These proceedings have their origin almost 25 years ago. On 2 December 1996, SLHD and Macquarie entered into six agreements (the Transaction Documents), being:
(i) a construction deed for the design and construction by Macquarie of a car park (the Car Park) and a private hospital (the Private Hospital) at what will be referred to as the Car Park Site and the Hospital Site, respectively (the Construction Deed). (The Car Park Site and the Hospital Site are two separate lots in the one deposited plan);
(ii) a lease granted to Macquarie over the Hospital Site for a term of 103 years (Hospital Lease);
(iii) a lease granted to SLHD and Macquarie as tenants-in-common in equal shares over the Car Park Site for a term of 103 years (Car Park Lease);
(iv) a sublease granted by SLHD (as co-lessee under the Car Park Lease) to Macquarie for a term of 28 years (Car Park Sublease);
(v) a Car Park Management Agreement (the Car Park Management Agreement) under which Macquarie agreed to manage and operate the Car Park which was to be erected; and
(vi) a co-ownership deed which regulated the rights and obligations of SLHD and Macquarie between themselves as co-owners concerning the Car Park.
The Transaction Documents have spawned substantial and lengthy litigation in this Court over the last two decades, including most recently, this Court's decision in Macquarie International Health Clinic Pty Ltd v Sydney Local Health District [2020] NSWCA 161. The issues the subject of that decision relate to events post-dating the matters under consideration in the current appeal.
On 19 June 1997, the Land and Environment Court granted development consent D1997/154 (the Consent) to demolish two buildings and erect a 7-9 storey private hospital and medical centre including ancillary facilities at 35-43 Carillon Avenue, Camperdown, adjacent to the site of the Royal Prince Alfred Hospital. The first condition of the Consent was that the development was to be generally in accordance with plans DA97.01B-24B, dated February 1997: see Macquarie International Health Clinic Pty Ltd v Sydney Local Health District (No 9) [2016] NSWSC 155; (2016) 215 LGERA 137 at [12].
Although the first stage of the Car Park was substantially completed by 7 June 1999, and a certificate of practical completion was issued on 15 June 1999, Macquarie failed to obtain an occupation certificate to operate the Car Park. No hospital has ever been built on the Hospital Site.
The current appeal has its origins in the service by SLHD on Macquarie of notices of termination under the Construction Deed, the Car Park Sublease and the Hospital Lease on 17 March 2000 (notices of default having been served in September 1999).
On 17 March 2000, SLHD re-entered and took possession of the Car Park Site and the Hospital Site. Some 10 days later, on 27 March 2000, Macquarie commenced proceedings in the Supreme Court of New South Wales seeking interlocutory and final relief.
On the following day, Windeyer J dismissed the application for interlocutory relief: see Macquarie International Health Clinic Pty Ltd v Central Sydney Area Health Service (Supreme Court (NSW), Windeyer J, 28 March 2000, unrep). In those proceedings, his Honour recorded (at 2-4) that:
"The original development plan was for a private hospital for 400 beds. Development approval for this was obtained. It has never been built, on Macquarie's case, because investment in private hospitals became less attractive after the heads of agreement were signed. For this and other reasons it was decided that the development should be reduced to a private hospital of 200 beds and it is accepted that Macquarie has no intention of building that hospital.
…
By [17 March 2000] … Macquarie had determined it could not go ahead with the proposed hospital. It was claiming that it had rights to seek a change of user by reason of changes to the legislation preventing the operation of the business or making it impossible to run it economically. It is perfectly clear that Macquarie could not, and will not proceed with the private hospital."
The proceedings were heard on a final basis by Nicholas J, resulting in a judgment delivered on 23 July 2008: see Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2008] NSWSC 738.
In the Fifth Further Amended Statement of Claim (FFASOC) filed on 2 May 2007, which was the final iteration of the pleading in the proceedings before Nicholas J, Macquarie claimed, inter alia, that SLHD's conduct in retaking possession of the Car Park and Hospital Sites in March 2000 amounted to an unlawful trespass and that, by reason thereof, it suffered loss and damage and continued to suffer loss and damage. The pleading of trespass was as follows:
"As at 17 March 2000 the Plaintiff was in lawful, peaceful and undisturbed exclusive possession, to which it was and is entitled, of the land described in folio identifier 11/809663 and 12/809663 ("the land") on which there is constructed, inter alia, a carpark pursuant to the following instruments between it and the Defendant …
On 17 March 2000 the Defendant unlawfully and wrongfully entered upon the land and the carpark and dispossessed the Plaintiff of its possession and continues to dispossess the Plaintiff therefrom.
On 17 March 2000 the Defendant unlawfully and wrongfully excluded the Plaintiff from the land and continues to do so.
The Defendant's conduct amounted to an unlawful trespass and the trespass is continuing.
By the conduct of the Defendant the Plaintiff has suffered loss and damage and continues to suffer loss and damage."
Nicholas J dismissed Macquarie's various claims in the FFASOC, including the claim for trespass. His Honour held, at [515], that:
"… by 30 June 1999, Macquarie had failed to complete construction of the car park. It was accepted that Macquarie had also failed to substantially commence construction of the hospital by that date. Accordingly, I find that there were breaches of cl 2.1 construction deed by Macquarie which were events of default under cl 16(4)(b) car park lease."
Consistent with what Windeyer J had observed in his decision of 28 March 2000, at [368]-[369] Nicholas J held that:
"368 In its submissions (reply ch 7) Macquarie contended that from at least November 1998 changes in the industry meant that MPH [Macquarie Private Hospital] was no longer economically viable, with the consequence that obtaining external finance or partners was virtually impossible. Macquarie accepted that the evidence supported the conclusion that declining operating margins from 1998 caused the MPH project to cease to be economically viable. It was put that, on Mr Sinclair's evidence, from 17 November MPH, with its current development application for a 200 bed hospital, was not a viable proposition which made it virtually impossible for Macquarie to obtain external finance or partners. Macquarie asked the court to find (reply ch 7, pars 68, 73) that from November 1998 MPH as a 200 bed hospital on the site with its current design was no longer economically viable or bankable. The view was held that the industry crisis with declining operating margins in 1998 rendered unviable the building of a 200 bed hospital in accordance with the project documents.
369 I accept these submissions. The weight of evidence supports the finding that the hospital did not proceed because Macquarie decided it would not have been viable." (Emphasis added.)
See also [437] and [657] where his Honour held in terms that "[b]y about November 1998 MPH was no longer economically viable. Later attempts to raise funding were unsuccessful."
At [606] of his judgment, Nicholas J extracted portions of a letter that Macquarie's solicitors had sent to SLHD's solicitors on 25 October 1999 which included the following:
"As CSAHS would be aware, health insurers (registered organisations for the purposes of the NHA) have used these hospital purchaser provider agreements to limit the amount of any payment from a health insurer to a hospital. The practical consequence of these agreements has been to virtually eliminate the profitability of private hospitals. We are aware of instances of private hospitals achieving high occupancy levels without generating a profit.
On the basis of these changes to the NHA we submit that it is reasonable for our client to conclude that the operation of the tenant's business is no longer economically viable even if operated in a proper and efficient manner." (Emphasis added.)
Macquarie was, of course, the tenant.
Nicholas J had earlier observed at [515] of his judgment that it was accepted that Macquarie had failed to substantially commence construction of the Private Hospital by 30 June 1999 and that this entailed a breach of cl 2.1 of the Construction Deed.
The judgments of both Windeyer J and Nicholas J were incorporated by reference into the reasons of one of the judgments the subject of the current appeal: see Macquarie International Health Clinic Pty Ltd v Sydney Local Health District (No 10) [2016] NSWSC 1587 at [5] (the Principal Judgment or PJ).
Macquarie successfully appealed from part of the decision of Nicholas J (see Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 268 (the 2010 Appeal Judgment)) although it did not challenge his Honour's findings that have been set out at [13]-[14] above. This was scarcely surprising as those findings entailed the acceptance of a submission that had been made by Macquarie and correspondence that its solicitors had sent on its behalf to SLHD. Indeed, in the 2010 Appeal Judgment at [259], Hodgson JA (with whom Allsop P and Macfarlan JA agreed) held that "the evidence does not support a finding that finance would have been available or that the Macquarie Group would have been able to finance the private hospital project itself " in the period December 1996 to September 1998.
On 13 December 2010, although making a declaration that, as at 30 June 1999, Macquarie was in default in respect of each of the Leases, the Construction Deed and the Car Park Sublease in its failure to commence construction of the private hospital and its failure to complete the car park, the Court of Appeal pronounced other orders consequent upon Macquarie's successful appeal: see Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2010] NSWCA 348.
Relevantly for the purposes of the current appeal, order 4 of those orders was as follows:
"(1) Judgment and an order for possession by [Macquarie] of Lot 11 in DP 809663 ('the car park site') and Lot 12 in DP 809663 ('the hospital site');
…
(5) A declaration that, as at 30 June 1999, [Macquarie] was in default of each of the leases, construction deed, and car park sub-lease dated 2 December 1996 ('the transaction documents') in its failure to commence the private hospital and its failure to complete the car park.
…
(11) A declaration that by virtue of s 129 of the Conveyancing Act 1919 (NSW) [SLHD] was precluded from taking possession of the hospital and car park sites on 17 March 2000 and [SLHD's] eviction of [Macquarie] was a trespass against [Macquarie].
(12) A declaration that the Car Park Lease, Hospital Lease, Sub-Lease and Construction Deed continue to operate and bind both [Macquarie] and [SLHD].
(13) Order that there be an enquiry before a Judge or Associate Judge other than Nicholas J as to the amount of damages which are payable by [SLHD] to [Macquarie], or an account of moneys received by [SLHD] (which account would include both revenue received and reasonable expenses incurred and rental from 1 December 1999), at [Macquarie's] election, in respect of being kept out of possession of the car park site and the hospital site between 17 March 2000 and the date of being restored to possession."
By order 7, the Court of Appeal stayed the operation of the orders:
"(1) for 28 days after date of making of these orders unless within that time an application for special leave to appeal to the High Court of Australia is filed;
(2) until further order, but subject to any order of the High Court of Australia, if within 28 days after the date of making of these orders an application for special leave to the High Court of Australia is filed;
provided that, for the purposes of the enquiry, the date of being restored to possession shall not operate until any stay of the order for possession in order 3(1) above has been lifted."
It was common ground that the reference to "order 3(1)" was intended to be a reference to order 4(1).
An application for special leave to the High Court was dismissed on 10 June 2011: see Sydney South West Area Health Service v Macquarie International Health Clinic Pty Ltd [2011] HCA Trans 155. Shortly thereafter, following a further brief hearing before Hodgson JA (see Macquarie International Health Clinic Pty Limited v Sydney Local Health Network [2011] NSWCA 231), Macquarie elected for an inquiry as to damages as opposed to an account of moneys received by SLHD from its occupation of the Car Park Site and the Hospital Site during the period of the trespass. This election was contemplated by order 4(13): see [20] above.
[2]
The inquiry as to damages
The inquiry contemplated by order 13 of the Court of Appeal's orders was undertaken by the primary judge over a number of years, the matter first being listed before his Honour in 2013, and the hearing commencing on 10 February 2014 (PJ [40]). It related to the trespass to both the Hospital Site and the Car Park Site.
By a judgment delivered on 6 November 2014, reflecting orders indicatively made on 19 September 2014, some 40 days into the hearing of the inquiry as to damages, the primary judge permitted an amendment to be made by Macquarie in relation to the way it put its case: see Macquarie International Health Clinic Pty Ltd v Sydney Local Health District (No 6) [2014] NSWSC 1549 (the Amendment Judgment). This entailed the abandonment of what hitherto had been Macquarie's case which was a claim for loss of profits or for damages for the loss of opportunity to develop the Private Hospital on the Hospital Site, and the introduction of a claim for mesne profits in respect of that site.
Mesne profits were similarly sought in respect of the Car Park Site and a claim for lost profits in respect of the trespass to that site was also abandoned.
The Amendment Judgment resulted in the claim for mesne profits in respect of the Hospital Site being formulated in the following way:
"The plaintiff claims damages for trespass, being a claim for mesne profits measured by applying a reasonable rate of return per annum on the market value of the Hospital Site over the period 17 March 2000 to the date possession is restored, or alternatively, measured by the market rent for the Hospital Site over the same period or alternatively, measured in the manner pleaded at paragraph 2(2) (c) (ii) of the Reply."
As at the date of the Amendment Judgment, the particulars to the claim were expressed as follows:
"To be supplied by way of an expert report or joint expert report from Mr Coleman and/or Mr Lonergan and a separate expert report from Mr Lister and the Plaintiff relies upon the matters pleaded at paragraph 2(2) (c) (ii) of the Reply."
The claim, insofar as reliance was placed upon the matters pleaded at paragraph 2(2) (c) (ii) of the Reply, has no continuing relevance for the purposes of this appeal.
The joint expert report referred to in the particulars to the amended claim in respect of the Hospital Site (the Coleman/Lonergan Report), when ultimately served on or soon after 1 September 2014, relevantly purported to value not the market value of the "Hospital Site" but, rather the "reasonable market value for the Hospital Lease" from certain dates and on various assumptions. Critically, [96] of the Coleman/Lonergan Report, under the heading "Assumptions", was in the following terms:
"Had Macquarie Health not been evicted from the car park and hospital site on 17 March 2000, we have been instructed to assume that it would have, or an incoming transferee or assignee could have:
(a) built Stage 1 of the private hospital and Stage 2 of the car park
(b) substantially completed construction of a 220 bed private hospital (being Stage 1 of the private hospital development)
(c) opened the private hospital, and admitted its first patient
(d) completed construction of Stage 2 of the private hospital, having regard to market conditions then prevailing." (Emphasis added.)
The amendment that saw the mesne profits claim introduced in respect of the Hospital Site in late 2014 was granted on various conditions. One was that Macquarie's amended case was "based on and limited to" the factual assumptions contained in the Coleman/Lonergan Report (together with a number of other assumptions which were set out in an exhibit reproduced at PJ [355]: see Order 5(3) of the orders made on 26 September 2014 contained in schedule 1 to the Amendment Judgment).
As will be seen, mesne profits were awarded on the basis of a model which was built on the assumption reproduced in [28] above, viz a hypothetical Private Hospital (Hypothetical Hospital), stage 1 of which would have been built by Macquarie or which could have been built by a transferee of Macquarie's leasehold interest in the Hospital Site. This assumption (and the Hypothetical Hospital to which it gave rise) was sought to be vigorously contested by SLHD in the hearing subsequent to the amendment to introduce the mesne profits claim but was never scrutinised by the primary judge who, as shall be seen, treated matters going to the likelihood of the assumption eventuating as "irrelevant" to his task. That issue and the correctness of the primary judge's treatment of extensive evidence and submissions as "irrelevant" is considered in addressing appeal ground 4: see [239]-[286] below.
In October 2015, after what were thought at the time to be closing submissions in the inquiry as to damages had been made but whilst the primary judge was still reserved, SLHD made an application to the Court of Appeal for orders formally discharging the stay order that had been made by the Court of Appeal in December 2010. This application was granted by Gleeson JA: see Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2015] NSWCA 323 and [22] above. This procedural step is of particular significance to an aspect of the present appeal addressed in relation to appeal grounds 7 and 8: see [449]-[464] below.
On 10 November 2016, the primary judge delivered the Principal Judgment, indicating his conclusions in relation to Macquarie's claim for damages by way of mesne profits in respect of the Car Park Site and the Hospital Site at [19] and [20] respectively. These were as follows:
"19 In relation to the Car Park Site, the Court has concluded that Macquarie is entitled to mesne profits calculated by reference to the 'user principle' (see paragraphs 111 to 118 below) on the basis of the following integers:
(1) Period of damage: 17 March 2000 up to 9 am on 2 November 2015
(2) Number of car spaces: 1,026
(3) Users: Staff only
(4) Rate: Staff rate of $3.00 per day as at 17 March 2000 adjusted annually for CPI with effect on and from 1 July in each year.
(5) Daily turnover per space to reflect '100%' occupancy: 1.45 times per day.
(6) Deductions in favour of the Health District: All proven expenses incurred by the Health District in each year in relation to the maintenance and operation of the car park and the annual rental that would have been payable by Macquarie to the Health District.
(7) Interest: At Court rates on the annual net amount, assuming that amount is positive.
20 In relation to the Hospital Site the Court has concluded that Macquarie is entitled to damages in the form of mesne profits calculated by the residual land value method and by reference to the user principle by the application of the following integers:
(1) The cost of building the hypothetical private hospital (excluding fixtures, fittings and equipment) ('FFE') is to be calculated as follows:
(a) Net construction costs of $48,000,000 (June 2001 prices);
(b) Subtract $1,737,000 for work already done;
(c) Add $6,289,000 for preliminaries;
(d) Add $4,138,470 for contingencies;
(e) Add 5% builder's allowance;
(f) Add $6,524,988 for design fees and subtract $2,000,000 for fees already incurred;
(g) Add $1,053,410 for costs escalations; and
(h) Insofar as amounts have to be escalated to present day values, such costs escalations should be done using the published NSW Building Price Index.
(2) An Earnings Before Interest and Taxes ('EBIT') margin of 15%.
(3) For the purposes of determining the revenue rate for the hypothetical private hospital, the Court adopts expert witness Mr Greg Anderson's approach, however he should recalculate his figures on the assumption of there being two catheterisation laboratories.
(4) FFE costs for the initial construction period of the hypothetical private hospital of $19,000,000 (in 2003 dollars).
(5) A discount rate when valuing the Private Hospital Lease as at 17 March 2000 of 8.94% (after tax).
(6) No capital replacement in relation to the hypothetical private hospital building in years 1 to 5.
(7) A factor of 0.5% of total capital value should be applied for capital replacement in years 6 to 10.
(8) A factor of 1.5% of total capital value should be applied for capital replacement in years 11-20.
(9) For the first 20 years, building capital expenditure should be escalated at 1.5% each year, compounding. Thereafter the full inflation rate should be applied.
(10) FFE life cycle replacement costs should be calculated by reference to expert witness Mr Tim Staker's life cycle period for replacement. Furthermore, the calculation should be made in accordance with the annual costs set out in Mr Staker's report pro-rated upwards by a figure of 1.2257.
(11) FFE replacement costs should be escalated by 1% simple interest in years 1 to 20 and thereafter a value of 2.5% for inflation should be applied.
(12) For the purpose of determining the market rental of the Hospital Site, what must be considered is the period of the trespass (approximately 15 years) out of the 103 year life of the Hospital Lease and not a notional 15 year lease or sub-lease."
As the primary judge's orders made clear, certain questions relating to the calculation of Macquarie's damages in relation to the Hospital Site and, to a certain extent, the Car Park Site, were left unresolved. In relation to the Hospital Site, it may immediately be seen that the method of calculation of damages contemplated that the hospital would be built by Macquarie or an assignee of its leasehold interest for the costs, excluding FFE, set out in PJ [20(1)]. So much was consistent with the assumptions set out in [96] of the Coleman/Lonergan Report referred to at [28] above.
In relation to the statement at PJ [20(12)], this reflected the primary judge's conclusion at PJ [548] that:
"In my view, the assessment of mesne profits must be done by reference to the 103 year life of the Hospital Lease. The Court accepts as legally and commercially correct Macquarie's submission that it is to be compensated for 15 years of a 103 year lease and not 15 years of a 15 year lease (or sub-lease). It is unsurprising that the Hospital District's valuation based on a lease for the term of the trespass produced a negative outcome, given that such a lease took in the entire burden of the construction and set up costs of PAPH in the first few years without being able to take into account the amortisation of those costs and the benefit to be derived over a much longer period from that initial investment."
This conclusion, too, assumed that the private hospital could and would be financed and built. It also disclosed that the methodology adopted by the primary judge was directed not to an assessment of damages merely for a trespass to a right to exclusive possession of a particular parcel of land, but far more, namely damages for trespass to land upon which Macquarie was entitled to erect and operate a private hospital for a 103-year period. But a claim based upon the loss of opportunity to operate such a hospital was precisely the claim that had been abandoned by Macquarie after 40 days of the inquiry as to damages: see [24] above. This observation is to anticipate one of the principal complaints made by SLHD on appeal. This complaint, moreover, was accompanied by an allied critique of the way in which the methodology in question was applied in any event.
One striking contrast between the primary judge's summary conclusions with regard to the assessment of damages contained in PJ [19]-[20] was that the Car Park Site contained a constructed car park at the time of the commencement of the trespass, hence none of the integers detailed by his Honour went towards its construction or construction costs. The damages were to be calculated by reference to the Car Park Site in its state as at the commencement of the trespass. That site had already been improved. This was quite unlike the Hospital Site which was in an essentially unimproved state as at 17 March 2000 when the trespass commenced.
Following delivery of the Principal Judgment, a directions hearing was held on 9 December 2016 and a further substantive hearing in respect of outstanding calculation issues was held on 14 February 2017. Certain issues were resolved on that occasion but others remained or emerged during that hearing, leading in turn to a further hearing on 9, 10 and 11 May 2017 which resulted in a further judgment on 18 September 2017: see Macquarie International Health Clinic Pty Ltd v Sydney Local Health District (No 11) [2017] NSWSC 1249 (it is convenient to refer to this as the Tax Judgment although it dealt with a number of other issues as well as taxation).
At a further directions hearing on 4 October 2017, following delivery of the Tax Judgment, certain issues remained in dispute between the experts in relation to the damages calculation for the Hospital Site. This resulted in directions for further evidence, submissions and calculations, and the fixing of a still further hearing on 16 and 17 November 2017.
Resolution of these issues came on 17 July 2019 with the delivery of a further judgment: see Macquarie International Health Clinic Pty Ltd v Sydney Local Health District (No 12) [2019] NSWSC 916 (the Supplementary Judgment or SJ).
The Supplementary Judgment also dealt with an interlocutory application which had been made by SLHD in May 2019 and which is relevant to appeal grounds 2 and 3: see at [160]-[201] below. By this point in time, SLHD had changed its legal team. On 6 May 2019, SLHD sought to have the proceedings relisted for reasons explained in a letter to the primary judge's Associate which was relevantly in these terms:
"1. The Trial Judge does not appear to have given any consideration to the Threshold Issue raised by the defendant as to the applicability of the user principle to vacant land.
2. It was, and remains, the defendant's case that the user principle applied to the Hospital Site involved an amount of the market rental of the land in its existing state or use (i.e. in vacant condition without the existence of a hypothetical hospital): see, e.g., defendant's conspectus dated 30 June 2015 at [5]-[6], [8], [21.1]-[21.2], [22], [36], [43]-[44]; defendant's submissions on issue 2 dated 30 June 2015 at pp 44-45 [30]-[36]; defendant's submissions dated 22 July 2015 at p 57 [5]; and defendant's submissions on issue 2 dated 14 August 2015 at [4].
3. It may be that the Court took the view that the Threshold Issue had been abandoned. The defendant did not, and does not, abandon its position on that Threshold Issue. The defendant will seek that his Honour clarify his intentions in relation to that matter and, to the extent that his Honour thinks appropriate, to address that Threshold Issue."
SLHD filed an Outline of Submissions on 9 May 2019 fleshing out its arguments as foreshadowed in the 6 May 2019 letter. What was described as the Threshold Issue, a somewhat unfortunate label which seems to have infected some of the primary judge's ultimate analysis, was as follows:
"The Court has not, as yet, determined the issue raised by SLHD's written and oral submissions that, to the extent that the user principle is applicable to the assessment of the damages to be awarded to the plaintiff, Macquarie International Health Clinic Pty Ltd (Macquarie), in respect of the Hospital Site, it required the Court to treat the land upon which SLHD trespassed on the basis of its existing state and/or use during the period of the trespass.
SLHD's argument to that effect was not, and has not been, abandoned."
The primary judge directed a Notice of Motion to be filed to formulate precisely what was being sought. This was done on 13 May 2019 with the relief being sought articulated as follows:
"1. Leave be granted to the defendant in Proceedings 2000/34949 and 2010/90340 to advance submissions:
[3]
(a) the subject of its written submissions dated 9 May 2019;
(b) (in particular) that the Court has not, as yet, determined the issue raised by the defendant's written and oral submissions that, to the extent that the user principle is applicable to the assessment of the damages to be awarded to the plaintiff in respect of the Hospital Site, it required the Court to treat the land upon which the defendant trespassed on the basis of its existing state and/or use during the period of the trespass;
(c) (in particular) that the defendant's argument to that effect was not, and has not been, abandoned.
2. Irrespective of the answer to paragraph 1(c) above, the Court rule as to the Threshold Issue as described in the defendant's submissions dated 9 May 2019.
3. The Court determine the plaintiffs entitlement to damages on the Threshold Issue.
4. To the extent necessary, leave be granted to the defendant to re-open Proceedings 2000/34949 and 2010/90340 to argue the issues the subject of paragraphs 1-3 above.
5. The Court review, revise, recall or supplement its reasons for judgment dated 10 November 2016 for the purposes of determining the issues the subject of paragraphs 1-3 above."
The course taken by SLHD in seeking to relist the matter was said, on appeal, to be consistent with the course which Latham CJ, Williams and Fullagar JJ had said in Suttor v Gundowda Pty Ltd (1950) 81 CLR 418 at 438; [1950] HCA 35 (Suttor) should be followed if an issue had not been dealt with after delivery of reasons but before the making of final orders, namely to ask the primary judge to "restore the suit to the list and hear argument upon the effect of [his] findings and if necessary to re-open the case and hear further evidence". Unlike the observation in Suttor, however, SLHD was not seeking to lead any new evidence but rather was concerned: (i) to direct the primary judge's attention to a legal argument which it contended had not been addressed in the Principal Judgment despite being the subject of submissions; and (ii) to seek to have that argument addressed prior to the making of final orders in circumstances where outstanding issues remained to be determined.
The Supplementary Judgment dealt with and rejected SLHD's application in relation to the Threshold Issue and the attempt, if necessary, to re-open, as well as dealing with outstanding issues between the experts relating to the calculation of damages in light of the Principal Judgment.
The inquiry as to damages was in fact not ultimately concluded until late 2019 following one further judgment: see Macquarie International Health Clinic Pty Ltd v Sydney Local Health District (No 13) [2019] NSWSC 1590 (the Interest Judgment).
