and the elevators, it is likely that the Lessor and Lessee would adopt the same liability regime for both matters. The structure of clause 13.13 is that the Lessor undertakes to respond on a 'best endeavours' basis if any of the services or facilities fails, but has no liability for losses arising out of the failure of the facilities or services. Liability for failure to use best endeavours has clearly not been excluded. 47 My conclusion, therefore, is that clause 7.1(d), on its proper construction, does not prevent Sovereign from recovering damages in compensation for loss which it has suffered by reason of Bevillesta's breach of its obligation to use its best endeavours, as opposed to loss suffered by reason of the equipment failing to function; and the clause does not prevent Sovereign from recovering damages for loss suffered through human intervention with the operation of the equipment, amounting to breach of the best endeavours obligation. 48 In reaching these conclusions, I have not relied on the proposition that an exclusion clause should be construed contra proferentem. Counsel for Bevillesta submitted that · construction contra proferentem requires the Court to identify the person (the proferens) benefiting from a contractual provision rather than the person who has drafted it or put it forward; · while the proferens of clause 7.1(d) would be Bevillesta if that clause were considered in isolation, the proferens of clause 7.1(a) would be Sovereign if that clause were considered in isolation; · if clause 7 is considered as a whole, it cannot be characterised as a clause for the benefit of one party rather than the other; · in those circumstances, it would be artificial to apply the rule of construction contra proferentem to clause 7 or any part of it: Amax International Ltd v Custodian Holdings Ltd [1986] 2 EGLR 111; K Lewison, The Interpretation of Contracts (2nd ed, 1997), 168-173; · the Court should simply resolve any ambiguity in accordance with the most natural meaning of the words in question, construed in the context of the lease a whole.

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Air-conditioning 50 Expert evidence with respect to air-conditioning was given by Mr Don Humphreys for sovereign and Mr John Reidy for Bevillesta. They produced an agreed statement of facts with respect to air-conditioning. While it is fairly technical, it accurately describes the system and is worth reproducing in full. It is annexed to these reasons for judgment. 51 There is a more simple description of the air-conditioning plant in the report of Mr Humphreys, as follows: 'The plant for the motel is a conventional induction unit system. It comprises two primary supply air conditioners, one for the east side of the building and one for the west side of the building ... . These conditioners cool and de-humidify, or heat, the primary supply air, on a pre-set schedule based on the ambient outdoor air temperature ... . The primary supply air takes care of the thermal transmission loads on the building from the outdoor air temperature, and therefore responds to ambient outdoor air temperatures. The primary supply air caters for approximately 20-25% of the room loads, due to heat transfer through the building structure. 'The secondary chilled water supplied to the induction units provides the other 75-80% of the room cooling climate. A thermostat in each room allows secondary chilled water to flow through the induction unit cooling coil, if the primary supply air is unable to maintain satisfactory room conditions, due to internal heat loads, and solar loads.' 52 As Mr Humphreys explained, primary chilled water is provided by the system and is used to cool and de-humidity the primary air supply. The primary chilled water is warmed by the primary air supply and is the source of secondary chilled water, designed to have a temperature of 11° C on full load days when the ambient outdoor air temperature is 32.2° C. The primary air cools, or heats, the motel rooms to a degree which depends on the thermal loads imposed on the building by the outdoor air temperature. The secondary chilled water supply cools a particular room in response to the loads imposed by the sun, people in the room, lights and other heat loads which are internal to the room. There is a thermostat located in each room. The main air-conditioning plant, and the secondary chilled water pump, are intended to provide chilled water to design temperatures whenever necessary, and to meet the demands for cooling made by the room thermostats. 53 The air-conditioning plant is controlled by a 'Direct Digital Control (DDC)' system, in which there are programmable controls that compare the outdoor ambient temperatures and indoor temperatures to sensors around the building. These controls are programmed to settings which cause the equipment to cut in and cut out as required by the program, and which may adjust the level of primary or secondary chilled water. The controls can be re-programmed at any time. There was also an energy management system ('EMS') which monitored the status of the air-conditioning plant, in order to operate the plant in an energy efficient manner. 54 Mr Humphreys and Mr Reidy agreed that, as Mr Humphreys put it in his first report, 'the system currently operating at the premises is capable of providing satisfactory cooling and air-conditioning for the motel premises'. In their agreed statement of facts, the experts said there was no relevant difference in the air-conditioning plant as existed before and after 1996. 55 However, the evidence clearly establishes that the system did not consistently provide satisfactory cooling and air-conditioning. Thus: · Mr Anton Ramian, the maintenance manager of the building who was responsible at the relevant time for maintenance of the air-conditioning system, agreed in cross-examination that there had been numerous and regular complaints about the air-conditioning to the hotel, sometimes to the effect that the hotel area was too hot, and sometimes that it was too cold. He accepted that his own observation of the temperature level was consistent with the complaints. · Mr John Shoudra, the manager of Sovereign's hotel from November 1998, gave evidence that he had carried out a number of room temperature readings between 5 December 1998 and 4 February 1999. The monitors were not placed in a sunny position so as to give an abnormally high reading. The readings showed room temperatures consistently in the mid to high 20s, ranging as high as 35° C on one occasion. He said the hotel also experienced humidity problems in the rooms, and that he had observed mildew on the bottoms of the curtains immediately above the air-conditioning outlets. And he gave particulars of various complaints that he had received. · Ms Kathy Laus, the hotel's administration officer, gave evidence that the restaurant and bar were very hot and stuffy during the summer and there were days during the winter when the restaurant and bar were very cold. She recalled frequent complaints about the air-conditioning and said she 'was apologising to guests on a daily basis, when they made complaints about the temperature in the rooms'. She said that complaints about the air-conditioning would come in spurts, every day for a period, stopping for a few days and then starting again. There were also complaints from guests attending conferences at the hotel. · Mr Robert Hancock, the licensee and co-manager with his wife of the motel business between January 1994 and August 1998, gave evidence that he observed and experienced severe problems with the comfort levels provided by the air-conditioning plant, particularly as he not only worked in the building, but lived there while employed by Sovereign. His observation was that from 9 am to 5pm Monday to Friday, excluding public holidays, the air-conditioning operated at a satisfactory level. During this time, of course, the building was used by tenants of its commercial office space. However, according to Hancock, between 6pm and 6am weekdays, and for the whole of the weekends and public holidays, the air-conditioning in all parts of the hotel was very uncomfortable. He made continual complaints. He gave evidence, to which I shall return, that gauges and dials in the chiller plant room were in an 'off' position. · Ms Claudia Steiner, who worked as a sales executive for Sovereign from 1992 to 1998, gave evidence which particularised complaints made by corporate and government clients who had stopped using the hotel's facilities. The complaints included complaints about the adequacy and noise of the air-conditioning plant. · Mr Eric Leatherbarrow, an expert consultant on hotel business, lived with his wife in the motel from November 1993 until February 1995, occupying a suite with a westerly aspect. His evidence was that throughout the entire period of their stay, they experienced considerable problems with the air-conditioning. He said the general comfort level provided by the air-conditioning was unsatisfactory during particular seasons, days of the week and times of day. The worst periods were the warmer months on weekends and nights. During normal commercial office hours, the comfort level was distinctly better. The suite was also too cold in the winter, at night and on the weekends. · Mr Douglas McCarron was the managing director of Red Barron Inns Pty Ltd, which conducted a motel business at the building before Sovereign replaced it. Mr McCarron's company was operating the motel when Bevillesta acquired the building. According to Mr McCarron's evidence, the air-conditioning was generally satisfactory while the building was owned by the previous owner, but problems with the air-conditioning arose almost immediately after Bevillesta acquired the building. He received numerous and continual complaints about the air-conditioning from the motel manager. He said the comfort level of the air-conditioning deteriorated after business hours and on weekends. 56 There is no credible challenge to this evidence, and I accept it. It is evidence which establishes that there were serious and persistent problems with the cooling system of the hotel premises. They were not problems that could be explained by reference to the inevitable breakdowns that occur in any air-conditioning system. Nor could they be explained by reference to problems with equipment that Bevillesta was not required to maintain, such as pneumatic thermostats in the hotel guest rooms. The problems were too general and persistent to be explained in that way. 57 In reaching my conclusion that were serious and persistent problems with the cooling system, I have had regard to the evidence which shows that there were numerous complaints by hotel guests and users of conference facilities. The evidence concerning those complaints was not admitted to prove the truth of the facts asserted in the complaints. But it did prove the fact that complaints were made about the air-conditioning, very frequently. Counsel for Sovereign submitted that 'the fact that numerous complaints were made in circumstances where the evidence shows that they were likely, more often than not, to have been true, is an important link in the causal chain between the breaches and the under-performance of the hotel.' I agree. I shall return to the problem of causation later.