Just over two weeks after delivering the Interest Judgment, the primary judge made final orders on 29 November 2019 which were relevantly as follows:
"1 Judgment for [Macquarie] in the amount of $84,242,994.15, consisting of:
(a) $21,791,000 in mesne profits for the Hospital Site and $33,382,645 in Court interest up to but not including 29 November 2019;
(b) $16,192,068 in mesne profits for the Car Park Site and $11,486,926 in Court interest up to but not including 18 October 2019 and a further $39,565.15 in Court interest up to but not including 29 November 2019;
(c) $1,048,800 in damages for additional building and consultancy costs; and
(d) $301,990 (excluding GST) in damages for remediation and excavation work.
2 Declare that the judgment sum of $21,791,000 in mesne profits damages (but excluding, for the avoidance of doubt, any interest included on that amount under s 100 of the Civil Procedure Act 2005 (NSW)) awarded to [Macquarie] for [SLHD's] trespass on the Hospital Site pursuant to Order 1(a) is of a kind which can be grossed up for taxation.
3 Declare that [SLHD] is obliged to indemnify [Macquarie] in respect of income tax referable to the judgment sum of $21,791,000 in mesne profits damages (but excluding, for the avoidance of doubt, any interest included in that amount under s 100 of the Civil Procedure Act 2005 (NSW)) awarded to [Macquarie] pursuant to Order 1(a) (Damages) and which constitute either ordinary income, or statutory income, or gives rise to a capital gain of [Macquarie] or Traknew Holdings Pty Ltd (as head company of the tax consolidated group of which [Macquarie] is a member) (relevant taxpayer) in respect of any year of income.
4 Declare that such indemnity shall be given effect by increasing the amount of such part of the Damages as constitute either ordinary income, or statutory income, or gives rise to a capital gain of the relevant taxpayer by the amount of 42.85714%.
5 [SLHD] to pay [Macquarie's] costs of the damages inquiry in proceedings 2000/34949, the guarantee and indemnity proceedings 2010/90340 and the Land and Environment Court proceedings 2015/348137 in the sum of $4,643,000.
6 [SLHD's] Notice of Motion filed on 13 May 2019 is dismissed.
7 [SLHD] to pay [Macquarie's] costs of [SLHD's] relisting of the proceedings on 9 May 2019 and [SLHD's] Notice of Motion filed on 13 May 2019 as agreed in the sum of $138,000.
8 With respect to the issue of whether the interest on the award of mesne profits should be grossed up for taxation:
(a) the costs of 2 September 2019 be the parties' costs in the cause;
(b) [Macquarie] to pay [SLHD's] costs of and incidental to the preparation of [SLHD's] submissions of 2 and 18 October 2019.
9 On the condition that [SLHD] pays [Macquarie] the amount of $16,059,335.15 (receipt of which amount on 18 October 2019 is acknowledged by [Macquarie]), stay the execution of Orders 1 and 5 above until further order and on the basis that interest is payable pursuant to s 101(1) of the Civil Procedure Act 2005 (NSW) on the judgment amount as is unpaid."
It is from those orders and the very substantial judgment in favour of Macquarie which they entail that SLHD has appealed. The appeal was held over the course of 5 days in the last week of May 2020. Self-evidently, in light of the multiplicity of judgments and the period of time the inquiry occupied, the material before the Court was voluminous.
[4]
Overview of issues on appeal
As has been noted at [24] above, Macquarie's claim for damages with regard to the Hospital Site was originally formulated as one for loss of profits or the lost opportunity to earn profits on the operation of the Private Hospital from 1 July 2004 (the date by which it was asserted the hospital could have been built) up until the date that Macquarie was restored to possession. An amendment some 40 days into the hearing saw that claim abandoned and Macquarie's claim reformulated as one for mesne profits "measured by applying a reasonable rate of return per annum on the market value of the Hospital Site over the period 17 March 2000 to the date possession is restored or, alternatively, measured by the market rent for the Hospital Site for the same period …": see the Amendment Judgment at [76].
In relation to the Car Park Site, as originally formulated, Macquarie's claim was also for loss of profits or the lost opportunity to earn profits on the operation of the Car Park Site although it also claimed, in the alternative, damages "measured by the difference between the market rent for the Car Park and the rent and outgoings payable under the Car Park Sub-Lease over the period 17 March 2000 to the date possession is restored". This claim was also reformulated, following the Amendment Judgment, to be expressed in terms as a claim for mesne profits, with the claim for lost profits in respect of the trespass to the Car Park Site consequently abandoned: see Amendment Judgment at [74]-[75].
One very important point to be borne in mind, as already noted and the full significance of which will become apparent, is that, as at the date of the commencement of the trespass in March 2000, Stage 1 of the Car Park on the Car Park Site existed, whereas the Private Hospital on the Hospital Site did not. The Hospital site was and remained empty and unimproved.
At the heart of the appeal is the nature of mesne profits as a measure of damages for trespass to property, and whether the primary judge erred in his approach to their assessment, particularly in respect of the Hospital Site. The primary judge assessed those damages at over $55 million including interest. As has been noted, whilst SLHD was in possession of the Hospital Site, no hospital had been constructed or was operating.
Controversially, the primary judge based his calculations which led to the award of mesne profits in relation to the Hospital Site on the hypothetical assumption that a private hospital had been constructed by Macquarie or a hypothetical transferee of the Hospital Lease, and was operating on the Hospital Site during the period of the trespass. His Honour regarded the case as a "novel" one, in that all other previously reported cases which had resulted in the award of damages measured in terms of mesne profits related to trespass to land or, by analogy, the conversion and detention of chattels, in its (or their) actual state at the time of the trespass and by reference to their existing use.
The extent to which the issue of what we will call the "Existing State/Actual User Argument" was exposed in the parties' arguments at first instance was also controversial. This issue was, as has already been explained, the subject of SLHD's application to the primary judge in May 2019 and formed an important aspect of the Supplementary Judgment.
Other important but subsidiary issues raised by the current appeal and affecting the primary judge's calculation of mesne profits include:
(i) the period during which Macquarie should be regarded as having been out of possession of the two sites, the issue being whether, as the primary judge held, it was until the formal discharge of the stay orders was made by Gleeson JA in late 2015 (see [31] above) or, as SLHD contended and contends, only until the High Court's rejection of the special leave application in June 2011 from the 2010 Appeal Judgment (the Duration Issue);
(ii) whether certain errors were made in respect of various integers used in the calculation of mesne profits for the Hypothetical Hospital on the Hospital Site, assuming that the methodology employed to assess mesne profits was the proper approach (the Integer Issues);
(iii) the basis upon which mesne profits in respect of the already constructed Car Park Site should be calculated and, in particular, whether or not, as the primary judge held, they should be calculated by reference to 100% occupancy of all car spaces for the duration of the trespass period or whether they should be calculated taking into account what was said to be the agreed much reduced weekend usage (the Car Park Use Issue); and
(iv) whether or not the damages awarded by way of mesne profits should be grossed up for taxation purposes (the Taxation Issue).
Each of these subsidiary issues, depending on its resolution, necessarily has the potential significantly to impact the quantum of damages awarded.
In addition to the above issues, Macquarie has brought a cross-appeal in relation to the discount rate applied in the methodology used by the primary judge to assess damages (the Discount Issue).
Macquarie also cross-appeals on the basis that the primary judge erred in finding that interest on the award of damages should not be grossed up for taxation purposes (the Interest Grossing-Up Issue).
Before turning to each of these issues and the grounds of appeal relating to them, it is first necessary to set out the key terms of the Hospital and Car Park Leases and the Construction Deed, followed by a consideration of the law with regard to damages for trespass in general, and damages calculated by reference to mesne profits in particular. This is because a clear understanding of those principles is central to most if not all of the issues raised by this complex appeal.
[5]
The Hospital and Car Park Leases and the Construction Deed
The term of both the Hospital Lease and the Car Park Lease was 103 years commencing on 1 December 1996 and ending on 30 November 2099.
The Hospital Lease was in respect of Lot 12 in Deposited Plan 809667, defined in the Hospital Lease as "the Premises". "Premises" was in turn defined in the Hospital Lease as meaning "the land leased by this lease and described in the coversheet of this lease together with all improvements erected on that land." The Premises are described in these reasons and in those of the primary judge as "the Hospital Site".
Clause 8.1 of the Hospital Lease provided that "[t]he Tenant must use the Premises only for the Permitted Use." "Permitted Use" was defined as meaning "the use of the Premises for a private hospital complex and any facility ancillary to that private hospital allowable under any current planning instrument applying to the land by a party who is a Related Entity of the Tenant as varied under clauses 8.7, 8.8 or 16.1(c)(ii)."
Clause 13.1 of the Hospital Lease, headed "Quiet Enjoyment" provided that:
"Subject to the Landlord's rights, while the Tenant complies with its obligations under this lease, it may occupy the Premises during the Term without interference by the Landlord."
The Rent for the Hospital Lease was dealt with in cl 2. Clause 2.1 was in the following terms:
"On or before the Rent Commencement Date the Tenant must pay to the Landlord the sum of $5,500,000 which sum represents all rental payable under this lease (other than that referred to in clause 2.2 of this lease and clause 3.5 of the Construction Deed) paid in one lump sum in advance (being $53,920.00 per annum)."
Annual Rent was provided for in cll 2.2 and 2.3 of the Hospital Lease as follows:
"2.2 In addition to the payment referred to in clause 2.1, the Tenant must pay to the Landlord annually:
(a) commencing on the Rent Commencement Date; and
(b) annually thereafter,
$400,000 per annum as reviewed under clause 3.
2.3 The rent payable under clause 2.2 may vary in the circumstances set out in clause 3 and in clause 3 of the Construction Deed."
It is also relevant to note that, by cl 12 of the Hospital Lease, certain constraints were placed upon Macquarie's ability to sublet the Premises or part with possession of the Premises or to transfer, dispose of or deal with any estate or interest (including the lease) in the Premises. The constraints included those imposed by cl 12.4 which was in these terms:
"Before a transfer under this clause 12 takes effect, the Tenant must:
(a) remedy any default by the Tenant under this lease unless the Landlord has waived it; and
(b) ensure that the proposed new tenant signs a contract relating to the transfer in a form reasonably required by the Landlord; and
(c) ensure that any guarantee or guarantee and indemnity reasonably required by the Landlord is given; and
(d) comply with and ensure that the proposed new tenant complies with all the Landlord's reasonable requirements within the context of clause 12.2; and
(e) obtain the Landlord's confirmation that the Landlord has obtained any consents it has agreed to obtain (which the Landlord agrees to seek to obtain within 21 days); and
(f) ensure that the proposed new tenant enters into a deed with the Landlord in which it agrees to comply with the obligations of the old tenant under the Construction Deed (unless the Landlord determines that the Tenant's obligations under the Construction Deed have been met and the proposed new tenant is not required to enter a deed under this clause 12.4(f))."
Also of note is an aspect of cl 12.7 which proscribed the sub-letting of the Premises if any event of default occurred which had not been remedied or waived.
Clause 17.2 of the Hospital Lease made Macquarie's obligations to pay money, as well as its obligations under cll 6, 8, 11 and 12, essential terms of the Hospital Lease. It also made Macquarie's obligations under cll 2.1, 2.4 and 3.7 of the Construction Deed, together with cll 5, 7, 10 and 11 of the Car Park Lease, essential terms of the Hospital Lease. Clause 2.1 of the Construction Deed required Macquarie to "commence, carry out and complete the Works in accordance with the Timetable". "Works" was defined in the Construction Deed as meaning:
"the works to be carried out in accordance with the Initial Proposal as amended or varied, the Plans and Specifications, the Schedule of Finishes, the relevant development approvals, any relevant building approvals and the requirements of any other regulatory authorities including:
(a) the excavation of the land comprised in Folio Identifiers 11 and 12/809663 and removal of materials;
(b) the construction of the Complex; and
(c) the fitting out of the Hospital
including all ancillary works and activities associated therewith."
"Complex" was defined as meaning "the Hospital to be erected on Lot 12 in Deposited Plan 809663 and the Car Park to be erected on Lot 11 in Deposited Plan 809663." "Hospital" was defined as meaning "the proposed private hospital and other facilities to be erected on Lot 12 in Deposited Plan 809663 and operated by or on behalf of the Tenant in accordance with the Initial Proposal."
Clause 3.1 of the Construction Deed imposed an obligation on Macquarie at its own cost and as expeditiously as possible to:
"carry out and complete or cause to be completed the Works in a proper and workmanlike manner in accordance with the Plans and Specifications approved by the Council and any other relevant authority, the terms of the development and building approval approved under clause 4.2 and the requirements of any other relevant authority. To this end [Macquarie] may take partners which in its opinion are of a quality, experience and substance sufficient to ensure the Project is completed."
The terms of the Car Park Lease are not as significant as those in respect of the Hospital Lease for present purposes, but it may be noted that the relevant provisions of the interlocking suite of agreements related to the Car Park Site provided:
1. The Car Park Lease under which SLHD leased the Car Park Site to itself and Macquarie as tenants in common for a term of 103 years commenced on 1 December 1996. Under the Car Park Lease, Macquarie was described as the managing tenant and was required to pay to SLHD a specified rent on 14 February 1999 and specified outgoings, proportionately with SLHD where the particular outgoing was a service (as defined) enjoyed by both Macquarie and SLHD;
2. A Car Park Sub-Lease under which SLHD let its interest in the Car Park Site as a tenant in common to Macquarie for a term of 28 years commenced on 1 December 1996. Under the Car Park Sub-Lease, Macquarie was required to pay an annual rent of $720,000 to SLHD;
3. The Car Park Management Agreement between SLHD, Macquarie and Macquarie Health Corporation Ltd (MHC) (as guarantor), under which Macquarie agreed to manage and operate the Car Park Site. This Agreement was not to come into effect until the date of termination of the Car Park Sub-Lease in 2024. In a decision delivered on 12 September 2019, recently upheld by this Court (see [5] above), Ward CJ in Eq declared that the Car Park Sub-Lease was validly terminated by SLHD by notice of termination dated 17 October 2017: see Macquarie International Health Clinic Pty Ltd v Sydney Local Health District [2019] NSWSC 1199; and
4. a Co-Ownership Deed between SLHD, Macquarie and MHC (as guarantor) which governed the rights and obligations of Macquarie and SLHD as co-owners of the Car Park Site. The Co-Ownership Deed also plays no part in the current proceedings because, in practical terms, it did not come into effect until the expiry of the Car Park Sub-Lease.
As indicated at [57] above, it is next necessary to set out the applicable legal principles relevant to damages for trespass in general and damages by way of mesne profits for trespass in particular, before turning to the grounds of appeal in detail, as an understanding of those principles is essential to understand the grounds of appeal.
[6]
Damages for trespass
The general measure of damages in tort is compensation for loss caused: see Butler v Egg and Egg Pulp Marketing Board (1966) 114 CLR 185 at 191; [1966] HCA 38 (Butler). "Compensation is the cardinal concept" and cognate with this concept is that "a plaintiff cannot recover more than he or she has lost": see Haines v Bendall (1991) 172 CLR 60 at 63; [1991] HCA 15 (Haines).
As Menzies J observed in Butler, a plaintiff is entitled to recover "no more than the real damage he has sustained": at 192. Menzies J was there speaking of an action for damages in respect of the tort of conversion, a tort which bears a close affinity with the tort of trespass to land: see, for example, Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246 at 252 and 254 (Strand); Gaba Formwork Contractors Pty Ltd v Turner Corporation Ltd (1991) 32 NSWLR 175 at 183 (Gaba); and Bunnings Group Limited v CHEP Australia Ltd (2011) 82 NSWLR 420; [2011] NSWCA 342 at [198] (Bunnings).
The torts of trespass to land, conversion, and detinue respond to the unlawful interference with the exclusive possessory rights of a plaintiff. They protect possession and not any other interest: see C Sappideen and P Vines (eds), Fleming's The Law of Torts (10th ed, Thomson Reuters, 2011) at [4.30].
In this context, the recent observations of Edelman J in Hocking v Director-General of the National Archives of Australia (2020) 94 ALJR 569; [2020] HCA 19 at [204] are of note:
"A 'right to use' a chattel is generally treated as one of the different 'sticks' in the 'bundle of rights' or as an aspect of the power derived from a 'concentration of patiently garnered rights'. But a 'right to use' a chattel usually means only a liberty to use it and a mere liberty to use a chattel is neither necessary nor sufficient for a property right … A clear understanding of a property right to tangible goods should eschew metaphors and avoid conflation of different juristic concepts by being expressed simply as the right to exclude others or, by a correlative, as a duty upon those others not to interfere physically with the chattel. For chattels, this is the 'necessary and sufficient condition of identifying the existence of property'." (Footnotes omitted.)
The tort of trespass is an unusual one which exists "though the damage be nothing": see Entick v Carrington (1765) 19 St Tr 1029 at 1066 per Lord Camden LCJ, cited by Brennan J in Halliday v Nevill (1984) 155 CLR 1 at 10; [1984] HCA 80. Trespass to land is actionable per se (see Port Stephens Shire Council v Tellamist Pty Ltd [2004] NSWCA 353; (2004) 135 LGERA 98 at [190] (Tellamist)) and "so nominal damages are awarded as a recognition of the infraction of the plaintiff's possessory right": see Mayfair Ltd v Pears [1987] 1 NZLR 459 at 465 (Mayfair).
That is not to say, however, that substantial damages may not be awarded for the tort. They may fall into different categories, as Santow JA explained in Tellamist at [193]-[200], being (a) cases where there is a benefit to the defendant without actual loss to the plaintiff; (b) where the benefit to the defendant correlates to the actual loss to the plaintiff; and (c) where the trespass involves loss to the plaintiff and no correlative gain by the defendant. To these three categories may arguably be added a fourth, namely where there is no benefit to the defendant and no actual loss to the plaintiff. In such a case, only nominal damages would lie. As will be seen, this may be the position where a trespasser has made no actual use of the land whilst in unauthorised possession of it.
There is no doubt that damages awarded for the tort of trespass may be awarded in a conventional manner consistent with the cardinal compensatory nature of damages in tort. Thus, it is open to a plaintiff upon whose land a defendant has trespassed to seek damages which would put that plaintiff in the same position it would have been had the tort not been committed or, to use the language of Hoffmann LJ (as his Lordship then was), to recover the "loss which he has suffered in consequence of the defendant's trespass": see Ministry of Defence v Ashman (1993) 25 HLR 513 at 519 (Ashman).
If, for example, the trespass had caused some economic loss by preventing the plaintiff's use of its land (including the exercise of any contractual or statutory rights associated with its occupation of the land), there is no reason in principle why such loss could not be recovered. Indeed, as has already been noted, for a very considerable period of time in the present case, Macquarie pursued a claim based on loss of profits or loss of the opportunity to earn profits from its occupation of the sites: see [24] above.
Damages may also be awarded in relation to any physical damage to the land in question (or chattel in the case of trespass to goods) caused by the trespasser.
It may also be noted in this context that there is authority for the proposition that both aggravated and exemplary damages are available for the tort of trespass "where [the defendant] acts in contumelious disregard of the plaintiff's rights": see Taylor v Beere [1982] 1 NZLR 81; Mayfair at 465; Horsford v Bird [2006] UKPC 3 at [14]; [2006] 1 EGLR 75; and Eaton Mansions (Westminster) Ltd v Stinger Compania De Inversion SA [2013] EWCA Civ 1308 at [26]-[28] (Eaton).
[7]
Mesne profits
Another form of damages available to a plaintiff upon whose land the defendant has trespassed is what are known as damages for mesne profits. Shortly put, this is a monetary remedy for the use of the plaintiff's land (or goods, in the case of trespass to chattels) by the defendant during the period of trespass. Typically this measure of damages will be sought where the plaintiff with the right to exclusive possession has in fact suffered no loss, or less loss than is represented by a "rent" or "hiring charge" for the land on which the trespass has occurred: Strand at 254.
Such a remedy, where available, is in the strict alternative to a claim for damages for loss of profits or loss of opportunity to use the land. This is because the calculation of damages for claims of this latter character are predicated upon the plaintiff being and remaining in possession; a plaintiff could not generate a profit from possession of the property whilst simultaneously renting it out. The claims are mutually exclusive: see Ashman at 105; Roberts v Rodney District Council [2001] 2 NZLR 402 at [15] (Roberts).
[8]
Mesne profits - characterisation issues
One particular feature of the award of damages by way of mesne profits is that a plaintiff does not need to establish on the balance of probabilities that he, she or it would have rented or licensed the land trespassed upon to the defendant trespasser. This aspect of the remedy has led some to question whether or not damages for mesne profits are compensatory in nature, and whether they conform to the fundamental or cardinal principle of compensation or have a different character.
Various judicial views have been expressed on that question. Thus there are those who consider damages for mesne profits:
(i) as plainly restitutionary in character (see, for example, Hoffman LJ in Ashman at 519 who said the time had come to "call a spade a spade");
(ii) as having something of a hybrid character (see, for example, Inverugie Investments Ltd v Hackett [1995] 1 WLR 713 at 718 (Inverugie) per Lord Lloyd: "The [user] principle need not be characterised as exclusively compensatory, or exclusively restitutionary; it combines elements of both");
(iii) as compensatory, employing that characterisation in a perhaps extended or wider sense (see, for example, Bunnings at [174]; Stoke-on-Trent City Council v W. & J. Wass Ltd [1988] 1 WLR 1406 at 1416 (Stoke-on-Trent));
(iv) as not conforming "to the strictly compensatory measure of damage for the injured person's loss unless loss is given a strained and artificial meaning": see Attorney-General v Blake [2001] AC 268 at 279 (Blake); or
(v) as something of an anomaly (see, for example, Roberts at [27]-[28] per Barker J: "damages for wrongful use do not fit neatly with the compensation principle which governs the assessment of damages in most areas of tort law … [they are] an anomalous measure of damages which rest upon an assumption that the plaintiff has incurred loss and the trespasser has incurred a profit as a result of the trespass").
Some of the cases in this area have been conceptualised as compensating a plaintiff upon whose land trespass has occurred or whose goods have been converted by way of damages for loss of the opportunity to bargain as to rent or hire: see, especially, RJ Sharpe and SM Waddams, "Damages for Lost Opportunity to Bargain" (1982) 2 Oxford J Legal Stud 290 at 295; see also SM Waddams, The Law of Damages (5th ed, Canada Law Book, 2012) at [9.80]-[9.100]. There is much wisdom in the observation of Mance LJ (as his Lordship then was) that "[w]hether the adoption of a standard measure of damages represents a departure from a compensatory approach depends upon what one understands by compensation": see Experience Hendrix LLC v PPX Enterprises Inc [2003] EWCA Civ 323 at [26].
Similarly significant for the purposes of the present case is the observation by Allsop P in Bunnings at [177] that:
"Essential to the notion of compensation here is the use by the wrongdoer that gives reality and content to the denial of, or interference with, the plaintiff's rights. So to say is not to transform damages into restitution; rather it is to set a practical limit to the principle based on the feature of the wrong (the wrongful use) which calls for the law's response to award damages for the denial or interference with the right."
Bunnings was a claim in conversion and detinue following Bunnings' wrongful refusal to return pallets to which the respondent (Chep) had the immediate right to possession: see Bunnings at [1]. This was the right to which Allsop P was referring in the above passage. As was said in Anderson v Bowles (1951) 84 CLR 310 at 325; [1951] HCA 61, "[m]esne profits are compensation for a wrong to possession".
The taxonomical debate noted above, and also described and considered by Giles JA in Bunnings at [194]-[198], does not arise directly in the present case and may be largely put to one side although it is observed that, had Macquarie elected (see [20] above) to recover whatever gains may have been made by SLHD from its operation of the Car Park Site during the period of the trespass, such recovery would undoubtedly have had a restitutionary character.
In Bunnings, Allsop P, with whom Macfarlan JA agreed, favoured a "compensatory" characterisation (see at [175] but cf Knott Investments Pty Ltd v Winnebago Industries, Inc (No 2) (2013) 305 ALR 387; [2013] FCAFC 117 at [26] per Allsop CJ). On the other hand, Giles JA favoured a restitutionary characterisation: at [198]-[199]. As we have indicated above, it is not necessary to seek to resolve this debate in the current case. Even if one were to prefer the broad compensatory characterisation, the cases which have favoured a restitutionary characterisation or analysis of mesne profits such as Ashman are still relevant for what they have to say about how damages for mesne profits, however characterised, fall to be assessed.
[9]
Mesne profits - some history
The most familiar context in which mesne profits are awarded is where a lessee remains in possession of property after the right to do so has expired or has been lawfully terminated, that is, "holding over" and refusing to vacate. See, for example, Aslin v Parkin [1758] 96 ER 1215; [1758] 97 ER 501; and Goodtitle v Tombs [1770] 95 ER 965. WS Holdsworth identifies the action as being well and truly in existence by 1589 by reference to Pelham's Case: see A History of English Law (2nd ed, Methuen, 1937) vol 7 at 15. As Brennan J explained almost 400 years later in Progressive Mailing House Pty Ltd v Tabali Pty Ltd (1985) 157 CLR 17 at 39; [1985] HCA 14:
"A lessor who, under a proviso for re-entry, serves the lessee with process for recovery of possession is entitled to mesne profits for the period during which the lessee remains in possession after service: Canas Property Co. Ltd. v. K.L. Television Services Ltd [1970] 2 Q.B. 433. The lessor may thereby recover an amount equal to the rent in respect of that period. But mesne profits are damages for trespass; mesne profits are not rent, nor are they damages for breach of a covenant to pay rent."
The relationship between trespass to land and mesne profits is of ancient lineage associated with the medieval "real action" which matured into an action in ejectment, the more general writ of quaere clausum fregit for trespass to land and the writ de ejection firmae, available "at the instance of a lessee against anyone who had ejected him from his term of years": see DM Walker, The Oxford Companion to Law (Oxford University Press, 1980) at 395; and see, more generally, Sir William Blackstone, Commentaries on the Laws of England (JB Lippincott Co, 1893) vol II at 199-206 (Blackstone). Blackstone records (at 205) that:
"The damages recovered in these actions … are now usually (since the title has been considered as the principal question) very small and inadequate, amounting commonly to one shilling, or some other trivial sum. In order therefore to complete the remedy when the possession has been long detained from him that hath the right to it, an action of trespass also lies, after a recovery in ejectment, to recover the mesne profits which the tenant in possession has wrongfully received. … In this case the judgment in ejectment is conclusive evidence against the defendant for all profits which have accrued since the date of the demise stated in the former declaration of the plaintiff; but if the plaintiff sues for any antecedent profits the defendant may make a new defence." (Footnotes omitted.)