[24]

The low load theory in connection with the chillers 59 Both Mr Reidy and Mr Ramian gave evidence that a likely explanation for cooling problems was that the chillers would cycle off in low load periods. Low load periods include mild to cold ambient temperature conditions, according to Mr Reidy's evidence. Mr Ramian said that 'a feature of the air-conditioning system installed in the Building is that the chillers and boilers will automatically cycle on almost continuously during office hours ie at times of peak load, but cycle on and off after office hours when low load conditions prevailed.' 60 It appears that the phenomenon of 'cycling off' was the one identified by Bevillesta in its verified answers to interrogatories, in which it said that the energy management system would cycle off the chiller if the outside air temperature fell below 14° C 'or such other temperature as would apply depending on the season'. 61 According to the agreed statement of facts prepared by the air-conditioning experts, the load for the chillers is determined by the outdoor ambient temperature, the number of air handling units and hotel room induction units in operation, and internal conditions (such as temperature, humidity and the sun load). Mr Pericles, an air-conditioning technician who gave evidence for Sovereign, explained that the primary factors for hotel guest rooms are the outside ambient temperature and the secondary chilled water to the induction units in the rooms, whereas for the restaurant and conference areas and foyer, which operate primarily on recycled air, the primary factor is the internal load (space temperature). 62 Mr Humphries gave evidence in cross-examination that chillers of the kind in the building are designed to unload at 10% of their full capacity. He estimated that about 60 or 70% of the demand on the chilling system would be referable to the office part of the building at times when both the hotel and office were operating. 63 The low load theory does not explain the consistent cooling problems, because it is plain from the evidence, summarised above, that cooling problems were frequently experienced at times of warm to hot ambient temperatures - in the vicinity of 24° C, according to Mr Ramian's evidence. The evidence, though not precise as to quantification, convinces me that it is unlikely that the chillers could be in 'low load' when the outside air temperature was as high as 24°, even though the office area may not have been air-conditioned at the time. 64 Moreover, there is evidence to indicate that the chillers were not working effectively even during office hours, at times of peak load. Thus, during the period from Monday 24 November 1997 to Thursday 27 November 1997 the ambient temperature (dry bulb) varied from between 21° C and 31.3° C. In office hours during the same period the temperature of the primary chilled water fluctuated between 7.2° C and 17.5° C. During the same period the temperature of the secondary chilled water fluctuated between 13° C and 20° C. Mr Reidy accepted in cross-examination that if the primary chilled water was not maintained at the design temperature, 6 or 7° C, this would cause the air supplied to the hotel rooms to rise in temperature. I infer that during those four days, the temperature in the hotel rooms was unacceptably high and the air-conditioning was not working adequately. 65 Bevillesta has not contended that the chillers were unable to supply primary chilled water at design temperature, even in extreme summer conditions. Indeed, there is evidence that the chillers were able to provide primary chilled water at near design temperature when the ambient temperature was 35.6° C (dry bulb). Sovereign invites me to draw the conclusion that the evidence of chronic cooling problems is inconsistent with the low-level theory. Mr Ramian agreed that all other things being equal, if the chillers are not programmed to cycle off when it is mild to warm, they will not cycle off when it is warm to hot. Mr Reidy agreed in cross-examination that if the complaints about the rooms being too hot were made on days of warm to high ambient air temperature (as they were), the low load theory would not explain why those complaints were made. In light of all the evidence, I agree that the low load theory is to be rejected.

[25]

The wear and tear theory in connection with the chillers 66 In his report annexed to his affidavit of 2 May 2000, Mr Reidy criticised the earlier report prepared by Mr Humphreys. He said that Ms Humphreys had not taken into account faults that may develop due to ordinary wear and tear. However, in cross-examination Mr Reidy agreed that the 'wear and tear' thesis was an unlikely explanation for continuous problems over a period of years. 67 Moreover, Mr Humphreys gave plausible reasons for rejecting the wear and tear theory. He pointed out that Mr Reidy gave no instances of faults due to wear and tear, other than saying he was advised that there was a fault with the chillers on 27 and 28 February 1999. On 28 January 1998, the air-conditioning plant was providing satisfactory conditions with an outside ambient temperature of up to 36.5° C. On 3 March 1999 the air-conditioning plant provided satisfactory conditions with an outside ambient temperature of up to 30.1° C. There is nothing to indicate that the chillers or related components were suffering from wear and tear on those days. 68 On this evidence, I do not regard the wear and tear theory a satisfactory general explanation for the persistent cooling problems, or even as an explanation for any of the reported problems at any stage. 69 A variant of the wear and tear theory was advanced by Bevillesta in submissions, relying on evidence given by Mr Pericles on behalf of Sovereign. Mr Pericles reported to Sovereign on 10 August 1998, observing that 'the pneumatic control system could also be a cause of the problems. They are known to be unreliable and unstable.'. In a later report dated 9 December 1999, Mr Pericles described the pneumatic control system as 'notoriously unreliable and unstable' and identified it as 'the most likely cause of the problems' experienced in the hotel. 70 Bevillesta submits that the secondary chilled water system was not only unstable but was evidently prone to malfunction. The graphs attached to Mr Humphries' report show that on 27 and 28 February 1999 (a weekend) the primary chilled water which served the restaurant was being chilled in accordance with controls (graphs 17) but the secondary chilled water temperature was far too high (graphs 11). Bevillesta says that plainly something had gone wrong with the secondary chilled water system, even though graph 17 showed that the chillers were working. 71 Bevillesta submits that although it had the air-conditioning system serviced and maintained on a regular basis by reputable companies, and regularly replaced parts as required, and Mr Ramian followed the instructions of technicians who came out to maintain the system, the pneumatic control system of the secondary chilled water system remained a major problem, for which Bevillesta cannot be made to answer. 72 Added to this, says Bevillesta, are the inevitable breakdowns in the system that occur from time to time which have the potential to affect performance of the system. Bevillesta cannot be made liable for those breakdowns so long as at it has used its best endeavours to repair the problems as they arise. 73 I do not find any of these variants of the wear and tear theory to be plausible. The evidence of Mr Pericles with respect to the pneumatic control system is not supported, as a probable cause of the problems, by the air conditioning experts of either party. Mr Pericles was a distinctly unimpressive witness who did not give an impression of expertise to anything like the level of expertise of Mr Humphreys and Mr Reidy. As I have said, for the most part the evidence in this case proceeded on the basis that the air-conditioning system was capable of providing satisfactory cooling and air-conditioning to the building including the hotel premises. 74 As to the events of 27 and 28 February 1999, Mr Humphreys noted the graphs and concluded that the unsatisfactory conditions in the hotel guest rooms because secondary chilled water was supplied at too high a temperature, were not the result of any inadequacy or shortcomings in the plant, but were solely the result of the way in which the plant was caused to operate by the building owner. That conclusion is not invalidated by graph 17. 75 If Bevillesta intervened in the cooling and heating systems as Sovereign alleges, the fact that Bevillesta attended to regular maintenance tasks is beside the point. The fact that there were inevitably, from time to time, breakdowns in the system may be relevant to the quantification of Sovereign's loss, but is not an obstacle to the finding of liability. 76 Another contention, advanced in Bevillesta's written submissions, is that the efficiency of the air-conditioning system was affected by the location, number and type of sensors around the building. I accept the evidence of Mr Humphreys that this factor did not have any significant effect in the present case, although he admitted that the location of the sensors was not ideal.

[27]

Unloading of the chillers 78 As appears from the appendix of agreed facts, each of the two chillers has internal electronic controls of the temperature of the cooling water leaving the chiller. Each chiller has a manual 'set point adjustment knob', which adjusts the temperature of the chilled water from the chiller. There are also adjustment knobs for limiting the power input to each chiller. Some of these controls require an operator to reset the controls after they have been triggered; while others will automatically allow the chiller to resume operation when the conditions which threatened to damage the chiller no longer exist. There is a 20 minute delay built into the control system to prevent damage to the chiller from frequent starting. In the plant room there is a DDC control unit capable of turning the chillers on and off. Each chiller contains safety controls to protect it from damage. The DDC control unit could be controlled remotely by units operated by Mr Ramian and Mr Reidy. 79 Chillers are 'unloaded' when something is done to reduce the capacity of the chiller to chill the primary chilled water to the 'set point' temperature. If a chiller is unloaded it will not have sufficient capacity to provide primary chilled water to the system at the set point temperature, if a sufficient load is placed on the system. Consequently room temperature will rise. As Mr Reidy acknowledged in cross-examination, a pattern of cooling problems overnight on weekdays, and during weekends and public holidays, is consistent with the chillers being unloaded prior to those periods and then 're-loaded' at the commencement of business hours. 80 The chillers could be unloaded by either Mr Ramian or Mr Reidy, who had access to the computers which would enable them to alter the controls in the DDC and the previous energy management system. Anyone who had access to the plant room could unload either chiller by altering the manual calibrated knob on the chiller. 81 Mr Ramian acknowledged that he manually unloaded the chillers over many years, although he later said that he only did so on instructions from the technician who serviced the chillers. He denied adjusting the temperature calibrated knob otherwise than pursuant to instructions given by the technician. He denied that the purpose of unloading the chillers was to reduce power consumption, although he agreed with expert opinion that the power input to a chiller is reduced if it is unloaded. 82 In my opinion, the chillers were persistently unloaded, probably by Mr Ramian or Mr Reidy, in a manner which reduced their performance outside commercial office hours. I make this finding by inference from evidence, which shows that problems arose persistently outside but not within commercial office hours; unloading the chillers would produce this effect, Mr Ramian and Mr Reidy had access to computers would enable them to do so, and to manual knobs in the plant room, and they knew how to unload the chillers to produce the outcomes which were in fact observed. Unloading the chillers had the effect of reducing the cost of operating the air-conditioning system. It seems to me likely, in those circumstances, that Mr Ramian or Mr Reidy unloaded the chillers outside business hours to reduce the cost operating of the air-conditioning plant. 83 Bevillesta pointed to evidence of occasions when the system malfunctioned during office hours. It submitted that no rational and experienced business owner would deliberately risk placing its commercial tenancies (included its own offices) in uncomfortable conditions with a view to saving a few thousand dollars per year. That may be so. Sovereign's case does not purport to explain all malfunctions. Instead, it asserts that there was a pattern to the malfunctions, where (by and large) cooling problems occurred outside normal business hours when only the hotel would be affected.