As this passage from Blackstone illustrates, the "profits" referred to in the expression "mesne profits" were the profits made by the defendant in or by reason of his, her or its unauthorised occupation of the property. So much is also plain from the form of "Declaration in Trespass for Mesne Profits and Costs" in use in the 19th century, which was reproduced in the Appendix to WR Cole, The Law and Practice in Ejectment (H Sweet, 1857) as follows:
"The [date when pleaded] xx day of xx, A.D. 18 xxx.
A.B. by E.F. his attorney (or in person, as the case may be] sues C.D., for that the defendant broke and entered certain tenements of the plaintiff (that is to say) [describe them in the ejectment, by names or abuttals as in an ordinary action of trespass], situate and being in the parish of xxx, in the county of xxx, and ejected, expelled, put out and removed the plaintiff from his possession and occupation thereof and kept him so ejected and expelled for a long time, and during that time took and received to the use of the defendant the issues and profits of the said tenements, with the appurtenances, whereby the plaintiff during all the time aforesaid not only lost the issues and profits of the said tenements, with the appurtenances, but was deprived of the use of the same tenements with the appurtenances [and also of the opportunity and means of cultivating the same], and was forced and obliged to and did bring and prosecute a certain action of ejectment for the recovery of the possession of the said tenements, with the appurtenances; and was also forced and obliged to and did necessarily pay and expend divers sums of money, and also necessarily incur and became liable to pay divers other sums of money, in and about the recovering of the possession of the said tenements, with the appurtenances: And the plaintiff claims £xxx."
The same may be seen in E Bullen and SM Leake, Precedents of Pleadings in Actions in the King's Bench Division of the High Court of Justice (3rd ed, Stevens, 1868) at 421-422, as Edelman J demonstrated in Hampton v BHP Billiton Minerals Pty Ltd (No 2) [2012] WASC 285 at [310]. In 1823, Washington J, delivering the opinion of the United States Supreme Court in Green v Biddle, 21 US 1 at 81 (1823), observed:
"Upon the whole, then, we take it to be perfectly clear that according to the common law, the statute law of Virginia, the principles of equity, and even those of the civil law, the successful claimant of land is entitled to an account of the mesne profits received by the occupant from some period prior to the judgment of eviction or decree." (Emphasis added.)
For a discussion of the history of the action, see Tilly v Bridges (1667-1744) 2 Eq Ca Abr 588; 22 ER 495 where reference is made to an equitable suit on a Bill for an Account of Profits available "for the Time the Possession was detained … [in] very particular circumstances"; Montreuil v The Ontario Asphalt Company and the Caldwell Sand and Gravel Company (1922) 63 SCR 401 at [98]-[103]; and Tellamist at [189]-[190].
An early case relied upon by Macquarie was the decision in Doe v Hare [1833] 97 ER 709; [1833] 3 LJ Ex 17, which stands as authority for the proposition that a party bound to account for mesne profits may, in effect, set off or have deducted from those profits involuntary expenses paid in respect of the (wrongful) possession of the land.
As will be seen, in more modern authorities, mesne profits have come to be treated not as limited to actual profits made or derived from the unauthorised occupation of the land trespassed upon, but rather as including recompense for the benefit enjoyed by the trespasser from unauthorised possession and usage of land, represented or measured by the rent or hire that could have been but was not charged for that occupation.
Here, the focus is on the benefit to, or expense saved by, the trespassing defendant, with the damages awarded being a proxy for the value of that benefit. Such notional or surrogate rent will be payable whether or not the trespasser's unauthorised possession of the property was "profitable". In this way, maintenance of the label mesne "profits" in this area of discourse may be apt to confuse or at least obscure. It is of some continuing importance, however, in its focus on the benefits (be they profitable or otherwise) which the defendant trespasser has secured or enjoyed from the actual use of the land upon which the trespass has occurred.
[10]
Mesne profits and the "user principle"
In cases involving a claim for damages by way of mesne profits, the plaintiff has often suffered no loss, or less loss than is represented by a hiring charge, as Denning LJ explained in Strand, concerning an action in detinue, at 254-255:
"if the wrongdoer has in fact used the goods he must pay a reasonable hire for them. Nor do I mean to suggest that a wrongdoer who has merely detained the goods and not used them would have to pay a hiring charge. The damages for detention recoverable against a carrier or a warehouseman have never been measured by a hiring charge. They are measured by the loss actually sustained by the plaintiff, subject, of course, to questions of remoteness. … The claim for a hiring charge is therefore not based on the loss to the plaintiff, but on the fact that the defendant has used the goods for his own purposes. It is an action against him because he has had the benefit of the goods. It resembles, therefore, an action for restitution rather than an action of tort. But it is unnecessary to place it into any formal category. The plaintiffs are entitled to a hiring charge for the period of detention, and that is all that matters. I can imagine cases where an owner might be entitled to the profits made by a wrongdoer by the use of a chattel, but I do not think this is such a case."
At least one judge has characterised mesne profits as "damages for wrongful use", damages in this regard being said to rest upon a "user principle": Roberts at [26]-[28]. In Stoke-on-Trent, both Nourse LJ (at 1414) and Nicholls LJ (as his Lordship then was) (at 1416) used the expression "the user principle", the former describing it as having "come about by accident rather than by design" (at 1415).
In Strand at 252, Somervell LJ said that the wrong is "not the mere deprivation … but the user", and, as both Nourse and Nicholls LJJ observed in Stoke-on-Trent, this notion goes back to Whitwham v Westminster Brymbo Coal and Coke Co [1896] 2 Ch 538 (Whitwham), and the cases on which it drew.
In Whitwham at 541-542, Lindley LJ had said:
"The plaintiffs have been injured in two respects. First, they have had the value of their land diminished; secondly, they have lost the use of their land, and the defendants have had it for their own benefit. It is unjust to leave out of sight the use which the defendants have made of this land for their own purposes, and that lies at the bottom of what are called the way-leave cases. Those cases are based upon the principle that, if one person has without leave of another been using that other's land for his own purposes, he ought to pay for such user. The law is now settled by Jegon v. Vivian, which has been approved of by the House of Lords in Livingstone v. Rawyards Coal Co. It proceeds upon the principle which Lord Hatherley L.C. stated in Phillips v. Homfray." (Footnotes omitted.)
The "way-leave cases" (see Martin v Porter (1839) 5 M & W 351; Jegon v Vivian (1871) LR 6 Ch App 742; and Phillips v Homfray (1871) LR 6 Ch App 770) were a series of cases in which the trespass relevantly comprised the use by the defendants of underground passages for the carriage of coal. The emphasis in the way-leave cases, as Nicholls LJ pointed out in Stoke-on-Trent at 1416, was on use rather than unlawful possession. The users of the passages for the movement of their coal were not in ongoing possession of those passages during the period of the trespass.
In Whitwham, the Court upheld a decision of Chitty J who awarded damages to the plaintiff on the basis of the value to the defendant of the use of the land in carrying out tipping refuse from its colliery onto the plaintiff's land: see Whitwham v Westminster Brymbo Coal and Coke Co [1896] 1 Ch 894. Chitty J said of the way-leave cases (at 899) that:
"They are founded on the principle that a wrongdoer shall not make a profit out of his own wrong, and that the value of the land for the purposes for which it was actually used by the wrongdoer ought to be taken into consideration." (Emphasis added.)
In New South Wales, the decisions in both Whitwham and Strand have been followed and applied: as to Strand, see Bunnings at [173] per Allsop P and the cases there cited. In Gaba, Giles J (as his Honour then was) noted that Strand had stood for 40 years and produced a "just result" (at 188) whilst, at 183, his Honour observed that Whitwham and the way-leave cases to which it in turn referred were foundational in terms of the claim for damages by way of mesne profits in an action for trespass.
Giles JA, as his Honour had then become, drew further on Strand in his separate judgment in Bunnings, noting (at [200]) that, although the three members of the English Court of Appeal in Strand differed in their reasoning, all required "use" by the defendant of the chattel in their analysis of the plaintiff's entitlement to damages by way of mesne profits. Strand was also applied by Jackson CJ in the Full Court of the Supreme Court of Western Australia: see Yakamia Dairy Pty Ltd v Wood [1976] WAR 57 at 58; see also Burt J at 58-59. Damages were awarded for the use by the defendant's cattle of the plaintiff's pasture, following their unauthorised trespass on to that land. Strand was also extensively cited by Yates J in Winnebago Industries Inc v Knott Investments Pty Ltd (No 4) (2015) 241 FCR 271; [2015] FCA 1327 at [20]-[26].
To return to the English line of cases after Strand, in Penarth Dock Engineering Co Ltd v Pounds [1963] 1 Lloyd's Rep 359 (Penarth), Lord Denning, sitting as an additional judge of the Queen's Bench Division, had before him a claim for damages for mesne profits arising from the unauthorised use of a pontoon at Penarth Dock. Lord Denning said at 361-362:
"True it is that the Penarth company themselves would not seem to have suffered any damage to speak of. They have not to pay any extra rent to the British Transport Commission. The dock is no use to them; they would not have made any money out of it. But, nevertheless, in a case of this kind, as I read the law, starting with Whitwham v Westminster Brymbo Coal and Coke Company, [1896] 2 Ch. 538, on which I commented myself in the case of Strand Electric and Engineering Company Ltd, v Brisford Entertainments, Ltd., [1952] 2 Q.B. 246, at pp. 253 to 254, the test of the measure of damages Is not what the plaintiffs have lost, but what benefit the defendant obtained by having the use of the berth; and he has been a trespasser, in my judgment, since Aug. 9, 1962." (Emphasis added.)
Whitwham and Penarth were followed and applied by the English Court of Appeal in Swordheath Properties Ltd v Tabet [1979] 1 WLR 285 (Swordheath). In that decision, Megaw LJ, with whom Browne and Waller LJJ agreed, observed (at 288) that:
"It appears to me to be clear, both as a matter of principle and of authority, that in a case of this sort the plaintiff, when he has established that the defendant has remained on as a trespasser in residential property, is entitled, without bringing evidence that he could or would have let the property to someone else in the absence of the trespassing defendant, to have as damages for the trespass the value of the property as it would fairly be calculated; and, in the absence of anything special in the particular case it would be the ordinary letting value of the property that would determine the amount of the damages."
In the year following Swordheath, this Court considered that decision together with Strand and some of the early way-leave cases in Bilambil-Terranora Pty Ltd v Tweed Shire Council [1980] 1 NSWLR 465, a case which involved an assessment of damages for the conversion of gravel by a local council where there had also been a trespass on to the plaintiff's land. That case, on analysis, has little relevance to the present case as no damages appear to have been awarded for the trespass on to the plaintiff's land; rather, the debate focussed entirely on the appropriate amount of damages to be paid for the conversion of the plaintiff's gravel which the Council had quarried, taken away and used.
A pair of decisions of the English Court of Appeal should be noted at this point: Ashman and Ministry of Defence v Thompson [1993] 2 EG 107 (Thompson). Both were cases in which the Ministry of Defence gave notice to families of servicemen to leave premises in London owned by the Ministry and which had been occupied by the families at a concessionary rate. When they did not do so, the Ministry commenced proceedings claiming possession and mesne profits based upon the open market rent that could be obtained for the letting of the properties.
The cases (noted by Elizabeth Cooke in "Trespass, Mesne Profits and Restitution" (1994) 110 LQR 420) were treated by the Court of Appeal as indistinguishable from each other, Hoffmann LJ (as his Lordship then was) being a common member of both benches. Ashman's principal significance lies in his Lordship's frank statement that damages for mesne profits were to be regarded as restitutionary in character, as has already been noted: see [82] above. Both decisions are significant in the present case, however, insofar as they treated as relevant to the assessment of damages by way of mesne profits the personal circumstances of defendants and, in the case of Lloyd LJ in Ashman, the circumstances of the Ministry. Both decisions are considered in a little more detail in the next section of these reasons.
The next decision of significance is that of the Privy Council in Inverugie where Lord Lloyd (as Lloyd LJ had then become) described the "user principle" as entitling a plaintiff "to recover a reasonable rent for the wrongful use of his property by the trespasser": at 718. His Lordship went on to say that "[s]imilarly, the trespasser may not have derived any actual benefit from the use of the property. But under the user principle he is obliged to pay a reasonable rent for the use which he has enjoyed." (Emphasis added.) This case will also be considered in greater detail below under the heading "Assessment of mesne profits".
In Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432 (Lamru), Cohen J cited this passage and said (at 439) that:
"Mesne profits are in effect damages for trespass. The authorities now seem to be clear that the usual measure is the value of the market rent for the premises which the trespasser should have paid for the period of its occupation. It will not depend on whether the plaintiff would have been able or willing to let the premises to someone else during the relevant period."
His Honour, citing Penarth and Ashman, went on to assess damages for mesne profits by reference to the value of the property to the trespasser defendant. This resulted in a higher than market rent on the facts of the case because of the particular value to the defendant in possession.
Some further reference should at this point be made to the decision of Giles J in Gaba which was decided seven years before Lamru. That was a claim in detinue for damages for the wrongful retention by the defendant of certain formwork materials. Gaba's business involved the hiring out of those materials. A referee had assessed damages for the defendant's use of the formwork up until 17 May 1991. Giles J held that Gaba was entitled to the hiring fee for the period to 17 May 1991, since although there was no express finding by the referee, it was to be inferred that the formwork materials were used by the defendant for its benefit during that period. Significantly, his Honour went on to say (at 188) that:
"I do not feel able to make the same inference in the case of the unreturned materials for the period following 17 May 1991. They may have been retained and used by Turner or its sub-contractor; they may have been simply retained; or they may have been lost or disposed of. If they were retained and used by Turner or its sub-contractor, Gaba is additionally entitled to a hiring fee for the unreturned materials to the date of judgment. If they were not, it is not so entitled in the absence of proof of actual loss."
In 2001, the House of Lords delivered its controversial decision in Blake: see, for Australian criticism, JD Heydon, MJ Leeming and PG Turner, Meagher Gummow & Lehane's Equity: Doctrines and Remedies (5th ed, LexisNexis Butterworths, 2015) at [26-075]; and JD Heydon, Heydon on Contract (Thomson Reuters, 2019) at [29.330]-[29.340]. In a non-controversial passage of his speech, however, Lord Nicholls (at 278) observed:
"Damages are measured by the plaintiff's loss, not the defendant's gain. But the common law, pragmatic as ever, has long recognised that there are many commonplace situations where a strict application of this principle would not do justice between the parties. Then compensation for the wrong done to the plaintiff is measured by a different yardstick. A trespasser who enters another's land may cause the landowner no financial loss. In such a case damages are measured by the benefit received by the trespasser, namely, by his use of the land." (Emphasis added.)
This monetary remedy recognises that where there has been a trespass to land for any sustained period of time and it has been used by the defendant, the plaintiff would have correspondingly lost the use of the land. Cases that have permitted the recovery of "mesne profits" have recognised that it is just that a landowner or lawful occupier be compensated for the trespasser's unauthorised use of the land during the period of the trespass. As Lord Clarke summarised the position in Bocardo SA v Star Energy UK Onshore Ltd [2011] AC 380 at [119] (see also at [128]):
"The courts have held that, in the case of trespass to land, damages may be recovered equal to the value to the defendant of the use he has made of the claimant's land even though the claimant has suffered no consequential loss and the value of his land has not been diminished. The principle originated in cases not unlike this, where the defendant trespassed by carrying coals along an underground way through the claimant's land." (Emphasis added.)
The "user principle" invites attention to the use in fact enjoyed by the defendant of the plaintiff's land because it is that use for which compensation is due. This is where the historical character of damages for mesne profits may have some significance for present purposes, irrespective of the actual taxonomical label to be attached to such damages. As has been seen, historically it was the defendant's actual "profits" derived from the unauthorised "demesne" or possession over another's property that could be awarded for trespass following repossession.
As shall be seen, the notional "rent" charged for the use made of the defendant's land may be market rent but that is only a prima facie position, as White J (as his Honour then was) observed in Laris v Lin [2017] NSWSC 279 at [17]. It may be more or less than market rent depending upon the special circumstances of the case, as the decisions in Inverugie and Bunnings, for example and which are considered in further detail below, illustrate.
[11]
Assessment of mesne profits
Inverugie was a case which involved a claim for mesne profits in respect of some 30 holiday apartments in a much larger hotel in the Bahamas. The plaintiff held the apartments under a 99 year lease and had been ejected and wrongfully held out of possession by the hotel operator for some 15.4 years. The issue in the case turned on what "rental figure" should have been used to calculate mesne profits for the hotel operator's trespass. Lord Lloyd, delivering the advice of the Privy Council, described the point as "not altogether easy": at 718.
Essentially there were three candidates: first (as contended for by the hotel operator), the notional rent for the 30 apartments as a whole calculated by reference to their annual occupancy; second, the rack or published rate for the 30 apartments on the basis of 100% occupancy; or third, the wholesale rate paid by tour operators, namely the published rate less 35% in winter and 65% in summer, but on the basis of 100% occupancy.
The latter approach which had been taken by Rowe JA (who had been in the minority in the Bahamas Court of Appeal) was favoured although, with the greatest of respect, there is little reasoning explaining why this approach prevailed although it was made clear that "[t]he chance of making a profit from the use of the apartment is not the correct test for arriving at a reasonable rent": at 718. The approach endorsed by the Privy Council may be seen to represent something of a hybrid or compromise result. It was in effect a "market rent" for tour operators booking a bloc of apartments as opposed to the market rent for individual holiday makers. From this amount it was also accepted that there should be deducted the rent the plaintiff needed to pay under his long-term lease, together with the plaintiff's obligation to contribute to the maintenance and refurbishment of common areas. As such, the damages by way of mesne profits awarded reflected at least the individual circumstances of the property and the defendant (as a tour operator) and, no doubt, an assessment that it was reasonable or just to use what was in effect a wholesale rate in order to calculate a notional or surrogate rent.
It should also be noted that, although the wholesale rate was used rather than an actual occupancy rate, the damages awarded by way of mesne profits were not in fact calculated by reference to a 100% occupancy for the entire period of the trespass which, it will be recalled, was some 15.4 years. The Privy Council endorsed the view taken by Rowe JA: see at 719. Rowe JA had calculated damages not for the entire period of the trespass but, rather, for 15.16 years, the approximate 3½ month reduction being effected to represent a period when the apartments would necessarily have been unoccupied whilst being refurbished and thus were not capable of being rented out. This aspect of the decision was not expressly addressed in the Privy Council but emerges from a consideration of the decision in the Bahamas Court of Appeal: see Hackett v Inverugie Investments Ltd [1993] BHS J 126 at [119]; see also at [80], [90] and [117].
In Bunnings, the trespass was to goods rather than land. The goods in question were pallets which were used for the carriage, storage and display of manufactured goods. They were the property of the respondent Chep, which Bunnings had refused to return despite Chep's demand. Chep had offered to hire them to Bunnings at 40% of its standard hire rate, this rate being referred to in the judgment as the "Wesfarmers' rate", no doubt reflecting a form of bulk discount. The pallets were in fact used by Bunnings for display and storage of goods in its stores which had been delivered on the pallets. As Allsop P observed at [180], the pallets were being deployed:
"in the business of Bunnings, even to the extent that they were recirculating pallets for returns. The refusal to return enabled the continued smooth operation of the Bunnings business to take place, without the inconvenience (and hence business cost) of doing that which they were legally obliged to do - return all pallets to Chep."
It is not unimportant to note that Allsop P had earlier observed (at [179]) that:
"If the wrong is the mere non-return of goods that lie idle and contribute not at all to the life, work or business of the wrongdoer it may be difficult to justify conceptually, in the absence of proof of actual loss or damage, the awarding of a hiring fee. Hire is, after all, in its nature, a payment for use."
In the previous paragraph of his judgment, his Honour had referred to "the capacity of the chattel to be hired by the owner". These observations recall the reference by Denning LJ in Strand to the mere warehouseman against whom his Lordship doubted an action for mesne profits would lie: see [94] above. Both the observations of Allsop P and those of Denning LJ in Strand draw attention to the connection between the defendant's use of the land or goods in question and the award of mesne profits.
At first instance in Bunnings, the trial judge had awarded damages for wrongful detention assessed by reference to Chep's standard rate rather than the discounted rate it had offered to Bunnings. Allsop P (with whom Giles and Macfarlan JJA agreed) took a different course, stating (at [185]) that:
"The focus should be on the appropriate measure of hire. The market or standard rate is to be chosen because it best reflects what the converter or detainer would have to pay and what the owner should obtain for his property wrongfully retained. Of course, it does not lie in the wrongdoer's mouth to posit a speculative advantage that it might have got had it not committed the wrong. That, however, is not the position in relation to the conversion or detinue after 8 August 2006. The very act of conversion and detinue was the refusal to enter a transaction, effectively on offer at the Wesfarmers' rate: see for example the Hire Equipment Proposal of March 2006 at section 3.4 (Blue Book Vol 1 p 425). In those circumstances, the very act of conversion or detinue was failing to accept the offer effectively based on the Wesfarmers' rate. This is the appropriate rate from 8 August 2006 for the quantity of pallets withheld and used by Bunnings. To give a higher rate after 8 August 2006 would be to risk over-compensation of the kind in Butler where to give damages by reference to the value of the eggs sold by the grower would have given the Board a sum greater than it would have received had the grower complied with the law, breach of which law amounted to the acts of conversion."
Allsop P continued:
"If this is the rate, I would still maintain the primary judge's usage of 90 per cent of the pallets upon which he calculated damage, as it reflected the evidence of Chep as to usage rates and also gave a margin to accommodate the possibility that some pallets were lying idle in Bunnings without either being used by way of possession or circulating in the carrying on of Bunnings' business."
Two points may be made. First, the rent was for the goods used with a corresponding recognition that rent was not payable in respect of goods not in fact used. The focus was thus on whether and to what extent the defendant had used that which was detained, namely the pallets. Second, as in Inverugie, the standard market rent or hire fee was not applied, but a lesser rent reflecting the facts of the actual case and the defendant's position vis-à-vis the plaintiff.
In a separate judgment, Giles JA stated (at [205]) that:
"The damages represent the expense saved by Bunnings through having the use of the pallets without paying for their hire. The damages are the amount Bunnings would have to pay for the use of the pallets, not the amount a third party would have had to pay for their use. Thus the Wesfarmers rate should be used."
Ashman is another case where less than market rent for premises was awarded by way of mesne profits. The property in question comprised married quarters occupied by members of the armed services. The Ministry of Defence claimed rent for premises of the physical kind in question that would have been available on the open market as opposed to the concessionary rent that had been charged on the property. Kennedy and Hoffmann LJJ differed in their approach to the assessment of damages to that favoured by Lloyd LJ. The latter would only have awarded damages for mesne profits by reference to the concessionary rent as his Lordship considered that the Ministry would not in practice have let the property on the open market, observing that "the Ministry of Defence is not a normal landlord and Mr Ashman is not a normal tenant": at 522. The other two judges were of the opinion that the notional "rent" should be calculated by reference to what the continued occupation of the property was in fact worth to Mrs Ashman, that is to say, the subjective benefit to her. The case was treated as one of special circumstances warranting departure from the ordinary measure based upon rental on the open market.
In Roberts, a local council had constructed a sewer pipe over the plaintiff's land without the requisite consent. This was held to amount to trespass. Barker J emphasised at [35]-[36] the need to be clear about the right for which the trespasser was compensating the plaintiff, stating that:
"[i]n order lawfully to construct and maintain a sewer pipe across the plaintiff's land, the council would have had to purchase a permanent right of passage. If exchanged as part of a voluntary transaction, this right would take the form of a positive easement in gross. There can be no market value for a right of this type. Its value necessarily depends on factors which are unique to the land and to the parties' situations."
It was no doubt for that reason that at [31] of his judgment, Barker J had referred to the need to have regard to the plaintiff's actual loss and the defendant's actual gain, stating that "[t]hese factors will likely assume a greater significance in cases where there is no readily definable market value". Similarly at [33] he spoke of "the need for a Court to weigh up the competing factors in the parties' circumstances in order to come to an assessment of damages which reflects the justice of the case".
Roberts was followed and applied in Waugh v Attorney-General [2006] 2 NZLR 812 (Waugh). At [63], Cooper J said that "[w]hat is necessary in each case is that the Court ascertains what it is that the defendant would have been prepared to pay to purchase a right allowing him or her to commit the act of trespass on which the plaintiff relies" (Emphasis added.) Later in his Honour's decision, at [94], Cooper J observed that:
"As in Roberts, the right in question here cannot legitimately be assessed on the basis that there is a market value for it, and the valuation exercise must depend on considerations that are unique to the land and the parties' situations."
One final decision to be noted in the context of a consideration of the principles relating to the assessment of damages by way of mesne profits is that of the English Court of Appeal in Eaton. Patten LJ, with whom Christopher Clarke and Tomlinson LJJ agreed, was considering a case where hypothetical negotiating damages had been sought as a measure of recompense for damages for trespass to land. His Lordship at [20] referred to a fundamental question as to what was to be taken to be the subject matter of the negotiations, in other words, what was it to which the measure of damages was to attach. Patten LJ agreed with and indeed (at [21]) described as "clearly right" the submission that:
"the court has to have regard to the actual period of trespass and to treat the parties as having negotiated on that basis because to do otherwise would disconnect the licence fee and therefore the damages from the legal wrong for which they are intended to provide compensation. In this case, Stinger would be required to pay for rights which their trespass never gave them and for a loss which EML never suffered."
[12]
Summary of principles
First, an abiding feature of the case law concerning damages for mesne profits consequent upon a trespass to land, together with authorities in the analogous context of detinue, is that such damages are for the defendant's actual use or usage of the plaintiff's real or personal property.
That feature may be seen both in the historical emphasis on a trespassing defendant being required to give up "profits" derived from the trespasser's use of the property, and also in the views of those judges and academics who have detected at least a restitutionary "flavour" to the action for damages for or by way of mesne profits.
It may also be seen in the fact that damages for or by way of mesne profits have only been awarded or have been limited by reference to the actual usage of the property: see Bunnings, Gaba and passages in the judgments of Denning LJ and Somervell LJ in Strand.
It is also consistent with judgments of the highest and most persuasive authority, including those of the Privy Council, the House of Lords, the English Court of Appeal, the Full Court of the Supreme Court of Western Australia and a relatively recent decision of this Court, namely Bunnings.
Secondly, in every case in which damages for or by way of mesne profits have been awarded, they are for the defendant's use of the property in its existing state at the time of the commencement of the trespass. That is entirely logical as a matter of principle because that was the state the property was in when the interference with the plaintiff's right to exclusive possession commenced, and the logic of the remedy is that the plaintiff was entirely out of possession of the property for the duration of the trespass and hence was in no position to change, alter, improve or develop the property.
Thirdly, whilst it is open to a plaintiff to claim damages for trespass by reference to any contractual rights associated with the property in question or indeed business opportunities which may have allowed the development of the property, such damages are only available for actual loss shown, on the balance of probabilities, to have been suffered.
Fourthly, the usual measure of damages for or by way of mesne profits will be the market rent for the premises or for the hire of the goods in their state during the period of the trespass. The calculation of that market rent must have regard to the particular context of the case and characteristics of the property or goods in question, as the variable rent calculated in Inverugie by reference to the holiday season illustrates.
Fifth, whilst the usual measure of damages for or by way of mesne profits will be the market rent for the premises in their state during the period of the trespass, there may be special circumstances associated with the defendant which warrant a departure from this yardstick. Any departure from this yardstick is not, however, at large, but again is tied or limited by the defendant's actual usage of the property in question.
Sixthly, and in a similar vein, the market rent may be conceptualised or influenced by reference to the particular characteristics of the trespasser (see Ashman and Thompson) or the plaintiff (see, for example, Chep's willingness in Bunnings to accept a lower rate of hire for a large customer such as Bunnings).
Seventhly, the particular circumstances of the parties and the property in question may be especially relevant in a case where there is no usual or standard market for the rental or hire of the property in question: see, for example, Roberts and Waugh.
It is with these principles in mind that we turn to consider the grounds of appeal challenging the primary judge's assessment of damages.
[13]
Appeal grounds 1-4: Overview
Grounds 1-4 of the Notice of Appeal are subsumed under the heading "Hospital Site - User Principle". They relate solely to the primary judge's assessment of mesne profits in relation to the Hospital Site which, it will be recalled, with interest, amounted to some $55 million up to 29 November 2019.
The first ground of appeal is as follows:
"The primary judge erred in holding that, in relation to Lot 12 in Deposited Plan 809663 (Hospital Site), the application of the user principle in calculating an award of mesne profits required or permitted his Honour to assess the market rental of the Hospital Site on the basis that there existed, or would exist, on the Hospital Site a constructed, operational and/or profit-earning private hospital, when no such hospital existed (or exists) ([2016] NSWSC 1587 at [20], [80], [114]-[117], [151]-[181], [185], [349]-[353], [560], [562]; [2019] NSWSC 916 at [70]-[72])."
This ground of appeal squarely challenges the primary judge's application of the user principle, as his Honour understood it, to the assessment of mesne profits in the case with respect to the Hospital Site.
It is not in dispute that the primary judge purported to apply the user principle to the assessment of damages in relation to the Hospital Site. What is raised by this ground is whether his Honour erred in his understanding or application of the user principle and, in particular, in his assessment of mesne profits by reference to the assumed existence, contrary to the fact, of the Hypothetical Hospital on the Hospital Site during the period of the trespass: see [30] above. SLHD contends that the primary judge did so err and that he should have assessed mesne profits on the basis of the existing state of the premises and SLHD's actual use of the Hospital Site, namely as an unimproved block of land. This is what we have earlier defined as the Existing State/Actual User Argument: see [52] above.
Macquarie does not entirely accept the characterisation by SLHD of the primary judge's approach as described in the first ground of appeal. For example, Mr Hutley SC submitted (T292:43-45) that "we of course contest that his Honour assumed that the hospital would exist or existed" and (T293:2-3) that "we do not accept that his Honour assumed that the hospital would exist". That the primary judge did make that assumption is evidenced not only by the condition he imposed as a price of the amendment (see [29] above) and his Honour's use of a model explicitly built upon the assumption, but also by his own language: see, for example, PJ [353] where the primary judge said:
"The Court has therefore approached its task by - where relevant - asking itself the question whether, in relation to any particular integer, the Court is able to make, on the balance of probabilities, a finding that reflects the situation that is likely to have occurred if the private hospital had been built by someone (not necessarily Macquarie). However, it is not a scientific exercise where precision is possible in every particular." (Emphasis added.)
See also at PJ [356]. For these and further reasons that will be developed, we consider that the characterisation of the approach the primary judge took for which SLHD contended in the first ground of appeal is correct.
More substantially, Macquarie responds to the first ground of appeal in two ways. Apart from submitting that there was no error in the application of the user principle, it contends that the Existing State/Actual User Argument:
(i) is "an entirely new case";
(ii) that SLHD "did not plead that case";
(iii) that SLHD "did not lead any evidence of the value of the Hospital Site as vacant land used for parking"; and
(iv) that SLHD "did not address that case in oral or written submissions".
Macquarie calls in aid of this submission the Supplementary Judgment in which the primary judge held that the Existing State/Actual User Argument (described in the Supplementary Judgment as the "Threshold Argument"):
(i) "was never raised": SJ at [32];
(ii) was not an argument that the primary judge ever understood had been raised by SLHD: SJ at [33];
(iii) "would have been an obvious question to include in the preliminary legal issues" but "was not included": SJ at [45];
(iv) does not feature anywhere "expressly or implicitly" in SLHD's closing submissions conspectus: SJ at [60]; and
(v) "was not argued or put into controversy by [SLHD] at the hearing which gave rise to the Principal Judgment": SJ at [66].
SLHD challenges these conclusions by its second ground of appeal which involves a consideration of whether or not the primary judge erred in concluding, in his Supplementary Judgment, that the Existing State/Actual User Argument had not been raised or sufficiently raised during the hearing before him as to the assessment of mesne profits.
The third ground of appeal is to the effect that, if the primary judge was correct in concluding in the Supplementary Judgment that the Existing State/Actual User Argument had not been raised or sufficiently raised in the course of the hearing leading up to the Principal Judgment, he should have permitted it to have been made, if necessary by way of re-opening, in the period before he handed down his Supplementary Judgment, as no final orders had been made by that time (and indeed were not made for almost a further six months).
On this footing, SLHD needs either to:
(i) assail the primary judge's discretionary decision not to allow the argument to be made before the making of final orders, or not to grant leave to re-open (on the assumption that that was necessary), SLHD accepting in this regard that House v The King error must be established ((1936) 55 CLR 499; [1936] HCA 40); or
(ii) convince the Court that the matter can be introduced into the case for the first time on appeal (again on the assumption that it was not raised at first instance).
If the primary judge was wrong in reaching the conclusion that the Existing State/Actual User Argument was not run before him, the third ground of appeal does not arise for the reason that SLHD never required leave to argue the matter or to re-open and the case is, in essence, simply one of the primary judge either having overlooked the argument or, alternatively, having implicitly rejected it.
It will be necessary, for the purposes of dealing with the second and third grounds of appeal, to go into some detail in relation to the circumstances which led to the Supplementary Judgment which was delivered six months before the making of final orders on the question of mesne profits. Some of that background has already been noted: see [39]-[43] above.
The fourth ground of appeal travels closely with the first ground in that it is consequent upon the primary judge's understanding of the user principle, the application of which is there challenged. As will be explained, his Honour's understanding of that principle led him to disregard as irrelevant very substantial tracts of evidence and detailed submissions made by SLHD in relation to the assessment of a market rental for the Hospital Site.
There is no dispute that the primary judge did disregard a substantial volume of evidence and submissions made by SLHD based upon that evidence. His Honour said so in terms at PJ [116]:
"In this case the user principle means that the Court rejects as irrelevant submissions that:
(1) ...
(2) …
(3) At the commencement of the trespass, Macquarie did not intend to build the private hospital.
(4) Macquarie had no financial capacity to build, and therefore would never have built, the private hospital.
(5) If Macquarie had built the private hospital it would have been a financial disaster, from which it has been saved by the Health District's trespass.
(6) …
(7) ….
(8) No third party would have considered the private hospital feasible with the specified existing design (described by the Health District as "unviable, unprofitable and inefficient") and the other contractual constraints under the Transaction Documents.
(9) Damages should be assessed on the fact that at the time of its dispossession, Macquarie had been prepared to part with the Hospital Site for no value.
(10) There was a risk the Transaction Documents would be validly terminated.
(11) More than the risk just referred to, the Transaction Documents remained liable to termination as at 17 March 2000 and the Health District would have validly terminated them by at least late 2000."
The primary judge then said, at PJ [117], that:
"A number of issues turned on the Court accepting submissions such as those set out in the preceding paragraph. For this reason the Court does not need to consider those issues or has considered them in a more limited way. They are issues 8, 11, 32, 33, 34, 39, 40 and 41."
Issues 32, 33 and 34 were as follows:
"32. Methodology for valuing the Hospital Lease
If relevant, what is the appropriate methodology for valuing the Hospital Lease with respect to the plaintiff's interest in the hospital site?
33. Feasibility and valuation outcomes
Was the private hospital project feasible and what is the outcome for mesne profits with respect to the leasehold of the hospital site?
34. Availability and likelihood of termination
As to a possible termination for breach:
● were the plaintiffs interests in the hospital site and carpark site liable to be terminated, and, if so, when and on what terms; and
● if relevant, would the defendant have terminated, and, if so, when and on what terms?"
Appeal ground 4 is to the effect that the primary judge erred in:
"a. excluding from consideration, and characterising as irrelevant to the assessment of mesne profits:
i. the appellant's evidence and submissions as to whether, during the period of the trespass, the respondent could or would have fulfilled its contractual obligations under the agreements into which it entered with the appellant on 2 December 1996; and
ii. the possibilities or probabilities as to what, but for the trespass, could or would have occurred during the period of the trespass;
b. (in a manner inconsistent with general principles relevant to the award of compensatory damages in tort) excluding from consideration any loss suffered by the respondent as a result of the trespass, which was nil; and
c. (in so far as an award of mesne profits involves application of restitutionary principles) excluding from consideration the benefit actually gained, or value obtained, by the appellant as a result of the trespass"
with the consequence that Macquarie was overcompensated for any loss it claimed to have sustained by reason of the trespass.
Appeal ground 4 is in the true alternative to appeal grounds 1-3, in that it is capable of succeeding even if grounds 1-3 were to fail.
[14]
Summary of conclusions on appeal grounds 1-4
In the Court's opinion, appeal grounds 1, 2 and 4 succeed and appeal ground 3 does not arise and is strictly unnecessary to decide.
Translating that summary conclusion, the Court is of the opinion that:
(i) the primary judge erred in his application of the user principle in the calculation of mesne profits in relation to the Hospital Site;
(ii) the Existing State/Actual User Argument was run at first instance;
(iii) the primary judge was wrong to conclude in the Supplementary Judgment that it had not been run;
(iv) the Existing State/Actual User Argument was not dealt with by the primary judge in his Principal Judgment;
(v) to the extent the primary judge purported to deal with and rejected the Existing State/Actual User Argument in the Supplementary Judgment (on the assumption that SLHD has been permitted to run it), his Honour was wrong to reject it;
(vi) on the alternative basis that the application of the user principle in calculating an award of mesne profits in relation to the Hospital Site permitted the primary judge to assess the market rental of the Hospital Site on the basis that there existed or would exist on that site an operational and profit earning Hypothetical Hospital, the primary judge was wrong to exclude evidence of and submissions in relation to the matters referred to in appeal ground 4 (see [151] - [154] above).
Had it been necessary to decide appeal ground 3, the Court would also have upheld that ground. The primary judge's discretion miscarried in a number of respects.
Because there is a live issue between the parties as to whether or not the Existing State/Actual User Argument was run at first instance, it is logical to commence consideration of the grounds of appeal with that issue, which is the second ground of appeal but which also deals with aspects of Macquarie's response to the first ground of appeal: see [144] above.
[15]
Appeal ground 2 - was the Existing State/Actual User Argument run at first instance?
This is a question of objective fact, and falls to be assessed by reference to the history and record of the proceedings including, in particular, the pleadings and the closing written and oral submissions of the parties. We have reviewed the pleadings and closing written submissions and the transcript of closing oral submissions carefully.
The starting point to note is that, as has already been observed, the mesne profits claim in relation to the Hospital Site was only introduced into the case by Macquarie after some 40 days of the inquiry as a result of the Amendment Judgment: see [24] above.
The way in which that claim was pleaded and particularised has been set out at [24] - [28] above. It is not insignificant that, as formulated, it was expressed in terms of a trespass to the "Hospital Site". On its face, that was a reference to trespass to land simpliciter. What was subsequently valued, however, in the Coleman/Lonergan Report and other evidence, was the value of the Hospital Lease, with a notional rent being derived from an assessment of what were said to be the "rights" derived from that lease.
To the extent that Macquarie sought mesne profits in relation to something more than the trespass to the Hospital Site simpliciter, SLHD, in its Points of Response, had pleaded that:
"[SLHD] admits that mesne profits is a form of damages for trespass known to law but does not admit that any of [Macquarie's] alternative claimed bases of measurement or calculation is a claim for or measure or calculation of damages for trespass known to law".
Closing oral submissions commenced on 20 July 2015, following some 89 days of hearing between 10 February 2014 and 1 July 2015. The parties' written closing submissions filed in advance of oral submissions were arranged by reference to a schedule of issues described as "Issues identified by the parties for determination". The first five issues identified were arranged under a sub-heading "Preliminary Legal Issues".
In its Closing Written Submissions (CWS) in chief, Macquarie, inter alia, made submissions under the sub-heading "Is mesne profits calculated on the assumption that the property remains in the state it was, as at the date of dispossession?" Pausing there, the very formulation of this question or issue is revealing in light of the way matters developed; it provides a powerful insight into whether or not the Existing State/Actual User Argument was in play and run at first instance.
In its CWS under this sub-heading, Macquarie submitted:
"51. There should be no assumption the property remains in the state it was at the date of dispossession. The defendant must pay the full market rent over the period of the trespass. If the features or characteristics of the property changed positively, or would reasonably be expected to have changed over that time, then it follows that those changes should be brought to account in the calculation of market rent.
[16]
…
55. In the case of the Hospital Site, market rent must take into account the opportunity to build a hospital on the site.
…
57. Further, it should not be lost sight of that the property rights infringed by the trespasser were much more than the mere opportunity to build the Private Hospital. …"
SLHD's CWS began with a 25 page overview entitled "Closing Submissions Conspectus" (Conspectus). Under the sub-heading "Fundamental considerations", the Conspectus included the following:
"4. This case differs from the norm in trespass. Usually what has been interfered with is actual possession of land or other property, or possessory rights to either, which has an existing state or usage, and which has been actually used by the trespasser in that existing state or which could have been used by the trespasser in a manner capable of reasonably certain definition in that existing state: 'use of property that earns or is capable of earning a profit': Bunnings Group Ltd v CHEP Australia Ltd (2011) 82 NSWLR 420 at [173] per Allsop P for the plurality. For instance, an apartment building has been or could have been used for rental as apartments, vacant land was used or could have been used for storage or pasturage (saving the trespasser the costs of finding the alternative and re-locating there); equipment was used or could have been used in the business or for its purposes.
5. In contrast, the plaintiff is not content with the net revenue (if any when rental due to the defendant as head lessor is taken into account) from the defendant's actual use of the private hospital and carpark leasehold and sub-leasehold sites in their existing state and usage, which has been the subject of an open offer in the defendant's points of response from the outset of the inquiry: see para 9(4) in the original points of response filed 17 October 2012 and repeated in each subsequent response to a change in the plaintiff's case. On the plaintiff's case, it was dispossessed of two leasehold sites, for the first 14 years out of leases which still have 85 years of tenure to run as at 30 November 2014 and which had approximately 89 years of tenure as at the date of the CA reasons and orders in late 2010. The plaintiff's claim is for a value for the temporary loss of those possessory rights beyond the sites in their existing state or usage. The value claimed lies in the contractual right by way of opportunity to use both sites beyond their existing state or usage and that opportunity is contingent upon the plaintiff fulfilling its contractual obligations to realise the opportunity; the sites are not 'earning or capable of earning a profit' in the manner and value claimed until that occurs. It matters not that the plaintiff has abandoned its original case for loss of opportunity damages based on the lost opportunity for net earnings per se (which in any event, the defendant contended, was not a form of compensation known to law for trespass). The question of the value of the contractual opportunity contingent on the plaintiff's performance of contractual obligations is at the heart of the plaintiff's current case because one must focus on what the plaintiff had, in terms of contractual entitlement and obligation, if the plaintiff wishes to claim a value for the loss of its possessory rights beyond actual state of the property and its usage by the defendant. Otherwise, the basis or rate of recovery is not 'reasonable' or 'appropriate in all the circumstances', would not reflect the 'ordinary letting value of the property' and/or would reflect something 'special in the particular case'.
…
10. A market rental, or reasonable rate of return, or investment return on assignment or compensation value, at the unadjusted levels for which the plaintiff contends and on the plaintiff's methodology of assessment, would be grossly dysfunctional, not just disproportionate, and not a just or principled outcome in the circumstances of this case given the nature and consequent effect on value of 'loss' of the possessory rights in question in this case as outlined above.
11. The defendant respectfully urges the Court to keep the foregoing at the forefront of its fact finding and approach to the law and to relief (if any). An issues statement and the detail of complex submissions ought not to cloud the fundamental perspective that such matters give". (Emphasis in original, footnotes omitted.)
Then, under the sub-heading "Plaintiff's lines of claim", the Conspectus set out the various ways in which SLHD understood Macquarie to be putting its claim for damages by way of mesne profits. Following this, under a sub-heading "Defendant's primary response to plaintiff's lines of claim", the following was stated:
"21.1. The plaintiff's claimed methods of measurement or calculation are not forms of mesne profits or otherwise forms of trespass known to law.
21.2. The plaintiff's claimed methods of measurement are too speculative, undefined and uncertain.
…
22. In essence, the plaintiff was and is in no position to derive more value from the leasehold sites than the defendant actually derived, because the plaintiff could not and would not have exploited the contractual opportunity beyond the existing state of the land at the start of the trespass and was thereby in default of its contractual obligations, on which the value of the opportunity afforded by the plaintiff's possessory rights depended. To the extent that is not already taken into account in the risk and value assessment as part of the exercise of expertise, it is taken into account to adjust the plaintiff's recovery."
Next, under the heading "Legal principles", SLHD submitted:
"36. What is 'reasonable', 'appropriate in all the circumstances' and will recognise the special nature of the claimed right interfered with in this particular case requires an analysis of and adjustment for nature and state of the possessory right in question and the nature of its use. The focus of the existing authority has been on property rights in their existing state and use. Any contractual obligations are related to the existing state and use; opportunities for use derive from the existing form and use. Thus, in Inverugie, the trespass was to leased apartments operating as part of an existing hotel business with the usual opportunities and risks of that existing business and, it appears, the usual lease covenants appurtenant to an existing building used for such existing business. In Bunnings Group Ltd v CHEP Australia Ltd (2011) 82 NSWLR 420, [2011] NSWCA 342, there was no contractual relationship between the dispossessed and the converter but the property (pallets) were existing and had a defined existing use arising directly out of and defined by their existing state. Anything beyond the existing state and use would introduce something 'special in the particular case': Megaw LJ in Swordheath Properties Ltd v Tabet [1979] 1 WLR 285 at 288, cited with approval by the PC in Inverugie [1995] 1 WLR at 717H.
…
43. The defendant's actual usage of the plaintiff's possessory rights has been in their existing form and use and has fully utilised that existing form and use. Absent evidence of a reasonable rental for the possessory rights in their existing form and use being higher than what the defendant has actually derived by net positive outcome (if any) from that actual usage, the defendant accepts, and as stated above has accepted from the outset, that an appropriate proxy is the actual outcome from actual usage. In Bunnings Group Ltd v CHEP Australia Ltd (2011) 82 NSWLR 420, [2011] NSWCA 342, which did not involve any contractual relationship between the dispossessed and the converter, the plurality in the CA at [179]-[181] placed emphasis on demonstrating matters that are based in compensation and actual usage; in Hampton v BHP Billiton Minerals Pty Ltd [No 2] [2012] WASC 285 at [338]-[339], Edelman J pointed to the authoritative allowance for deductions 'to reflect expenses which the plaintiff would have incurred if the plaintiff had been in occupation'.
44. … In the present case the defendant had no interest during the trespass period in the leases beyond actual usage in their existing state and use, deriving the actual net return that has been the subject of open offer. It was constrained, as the price of its possession during the previous round of the litigation, by its undertakings not to deal with the leasehold assets which meant that there was no opportunity to exercise rights to seek tender for re-letting the premises under the compensation provisions if they were valid, enforceable and applicable prior to opening of the private hospital. It itself had no right to construct the private hospital or complete the carpark, or to put them out to tender on different terms from those in the current leases and construction deed while the plaintiff was maintaining its right to re-possession and until the compensation provisions were declared to be void, unenforceable or inapplicable. By definition as a public authority it itself could not construct or build and operate a private hospital with interdependent carpark." (Emphasis in original, footnotes omitted.)
In that part of SLHD's CWS dealing with Issue 2, headed "What is the nature of trespass damages and mesne profits, including compensatory and restitutionary aspects?", the submissions included the following:
"5. In a claim for trespass, what has been interfered with is actual possession of the relevant property right which usually has an existing state or usage, and which has been actually used by the trespasser in that existing state or which could have been used by the trespasser in a manner capable of reasonably certain definition in that existing state. A person entitled to the land can claim compensation for being deprived of possession by damages representing either the rent he actually lost or the rent that he could have obtained if he had let the premises.
6. In this case, the plaintiff's claim is for a value for the temporary loss of possessory rights beyond the car park and hospital sites in their existing state or usage. It is a novel claim. The value claimed lies in the contractual right by way of the opportunity to use both sites beyond their existing state or usage and that opportunity is contingent upon the plaintiff fulfilling its contractual obligations to realise the opportunity.
…
14. In order to assist the Court to approach the plaintiff's claim in a principled manner the defendant has identified what it considers are the principal jurisprudential underpinnings to mesne profits as disclosed in the principal authorities. The identification of the juridical underpinnings are significant where, as here, the court is confronted with what, on any view, is a novel claim, namely a claim for mesne profits for a loss of value of a possessory right the value of which is contingent on the fulfilment of contractual obligations which the plaintiff has in effect accepted it didn't have the capacity to fulfil and the realisation of opportunities related to those contractual obligations.
…
25. The plaintiff's claim for mesne profits is both ambitious and novel. The value of the claimed loss is dependent on the fulfilment of its contractual obligations to realise an opportunity. It is, in that respect, perhaps unique.
26. This is not a case where the plaintiff can say that its conduct is irrelevant to an assessment of its loss and that a court should, in line with authority, accept that it 'would have' or 'could have' leased or relevantly dealt with the land with a fully built carpark and private hospital and assess damages accordingly. It is one thing to say that a claimant may be entitled to be compensated for the loss it has suffered on land in an existing state which the claimant had the opportunity to develop, it is quite another to say that it should be compensated for the use of the land in an existing state which it has no possibility of developing so as to realise the opportunity, particularly where lack of development of one leasehold interest impacts on the realisation of the opportunity on the other leasehold interest. Put simply, there cannot be any value in an opportunity that has no possibility of fulfilment. Such value is illusory: it is a chimera.
…
28. Further, and tellingly, the plaintiff was in essential default of its obligations at the date of the trespass, as the Court of Appeal has declared in its orders and reasons. Accordingly, the hypothetical and illusory value claimed by the plaintiff cannot be 'reasonable' or 'appropriate in all the circumstances' and does not reflect the 'ordinary letting value of the property' and/or would reflect something 'special in the particular case' because what is sought to be compensated for is not 'use of property that earns or is capable of earning a profit'.
…
30. A significant qualification on the availability of mesne profits is that the possessory right of use that has been interfered with must be a 'use' that has existence. If it does not have an existence, it necessarily follows it cannot be wrongfully used.
31. An analysis of the authorities demonstrates without exception that each claim for damages was for the wrongful interference or invasion of land or chattels in an existing and identifiable state and use. They demonstrate that the land or chattel has been or could have been used in their existing states or could have been used in a manner capable of reasonably certain definition in that existing state.
32. In the limited number of cases where contractual obligations are attached to the claimant's land or chattels, those contractual obligations (and entitlements) were related in a readily realisable manner to the existing state and use of the land or chattel. That is to be contrasted with plaintiff's claim here.
33. The plaintiff's claim here is that its contractual entitlements should be front and centre when determining the possessory right it lost by the defendant's trespass, namely, its contractual entitlements with attendant obligations to realise and exploit the opportunity to change the existing states and use of the car park and hospital leasehold sites. But that is not the possessory right use of which was lost by the defendant's trespass. It was not lost because the opportunity to exploit it was illusory. It was illusory and had no real existence because it was incapable of fulfilment by the plaintiff (Conspectus [36]-[37]).
34. It follows if the possessory right claimed to be interfered with does not have existence (in a commercial or practical sense), there can no loss to compensate.
35. Consistent with authority, the court should have regard to the existing state and use of the plaintiff's possessory right when assessing the defendant's liability, if any, to mesne profits and their value.
36. In this regard (Conspectus [43]) SLHD's actual usage of the plaintiff's possessory rights has been in their existing form and use. It is uncontroversial that the defendant's actual gain has been the subject of an open offer to the plaintiff since the defendant's first response to the plaintiff original points of claim.
…
96. The plaintiff does not want that existing usage, it wants the full value of the best version of the opportunity that the contractual rights and obligations comprising the leasehold interest could achieve, without having the intention or the financial capacity in 2000-2002 to achieve that outcome for itself and without even taking into account the severe risks of achieving all or any part of that outcome. Such a claim is profoundly unjust and not in accord with principle." (Footnotes omitted.)
Under Issue 3, headed "Methods for Assessing Trespass Damages", SLHD's CWS included the following:
"5. The plaintiff's claim is for a value for the temporary loss of those possessory rights beyond the sites in their existing state or usage.
6. For the reasons set out in Legal Issue 2 at paragraphs 25-35 under the heading 'The Plaintiff's Possessory Right', the defendant submits that the plaintiff's claimed methods of measurement or calculation in relation to those possessory rights are not forms of mesne profits known to law."
In respect of Issue 4, SLHD's CWS responded to Issue 4.6, headed "Is mesne profits calculated on the assumption that the property remains in the state it was, at the date of dispossession?", as follows:
"10. This question is considered in the valuation principles set out Legal Issue 2 at paragraphs 37-77 under the heading 'Market Rent' and is also the subject of the defendant's expert evidence (see Legal Issue 22.11 regarding the carpark). There has been no attempt by the plaintiff to prove that the hospital site has any value other than what value (if any) exits [sic] due to the right (if any) to build a hospital."