[32]

It will be noted that in this conversation Mr Reidy admitted that a few years before May 1997, Bevillesta used to turn off the chiller. Mr Reidy repeated this admission in his oral evidence, with respect to the period before 1994. 86 Secondly, Mr Hancock gave evidence of a conversation with Mr Ramian during 1996, in which Mr Ramian told him that 'because of all the complaints, we have overridden the system and the chillers and boilers will be running all of the time.' Mr Hancock noted that the problems with the air-conditioning system after business hours immediately disappeared. The conversation was not denied by Mr Ramian and I accept that it occurred. 87 Thirdly, Mr Humphreys inspected the air-conditioning system on 18, 19 and 20 March 1999. Mr Ramian said he was aware from early March 1999 that the inspection would occur. The evidence shows that the system commenced to function in accordance with its design temperatures from about 11pm on Sunday 28th 1999 until 21 March 1999, the day after completion of the inspection. Mr Humphreys postulated in his report that the energy management system had been disabled during the period from 1 March to 20 March 1999. 88 On 3 May 2000 Sovereign's solicitor wrote to Bevillesta's solicitor asking for information about a fault in the chillers on Saturday 27 and Sunday 28 February 1999, referred to in what was then a draft of Mr Reidy's report. Bevillesta's solicitor replied on 5 May 2000, saying that the chillers 'tripped off' on 27/28 February and this was noticed on 1 March, and rectified on that day, when Mr Ramian manually reset them. I find this to be an implausible account, having regard to the oral evidence of Mr Reidy and Mr Ramian. 89 Mr Reidy admitted in cross-examination that Mr Humphreys' graph of the entering temperature in a hotel room on 27 and 28 February suggested that it was probable that the chillers were off on 27 February and for most of 28 February, but the position changed late on 28 February. This suggests that the chillers were manually switched on at the end of the weekend, before the commencement of the next business day, Monday 1 March, rather than that a problem was located and fixed on the Monday. Mr Humphreys' graph (graph 11) itself shows a dramatic change just before the end of 28 February. 90 Mr Ramian was cross-examined about Mr Humphreys' graph 17, which shows the entering temperature of air into the restaurant. The graph indicates that the air had been chilled reasonably effectively on 27 and 28 February. This suggests that the chillers were in fact operating to deliver chilled air to the restaurant, which relied only on primary chilled water. Graph 11 shows that the secondary chilled water had not been adequately chilled. Mr Ramian was evasive in his answers to questions on the subject, being at first reluctant to admit that he instructed Bevillesta's solicitor that the chillers had tripped off, and eventually admitting that it was inaccurate to say so. 91 In the end, Bevillesta offered no satisfactory explanation for graphs 11 and 17, leaving open the inference that the effects were produced by some manipulation of the system.

[36]