Macquarie exchanged opening submissions using the same template headings which had been agreed between the parties. As was noted at [165] above, Issue 4.6 - "Is mesne profits calculated on the assumption that the property remains in the state it was, at the date of dispossession?" - encapsulated the very point that Macquarie contended both before the primary judge in July 2019 and before this Court on the hearing of the appeal, had never been run.
On 17 July 2015, the Friday before the commencement of what were intended to be the closing oral submissions on the inquiry as to damages, Macquarie filed submissions in reply to SLHD's CWS. Macquarie's Reply Submissions included the following:
"3. In an attempt to circumvent the user principle, the defendant's conspectus raises four principal themes which then pervade its submissions at every level:
(1) what the defendant should pay should be related to its actual use of the property and the returns which it has derived from the property: DS Consp. [5], [8], [21.3(8)], [43];
(2) market rent should be assessed by reference to a hypothetical sale of the plaintiff's interests at the date of dispossession, based only upon information known at that date: DS Consp. [16], [17], [24]-[33];
(3) what should be valued as at 17 March 2000 is the 'plaintiff's intention and capacity to fulfil its contractual obligations' to exploit the benefit of the leases: DS Consp. [16], [22], [34]; see also [5], [6.5], [6.6], [21.3(9)], [21.7];
(4) when assessing market rent, only the 'existing state and usage' of the sites should be brought to account: DS Consp. [5], [8], [22], [36], [43]; DS Issue 2 p. 45 [35].
[4] These four themes are the building blocks for the defendant's contention that a zero or low award is a 'just outcome' (DS Consp. [1]-[3], [7], [9])." (Emphasis added.)
Macquarie's Reply Submissions further engaged with the matters it characterised as "pervading" SLHD's Conspectus Submissions. For example, there are sections of these submissions headed "Defendant's actual use and actual return irrelevant" and "Market rental not limited to existing state and usage of the sites". These headings demonstrate issue squarely being joined with the very argument Macquarie said to the primary judge in July 2019 and continued to maintain on appeal had never been made in July 2015, when "closing" submissions were made.
In some further submissions filed by SLHD on 22 July 2015, it was submitted (at para 18) that:
"As said in [2(a)] above, Bunnings, like Inverugie, concerned an existing asset in existing state of use where the continuance of that same use was the basis of the claim. In contrast, the plaintiff wishes to claim for different characteristics and different usage, which involves assessing the forecast risks associated with achieving the opportunity of those characteristics and usage." (Emphasis added.)
That the issue of principle was squarely raised and in play is also illustrated by the following and revealing exchange between the primary judge and senior counsel for Macquarie in the course of closing oral submissions on 20 July 2015:
"HIS HONOUR: … but in relation to the hospital lease, if you knew nothing about this case and just looked at what the book says as to how [mesne] profits should be calculated, one might say, well, what you get is the rental value of that piece of dirt on which the hospital was meant to be constructed, with whatever zoning or anything that attaches to it. The valuer just goes in and says, 'Here's a piece of land. What's the rental value of that piece of land?' That is a different thing to the value of the lease, because what [mesne] profits looks to is the land. So simpliciter what's the rental value of that piece of land.
DUBLER: Yes, well, it's more or less how we put our hospital lease point.
HIS HONOUR: Yes, but my point is: Is there a distinction between the hospital lease - it's not the property lease, it's the not the lease, it's not your exclusion from the lease that's being valued. It's your exclusion from the land.
DUBLER: Yes.
HIS HONOUR: What's the value of the land?
DUBLER: Yes.
HIS HONOUR: Well, that's not affected by the lease on this theory.
DUBLER: No, I see.
HIS HONOUR: It's just you've got a right to occupy some land. They've been occupying it. What's the rental value of that piece of land?
DUBLER: But the trouble with that is that one has to be if focussed on what's the interference in the right and the right is the property rights under the lease and so what is then valued is the value of the remaining period of the lease on a deferred annual basis which we say is the result of that line of authority. In some ways it could mean over compensation if you focus on the land rather than the lease.
HIS HONOUR: No, the other way. I would have thought there's a much greater risk of over compensation if we focus on the lease."
A number of matters stand out about this extract. First, the distinction the primary judge drew in the course of argument was precisely the distinction that had been made by SLHD in its written submissions. Secondly, Mr Dubler's submission "well, it's more or less how we put our hospital lease point" was simply not accurate as the balance of the extract shows: what was sought to be valued was not just the right to possess the Hospital Site, but also to operate the Hypothetical Hospital on it, on the unproven assumption that the Hypothetical Hospital could have been, and was, financed and built. Thirdly, the primary judge's instinct that Macquarie's way of expressing its case had a "much greater risk of over compensation" was entirely sound.
Finally, in a document entitled "Defendant's Further Submissions in Reply" dated 14 August 2015, evidently responding to a note handed up by Macquarie in the course of oral submissions in July 2015, SLHD, under a heading "Bunnings and 'existing state of use'", submitted:
"4. The Plaintiff's submissions in [5] misunderstand the Defendant's position. The point which the Defendant was seeking to make in DSR Issue 2 [18] was that Bunnings and Inverugie (and the Strand) were distinguishable from the facts of this case in that:
(a) In those cases, damages were assessed on the basis of a rental consistent with the existing use of the property by the Plaintiff at the time of the trespass;
(b) In the present case, the Plaintiff seeks to have damages assessed on the basis of a rental appropriate to usage of the property which was fundamentally different from the existing use of the property by the Plaintiff at the time of trespass.
(c) in each case, the usage by the trespasser was not the existing usage focused on by the Court." (Emphasis in original.)
In our opinion, a review of the closing written submissions exchanged by the parties including the passages highlighted above, simply does not sustain Macquarie's contention that the Existing State/Actual User Argument was not in issue or run at first instance, nor does it sustain the submission, put orally by Mr Hutley during the hearing of the appeal, that the various references assembled above were "footprints in the sand", an allusion to the judgment of Allsop J, as his Honour then was, in White v Overland [2001] FCA 1333 at [4], cited in Nowlan v Marson Transport Pty Ltd (2001) 53 NSWLR 116; [2001] NSWCA 346 at [28]. Not only were the points made by SLHD, and made prominently, they were understood and responded to by Macquarie.
Even more significantly, the references and lengthy extracts set out above fundamentally negative the primary judge's various statements that have been collected at [145] above to the effect that the Existing State/Actual User Argument was never raised or argued.
We also note that no suggestion was advanced by Macquarie that the Existing State/Actual User Argument had been put but abandoned by SLHD. That would have been fundamentally inconsistent with the position Macquarie took before the primary judge in July 2019 that the argument had never been made. His Honour dealt with the question of abandonment in the Supplementary Judgment because SLHD, in its communication with the Court leading to the relisting of the matter in May 2019, had expressed the view that the primary judge may have in some way mistakenly thought that the argument had been abandoned: see [39] above. His Honour dealt with this possibility in the Supplementary Judgment, stating at SJ [33] that:
"…it is necessary to make some subjective observations to dispose of the Health District's submission or concern that the Court may have thought that the Threshold Issue had been abandoned. Insofar as the subjective awareness of the trial judge may be relevant, I record in the interests of candour that I never regarded the Threshold Issue as having been abandoned because, subjectively speaking, I never understood it to be an argument that was raised by the Health District."
To the extent the primary judge gave various reasons in the Supplementary Judgment for reaching his conclusion that the "Existing State/Actual User Argument" or Threshold Issue, as his Honour referred to it, had not been run before him, these reasons cannot overcome the objective record from which we have quoted extensively. Further, to the extent it is necessary to deal with those reasons in light of the objective record, we do not, with respect, find his Honour's reasons for his conclusion that the argument was not run before him in July 2015 convincing. In saying this, we do not for one moment question his Honour's evident subjective belief that the argument was not ventilated.
Before dealing briefly with his Honour's reasons for considering that the Existing State/Actual User Argument was not run, it is no doubt the case that a great deal of the evidence which had occupied so much of the lengthy inquiry as to damages related to the financial model relied upon by Macquarie to support its claim for mesne profits in respect of the Hospital Site, and the various inputs into the model. It is also plainly the case that very significant tracts of the written and oral closing submissions related to those topics and they may well have swamped and obscured the relatively short and straightforward point that SLHD wished to make, namely that damages by way of mesne profits are awarded in respect of a defendant trespasser's actual use of the land to which the plaintiff had a right to exclusive possession, and to the extent that rent is to be calculated in respect of the trespass to that land, it is by reference to its existing state at the time of the trespass.
Short of a strike out application, SLHD had no option but to devote time and resources to attacking the model that Macquarie had advanced. That did not mean, however, that it could not also rely on a short and relatively simple point of principle, reflected in the submission that Macquarie's "claimed methods of measurement or calculation [were] not forms of mesne profits or otherwise forms of trespass known to law". That was a submission made in the opening "Conspectus" section of SLHD's CWS, under the heading, "Fundamental Considerations", and was a matter that Macquarie itself characterised in its response to SLHD's Conspectus as "pervading" SLHD's argument. It was never abandoned.
Turning to the primary judge's various reasons for concluding that the Existing State/Actual User Argument had not been made before him, the primary judge said at SJ [41] that SLHD had "not offered any explanation why it has not called any of its former legal advisers who actually had the conduct of the matter up to and including the time of the Principal Judgment to give evidence in support of its contention that the Threshold Issue was raised". This reason, with respect, was unsound. The primary judge had the record of what had been put and argued in front of him. That record could not be altered or affected by the evidence of SLHD's former legal advisers. What had been argued was objectively recorded, and any subjective evidence would not have advanced the matter. In fairness to the primary judge, he accepted that this was not a particularly strong argument.
A second reason advanced by the primary judge was that, had what he had described as the Threshold Issue been sought to be argued, it was "inconceivable" that someone would not have given attention to the possibility of a preliminary issue being posed "even if only to be disregarded": SJ [40]. This is not compelling for at least four reasons. First, the inquiry as to damages as originally set down was only envisaged to take two to three weeks and nothing like the time it eventually took, so that it was far from "inconceivable" that a separate question would have been considered. Secondly, it will be recalled that, for the first 40 days of the inquiry, Macquarie's case was put on an entirely different basis which was then permitted to be abandoned: see [24] above. Thirdly, experienced commercial litigators are aware of the high hurdle that needs to be overcome to secure an order for a separate question: see, for example, Perre v Apand Pty Limited (1999) 198 CLR 180; [1999] HCA 36 at [436]; Tepko Pty Limited v Water Board (2001) 206 CLR 1; [2001] HCA 19 at [168]-[170]; Commonwealth Bank of Australia v Clune [2008] NSWSC 1125 at [6]; Bailey & Bailey v Director-General Department of Energy Climate Change and Water [2010] NSWSC 979 at [4]; and Southwell v Bennett [2010] NSWSC 1372 at [15]. Finally, the fact that a separate or preliminary question had not been sought does not alter or affect the objective record already referred to.
Third, the primary judge stated at SJ [35] that Mr Williams SC "properly conceded that nowhere in any of the written materials or transcript had the Threshold Issue ever been put to the Court in the terms, or with the potentially dispositive significance, for which the Health District now contended". His Honour went on to say that Mr Williams "accepted that the words 'threshold issue' had never been put to the Court, nor had the submission which is now described as the Threshold Issue ever been put as something that had to be decided separately and before the Court moved on to some other question".
A number of things may be said about this reason. First, the concession, to the extent there was a concession, was far more limited than the primary judge implied. It was a concession as to the non-use of the term or expression "Threshold Issue". This point was a semantic one. Secondly, the fact that it may never have been put that the issue "had to be decided separately and before the Court moved on to some other question" is really a variation of the argument dealt with at [187] above. In any event, our review of the objective materials at [160]-[180] above makes it plain that the question was expressed at the beginning of SLHD's Conspectus of its argument as one that was of fundamental significance.
A further reason advanced to support the primary judge's conclusion that the Existing State/Actual User Argument had not been put related to the fact that a considerable period of time elapsed between the delivery of the Principal Judgment in late 2016, and the raising of the issue by notice of motion notwithstanding that, as the primary judge said at SJ [38], the Court made it clear, at the time of delivery of the Principal Judgment, that if any party thought something had not been properly dealt with in the Principal Judgment, they would be heard in relation to that question. The fact that the matter was not sought to be taken up for a considerable period of time does not bear logically on whether or not an argument had or had not been made at an earlier point in time.
The next reason advanced by the primary judge was by reference to a schedule of issues identified by the parties for determination, which was a framework which the parties had prepared at the primary judge's request "to enable the orderly disposition of the Court's reasons". The primary judge held at SJ [45] that the Threshold Issue had not been included in that schedule. We do not agree. The preliminary legal issues identified included a heading "Mesne Profits" followed by the question "What is the nature of trespass damages and mesne profits, including compensatory and restitutionary aspects?" Further, as we have outlined, the written submissions filed which followed the structure of separately identified agreed issues, made it plain that the issue which the primary judge said had never been raised was in fact raised at some considerable length and, moreover, was accepted by Macquarie as having been raised and indeed as "pervading" SLHD's closing written submissions.
Next, the primary judge held at SJ [46] that he accepted Macquarie's submission that:
"Macquarie's outline of the Health District's case ... correctly identifies that the Health District's reliance on existing state and usage was an ultimate fallback position which became relevant only if the Court accepted that the contractual rights represented by the Hospital Lease had no value because of Macquarie's unwillingness or inability to build the private hospital. Macquarie's outline not only does not support, but also contradicts, the submission that the Health District had raised the Threshold Issue."
The arguments put by SLHD in its outline of submissions prior to the Principal Judgment did not put the Existing State/Actual User Argument as "an ultimate fallback position" which became relevant only if the Court accepted that the contractual rights represented by the hospital lease had no value". As we have illustrated, the Existing State/Actual User Argument was put at the forefront of SLHD's argument. It made no sense to express that argument as a "fallback"; rather, it was fundamental and was identified as such. Even if it could be correctly characterised as a "fallback" argument, such a conclusion would have been quite inconsistent with the primary judge's subjective view that it was an argument that had never been made in the first place and never abandoned.
Finally, his Honour quoted parts of the transcript involving his interactions with Mr Burton SC who appeared at the trial for SLHD in relation to the financial model that had been relied upon by Macquarie and responded to by SLHD. Aspects of the treatment by the primary judge of that model and the experts' evidence in relation to it are dealt with later in these submissions in addressing appeal ground 4 at [254] but, to the extent that the primary judge referred to these exchanges in support of his conclusion that the Existing State/Actual User Argument had not been put, we are unable to accept that there was any concession of the kind the primary judge apparently thought had been made or that the concession, even if made, was inconsistent with SLHD advancing the Existing State/Actual User Argument.
For all of the above reasons, and most particularly the extensive extracts from the written submissions and oral exchanges referred to at [160]-[180] above, the Court is comfortably satisfied that the Existing State/Actual User Argument was raised at first instance and that the primary judge erred in concluding to the contrary. Accordingly, Macquarie's partial response to the first ground of appeal based on the assertion that the Actual State/Existing User Argument was not run at first instance and should not be permitted to be raised on appeal must also be rejected.
The second ground of appeal must succeed.
The Court's conclusion on appeal ground 2 means that it can proceed directly to the issue of principle presented by appeal ground 1, without strictly needing to deal with appeal ground 3.
[17]
Appeal ground 3 - if the Existing State/Actual User Argument had not been made in July 2015, should it still have been permitted to be raised in July 2019?
Had it been necessary to deal with appeal ground 3, however, which raised the question as to whether, if the Existing State/Actual User Argument had not been made in July 2015, it should still have been permitted to be raised in July 2019 when, notwithstanding the delivery of the Principal Judgment in late 2016, the inquiry was still underway and no orders had been made, we would have been minded to uphold this ground as well. In this context, it was significant that, notwithstanding his conclusion that it had not been run in 2015 and should not have been permitted to be run in July 2019, the primary judge nonetheless felt able to deal with the Existing State/Actual User Argument, and in fact dealt with it, albeit briefly, in the Supplementary Judgment. Thus, at SJ [70], although he had held that the Existing State/Actual User Argument had never been made, the primary judge said:
"In any event, I have reviewed those parts of the submissions and transcripts which the Health District submits represent the totality of what it wished the Court to take into account were it to consider the Threshold Issue. Because it appears inevitable that this matter will go further, I therefore briefly record my conclusion that, if it had been necessary for me to decide the question, I would have decided the Threshold Issue against the Health District. That result is at least implicit in the conclusion I reached in relation to the application of the user principle as set out in the Principal Judgement [sic]" (Emphasis added.)
The primary judge continued at SJ [71]-[72]:
"71 I respectfully adhere to what I said in paragraph [181] of the Principal Judgment, quoting Allsop P in Bunnings, that the law of mesne profits was to be applied in a case such as the present by reference to the 'rules of compensatory damages sensibly and flexibly applied'. The cases to which I refer in the Principal Judgment deal with assets as diverse as portable theatrical switchboards, hotel rooms and storage pallets. At the level of fundamental principle, those cases demonstrate that the user principle will be applied to determine a price or hiring charge to compensate a plaintiff who has been wrongly deprived of an asset which has as one of its existing qualities a value referable to the asset's ability to generate economic gain for that plaintiff.
72 As Allsop P said in Bunnings (at [177]), 'if a property right has been invaded by wrongful user, the law should and does provide a remedy for the wrong, compensatory in character in the broad sense, focussing on the interference with the right in question' (emphasis added). Macquarie's rights in this case included not only a right to occupy the Hospital Site, but also a right and obligation to build the private hospital that was inextricably bound up in Macquarie's rights as a tenant because it was the raison d'être for Macquarie's occupation. In my respectful opinion, it would not be sensible, flexible or realistic to ignore that in the present case the Health District's trespass did not just exclude Macquarie from a piece of land that was going to sit there doing nothing, but in fact excluded Macquarie for 15 years from a right to occupy land which carried with it contractual rights and obligations to exploit that land for Macquarie's economic benefit for 103 years. Just as CHEP was 'entitled to be compensated according to law for the wrongful use and detention of its pallets, as potentially profit earning chattels owned by it and to which it had the immediate right to possession' (Bunnings at [169]), so too was the Hospital Site a 'potentially profit earning' asset leased by Macquarie and to which it had the immediate right to possession that was negated by the Health District's 15 year trespass."
The fact that the primary judge evidently felt capable of dealing with the Existing State/Actual User Argument in the Supplementary Judgment, that the issue was one concerning a question of law, and that SLHD had indicated in the course of submissions on the application to re-open if necessary that it did not seek any additional hearing or to rely on any further evidence, makes it difficult to understand what prejudice arose to Macquarie on the re-opening, if that was what in truth was required.
How Macquarie put its case in favour of mesne profits and what evidence it chose to deploy in that regard had always been a matter for it. It was a matter on which it bore the onus. It had always been open to Macquarie to lead evidence as to what the rent for the unimproved land value was, and the fact that the Hospital Lease itself contained an annual rental charge (see [62] above) may well have been regarded as the best evidence of that matter in any event.
We turn now to consider appeal ground 1 which has been set out at [140] above and which squarely raises the correctness of the primary judge's approach to the assessment of mesne profits. The following part of these reasons necessarily draws upon our survey of the relevant principles relating to the assessment of damages by way of mesne profits at [79]-[127] and summarised at [128]-[137] above.
[18]
Appeal ground 1 - correctness of approach to assessment of mesne profits
The primary judge at PJ [152] identified the following propositions as common ground between the parties as to the principles applicable to the calculation of mesne profits:
"(1) An action for mesne profits is a species of the action for trespass (a tort).
(2) Mesne profits represent the traditional measure of assessing damages where one party's possession or occupation of land has been wrongly interfered with.
(3) Mesne profits are damages which compensate for the wrongful denial of property rights (i.e. the loss of use of those rights).
(4) The 'yardstick' or 'normal measure' of mesne profits is an amount calculated by reference to the 'reasonable letting value', 'reasonable rent' or 'market rental' of the land the subject of the trespass, which it would be reasonable for the trespasser to pay, and the party whose property rights have been wrongfully denied to accept, for the period of wrongful occupation. This yardstick is sometimes referred to as the user principle.
(5) Whilst it is the interference with or infringement upon actual possession of the relevant property rights which provides the basis for an award of compensation, it is not necessary to establish actual financial loss, or a financial benefit to the trespasser, to recover damages.
(6) There is some uncertainty in the authorities (both English and Australian) as to whether the 'juridical underpinnings' of mesne profits are such that the assessment of damages is governed by principles of compensation or restitution, or elements of both.
(7) This Court should follow the approach set out in Bunnings Group Ltd v CHEP Australia Ltd (2011) 82 NSWLR 420; [2011] 82 NSWCA 342 ('Bunnings') at [177] per Allsop P (Macfarlan JA agreeing) (a case dealing with wrongful detention of chattels), namely that damages in accordance with the user principle for the wrongful interference or denial of property rights are compensatory in nature."
In light of the discussion of the authorities surveyed at [79]-[127] above, the primary judge's summary was unexceptionable, as was his observation at PJ [114] that "[t]he user principle requires mesne profits to be calculated by reference to the trespasser's actual use of the land" (Emphasis added.)
The primary judge placed particular emphasis on the decision of the Privy Council in Inverugie (which his Honour saw as directly analogous to the claim with regard to the Car Park Site: see PJ [83]) and that of this Court in Bunnings, describing the latter as being of "seminal importance to the present proceedings": PJ [170]. After setting out relevant parts of Bunnings in extenso, the primary judge said (at PJ [173]):
"What emerges clearly from the foregoing statements of principle is that in Australia mesne profits are the means by which damages for trespass are awarded. Furthermore, the calculation of those mesne profits is done by reference to the user principle. The user principle means that the Court is not concerned with whether or not the innocent party could or would have used the land in question or whether the wrongdoer can demonstrate that it may have been able to gain some advantage if it had, in fact, negotiated with the innocent party for the use in question. In my view, the user principle requires a robust and straightforward inquiry firmly based upon what in fact occurred: what was the wrongful use and what is a market or going rate for that use?" (Emphasis added.)
This summary, too, was unexceptionable.
Notwithstanding the primary judge's clear and accurate statements of relevant principle, the "rent" he calculated for the trespass to the Hospital Site was neither by reference to the "actual use of the land", nor "based upon what in fact occurred". SLHD's actual use of Macquarie's right to immediate possession of the Hospital Site ("what in fact occurred") was as a spill over car park on a largely unimproved site.
Nor was the primary judge's assessment of mesne profits for interference with Macquarie's right to immediate possession of the Hospital Site. Rather, the primary judge calculated and imposed as notional rent mesne profits based on a discounted cash flow analysis for the Hypothetical Hospital, being a hypothetical but operating private hospital on the Hospital Site on an assumption, which Macquarie did not attempt to prove, that such a hospital would have been built, thereby come into existence, have had certain characteristics and commenced operation: see at [29]-[30] above. SLHD never had actual use of such a hospital nor, it should be said, of any "rights" to build and operate such a hospital. The assessment of damages undertaken was plainly not by reference to the "existing state" of the land to which Macquarie had the right to exclusive possession conferred by the lease but by reference to a hypothetical future state.
As was made clear in SJ [72] (see [199] above), his Honour purported to value "contractual rights and obligations to exploit that land for Macquarie's economic benefit for 103 years". This took his Honour's exercise into not only utterly novel but, as we shall seek to explain, illegitimate territory.
At PJ [84], the primary judge stated that, as the Private Hospital (as opposed to the Car Park) had not been built at the time of the commencement of the trespass and indeed was never built, this engaged "a different set of considerations vis-à-vis the car park". His Honour recorded Macquarie's submission (at PJ [84]) that:
"[T]he question of the appropriate measure of damages in trespass in these circumstances was to be considered in relation to a tenant who has been put out of an asset which, as it were, had not yet come into existence." (Emphasis added.)
It is not clear whether his Honour was here quoting a submission actually made by Macquarie, or articulating his understanding of Macquarie's case, but how one can trespass on a non-existing asset was nowhere explained. If his Honour was referring to a commercial opportunity, interference with a commercial opportunity is far removed from trespass to a right to immediate possession of land. If the consequence of a trespass is to interfere with a commercial opportunity, that may sound in damages if a lessee can point to and establish actual loss or loss of opportunity. But this is the very case that Macquarie had abandoned by the 40th day of the inquiry as to damages: see [24] above.
The primary judge went on at PJ [84] to say:
"The asset in this sense is not the land itself (from which the tenant has been excluded) but a particular use to which the land was to be put in the future but for the intervening ejectment."
It is, with respect, difficult to reconcile this statement with the fact that trespass to land relates to the interference with a right to immediate possession to land, and that mesne profits represent a remedy which is available in respect of such a trespass.
Even putting that fundamental consideration to one side and assuming that it was appropriate to assess mesne profits by reference not to the actual use of land in its existing state but to some hypothetical scenario which assumed that a non-existent private hospital had come into existence, the primary judge considered that the "user principle" constrained what SLHD could argue in relation to that hypothetical scenario. Thus, at PJ [115], the primary judge said:
"Insofar as the user principle has an effect on the issues presented for determination, two related matters are critical. First, it means that whether the plaintiff could have, would have or ever did or did not want to do what constituted the trespass (or anything else) is irrelevant. The plaintiff is to be compensated for the wrongful use which occurred. Second, the defendant trespasser cannot seek to establish hypothetical counterfactuals to demonstrate that, if the trespass had not occurred, the plaintiff would have suffered no loss."
Again, whilst the statement that "[t]he plaintiff is to be compensated for the wrongful use which occurred" is unexceptionable, the first consideration highlighted by the primary judge in this passage overlooked the fact that the damages model propounded by Macquarie, and ultimately used by the primary judge to assess and calculate mesne profits, was built on the express assumption that Macquarie would in fact have made use of the Hospital Site by building (or having an assignee build) the Hypothetical Hospital: see [28] above.
As to the second consideration noted by the primary judge, namely that the defendant trespasser cannot seek to establish hypothetical counterfactuals to demonstrate that, if the trespass had not occurred, the plaintiff would have suffered no loss, this consideration overlooked the entirely hypothetical nature of the damages model upon which Macquarie's case was built, and mischaracterised SLHD's forensic efforts to test and attack that hypothesis. It was for Macquarie to establish its case and, prima facie, SLHD was entitled to attack it. The primary judge, however, understood the user principle as in some way precluding SLHD from so doing.
The twin considerations highlighted by the primary judge in PJ [115] were central to his Honour's rejection of much of SLHD's evidence and submissions as irrelevant in PJ [116], the terms of which have already been noted at [152] above. Also of relevance in this regard is the following conclusion of the primary judge at PJ [560]:
"For reasons already stated, the Court's view of the user principle means that Macquarie's capacity and willingness to build the private hospital is irrelevant, whether to fulfil obligations under the Transaction Documents or to assign those obligations to someone else. By reference to the user principle and for the reasons already given (see paragraphs [179] to [180] above), the Court also does not accept the Health District's characterisation that the value of the possessory right that Macquarie claims was interfered with is contingent on Macquarie fulfilling contractual obligations to realise 'the opportunity' constituting that right. Whether it wanted to, could have or would have is irrelevant."
[19]
Consideration of primary judge's approach to the assessment of mesne profits in respect of the Hospital Site
In our assessment, the primary judge's approach to the assessment of mesne profits was deeply flawed and departed significantly from principle. There was a marked disjunction between what his Honour, with respect, correctly identified as the applicable principles in parts of his judgment, and how he went about his assessment. This disjunction was also exposed by his Honour's contrasting assessment of damages for mesne profits with respect to the Car Park Site in the course of which he correctly emphasised that Macquarie was entitled to mesne profits for the actual use by SLHD of Stage 1 of the Car Park, which had been constructed and was operating.
The difficulty with the primary judge's approach to the assessment of damages by way of mesne profits in respect of the Hospital Site may be stated in a number of ways.
First and most fundamentally, mesne profits is a remedy for trespass to the right to immediate possession of land. A notional or surrogate rent for much more than the land was valued and assessed by way of damages.
This misconception in the primary judge's approach is most graphically revealed in his Honour's candid acknowledgement that he was assessing damages in effect for trespass to an "asset which, as it were, had not yet come into existence" (see [210] above) or for interference with contractual rights: see [209] above.
Secondly, at PJ [181], the primary judge stated that "it must be accepted that Macquarie's case in relation to the hospital site in particular presents some novel features insofar as no similar case has been able to be found." Exactly why the case was said to be "novel" was not explained. On its face, there should have been nothing novel about valuing and calculating rent for an unimproved parcel of land, being the Hospital Site, on which cars could be and were parked. But that is not what was done. Nor would there have been anything novel about valuing and calculating rent for an operating private hospital on the land which was the subject of the trespass, had such a hospital existed. The analogy with the holiday apartments in Inverugie would have been apposite in such a case. But no such hospital ever existed.
The novelty of the case as approached by the primary judge, and as agitated by Macquarie, lay in the fact that what was sought to be valued was not only the land upon which the trespass had occurred, but the perceived value of what the primary judge candidly described as Macquarie's contractual rights (and presumably the associated Consent that had been obtained from the Land and Environment Court) on the assumption that such rights were capable of being, and would have been, exploited by Macquarie or some hypothetical transferee of Macquarie's rights.
In this context, in the course of the appeal, Mr Hutley, who appeared for Macquarie, suggested that the Existing State/Actual User Argument was "legally incoherent" and that it ignored the Hospital Lease. Putting aside the advocate's flourish, the argument did not ignore the lease at all. It was the right to immediate possession of the Hospital Site which flowed from the Hospital Lease that gave Macquarie the right to seek damages for trespass which it elected to have calculated by an assessment of mesne profits. There was a conflation in Macquarie's argument between a trespass to the Hospital Site and Macquarie's contractual right to use the site for the duration of the lease to operate a private hospital, following the discharge of its obligations under the Construction Deed to build the private hospital on the Hospital Site in the first place. There was no contractual right to operate a pre-existing private hospital on the Hospital Site that was appurtenant to the Hospital Site, at the time of the trespass.
Thirdly, even assuming that it was in some way consistent with principle to seek to value contractual rights in the context of an assessment of damages for trespass to land - what Mr Hutley described (T262:40-41) as "a right to build a hospital" - it may be observed that, by reason of its trespass, SLHD did not acquire the benefit of Macquarie's contractual rights and associated development rights consequent upon the Land and Environment Court's decision (see [6] above) as the result of its trespass.
Fourthly, any interference with Macquarie's contractual rights (as opposed to its rights as lessee) could have been taken into account in the abandoned claim for loss of profits or loss of opportunity to earn profits (see [24] above) or alternatively may perhaps have been the subject of a separate claim also in tort but for a different tort, namely interference with contractual relations. Such a claim, however, was never made. Macquarie's claim for mesne profits, as assessed by the primary judge, introduced and propounded the notion that "market rent must take into account the opportunity to build a hospital on the site" (see Macquarie's Conspectus Reply Submissions); see also Macquarie's submission in relation to Issue 4.6 that "market rent must take into account the opportunity to build a hospital on the site", and Macquarie's Outline of Closing Submissions in Reply, para 57 of which included that:
"…it should not be lost sight of that the property rights infringed by the trespasser were much more than the mere opportunity to build the Private Hospital".
It was and is problematic to describe the opportunity to build the Private Hospital as a "property right", or at least as a property right which could be the object of an action for trespass. So, too, in its submissions on appeal, Macquarie maintained that the assessment of damages for trespass should reflect lost opportunity. Thus it was put at para 30 of Macquarie's submissions that:
"For the purposes of determining the annual rental value of the Hospital Lease (which included the opportunity to build and operate a hospital) it was necessary to project the future cash flows generated by the Hospital Lease..."
Submissions of the kind instanced are revealing. They disclose the reintroduction, illegitimately, of the very case that had been abandoned 40 days into the trial which, coupled with the primary judge's view that key assumptions upon which the valuation model was built could not be tested (see consideration of appeal ground 4 below), meant that Macquarie was massively overcompensated in respect of the trespass to the Hospital Site.
Fifthly, the primary judge's approach had the result that Macquarie secured the benefit of notional or surrogate rent from the Hypothetical Hospital which was either not the hospital it had the rights to develop or, alternatively, was the hospital which it was found as long ago as 2000 it would never have developed: see [10] above and Windeyer J's observation that "[i]t is perfectly clear that Macquarie could not and will not proceed with the private hospital" (see also the findings of Nicholas J, reproduced at [13]-[14] above, based on Macquarie's own submissions, that the private hospital would "not proceed because Macquarie decided it would not be viable"). As SLHD submitted, the primary judge's approach to the assessment of mesne profits violated the observation of Sir Owen Dixon made in the context of valuation of land in the context of compensation for resumption, namely that "[y]ou must not notionally bring what is only potential into actual being and value it as if it existed": see Turner v Minister of Public Instruction (1956) 95 CLR 245 at 268; [1956] HCA 7.
Sixthly, the primary judge's approach in purporting to value contractual rights based upon a Hypothetical Hospital also did not focus on the actual use of the land by SLHD in its existing state, but on the potential future use of the land by Macquarie or an assignee or transferee of Macquarie's rights under the Hospital Lease if it had developed the Hospital Site. This was also contrary to principle. It was an approach which presupposed that Macquarie had exercised what the primary judge described as its contractual rights (and complied with its contractual obligations) to construct the contractually mandated Private Hospital, that it had done so successfully, and that the notional or surrogate rent which SLHD was obliged to pay by way of mesne profits was for trespass to that asset, even though it never existed and despite the unchallenged findings that had been made by Nicholas J as set out at [13]-[14] above, namely that Macquarie, at the time of SLHD's wrongful taking of possession, had no intention of building the private hospital for which it had contracted and in respect of which it had obtained development approval.
Seventhly, even accepting that damages by way of mesne profits may not require that a plaintiff suffer actual loss, the notional "rent" must nonetheless be reasonable. There is nothing reasonable about a notional rent for an asset that never existed and which the plaintiff, on its own case, would never have built because it would not have been viable to do so.
The principal justification offered by the primary judge for the approach adopted and what his Honour described (at PJ [181]) as "my touchstone" was the reference made by Allsop P in Bunnings at [174] to the "rules of compensatory damages, sensibly and flexibly applied".
With all due respect to the primary judge, Allsop P in Bunnings at [174] was not adumbrating a new and open-ended test for the assessment of damages by way of mesne profits or in any way suggesting that the notional rent to be calculated was for something other than, or in addition to, the proprietary interest infringed by the trespass. Rather, the words adopted by the primary judge as his "touchstone" were uttered by the then President in an entirely different context, as the entirety of [174] of Bunnings shows:
"Stability of approach, especially in a field directly related to commercial law should be maintained. It is unnecessary to discuss the extent to which a degree of re-adjustment in taxonomy is required by reference to notions of restitutionary damages (cf McGregor Ch 12). Rules of compensatory damages, sensibly and flexibly applied, are adequate to explain the theoretical and practical positions, without any extension of principle involving the award of the wrongdoer's profit as a remedial consequence of the commission of a tort."
Whilst it is correct that the "user principle" does not require a plaintiff to demonstrate that it would have hired the land out (and so much is assumed), none of the cases surveyed earlier in these reasons close their eyes to the reality of the circumstances of either the plaintiff (see, for example, Ashman, in which the Ministry of Defence was not regarded as a normal landlord; Bunnings, in which Chep's damages were affected by the fact that it had offered Bunnings the so-called Wesfarmers rate; the two New Zealand cases of Roberts and Waugh) or the defendant (see, for example, Ashman; Bunnings, where the defendant was of a size that had led to a discount hire offer in fact being made to it and the charge was only made in relation to 90% of the pallets, reflecting the defendant's actual use; or Lamru, where the occupation of the site had a special value and benefit to the defendant).
In addition, the general circumstances of the case, especially where there is no ready market for the property, have been explicitly said to be relevant in Roberts and Waugh. They were also relevant in Inverugie, where the mesne profits were assessed by reference to seasonal rates, and also had set off against them the rent that had not been paid by the plaintiff.
Reference has been made at [215] above to the primary judge's view at PJ [560] that the user principle dictated the rejection of much of SLHD's submissions and evidence in relation to the damages assessment model propounded by Macquarie. This matter is principally considered in the context of appeal ground 4, but it is far from apparent in the primary judge's reasons as to why his Honour considered that the "user principle" dictated the exclusion of such evidence. The "user principle" is nothing more than the label applied by Nourse and Nicholls LJJ in Stoke-on-Trent to describe the fact that mesne profits are available for the trespasser's actual use of the land upon which the trespass occurred.
[20]
Conclusion in relation to appeal ground 1
For the foregoing reasons, we are of the opinion that the primary judge's assessment of damages by way of mesne profits in respect of the Hospital Site miscarried, resulting in a massive overcompensation to Macquarie.
Having abandoned a case for damages for loss of opportunity, the damages awarded were effectively for a measure of such loss, but with the sting that the primary judge excluded significant arguments and evidence that the opportunity in fact had little, if any, value.
The perverse consequence is that damages in the sum of some $55 million including interest up to November 2019 have been awarded in respect of trespass to an unimproved site by reference to a private hospital that never existed and which Macquarie had accepted for almost 20 years would not have been built and would not have been viable.
No fall-back value was propounded by Macquarie for a notional rental in respect of the actual use of the Hospital Site in its existing state at the time of the trespass. In these circumstances, it follows that Macquarie's claim for mesne profits relating to the Hospital Site should be assessed as nil or nominal.
[21]
Appeal grounds 4 and 11-14
We have considered whether appeal grounds 4 and 11-14, all relating to the method of assessing damages in relation to the Hospital Site, should be resolved even though they cannot affect the outcome of the appeal in light of our conclusions in respect of appeal grounds 1 and 2: see Kuru v State of New South Wales (2008) 236 CLR 1; [2008] HCA 26 at [12] (Kuru) and Boensch v Pascoe (2019) 94 ALJR 112; [2019] HCA 49 at [8], [101]. Given that the grounds were fully argued and there remains the possibility of a further appeal, it is desirable to deal with these non-dispositive issues.
Appeal ground 4, which has been set out at [154] above, relates to the primary judge's characterisation of a large number of submissions (and the evidence on which those submissions were based) as irrelevant to his inquiry as to damages in relation to the Hospital Site: see also [151]-[153] above. These included matters such as Macquarie's capacity and willingness to construct the Hypothetical Hospital, the commercial feasibility of doing so, the willingness of any putative tenant to lease the Hospital Site, and the significance of Macquarie's breaches of the Construction Deed prior to 17 March 2000.
One issue which, at least initially, divided the parties on the appeal was the extent to which the primary judge had treated submissions and evidence as irrelevant to the issue of valuing Macquarie's rights in relation to the Hypothetical Hospital. Given the disagreement between the parties, the Court directed SLHD to provide, and Macquarie to comment upon, a table of the material comprising that regarded as irrelevant by the primary judge. Even after that exercise, the precise boundaries of the material regarded as irrelevant by the primary judge remained contentious, however, a number of matters were identified as uncontentious by the parties.
The parties agreed that the primary judge described the following material as not relevant, or addressed it in a limited way:
1. reports of Michael Palassis dated:
1. 23 December 2013 {Ex 15P tab 41};
2. 30 January 2014 {Ex 17P tab 48};
3. 15 August 2014 {Ex 58P tab 9};
4. 9 April 2015 {Ex 95P tab 4 INQ-BD-17164 -17276};
1. evidence of Mr Palassis:
1. 4414-4416;
2. 4524-4525;
3. 4818-4820;
1. reports of Mr Gower:
1. 17 April 2015 {Ex 95P tab 5 pages INQ-BD-17277- 17427};
2. 14 June 2015 {Ex 100P tab 13 pages INQ-BD-21350-21362};
3. Joint report of Coleman and Gower 21 May 2015 {Ex 95 page INQ-BD-20203-20302};
4. 28 November 2015 (damages) {Ex 95P Tab 5 INQBD-17307};
1. evidence of Mr Gower from 4407-4465;
2. Reports of Mr Arnott dated:
1. 26 January 2014 {Ex 17P tab 46};
2. 3 February 2014 {Ex 28P tab 11};
3. 2 September 2014 {Ex 58P tab 14};
1. affidavit of Keith Cadell 15 February 2006 {Ex19P tab 9 at [25]-[26] INQ-D-0740};
2. affidavit of Keith Cadell 15 February 2006 {Ex 19P tab 8 [40] INQ-D-0502};
3. affidavit of Keith Cadell 16 January 2007 {Ex 19P INQ-D-0743-Ex 20P tab 11 at [78] INQ-D-0764};
4. issues arising from evidence on 19-20 November 2014 and earlier conclaves - answers by Mr Palassis and Mr Anderson to particular questions {Ex 87P Blue 5/2253 at [5] on 2260};
5. Ex 4P tab 143 INQ-A-2283T-V;
6. Ex 88P;
7. Ex A94D, A97D, A98D;
8. Evidence of Mr Wenkart, T 3238-44;
9. Primary orders 13 December 2010 order 4(5);
10. Construction Deed Clauses 2.1,7.1,7.2 {Ex 1P [INQ-A-0052, 0092, 0100, 0378,0444-0453] 10/3893};
11. Hospital lease clauses 17.1, 17.2 {[INQ-A-0192] 10/3932};
12. Affidavit of Wallace, 9 April 2013 {Ex 12P INQ-B-2901};
13. Horvath examination in chief {D13 T 766};
14. Wallace examination in chief {D15 T 899-906};
15. Dr Wenkart cross-examination {D61 T 3283-84};
16. Ms Pethard {Ex 84P INQ-BD-15824};
17. Mr Puplick {Ex 84P tab 6 INQ-BD- 15838 at [97]-[105]};
18. Oral Evidence of Dr Horvath {T3930.25-3931.2; T3930-3934};
19. Evidence of Dr Wenkart {T3136-49, D60, T3249-50};
20. Hospital Lease IP {INQ-A-OI62};
21. Notice of default 2P {INQ-A-0495};
22. The compensation clauses {Ex 1P INQ-A-0138-0139, 0194}.
We do not propose to summarise this evidence save to say that there was a vast body of both primary and expert evidence which the primary judge regarded as irrelevant which went to the following issues which had been tendered for determination by the parties but which were not addressed by the primary judge:
Issue 32: Methodology for valuing the Hospital Lease
° If relevant, what is the appropriate methodology for valuing the Hospital Lease with respect to the plaintiff's interest in the hospital site?
Issue 33: Feasibility and valuation outcomes
° Was the private hospital project feasible and what is the outcome for mesne profits with respect to the leasehold of the hospital site?
Issue 34: Availability of and likelihood of termination
° As to a possible termination for breach:
• were the plaintiffs interests in the hospital site and carpark site liable to be terminated, and, if so, when and on what terms; and
• if relevant, would the defendant have terminated, and, if so, when and on what terms?
Issue 39: Application of the compensation for termination provisions
° Do the compensation for termination provisions apply?
Issue 40: Reasonableness of Assumptions; and
° With respect to each of the following modifications to the Project Definition assumptions above:
• is it contested; and
• if contested (and if not dealt with in more detail in another section) is it, or is it not, a reasonable assumption for the valuation of mesne profits; and
• what other or alternative assumptions should be made?
Issue 41: Quantification of compensation for termination.
° Assuming validity of the compensation provisions, what compensation is due under those provisions and what is the outcome for purposes of mesne profits?
As we have explained, Macquarie's valuation evidence proceeded on an instructed assumption that Macquarie, or an incoming transferee or assignee, could have:
"(a) built Stage 1 of the private hospital and Stage 2 of the car park
(b) substantially completed construction of a 220 bed private hospital (being Stage 1 of the private hospital development)
(c) opened the private hospital, and admitted its first patient
(d) completed construction of Stage 2 of the private hospital, having regard to market conditions then prevailing."
As noted at [152] above, the primary judge found (at PJ [116]) that it was irrelevant that:
1. at the commencement of the trespass, Macquarie did not intend to build the private hospital;
2. Macquarie had no financial capacity to build, and therefore would never have built, the private hospital;
3. if Macquarie had built the private hospital it would have been a financial disaster, from which it had been saved by SLHD's trespass;
4. no third party would have considered the private hospital feasible with the specified existing design (described by SLHD as "unviable, unprofitable and inefficient") and the other contractual constraints under the Transaction Documents;
5. damages should be assessed on the fact that at the time of its dispossession, Macquarie had been prepared to part with the Hospital Site for no value;
6. there was a risk the Transaction Documents would be validly terminated;
7. more than the risk just referred to, the Transaction Documents remained liable to termination as at 17 March 2000 and SLHD would have validly terminated them by at least late 2000.
The conclusion that these matters were all irrelevant is prima facie extremely difficult to reconcile with Mr Hutley's acceptance, in argument on the appeal, that the "right to operate the hospital is necessarily predicated and sourced in the obligation to construct [it]": T241:9-10. The matters the primary judge somewhat sweepingly deemed "irrelevant" went directly to the likelihood of the obligation to construct the hospital being fulfilled. And if that obligation were not or was unlikely to be fulfilled, the right to operate the hospital said to be based upon the Hospital Lease would not arise or necessarily be significantly devalued.
In short, the primary judge found that it was unnecessary to address the critical assumptions underlying Macquarie's claim for damages in relation to the Hospital Site for two reasons:
(i) assessment of the risks referred to in the evidence by SLHD was not consistent with the proper application of the "user principle", as the primary judge understood it, which did not permit SLHD to seek to establish hypothetical counterfactuals to demonstrate that, had the trespass not occurred, Macquarie would not have suffered any loss because it could or would not have utilised the land in a particular way: at PJ [80], [115]-[118], [159], [173]-[180], [185], [352], [411], [551]-[553], [555] and [559]-[561]; and
(ii) consideration of those risks was superseded by the parties' agreement that the Residual Land Value methodology was the correct approach to calculating market rental in relation to the Hospital Site: at PJ [543].
[22]
Equity beta/discount rate
Perhaps the most important integer reflecting the treatment of relevant risks as "irrelevant" was the appropriate figure for equity beta to be used and the resultant discount rate which should be applied to the cash flows used in the Capital Asset Pricing Model which formed a critical part of the Residual Land Value methodology. The equity beta and the discount rate should reflect risks to the assumed cash flows being achieved.
The relevant experts were Messrs Coleman (for Macquarie) and Gower (for SLHD). Mr Coleman used an equity beta of 0.90%. Mr Gower used an equity beta of 1.7%. Mr Gower in his report dated 17 April 2015 identified the relationship between the equity beta he selected and the appropriate discount rate in the following table:
"[240] In my opinion, the LEA [Mr Coleman's] discount rates which have been applied to the PAPH cash flows in any event (disregarding that these are the incorrect cash flows) should be adjusted to include a beta of 1.7 and a small company risk premium of 5.0%. On this basis the LEA discount rates are adjusted to:
Assessment of WACC Mar-00 Jan-01 Jul-01 Jan-02 Jul-02
% % % % %
Risk-free rate Rf 6.52% 5.46% 6.04% 6.01% 6.01%
Market risk premium MRP 6.00% 6.00% 6.00% 6.00% 6.00%
Equity beta βe 1.70 1.70 1.70 1.70 1.70
Re = Rf + (βe x MRP) 16.72% 15.66% 16.24% 16.21% 16.21%
Small company risk premium (including liquidity) 5.00% 5.00% 5.00% 5.00% 5.00%
Cost of equity 21.72% 20.66% 20.24% 21.21% 21.21%
Gearing D/V 50.00% 50.00% 50.00% 50.00% 50.00%
Before tax cost of debt Rd 8.51% 7.46% 8.04% 8.00% 8.01%
Applicable tax rate t 30.00% 30.00% 30.00% 30.00% 30.00%
After tax cost of debt Rd (1-t) 5.96% 5.22% 5.63% 5.60% 5.61%
WACC based on after lax cost of debt Re * E/V+Rd*(1-t)*D/V 13.84% 12.94% 13.43% 13.41% 13.41 %
[23]
As Mr Gower explained in his oral evidence, the differences in the approaches taken between him and Mr Coleman turned on Mr Gower's assessment that "at Prince Alfred Private Hospital project at the time at which we were valuing it, and at that time it had no income, it had no hospital. It was a prospective venture which may or may not succeed". Mr Coleman, it will be remembered, was told to assume that the Hypothetical Hospital would be built, thus taking out of consideration these matters addressed by Mr Gower. Mr Gower's explanation was as follows:
"WITNESS GOWER: … The essential difference between Mr Coleman and myself, we have used the same weighted average cost of capital methodology and we have both calculated the discount rates on a post-tax basis, so we're similar to that extent. We are also similar in the debt equity ratios that we have used and the cost of debt. The difference relates to the perception of risk. Mr Coleman has used beta which is the risk factor of .9; I have used a beta of 1.7. In understanding betas one represents the risk profile of the market as a whole, so if you were to invest in portfolio of assets, in listed assets, that would behave like the market, the risk profile of that portfolio would be one. If you were to invest in a single share or a single asset the question would be, is that asset more risky or less risky than the market as a whole. By adopting a risk profile, a beta of less than one, what you're effectively saying is that this Prince Alfred Private Hospital project is less risky than the market as a whole. So that's the first point I would make.
When I looked at the 1.7 I looked at some companies within the medical sector and I observed a range of betas which were quote for those. The two most comparable ones were Primary Health Care and Ramsay, neither of them are directly comparable but both of them are emerging businesses or rapidly growing businesses in the health care sector. Primary Health Care not so much in hospitals but more in medical centres, pathology and that sort of area. Ramsay of course is directly comparable. Ramsay at that time had the benefit of two very significant income streams relating to veterans' hospitals and it also had some co-located hospitals which it was struggling to establish. So I looked at those two, the betas that were observed of those two, and decided that, and it's a judgmental question, I decided that the beta relating to this single project with a single income stream should be at least higher than that and so I settled on a beta of 1.7 on that basis.
In addition to that I looked at Prince Alfred Private Hospital project at the time at which we were valuing it, and at that time it had no income, it had no hospital. It was a prospective venture which may or may not succeed and also we were comparing the - the comparators that we were looking at were listed business enterprises and classically we're looking at comparing private unlisted entities against listed entities. There is a liquidity premium that listed entities usually trade at and so I needed to make an allowance for that because the Prince Alfred Private Hospital is not listed and investors or an acquirer of that enterprise is putting their capital up front and they cannot get it out easily, and that in addition to the point that this was essentially a start-up enterprise which hadn't yet proved itself, I felt that there should be an additional risk premium that should be applied. In my view it was 5% and I applied that percentage, and that's your Honour I think in a nutshell is the difference as I understand it. I have looked specifically at the Prince Alfred Private Hospital project and the rates of return which I believe are applicable to that project, not to a portfolio of hospital projects, or anything else.
HIS HONOUR: What do you say to the proposition, taking a step back, we're talking about a private hospital that was going to be built next to one of the largest public hospitals in Sydney, the prospect of - and it might be put to you that you have taken an excessively pessimistic view of the risk given just a sense that it would be very hard for a hospital in that situation not to succeed?
WITNESS GOWER: Your Honour there may be some that have that view. If one reads the financial statements of Ramsay Health Care at that time, they were involved in developing and establishing the Royal North Shore Private Hospital and the Flinders Hospital in South Australia. Both of those hospitals had early difficulties. The Royal North Shore, their accounts reflect that there was a write-off against those two hospitals. They - I don't know how much the write-off was against each of those hospitals, but they subsequently disposed of the Flinders Hospital at a loss. They also declined to proceed with the Princess Alexandra Private Hospital. Each of those hospitals were collocated. If one looks at the profit and loss statements of Ramsay it's quite clear that during those early stages the rates, the margins they were getting and the emergence of profits out of those projects was slow. Subsequently the Royal North Shore Private Hospital has become extremely successful, but in that early stage, those first few years it was certainly by no means a failsafe project."
It was common ground that the difference between Messrs Gower and Coleman on this issue made a critical difference to the outcome of the valuation:
"PAYNE JA: What's the outcome, Mr Hutley, if you apply Mr Gower's beta and his discount rate?
MR HUTLEY: I don't have the precise figure, because it would have to be tweaked, but the difference is vast. Vast…" (T257:12-17)
In addressing this issue we accept, as Macquarie submitted, that there was no specific challenge by SLHD to the finding by the primary judge about the appropriate equity beta or discount rate to adopt. SLHD's complaint is more fundamental. In the capital asset pricing model the equity beta and discount rate selected are a reflection of the assessment of risk to the projected cash flows being achieved. The Coleman model, upon which Macquarie's damages case for the Hypothetical Hospital rested, adopted an equity beta and discount rate which SLHD complain was not tested by evidence about relevant risks as the primary judge treated that evidence about risk as irrelevant. The Coleman report and the primary judge's conclusions based on that report were open to challenge on the basis of the evidence and submissions that the primary judge treated as irrelevant. That is a matter at the heart of appeal ground 4.