Breach of clause 7.1(a) in connection with the elevators 102 Mr Shoudra gave evidence that since the commencement of his appointment as hotel manager in November 1998, the elevator system for the hotel had been a constant source of complaint. The complaints related to the failure of the carriage floor to level with the floor of the building, lift doors not opening, the lift not stopping at the correct floors, the ventilation fans in the elevators frequently not operating, one of the lifts operating of its own accord without passengers throughout the night, and significant delays in the arrival of elevators. Extensive incident reports and correspondence about the lifts are in evidence. Ms Laus gave evidence that there were daily complaints to her from guests and house staff about the operation of the elevators, along the same lines as particularised by Mr Shoudra. Mr Gary Miles, a director of Sovereign, gave evidence that he received reports from members of staff about problems with the elevators, which he passed on to Mr Ramian. The problems which he particularised are similar to those set out by Mr Shoudra. The evidence of Mr Leatherbarrow and Mr Hancock is to the same effect. 103 The evidence shows that problems existed between 1991, when the lease commenced, and April 2000 when Bevillesta sold the building. Sovereign contends that this evidence, when considered together, demonstrates that Bevillesta failed to use its best endeavours to maintain and service the elevators, as required by clause 7.1(a). 104 The complaints by guests and staff related to reasonably serious problems, although not necessarily emergency situations. Sovereign alleges that the complaints were not responded to by Bevillesta except as part of the regular maintenance program. There is evidence that Bevillesta told Sovereign not to contact Schindler Lifts except in an emergency - for example, someone being locked in an elevator. 105 Bevillesta's answer is that it engaged Schindler Lifts Australia Pty Ltd, a reputable lift maintenance company, to service the elevators on a regular basis and by doing so, it discharged its obligations under the lease. There is in evidence a document entitled 'Schindler Comprehensive Maintenance Agreement' between Schindler and Bevillesta dated 29 May 1996, which required Schindler to provide suitably trained and supervised personnel to service and maintain the equipment and to keep it in good working order, and required Bevillesta to pay substantial fees in return. The agreement is not based on a 'per call' fee in the ordinary course. Programmed maintenance schedules show that during the period 1996/1997 Schindler carried out general maintenance and also responded to problems. 106 Quite apart from the maintenance schedules, there is evidence that Bevillesta contracted Schindler for advice in relation to the elevators, and in response to complaints. For example, Bevillesta procured a report from Schindler on specific problems by letter dated 14 December 1998, and exhibits to Mr Shoudra's affidavit show that Mr Ramian contacted Schindler frequently in response to complaints during 1999. It cannot be said that Bevillesta did nothing except to arrange routine maintenance. 107 The evidence persuades me that the elevators in this building were more than usually troublesome. However, I have concluded that the plaintiff has failed to establish that Bevillesta did not use its best endeavours to maintain and service the elevators to the best of its ability, to ensure that they were kept working and reasonably available for Sovereign's use in the hotel premises. There was therefore no breach of clause 7.1(a).

[38]

Damages - causation 110 Sovereign seeks to recover damages representing its loss due to under-performance of the hotel. To do so, it must establish that the loss was caused by Bevillesta's breach of clause 7.1(a) with respect to the air-conditioning plant. As counsel for Bevillesta submitted, the onus is squarely on Sovereign to prove causation: Wilsher v Essex Area Health Authority [1988] AC 1074; J Carter and D Harland, Contract Law in Australia (3rd ed, 1996), para [2120]. In the common law tradition, as it applies to actions in contract or tort, the question of causation is a question of fact which 'must be determined by applying common sense to the facts of each particular case': March v E &MH Stramare Pty Ltd (1991) 171 CLR 506, 515 per Mason CJ. The question is not whether, but for the defendant's breach, the plaintiff's loss would have been sustained, but whether the defendant's identified breach was 'so connected with the plaintiff's loss or injury that, as a matter of ordinary common sense and experience, it should be regarded as a cause of it': March v Stramare, at 522 per Deane J. 111 I accept the evidence given by Mr Leatherbarrow and by Mr Mills, Mr Hancock and Mr Shoudra, which establishes that the cooling and heating problems with the air-conditioning plant occurred regularly and frequently throughout the period of the lease. Bevillesta did not directly challenge their evidence as to the existence and persistence of the problems, but denied that the problems have been caused by any failure on its part to use best endeavours. 