We have concluded that the findings of the primary judge, accepting Mr Coleman's evidence and rejecting Mr Gower's approach, proceeded on an unrealistic assessment about risk to the project. At its heart, this appears to be because the primary judge accepted Mr Coleman's evidence that the Hypothetical Hospital was a less risky project than the market as a whole. In reaching this finding, the primary judge appears to have overlooked the assumption that Mr Coleman was asked to make that the Hypothetical Hospital would be built. The primary judge found:
"498 During the course of the concurrent evidence, Mr Coleman responded to Mr Gower's observations (and others) (T4419:4-T4420:26):
'WITNESS COLEMAN: ….
There is probably one other thing I'd just like to add around the consideration of the risk profile of this particular project which doesn't really seem to have come out at this stage. There were two other things going on in the general marketplace for hospitals at that time which I think are worth reflecting on. And I say this in the context of having used what I'll call a classic analysis of betas which are, effectively, a retrospective looking measure - they look back at what's happened to the share price in the past - and, therefore, there is an argument that says, 'Well, in, in the overall view you take of this, should you be at least looking at what's going on in the industry now and what future risks might be inherent in the way the industry is changing?'
And there was actually something going on that was pretty important at the time in that industry. In 1999 the Federal government basically legislated to change the way in which health insurance funds were able to operate and charge for the insurance they provide to their clients, the upshot of which was that, by 30 June 2000, the private membership of private health insurance funds was climbing again dramatically after many years of decline. There is no doubt that private health - sorry, private hospital operators saw that as an important factor in the market at that time, and you only have to look at the annual returns - annual reports of Ramsay and Healthscope and Mayne Nickless.
Their chairmen's reports and their CEOs' reports for the year ended 30 June 2000 all refer to it. In fact, it's the first thing in the chairman's report of Ramsay as a positive factor affecting the way their business is going to development because, obviously, as there are more people who are privately insured, there are more people who can afford to come and use private hospitals. So I see that as a factor in the industry at large which was, if anything, beginning to reduce the risks in the industry.
Specifically to this project, I think my risk assessment anyway was that, well, we already have a BA and a DA in place so a lot of the normal development risks obviously aren't there. Yes, construction risk clearly still is an issue that is part of the risk profile. On the demand risk issue, this hospital was an unusual one in the sense it was well known in the market at the time, and it's actually referred to in Mr Caddell's evidence in this matter back in 2007, that there were a very large number of surgeons who operated at Royal Prince Alfred Public Hospital who had much of their private business located at Strathfield Private Hospital, some then 20 or 30 minutes' drive away.
And, therefore, there was a body of doctors and their patients who it was reasonable to expect could have been attracted to the position that, 'Here is a brand new hospital built right next to where your public practice is and, therefore, you don't have to travel nearly so much any more to go, shuttle backwards and forwards to Strathfield.' So, in a sense, there was the beginnings of a readymade demand already there for that hospital as well, which is unique to this particular one, and, therefore, in my view, the demand risk was lower than it might otherwise have been for an otherwise typical collocated hospital.
499 I have preferred Mr Coleman's ultimate figure because I have found his approach and reasoning more persuasive than that of Mr Gower. For the reasons set out in Mr Coleman's answer reproduced in paragraph [498] above, I have formed a firm view that Mr Gower's assessment of the commercial risk of PAPH (and therefore increasing the beta) is far too pessimistic.
500 Three additional specific reasons must be noted.
501 First, while no approach was without its problems, Mr Coleman's method of situating risk between that of the health care industry and the beta for the developers and contractors industry is to be preferred because it minimises the difficulties of trying to compare specific companies with the private hospital. Consistent with his role as an independent witness, Mr Gower volunteered that as to the specific companies in the health care sector whose betas he had examined - Primary Health Care and Ramsay - neither of them was directly comparable to PAPH. Mr Coleman's approach involved using figures which, necessarily, relied upon a wider sample.
502 Second, Mr Gower's 'small company risk premium' of 5% which he added into his calculations is not consistent with the objective valuation task which the parties have agreed the Court must undertake. In other words, particular characteristics of particular purchasers are not taken into account. Even if I am wrong in that, the addition of the 5% was premised on an excessively pessimistic view of the risk attached to PAPH. In saying that, I have not overlooked that Mr Gower did take into account the fact that PAPH had the necessary building approvals. However, having heard evidence from a number of participants (including Dr Horvath) as to how desperately RPAH needed a co-located private hospital, I am left with the clear impression that Mr Coleman's lower assessment of risk, which informed his beta of 0.9, is more accurate than Mr Gower's.
503 Finally, I do not accept the Health District's argument that Mr Coleman's approach was flawed because his beta was slightly less than the market rate of 1.0. I accept Macquarie's submission that a beta of 1.0 represents the overall equity market premium risk of 6% above the risk-free rate. PAPH enjoyed advantages (identified by Mr Coleman in his answer as set out in paragraph [498] above and also referred to in paragraph [484] above) which, in my view, are consistent with a beta lower than that for the risk inherent in the market generally. Mr Coleman's opinion relied on matters which in my view justify a result which (to borrow Mr Gower's words - see paragraph [496] above) says 'that this Prince Alfred Private Hospital project is less risky than the market as a whole'."
Nowhere did his Honour address the fact that Mr Coleman's identification of key risks, as reflected in the equity beta he selected, was made in the context of his instructed assumption that the Hypothetical Hospital would be built. Nowhere did the primary judge address the fact that Mr Gower's assessment of risk was based on the fact that the project being valued "at that time [it] had no income, it had no hospital. It was a prospective venture which may or may not succeed". Without taking those critical risks into account, the valuation of Macquarie's contractual rights by the primary judge proceeded in error.
The finding at PJ [503] that the "Prince Alfred Private Hospital project is less risky than the market as a whole" was infected by his Honour's misunderstanding of the exercise being conducted and the correct role of risk in assessing the value of Macquarie's lost opportunity. That misunderstanding was reflected in his Honour treating the evidence and submissions the subject of appeal ground 4 as irrelevant.
To describe investment in Macquarie's contractual rights to build a hospital that his Honour later found was unlikely ever to be built, by anyone, as "less risky than the market as a whole" was an error that permeated the findings made by his Honour about the market rent for the Hospital Site. This conclusion, of itself, requires that appeal ground 4 be upheld.
[24]
Project cashflows - EBITDA/EBIT margins
An important element on the calculation of the Hypothetical Hospital cash flows was the identification of an appropriate assumption about earnings before interest, taxation, depreciation and amortisation (EBITDA) or earnings before interest and taxation (EBIT). The EBITDA or EBIT margin was an essential integer in the capital asset pricing model used by the experts, Messrs Coleman and Gower. The appropriate EBITDA or EBIT margin to be used in the 2015 damages model was supplied by evidence from other experts, namely Mr Palassis for SLHD and Mr Anderson for Macquarie. Both Messrs Coleman and Gower preferred to use EBITDA margins. As will be explained, Mr Anderson, Macquarie's relevant expert, ultimately agreed that a 17% EBITDA margin was appropriate. SLHD's expert, Mr Palassis, identified the appropriate EBITDA margin as 13%.
The primary judge did not accept either figure, but rather selected an EBIT margin figure of 15% used by Mr Cadell, an expert called by SLHD in 2007: see PJ [437]. Mr Cadell died before the primary judge considered the issue and did not give evidence before him. Mr Cadell's EBIT margin was used for the purposes of a model advanced in 2007 which addressed different issues.
As we will explain when addressing appeal ground 11 below, by adopting the 15% EBIT figure, the primary judge fell into error. For present purposes, the issue that needs to be emphasised is that, by adopting a 15% EBIT figure, the primary judge failed properly to take into account the risks to the Hypothetical Hospital project.
The selection by the primary judge of an EBIT margin of 15% based on a model prepared by an expert called by SLHD in 2007 for a different purpose, without addressing the other aspects of that expert's reasoning, was an error. In particular, the 2007 model contained quite different approaches to the question of risk, reflected in the discount rate used. The 2007 Cadell methodology, adopted in 2007 by Mr Gower, used a 15% EBIT margin but adopted a discount rate of 13.6%, giving rise to a loss to the project; i.e. a negative result to Macquarie.
To select a 15% EBIT margin for use as part of his Honour's damages calculation for the Hypothetical Hospital, shorn of the context in which that figure was derived, led to error. It is another respect in which the approach to calculating Macquarie's damages for their lost commercial opportunity did not reflect a correct approach to risk. This error permeated the findings made by his Honour about the market rent for the Hospital Site. This conclusion, of itself, also requires that appeal ground 4 be upheld.
To explain, in a little more detail, the EBIT/EBITDA error and the associated questions related to fixtures, fittings and equipment (FFE) which formed part of the damages calculations, it is convenient now to address appeal grounds 11-14.
Appeal grounds 11-14 challenge three findings made by the primary judge with respect to particular assumptions to be adopted in the discounted cash flow model used by both Messrs Coleman and Gower to determine the present value of the net cash flows from the Hypothetical Hospital. The model assumed that Stage 1 of the Hypothetical Hospital, as described at PJ [355], was built comprising in summary:
"(i) 204 general beds (being 180 general ward beds, 8 high dependency beds and 16 obstetric beds including labour wards);
(ii) 16 intensive care/coronary care beds initially, with the capacity to increase to 21 beds - for the purposes of your report you should assume 16 beds;
(iii) 12 operating theatres;
(iv) 50 beds in recovery / pre-operative areas;
(v) 2 cardiac catheterisation labs; and
(vi) 2 endoscopic rooms."
Appeal ground 11 concerns the assumption about the earnings margin used to derive the net revenue of the Hypothetical Hospital: whether the appropriate margin is EBIT of 15%, or EBITDA of 17%.
Appeal grounds 12, 13 and 14 are related. Appeal grounds 12 and 13 concern the estimate of the capital cost of FFE required for the Hypothetical Hospital. Appeal ground 14 concerns the lifecycle capital cost of the upgrade and replacement of FFE when they fall due over the first 20 years of the Hypothetical Hospital.
[26]
Appeal ground 11 - EBIT or EBITDA margins
Appeal ground 11 was in the following terms:
"In deriving the net revenue of the hypothetical private hospital, the primary judge erred in using an earnings before interest and taxation (EBIT) rate of 15 per cent rather than earnings before interest, taxation, depreciation and amortisation (EBITDA) of 17 per cent (or an equivalent figure of EBIT), such conclusion having been reached:
a. in assessing EBIT and EBITDA in 2016, by preferring the evidence of Keith Cadell and Greg Anderson, given in 2007, rather than the position of the respondent's expert, Mr Anderson, given in 2014 that the appropriate measure was EBITDA of 17 per cent; and
b. by wrongly considering that an EBITDA rate of 17 per cent, propounded by Mr Anderson yielded an EBIT of 'marginally lower' than 15 per cent (or that the former represented a 'slight modification' to Mr Anderson's earlier adoption of an EBIT rate of 15 per cent), when his Honour had evidence and submissions before him that an EBITDA of 18.5 per cent was broadly equivalent to an EBIT of 14 to 15 per cent ([2016] NSWSC 1587 at [426], [437], [440]-[443], [446], [448])."
As indicated at [283] above, the primary judge did not accept either the EBITDA margin proposed by Mr Anderson of 17% or by Mr Palassis of 13%, and instead selected an EBIT margin of 15%, giving two reasons. The first was, as has already been noted in a different context, that an EBIT margin of 15% was the figure adopted by SLHD's own witness, Mr Cadell, in the hearing before Nicholas J in 2007. The second was that, in choosing between the expert witnesses on the damages inquiry, his Honour preferred the evidence of Mr Anderson to Mr Palassis, on the basis that Mr Anderson had greater relevant, "hands-on" experience in relation to private for-profit hospitals such as the proposed private hospital: at PJ [437].
His Honour further explained his reasons at PJ [438]-[443]:
"438 In the original liability proceedings before Nicholas J two issues that were ventilated at length were whether or not Macquarie's private hospital project was, at the time of the commencement of the trespass, economically viable and the state of the Health District's knowledge of, and support for, a private hospital to be built by Sydney University (referred to as the Sydney University Private Hospital). Ultimately, it was not necessary for Nicholas J to make decisions about either issue (see paragraphs [601] and [631] of his judgment).
439 In relation to the question of economic viability, Macquarie contended before Nicholas J that the private hospital project had become economically unviable. This contention was part of what was called Macquarie's 'change of use' argument. As part of contradicting this case, the Health District relied heavily on the expert evidence of Mr Cadell, head of group operations and CEO of Health Care Australia ('HCA'). He gave evidence regarding bed day rates, margin and capital expenditure.
440 Mr Cadell gave evidence of his calculations to demonstrate his opinion that Macquarie's project was, at the relevant time, economically viable. In doing so, he adopted an EBIT figure of 15%. Mr Cadell knew the Private Hospital Site well. HCA had tendered (unsuccessfully) for the Private Hospital Site in 1999. Moreover, he and his company had undertaken a full feasibility study into the Sydney University Private Hospital, which I accept was a materially comparable hospital to Macquarie's and was intended to be built only a few hundred metres from the Private Hospital Site. For the purposes of that feasibility study Mr Cadell had also adopted a 15% EBIT.
441 Mr Cadell's evidence was before Nicholas J and, therefore, before me. Unfortunately, by the time of the hearing over which I presided, Mr Cadell had died. He was terminally ill during the proceedings before Nicholas J. Mr Cadell's illness was one of the reasons advanced by the Health District in an attempt to disavow his evidence. The Health District suggested that Mr Cadell's adoption of the 15% EBIT figure is less reliable because he had arrived at it in circumstances where he was unwell and the preparation of his evidence had been rushed. The facts do not bear out that criticism, the relevant evidence having been given in an affidavit prepared early in the proceedings, well before it would appear Mr Cadell was affected by his illness.
442 The Court is satisfied that Mr Cadell was one of the most experienced managers of private hospitals in Australia at the time he prepared his evidence. His adoption of the 15% EBIT figure both for the purposes of his analysis of the economic viability of the private hospital and in his actual feasibility assessment of the Sydney University Private Hospital are, to my mind, compelling evidence of the reliability of that figure both as a matter of contemporaneity and expertise. The Court adopts it accordingly.
443 Macquarie's expert on this question before me, Mr Anderson, also accepted Mr Cadell's EBIT figure of 15%. I regard his acceptance of that figure as fortifying the conclusion I have reached. As a matter of comparative expertise, I prefer the evidence of Mr Anderson over that of the Health District's expert, Mr Michael Palassis, on this question. In reaching this conclusion I have not overlooked Mr Anderson's slight modification in the hearing before me to an EBITDA of 17%. However the parties accepted the Court could find either an EBIT or EBITDA (see further paragraph [448] below) and I prefer the EBIT figure arrived at by Mr Cadell."
As to the selection of an appropriate earnings margin figure, his Honour said at PJ [448]:
"Finally, the accounting experts also considered the question of EBITDA. There appeared to be no dispute that the figure for amortisation in this case was zero, so that the only matter for consideration was depreciation. I understood the effect of the evidence to be that it was sufficient for the Court to find a figure for EBIT and that the experts would be able to determine the appropriate EBITDA figure based on the Court's finding of the EBIT and other factual conclusions made elsewhere in these reasons. Accordingly, the Court finds that for the purposes of calculating Macquarie's damages, net revenue for the private hospital should be derived by using an EBIT margin figure of 15%."
The Court was not taken to any evidence of what the experts subsequently agreed should be EBITDA margin in the damages model, presumably for the purposes of an exit multiple or terminal value of the earnings at the end of the cash flow forecast period, based on his Honour's finding of an EBIT of 15%.
[27]
Submissions
SLHD submitted that his Honour erred in adopting an EBIT margin of 15%, essentially for three reasons:
(i) his Honour failed to consider the effect of certain additional evidence and data obtained since 2007 that had caused Mr Anderson to modify his opinion, which evidence was not available to Mr Cadell;
(ii) his Honour was mistaken in concluding that Mr Anderson had only modified his position "slightly" in adopting an EBITDA margin of 17%;
(iii) his Honour proceeded on a misunderstanding of the evidence that an EBITDA margin of 17% yielded an EBIT margin "marginally" lower than 15%, when the evidence was that an EBITDA margin of 18.5% yielded an EBIT margin of 14-15%.
SLHD contended, adopting the view of Mr Anderson, that this Court should find that net revenue for the Hypothetical Hospital should be derived by using an EBITDA margin of 17%.
In seeking to uphold his Honour's reasoning, Macquarie submitted that:
(i) there is no decisive equivalence between the two concepts of EBIT and EBITDA;
(ii) there was no error in his Honour accepting the evidence of Mr Anderson that an EBIT margin of 15% remained valid and was appropriate; and
(iii) his Honour did not fail to consider the effect of additional evidence obtained since Messrs Cadell and Anderson first gave evidence in 2007.
[28]
Background - the evidence in the 2007 proceedings
In the 2007 proceedings, the experts who gave evidence on the financial feasibility of Macquarie's proposed private hospital were Messrs Anderson, Cadell and Gower. Mr Anderson's damages report dated 24 November 2006 addressed four questions. Question (3) relevantly asked that he provide his best estimate of the profits (if any) which Macquarie would have generated for the operation of the carpark and the private hospital pursuant to the hypothetical Macquarie development for the full term of the relevant leases.
In his report, Mr Anderson adopted a top-down modelling approach to the assessment of profits lost from the hypothetical Macquarie development, utilising two models: (a) a base model adopting operating assumptions used by Mr Cadell and in the original proposed Royal Prince Alfred Private Hospital, and (b) a hypothetical model incorporating key factors from actual current hospital performance to estimate potential profits to derive the economic losses.
The key assumptions in Mr Anderson's base model included an EBIT margin of 15.36 (rounded to 15.4)% before corporate overheads from Year 3 onwards, and an EBITDA of 26.9% commencing in Year 3 reducing to 18.5% from Year 8 onwards. The key assumptions in Mr Anderson's hypothetical model included an EBIT margin of 11.73% from Year 3 onwards before corporate overheads, which Mr Anderson explained had been adopted "to reflect current margins experienced by hospital operators, as opposed to the stronger margins of 15.36% experienced leading up to 1997", and an EBITDA margin of 23.3% from Year 3 reducing to 14.9% from Year 9 onwards.
Mr Cadell held senior management positions with Health Care of Australia (HCoA), a division of Mayne Nickless Limited, from 1991 to July 2000, including from 1998 as CEO of HCoA. In his affidavit dated 16 January 2007 Mr Cadell considered, among other issues, Macquarie's various feasibility studies in relation to the proposed private hospital which projected EBIT margins exceeding 20% and sometimes as high as 30%, which Mr Cadell considered were over-optimistic (at para 52). Mr Cadell observed that the EBIT margins projected in Macquarie's feasibility studies were well over the 15% benchmark at the time adopted by HCoA. Mr Cadell said that whilst the industry average was not as high as 15% in October 1997, HCoA's objective was to achieve a 15% EBIT margin (at para 54). Mr Cadell also expressed the opinion that "[m]ature hospitals in well-established markets may achieve 15 per cent [EBIT margin] and I have not experienced a 20 per cent margin in hospitals during 1995-2000" (at para 55). Mr Cadell referred to the reported EBIT margins of Ramsay Health Care Limited, the largest publicly listed private hospital operator in Australia, which were less than 10% in 2000 and just on 10% in 1999, and Healthscope, a publicly listed company which had major problems with several of its major private hospitals, which reported an EBIT margin of 7.5% (at paras 57 and 58).
Mr Cadell had used a 15% EBIT margin in exhibit KC3 to his earlier affidavit of 15 February 2006, explaining in para 36 of that affidavit the various columns in Exh KC3 set out certain calculations of construction costs giving "Projected returns for PAPH and Sydney University Private Hospital". PAPH was a reference to Macquarie's proposed private hospital. The Sydney University Private Hospital was a reference to a feasibility study by HCoA in February 1997 for a private hospital on the campus of The University of Sydney (the Sydney University feasibility study). At that time, Mr Cadell was the Director of Group Operations of HCoA.
Relevantly, for the PAPH project the calculations in Exh KC3 estimated a return on shareholders' funds of around 10.27%, and included a sensitivity analysis around the estimated cost of construction giving a return of around 12%. The projected EBIT of $9 million for the PAPH project assumed an EBIT margin of 15% based on revenue of $60 million. An extract from the Sydney University feasibility study, set out a calculation of construction costs which was based on an average return on investment of 13.5% over 10 years.
In cross-examination in the 2007 proceedings, Mr Anderson agreed with the description of Mr Cadell's Exh KC3 as "back-of-envelope calculations": Exh 79P, p 121. Mr Anderson also agreed that "the purpose of that exercise … was simply to see how a certain level of EBIT based on alterations of construction costs might affect shareholders' funds.": Ex 74P, 121 (48-52).
[29]
2007 experts' conclaves
Following a conclave in February 2007, Messrs Anderson and Gower gave a joint statement of experts dated 26 February 2007 which noted that they had adopted different EBITDA margins: Mr Anderson's EBITDA margin for Years 1 to 6 ranged from 23.3% to 14.8% and from Year 7 onwards was 13.9% to 14.9%. Mr Gower adopted Mr Cadell's EBITDA margin for Years 1 to 6 ranging from 0.0% to 13.7% and from Year 7 onwards of 14.5%.
This first joint statement was overtaken by a second joint statement dated 1 March 2007, in which Messrs Anderson, Cadell and Gower agreed to adopt the following EBIT margins as the operating margins of the Hypothetical Hospital:
Year of Operation
Year 1 - 5.0%
Year 2 9.8%
Year 3 10.2%
Year 4 12.0%
Year 5 onwards 15.0%
[30]
The rationale for this "ramp-up" of the EBIT margins in the first 5 years of the Hypothetical Hospital was later explained by Mr Anderson in a document tendered in March 2015:
"The Anderson/Cadell model from 2007 reflected an EBIT loss in the initial Year 1 growing to achieving the EBIT target in Year 5. This is reflective of the reality that hospitals do not achieve their maximum profitability until some time, typically up to 5 years, after opening."
The experts also agreed to adopt a terminal multiple in the cash flow model of 8.5 times final year EBITDA.
[31]
Damages inquiry: 2014-2015
On the damages inquiry before the primary judge, Mr Cadell was replaced by Mr Palassis. In their joint conclave report dated 22 August 2014, Messrs Anderson and Palassis agreed that the appropriate earnings margin assumption was an EBITDAR margin, "as this measure normalises for varied capital and asset ownership structures". It is common ground that the experts' reference to EBITDAR (earnings before interest, taxation, depreciation, amortisation and rent) can be ignored, as the element of "rent" was not material, and the experts subsequently agreed in November 2014 that EBITDA was the appropriate margin.
By August 2014, Mr Anderson had modified his position from that which he had previously adopted in 2007 for his "baseline feasibility at 1997", being an EBITDA of 18.5% (which he had repeated in his 2013 report), to an EBITDAR of 17.0% (excluding head office costs). Mr Palassis' view was that an appropriate EBITDAR margin was 13.0%, assuming head office costs were included. In their final conclave report in November 2014, the experts maintained their earlier views, now expressed as EBITDA.
In his 12 June 2015 damages report, Mr Coleman adopted a 17% EBITDA margin, consistent with Mr Anderson's views in the final conclave report in November 2014. Mr Gower also adopted Mr Anderson's 17% EBITDA margin in his 17 April 2015 report (para 245(b)).
The oral evidence given by Messrs Anderson and Palassis in August and November 2014 on the topic of earnings margins focused on EBITDA margins. It is not necessary to refer to Mr Palassis' evidence on this topic, given that SLHD now adopts on appeal Mr Anderson's view that the earnings margin assumption should be an EBITDA of 17%.
In his oral evidence in August 2014, Mr Anderson explained the context in which he agreed in 2007 to Mr Cadell's 15% EBIT margin. Mr Anderson said that:
in 2007 he had undertaken his work by looking at the EBITDA margin and he had agreed to adopt Mr Cadell's EBIT approach in 2007 "so that we could come to an agreement";
the EBIT approach favoured by Mr Cadell "was not the way that he would normally look at these things", but he was prepared to accept it because "it happened to produce an EBITDA that he could see from the information [available to him was] something that he thought that [the] hospital could achieve", being at that time an EBITDA of 18.5%;
he felt at the time (in 2007) that "the EBIT rate that was applied was slightly aggressive".
Messrs Anderson and Palassis gave further evidence on 25 March 2015, at which time a document was tendered in which they provided their opinions in written answers to particular questions arising from their evidence and earlier conclaves: Exh 87P. Mr Anderson identified three main themes where he differed from Mr Palassis on the use of material supplied by Mr Palassis from the St John of God Hospital group. One theme was Mr Anderson's view that the most useful source of information was the margins of the comparable hospitals being complex surgical of a reasonable size over 100 beds over the entire period from 2000-2014. Mr Anderson said that an EBITDA margin of 17.0% remained conservative given more recent trends, in particular, the Ramsay and Healthscope margins of greater than 17.0% on a group basis (after adjusting for rent).
In its closing written submissions on the damages inquiry, Macquarie submitted an "EBIT rate of 15 per cent is marginally higher than an EBITDA rate of 17 per cent". Macquarie characterised Mr Anderson as only having "somewhat moderated" his views from that agreed with Mr Cadell in 2007. Macquarie complained that SLHD had done a complete about face in relying on Mr Palassis and had resiled from the agreed 15% EBIT margin put forward by Mr Cadell in 2007. Whilst Macquarie advanced detailed submissions contending that Mr Anderson's EBITDA margin of 17% should be accepted, rather than Mr Palassis' EBITDA margin of 13%, ultimately Macquarie submitted that:
"… the Court should prefer the assumption on margins (being 15 per cent EBIT) derived from Mr Cadell's vast practical experience, amplified and supported by Mr Anderson's reasoning and own practical experience, in preference to those derived from Mr Palassis' limited and largely irrelevant expertise and flawed reasoning."
[32]
Whether error in selecting EBIT margin of 15%?
Rather than choose between the competing views of the experts, Messrs Anderson and Palassis, on EBITDA margins, his Honour accepted the ultimate submission of Macquarie that he should prefer the assumption on margins of an EBIT of 15% which Messrs Cadell, Anderson and Gower had agreed in 2007.