112 Sovereign submits that, applying the test of causation enunciated in March v Stramare, ordinary common sense and experience point to the conclusion that the problems with the air-conditioning were a cause of under-performance by the hotel. Sovereign seeks to support that conclusion by relying on expert evidence. 113 The expert evidence was supplied by Mr Greg Vains of Horwath Asia Pacific Pty Ltd ('HAP'), in reports dated 12 November 1998, 24 May 2000 and 25 May 2000. The first of these reports sets out some projections of operating performance and cash flow for the period from 1 July 1992 to 30 June 1996, based on assumptions to the effect that the air-conditioning plant and elevators were adequately serviced and maintained and the external appearance of the building was maintained to a proper commercial standard. According to Mr Vains, there is a variance between actual net results for those years and estimated re-forecast net results of $1,838,000 (a lower figure was stated in the first report, but a miscalculation was corrected in a later letter). The second report is a similar analysis for the period from 1 July 1996 to 31 May 2000. The variance between actual net results and estimated re-forecast net results for that period is $1,103,000. 114 The first two reports attempted to assess the likely performance of the hotel within the North Sydney market on the basis that there were no physical impediments impacting on the trading performance. The reports make projections of occupancy rates for the hotel based on Mr Vains' analysis of the competitive hotel market research and research into the historical performance of the North Sydney hotel market. The reports identify six hotels thought to be contributors to confidential survey information regarding occupancy rates and other matters. 115 Bevillesta responded to the first report by obtaining a 'valuation report in reply' prepared by Mr John Robertson of John Robertson & Associates Pty Ltd, dated 31 March 2000. Mr Robertson was critical of Mr Vains' methodology. He pointed out that Mr Vains had not attempted to assess the impact of the alleged problems with the air-conditioning, lifts and presentation of the building, but had simply compared actual profits with an estimate of profits on the basis that those problems did not exist. According to Mr Robertson, there are many factors which can impact on the performance of a hotel business, and so an appropriate nexus must be established between the alleged problems and the actual loss of income. He said that even if one were to accept the proposition that the hotel was under-performing, it is not sufficient to assume that the underperformance can be totally attributed to the alleged problems. Mr Vains had made no attempt to analyse why the hotel may be trading below the result obtained by adopting the anticipated hypothetical approach. 116 Mr Robertson challenged the reliance by Mr Vains on information about eight other specific hotels in order to arrive at the applicable average daily rate and occupancy rates for Sovereign's hotel. He said that only one of the hotels in Mr Vains' list had comparative features, and there were three other hotels which were more closely comparable, which Mr Vains had failed to consider. Mr Robertson referred to evidence which, he said, illustrated that Sovereign's hotel was following market trends. Mr Robertson concluded that in view of the lack of documentary evidence to support the claims made by Sovereign, and the absence of any evidence to establish a nexus between the alleged problems with the air-conditioning, lifts and the presentation of the building and the hotel's underperformance, he was unable to determine an assessment of damages. 117 Mr Vains' third report is a response to Mr Robertson's report. Mr Vains justified his methodology on the ground that it would be impossible to quantify with mathematical precision the impact of the air-conditioning and other problems on the business of the hotel. He said that, as experienced hotel consultants, his company had been involved in a number of situations in which air-conditioning and lift problems had resulted in lost accommodation demand and other lost revenue-generating activities. He continued: 'With respect to air-conditioning problems, where the expected guest comfort levels and satisfaction had not been achieved, this translates into lost business opportunities, such as:

[45]

Hotel guests (including accommodation and conference organisers) by their very nature are typically very demanding and fickle consumers and will change hotels with little regard for loyalty. HAP understand from consumer market research specialists that if a consumer has a bad experience, it would be reasonable to assume that an adverse experience would be communicated to upwards of 10 people. HAP consider that this also applies to a negative hotel guest experience. Those consumers that do not register a complaint probably have the most negative impact, as the service provider (in this case the hotel) will not fully appreciate the entire effect the problems are having upon client satisfaction levels. Such consumers will pass on their negative 'word of mouth' comments to work colleagues, friends and other potential users of hotel accommodation. Further, given the variety and choice of accommodation and conference facilities available within the wider market place and in particular, within the local market area and having regard for the competitive environment between hotels in attracting the corporate and conference market segments, based on our experience, these market segments are unforgiving and will cancel, stop using and/or relocate their accommodation and conference needs to other hotels. To 'win' them back, firstly requires rectification of the existing problems, not lip service, the assurance from hotel management that it will not occur again, and the extra hard work and persistence needed to recapture lost business.' 118 Sovereign relies on this expert opinion evidence, and also on the evidence of Mr Leatherbarrow, a person of great experience in the hotel industry, who stated that problems with lifts and air-conditioning would damage the reputation of the hotel, and in consequence, result in reduced occupancy and revenue. 119 Bevillesta seeks to destroy this evidence of causation on several grounds. 120 First, counsel for Bevillesta criticises Mr Vains' opinion evidence along the lines outlined in Mr Robertson's report. Counsel for Bevillesta is critical of the lack of truly comparable hotel information. He contends that, in order to establish what level of trade Sovereign could have expected but for the problems relating to air-conditioning and other matters, it is necessary for a comparison to be made with hotels that are truly comparable to Sovereign's hotel in terms of market advantage or disadvantage, whether or not they were competing in the same marketplace. Counsel contends that the two competitors in the same market as Sovereign's hotel were small hotels. Small hotels are comparable with one another because they compete to pick up whatever trade is left over from the big hotels. According to counsel for Bevillesta, Mr Vains' analysis does not provide any evidence to support the contention that the plaintiff was trading otherwise than as expected. On the contrary, according to Mr Robertson, the trading position of Sovereign's hotel over time was entirely consistent with a hotel following the market in a position of competitive disadvantage. It was as if Mr Vains had compared the turnover of a supposedly under-performing convenience store with the trading history of local supermarkets, which were undoubtedly competitors but which were not competing in precisely the same market. 121 On balance, I do not regard this criticism of Mr Vains' work as destroying its value and utility for present purposes. I accept that, for the purpose of estimating average daily rates and occupancy rates on an hypothesis, the valuer should have regard to the most closely analogous comparative information. But this does not mean that no estimate can be made unless close analogues are available. Making adjustments to allow for limits of comparability is an important part of the expert's task. In my opinion, the assault on Mr Vains' work by Mr Robertson and counsel for Bevillesta serves to weaken his evidence to a degree, but does not undermine his expertise sufficiently to destroy the evidence. 122 Rather than putting forward a competing expert assessment, Mr Robertson has chosen to conclude that no such assessment can be given. His opinion rests, in my view, on a proposition as to which he has no particular expertise: namely, that the Court cannot reach conclusions as to causation unless there is specific evidence making out a nexus between the breach and the loss. But in my view Mr Robertson's proposition about causation is more narrow than the case law requires. The Court can form a view about causation by inference from the known facts, even if there is no specific evidence establishing a nexus. It does so by applying the 'ordinary common sense and experience' approach of March v Stramare and similar cases. 123 In the present case ordinary common sense and experience are reflected in the passage from Mr Vains' third report which I have set out. If his view establishes a causal nexus, as I believe it does, then the Court's only remaining task is to assess damages, using such evidence as it has. Mr Vains' expert estimates are evidence relevant for this purpose, though admittedly that evidence is not overwhelmingly strong. But there is nothing to contradict it. 124 Secondly, counsel for Bevillesta complained that Sovereign did not call evidence from any independent patron of the hotel. No evidence was given from the corporate clients to whom Ms Steiner referred as to why they moved their conference business away from Sovereign's hotel. Counsel invites the Court to draw the inference that this evidence would not have assisted Sovereign. According to this submission, the complaints in fact put in evidence do not assist the Court. The customer complaints reveal a pattern, not of concern about air-conditioning or elevators, but about a range of issues which go further to explain the competitive disadvantages under which hotel such as Sovereign's was labouring. 125 I am prepared to assume that evidence from the corporate clients to whom Ms Steiner referred would not have assisted Sovereign. It appears that some of those clients have remained with Sovereign, and others may have left for reasons not relevant to the present case. But the persistent customer complaints include, amongst many other things, a strong component of complaints about the air-conditioning system. To that one must add the evidence of Sovereign's witnesses of their own personal experience of discomfort. It is true that the discomfort was not of such a level as to force Mr Leatherbarrow out of the hotel, but there may have been other reasons for him to stay. All in all, my view is that there is some evidence of customer complaints about the air-conditioning plant, although not overwhelmingly strong, that corroborates the evidence of Sovereign's witnesses to the effect that there were persistent cooling and heating problems which caused discomfort. 126 Thirdly, according to counsel for Bevillesta there is no reliable evidence of the reaction of individuals to conditions of excessive heat or cold, sufficient to establish that a person affected by discomfort would be driven away from the hotel causing loss of business. I do not agree that there is no such evidence, all I accept is that the evidence does not come from individuals who are independent of Sovereign. But the absence of independent evidence is not fatal, since the linkage can be established by the application of ordinary common sense and experience. 127 Finally, counsel for Bevillesta invites the Court to infer that Sovereign did not believe that Bevillesta's conduct was having a substantial adverse effect upon its trading, on the basis that it did not seek interim or expedited injunctive relief and did not negotiate with the purchasers of the building from Bevillesta, to explore the prospect of having the lease bought out. It seems to me that these matters are insufficient to warrant the inference which counsel seeks to draw.

[70]

Internal controls of the mechanical parts Chillers - the internal controls ('the controllers') are electronic and control the temperature of the cooling water ('primary chiller water') leaving the chiller. There are two chillers. Each controller includes a set point adjustment knob, which adjusts the temperature of the chilled water from each chiller. The controllers also includes adjustment knobs for limiting the power input to each chiller. The controllers include safety controls to protect the chiller from damage. Some require an operator to reset, the others will automatically allow the chiller to resume operation when conditions which threaten to damage the chiller no longer exist. Both chillers have both types of controls. There is a 20 minute delay built into the controller to prevent damage to the chiller from frequent starting. Boilers - thermostats (adjustable) located on each boiler with set point knobs to turn the gas flame on and off in response to hot water temperature variations. There are safety thermostats to protect each boiler from overheating. The safety thermostats can only be re-set manually. Air handling units - the primary air handling units deliver air to the hotel rooms. Each has a controller, which controls the supply of chilled water and hot water to the air handling units in response to outdoor conditions. Only. This is DDC controlled and can be adjusted and operated remotely. The other air handling units for the remainder of the building, respond to internal conditions to control the supply of chilled water and hot water to the air handling units. These are pneumatically controlled in the hotel. Room induction units are fitted with a room thermostat, which controls the amount of cooling from the secondary chilled water. This thermostat has a set point knob available to the room occupants. These are pneumatically controlled. A pneumatic control system uses compressed air controlled by a thermostat to operate heating and cooling control valves.

Sovereign v Bevillesta

At a glance

Court

Decision date

Before

Source

Judgment (83 paragraphs)

Parties

Legislation Cited (1)

Cases Cited (12)

Cited By (2)