The difficulty with this finding is that his Honour selected a 15% EBIT margin without squarely addressing why it was appropriate to depart from the experts' preferred approach on the damages inquiry, particularly as their views on EBITDA margins had regard to additional material since 2007, and that material was not available to Mr Cadell.
As explained above, Mr Cadell's view on margins in 2007 was that whilst the industry average was not as high as an EBIT margin of 15%, HCoA's objective was to achieve a 15% EBIT margin, and Mr Cadell considered that "[m]ature hospitals in well-established markets may achieve 15 per cent [EBIT margin]". Mr Cadell had used an EBIT margin of 15% for the purposes of his back-of-envelope calculations in Exh KC3 which considered the effect of alteration in assumptions as to construction costs for the proposed private hospital on estimated returns on shareholders' funds. The primary judge also found that for the purposes of the Sydney University feasibility study Mr Cadell had also adopted a 15% EBIT: at PJ [440]. In fact, the draft financial model for the Sydney University feasibility study assumed the return on shareholders' funds must achieve 15% by Year 5 (Ex 2P - tab 59 (INQ-A-1109 at 1119 (par 1.4(g)(ii))).
In preferring Mr Cadell's view in 2007 of a 15% EBIT margin to the competing views of the experts, Messrs Anderson and Palassis, on EBITDA margins in 2014/2015, his Honour overlooked four matters.
First, the experts' agreement in 2007 to a 15% EBIT should have been viewed by his Honour with some caution, given that Mr Cadell's 2007 damages calculation using a 15% EBIT margin adopted a discount rate of 13.6% and gave rise to a loss on the Hypothetical Hospital: see [285] above. Secondly, the evidence of Mr Anderson referred to at[314] above explaining the context of his agreement to a 15% EBIT margin in 2007, including that "the EBIT rate that was applied was slightly aggressive", and Mr Cadell's evidence referred to at [302] above that industry average EBIT margins were not as high as 15% in October 1997. Thirdly, Macquarie's proposed Hypothetical Hospital could not be described as a "mature hospital" which Mr Cadell considered "in well-established markets may achieve 15 per cent [EBIT margin]". Fourthly, by 2014 Mr Anderson had moved away from Mr Cadell's 15% EBIT margin and had also modified his own views on EBITDA, having reviewed the EBITDA margins of various hospitals that he regarded as comparable in the period 2000 to 2014 and trends in margins since 2007. That was information which was not available to Mr Cadell.
Thus whilst it was open to his Honour when evaluating the experts' evidence on EBITDA margins to give preference to what he considered to be Mr Anderson's evidence and greater "hands-on" experience to that of Mr Palassis, that was not a sound basis for selecting an EBIT margin rather than an EBITDA margin, when EBIT margins was not the focus of the experts evidence on the damages inquiry.
In addressing the significance of Mr Anderson having modified his view on EBITDA from 18.5% to 17%, his Honour erred in finding that a 17% EBITDA margin was only a "slight" modification of Mr Anderson's earlier view in 2007 and that an EBITDA of 17% "yields an EBIT of marginally lower than 15 %": PJ [426]. It is apparent that these findings were based on an acceptance of Macquarie's submissions referred to at [316] above, however, those submissions mischaracterised the significance of Mr Anderson's reduction in EBITDA from 18.5% to 17%.
The finding that an EBITDA of 17% "yields an EBIT of marginally lower than 15 %", overlooked the evidence of Messrs Coleman and Gower, who both addressed the broad equivalence between EBITDA and EBIT margins. In his June 2015 damages report, Mr Coleman said that an EBITDA margin of 18.5% is "broadly equivalent" to an EBIT margin in the range of 14 to 15%. Both parties accepted in this Court the thrust of Mr Coleman's evidence on this topic: T379, T424-425. Mr Gower gave evidence in cross-examination that he expected the difference between a 15% EBIT margin and either a 17% or 13% EBITDA margin to be "quite significant", explaining that he expected EBITDA to be "higher and often significantly higher than EBIT, depending on the level of depreciation and amortisation".
Accepting Mr Coleman's evidence that an EBITDA of 18.5% is "broadly equivalent" to an EBIT margin in the range of 14 to 15%, SLHD submitted, correctly in our view, that as a matter of logic it cannot follow that an EBITDA of 17% is also equivalent to an EBIT of "marginally lower" than 15%, which was the submission by Macquarie that his Honour accepted: at PJ [426], [443].
Macquarie sought to defend his Honour's finding on EBIT by submitting that a reduction in Mr Anderson's EBITDA margin from 18.5 to 17% was approximately 9% and it could be expected that there would be a broadly similar reduction in an EBIT margin: T379:42-44. Implicit in this submission was the proposition that a 9% reduction in EBITDA or EBIT was a "slight" reduction. We do not agree. Applying Macquarie's arithmetical difference of about 9%, Mr Anderson's 17% EBITDA would have broad equivalence to an EBIT of about 13.65%, depending on the level of depreciation and amortisation.
Contrary to his Honour's view, a reduction in Mr Anderson's EBITDA margin from 18.5 to 17% was not "slight"; the difference in the margin was material. The finding by his Honour that a 17% EBITDA was equivalent to an EBIT only "marginally lower" than 15% should be set aside. On Mr Coleman's evidence, which was supported in general terms by Mr Gower's evidence, it could reasonably be expected that an EBITDA margin of 17% is broadly equivalent to an EBIT margin of less than 14%. It is not necessary to say how much would be less than 14%, because it is common ground that a 1% reduction in EBIT margin would have a significant effect on the hypothetical profit calculations in the discounted cash flow model.
Given that SLHD does not challenge his Honour's preference for Mr Anderson's evidence to that of Mr Palassis on EBITDA margins, if it was necessary to calculate Macquarie's damages, then the net revenue for the Hypothetical Hospital should be derived using Mr Anderson's EBITDA margin of 17% (from Year 5). The materials to which the Court was taken are insufficient to determine Mr Anderson's specific EBITDA margin in Years 1 to 4, which we assume, included a "ramp-up" in EBITDA margins in those early years. If it subsequently becomes relevant, the parties are directed to confer and agree the EBITDA margins in Years 1 to 4 (based on Mr Anderson's views).
[33]
Appeal grounds 12 and 13 - Fixtures, Fittings and Equipment
On the damages inquiry, Ms Maprock was called by Macquarie and Mr Harris was called by SLHD to give evidence on the appropriate assumption concerning the cost of FFE for the Hypothetical Hospital. As will be seen, ultimately Ms Maprock's estimate was $16,849,069, although Ms Maprock and Macquarie argued that this figure should be discounted for a procurement cost discount and the removal of one catheterisation laboratory. Mr Harris' estimate was $21,818,970.
The primary judge found that the correct assumption as to FFE costs for the initial construction period of the Hypothetical Hospital was $19,000,000 (in 2003 dollars), adopting a "broad brush" approach which involved selecting a figure in between those propounded by the experts: at PJ [472].
In rejecting the figure propounded by Ms Maprock as likely to be "too low", his Honour found that Ms Maprock's opinions were "clearly coloured by both her reliance on Dr Wenkart's instructions and her mindset": at PJ [474]. In rejecting the figure propounded by Mr Harris as likely to be "too high", his Honour found that he was left with the clear impression that Mr Harris "had pitched his estimates at the highest end of the market": at PJ [477]-[478].
His Honour observed that the largest area of difference related to the estimated cost of theatre and operating room equipment, and that Mr Harris' supplementary report in October 2014 noted the difference in cost at that time of some $5.6 million and that after further analysis Mr Harris identified the difference as $4.5 million: at PJ [479].
Accepting that the most significant difference between the experts was the estimate for the theatre/operating room equipment and that Mr Harris was of the view that the estimate in Ms Maprock's report should be increased by $4.5 million to be a reasonable estimate, his Honour gave the following reasons at PJ [480] for arriving at a figure of $19 million for FFE:
"It is clear that the main difference between them was in relation to theatre and operating room equipment. Doing the best I can and making a reduction of a third in Mr Harris' proposed addition (to make a discount for what I consider to be a tendency to quote at the "high end"), this would involve adding $3,000,000 to what was then Ms Maprock's undiscounted figure of $15,300,000. It needs to be recalled that Ms Maprock's report at that time did not include a kitchen. Even as to that they were eventually a long way apart (Mr Harris at $1,360,000 and Ms Maprock at $605,000). To allow for the kitchen I would add $700,000 to arrive at a figure of $19,000,000 for the FFE. In adopting this approach I think a higher figure for theatre equipment (but not as high as Mr Harris') is necessary to reflect what I accept to be the case - namely, that PAPH had to be of a high standard and was intended to attract the best practitioners. Such practitioners would demand and be given high quality equipment, irrespective of (but consistent with) the obligation under the Construction Deed (see paragraph [468] above)."
Appeal grounds 12 and 13 were expressed in the following terms:
"12 The primary judge erred in finding that the cost of fixtures, fittings and equipment (FFE) for the initial construction period of the hypothetical private hospital would be $19,000,000 and failed to give adequate reasons for that finding (PJ[462]-[481])
13 In particular, the primary judge:
(a) ignored the results of the later expert conclave in his analysis of the differences between the experts and the appropriate figure to be utilised for the costs of FFE;
(b) incorrectly discounted the evidence of Ian Harris on the basis that Mr Harris had 'pitched his estimates at the very highest end of the market' or 'had a tendency to quote at the "high end"' in relation to theatre and operating room equipment costs, when Mr Harris had already discounted his figure through the expert conclaves from $24,324,905 to $21,818,970; and
(c) treated the sum of $4,500,000 as if it were the difference between the experts as at the date of Mr Harris' analysis, whereas the difference between the experts at that point in time was approximately $8,000,000 (PJ [476]-[481])."
[34]
Submissions
SLHD submitted that his Honour erred in adopting an assumed FFE cost of $19 million for essentially two reasons:
1. his Honour failed to consider the joint report produced following the expert's final conclave in December 2014 and the concessions made therein, and rather commenced his analysis by reference to a superseded report prepared by Mr Harris in October 2014 analysing the original report of Ms Maprock;
2. his Honour adopted a flawed process of reasoning to derive the figure of $19,000,000 which used as its starting point wrong figures and professed to decrease the estimate of Mr Harris by one-third to account for his tendency to quote at the high end, but this had the effect of making multiple discounts having the effect of discounting his estimate by more than half.
SLHD contended that this Court should find that the cost of FFE for the initial construction period of the Hypothetical Hospital would be $21,818,970 based on Mr Harris' opinion in the final conclave report of March 2015, or, alternatively, $20,162,336 which was derived by SLHD by applying the reasoning of the primary judge, that is, reducing the difference between the two experts ($21,818,970 - $16,849,069 = $4,969,901) by one third and adding the remaining two thirds ($3,313,267) to Ms Maprock's figure ($16,849,069 + $3,313,267 = $20,162,336).
In seeking to uphold his Honour's reasoning, Macquarie emphasised two matters. First, there is no challenge by SLHD to his Honour adopting a "broad brush" approach to the difference between the experts. Secondly, the mid-point between the experts in their first conclave report in July 2014 and the final conclave report in March 2015 was, in each case, approximately $19 million. It was submitted that there was no error in his Honour effectively splitting the difference between the FFE estimates of the two experts.
[35]
Background - the experts' reports and conclaves
An understanding of the FFE issue is assisted by an outline of the course of the experts' evidence in their reports and joint conclaves.
In his report of 1 April 2014, Mr Harris estimated a reasonable FFE as $24,324,905, including a kitchen at approximately $1.3 million. In her report of 4 June 2014, Ms Maprock estimated a reasonable FFE as $15,138,094, not including a kitchen. Ms Maprock had been instructed by Macquarie's solicitors to assume that the costs plan for FFE was in the range of $10 million to $15 million. Following an expert's conclave on 28 July 2014, Mr Harris agreed to reduce his estimate to $23,326,000; Ms Maprock did not alter her estimate (first conclave report).
Mr Harris then prepared a supplementary report dated 2 October 2014 analysing the differences between his report and Ms Maprock's report. Mr Harris adjusted Ms Maprock's report by first increasing her estimate to $15,331,844.30 to account for what he described as "typographical errors and costing inconsistencies" which he had identified in Ms Maprock's report totalling $195,000 and then reduced his own estimate to $23,330,925 largely in accordance with the concessions that he made in the first conclave (the supplementary Harris report). His Honour seems to have accepted that such errors had been made by Ms Maprock which required correction, given the reference to Ms Maprock's "undiscounted figure of $15,300,000" at PJ [480]: see [333] above.
Mr Harris noted that the total difference between the experts of approximately $8 million was largely reflected in three significant items: theatres - $5,600,000; kitchen - $1,400,000; and ICU - $800,000. Mr Harris considered that Ms Maprock's total adjusted estimate should be increased by $6,360,500 from $15,331,000 to $21,690,500 to be considered a reasonable estimate of the cost of FFE, comprising the following items:
Theatres $4,539,000
Kitchen $ 966,500
ICU $ 630,000
Other - $ 120,000
Maternity department $ 105,000
ECG machines
Total: $6,360,500
[36]
A further experts' conclave was held on 11 December 2014 and produced a conclave report dated 12 March 2015 which resulted in Mr Harris further reducing his estimate to $21,818.970 and Ms Maprock increasing her estimate to $16,849,069, subject to certain discounts (the final conclave report). It is convenient to reproduce the summary table from the final conclave report in relation to what was described as Scenario 1 which assumed 12 theatres, 2 endoscopy procedure rooms, and 2 catheterisation laboratories: Each expert's column showed the relative difference in their previous budget estimates for particular items of FFE, relevantly, since the first conclave report.
Description HARRIS MAPROCK Difference
Scenario 1: 12 theatres, 2 endoscopy procedure rooms and 2 Cath Labs
Initial Budget Estimate $24,324,905 $15,138,094
(April 2014) (June 2014)
Reduction/addition following conclave - 28th July 2014 -$ 1,003,900 $0
Budget Estimate after agreed amendments following 1st Conclave $23,321,005 $15,138,094
Operating Lights No charge No charge
Services Pendants -$ 429,000 -$ 66,000
Operating Tables No charge -$ 55,000
Operating table: orthopaedic -$ 90,000 $0
Operating table: Jackson -$ 90,000 $0
Operating table: Gynaecological -$ 90,000 $0
Camera stacks -$ 700,000 $ 338,000
Instruments -$ 300,000 No charge
Telescopes $1,500,000 $ 193,000
Misc. theatre $ 104,820 $ 244,180
Kitchen -$ 754,215 $ 605,900
ICU/HDU -$ 346,000 $ 420,000
Maternity -$ 23,000 No charge
ECG -$ 75,000 $ 30,000
Sub-total -$1,502,035 $ 1,710,975
Total $21,818,970 $16,849,069 $4,969,901
discount 10% Not Applicable $- 1,684,906
discount 12.5% Not Applicable $- 2,106,133
Total with 12.5% discount Not Applicable $14,742,936
[37]
Four matters emerge from the summary table. First, the overall difference between the experts had reduced from $8 million to approximately $5 million.
Secondly, the estimates for the cost of the kitchen and the ECG machines had been agreed by the experts. Mr Harris reduced his October 2014 estimate for the kitchen of $1,360,115 by $754,215 to $605,900; Ms Maprock increased her estimate for the kitchen from $0 to $605,000. Mr Harris reduced his estimate for the ECG machines of $105,000 by $75,000 to $30,000; Ms Maprock increased her estimate for ECG machines from $0 to $30,000.
Thirdly, there was convergence between the experts in their estimates for the cost of the ICU: Mr Harris reduced his October 2014 estimate for the ICU of $1,221,860 by $346,000 to $875,860 and Ms Maprock increased her initial estimate for the ICU of $419,094 by $420,000 to $839,094.
Fourthly, whilst there was some convergence in the experts' estimates of the cost of the theatres/operating rooms, this item (which included the first 10 items in the table of adjustments set out at [342] above) remained the most significant difference between the experts: Mr Harris' estimate for theatres/operating rooms had reduced by a net $303,820 and Ms Maprock's estimate had increased by a net $655,079. Thus the initial difference in the experts' estimate for theatres/operating rooms of $5,630,750 at the time of the first conclave report had reduced by $958,895 to $4,671,855.
Before the primary judge, SLHD submitted that a reasonable estimate of FFE was Mr Harris' reduced estimate of $21,818.970. Macquarie submitted that a reasonable estimate of FFE was $13,227,216, being Ms Maprock's estimate in the final conclave report of $16,849,069 discounted by 12.5% for a procurement purchase discount and reduced further by the cost of one catheterisation laboratory in the sum of $1,515,720. The primary judge rejected an allowance for discounting and determined that the estimate of FFE should provide for two cardiac catheterisation laboratories: at PJ [463]-[464]. As indicated, the primary judge arrived at the figure for FFE of $19,000,000.
[38]
Whether error in the estimated cost of FFE?
It is common ground on appeal that in evaluating the expert evidence his Honour was entitled to adopt a broad brush approach to resolve the differences between the experts. That approach is consistent with authority that where there has been a loss of some sort, a court is entitled to take a broad brush approach to the difficulties of estimating the loss in money: see, for example, Nikolaou v Papasavas, Phillips & Co (1989) 166 CLR 394 at 404; [1989] HCA 11 (Wilson, Dawson, Toohey and Gaudron JJ); Fink v Fink (1946) 74 CLR 127 at 143; [1946] HCA 54 (Dixon and McTiernan JJ).
However, in applying a broad brush approach his Honour erred in commencing his analysis using the experts' estimates following the first conclave, relevantly, Mr Harris' adjusted estimate of $23,330,925 and Ms Maprock's estimate, as adjusted by Mr Harris in October 2014 of about $15,300,000.
Contrary to Macquarie's submission, it is no answer to this error that the mid-point between the experts in their first conclave report and final conclave report was in each case approximately $19 million. By starting with the $8 million difference between the experts following the first conclave report and attempting to arrive at a "broad brush" figure to account for the differences between the experts, his Honour overlooked the significance of the various concessions and adjustments that the experts made in the final conclave report which had the consequence that the difference between the experts had reduced significantly to about $5 million.
Accepting that his Honour should have used as his starting point the experts' estimates of FFE in the final conclave report, it does not follow as SLHD submitted that his Honour should have accepted Mr Harris' estimate in the final conclave report of $21,818,970. To have done so would have ignored his Honour's finding, which is not challenged, that Mr Harris' estimate was likely to be "too high".
So much was acknowledged by SLHD in its ultimate submission on this ground that "[t]he correct approach was for the primary judge to commence his analysis by utilising Mr Harris' (already discounted) estimate from the Final Conclave of $21,818,970" (Emphasis added.) The corollary of this submission is that his Honour should have made any adjustments to Ms Maprock's estimate in the final conclave report of $16,849,069, and not to Ms Maprock's "undiscounted" figure of $15,300,000.
Two further observations should be made about his Honour's approach.
First, there was no basis to make an adjustment of $700,000, as his Honour did, for the perceived difference between the experts in the cost of the kitchen. In this regard his Honour seems to have conflated Mr Harris' initial estimate for the kitchen of $1,360,115 in the first conclave report with Ms Maprock's estimate of $605,900 in the final conclave report and overlooked that both experts ultimately agreed an estimate for cost of the kitchen of $605,900 in the final conclave report.
Secondly, in selecting the figure of $19 million for FFE his Honour ignored the other items of FFE in respect of which there remained a difference between the experts in the final conclave report. The difference in dollar terms for the remaining items, other than theatres/operating rooms, is $298,046 (total difference of $4,969,901 - difference in theatres/operating rooms of $4,671,855). This difference was material yet no reasons were given by his Honour for not making any adjustment for these remaining differences. The failure to do so was arbitrary.
We conclude that his Honour's finding that the correct assumption as to FFE costs for the initial construction period of the Hypothetical Hospital was $19,000,000 (in 2003 dollars) cannot stand. The total difference between the experts of about $5 million should be adjusted to allow for his Honour's evaluation of Mr Harris' estimate as likely to be too high and Ms Maprock's estimate as likely to be too low.
If it was necessary to calculate Macquarie's damages, we would accept SLHD's alternative submission that the finding which should be made is that a reasonable estimate of FFE is $20,162,336 (in 2003 dollars). This figure is derived in the manner referred to at [336] above.
Another assumption in calculating the net revenue for the Hypothetical Hospital was the escalation factor for what was referred to as FFE replacement lifecycle periods. This was a reference to an estimate of lifecycle cost of updating and replacement of FFE over the first 20 years, assuming the Hypothetical Hospital opened in June 2004. Due to Ms Maprock's unavailability, Macquarie called Mr Staker to give evidence on this topic. SLHD primarily relied upon Mr Harris, and also Messrs Palassis and Gower.
The primary judge found that there was no dispute that the lifecycle periods of FFE proposed by Mr Staker should be adopted. However, Mr Staker's figure for FFE had to be increased applying a broad brush approach by a factor of 1.2257 to account for his Honour's finding that the Hypothetical Hospital would have had two catheterisation laboratories initially and incurred FFE of $19,000,000, whereas Mr Staker had calculated figures on the basis of one cardiac catheterisation laboratory with additional expenditure in the fifth year resulting in a total FFE expenditure of only $15,501,750: at PJ [537]-[538].
The primary judge then turned to the difference of opinion between Mr Staker that there should be a nil inflation figure applied for growth in the costs of FFE because prices of equipment had, in dollar terms, dropped over time and Messrs Harris, Palassis and Gower that a 2.5% simple interest assumption should apply: at PJ [539].
His Honour noted that there was some measure of agreement reached between Messrs Staker and Harris, namely that "[h]ospitals tend to replace old equipment with higher functioning equipment, rather than equipment with the same functionality as the old equipment" and that "[r]eplacing the equipment with equipment with the same level of functionality would cost the same amount (with no escalation)": at PJ [540].
His Honour then reasoned to his conclusion of a 1% escalation cost at PJ [541]-[542]:
"541 Mr Staker adhered to his view of 0% escalation, notwithstanding the agreement referred to in the previous paragraph, because, in his view, the decision to implement a newer piece of technology was a project decision made by the hospital rather than a replacement decision. The Court does not accept that distinction for the purposes of the present exercise. However, Mr Staker did provide convincing data that some sorts of equipment were cheaper in dollar terms today than they had been several years ago. That result is unsurprising and accords with common experience in relation to, for example, consumer electronics. Nevertheless, I am not satisfied that Mr Staker's approach or reasoning can be applied to all FFE replacement, as the agreement between Messrs Staker and Harris recorded in paragraph [540] above makes clear.
542 In my view, the figure propounded on behalf [of] the Health District of 2.5% does not take account of the reality that some equipment becomes less expensive in dollar terms over time. Equally, Mr Staker's figure does not take account of the fact that a hospital will purchase higher functioning equipment which is likely to be more expensive in dollar terms than the equipment which it is replacing. In order to take account of those matters, the Court finds that an escalation of 1% simple interest should be applied for the first 20 years. There was no dispute between the experts that thereafter a value of 2.5% for inflation should be applied." (Emphasis added.)
Appeal ground 14 was in the following terms:
"14 The primary judge erred, in relation to the FFE life cycle replacement costs, in
(a) finding a factor of 1.2257 should be applied to the total FFE found by the respondent's lifecycle replacement expert, Tim Staker, to adjust for his Honour's finding that the FFE for the initial construction of the hypothetical private hospital would be $19,000,000 and his Honour ought to have applied an increased factor to reflect the difference between $15,501,750 and the appropriate initial FFE figure (PJ [537]-[538]);
(b) finding an inflation figure to apply for growth in the costs of FFE life cycle replacement of one per cent simple interest should be applied for the first 20 years and failed to give adequate reasons for that conclusion (PJ[540]-[542]); and
(c) failing to find an inflation figure to apply for growth in the costs of FFE life cycle replacement of 2.5 per cent or a figure of approximately that amount (PJ[540]-[542])".
[40]
Submissions
The SLHD submitted that his Honour erred for three reasons:
(i) his Honour ought to have applied an increased factor greater than 1.2257 to reflect the difference between $15,501,750 and the appropriate assumption for the initial FFE figure (assuming success on appeal grounds 12 and 13);
(ii) his Honour erred in finding that an inflation figure of 1% should be applied for the first 20 years for growth in the costs of FFE lifecycle replacement, and failed to give adequate reasons for that finding;
(iii) his Honour should have found an inflation figure of 2.5% or a figure of approximately that amount, to apply for growth in the costs of FFE lifecycle replacement.
SLHD contended that this Court should find, in the event of success on appeal grounds 12 and 13, that the factor to be applied for FFE lifecycle replacement needs to be increased to reflect the difference between $15,501,750 (being the figure proposed by Mr Staker) and the appropriate initial FFE figure propounded by SLHD (being either $21,818,970 or $20,162,336). Further and in any event, SLHD contended that this Court should find that the escalation rate to be adopted should be either 2.5% or a figure of approximately that amount.
Macquarie accepted that if this Court concludes that an increase in the total FFE figure for initial construction of $19 million is warranted, then, applying the reasoning of the primary judge there would need to be a corresponding increase in the FFE lifecycle replacement factor, currently 1.2257. Subject to that acknowledgement, Macquarie sought to uphold his Honour's reasoning on the FFE lifecycle issue.
Macquarie emphasised that his Honour did not accept the opinion of either expert in relation to the escalation factor to be applied for the first 20 years and submitted that no criticism can be made in his Honour adopting an escalation figure of 1%.
[41]
Whether error in FFE lifecycle replacement cost estimates?
Given our contingent conclusion on appeal grounds 12-13 that the total FFE figure for initial construction should be $20,162,336, and applying the same reasoning as the primary judge, there needs to be a corresponding increase in the FFE lifecycle replacement factor, currently 1.2257 (19,000,000/15,501,750), to allow for the increase in the FFE figure assumed by Mr Staker from $15,501,750 to $20,162,336. If this factor subsequently becomes relevant, it would be derived as follows: 20,162,336/15,501,750 = 1.30065. If it were ever necessary to address this contingent issue, the parties would be given liberty to apply in the event that they propose a different figure.
[42]
Whether error in FFE lifecycle replacement escalation figure?
The remaining issue is whether his Honour erred in adopting an escalation figure of 1%, rather than 2.5% as submitted by SLHD, for the growth in the costs of FFE life cycle replacement for the first 20 years.
Central to the resolution of this issue is the challenge by SLHD to the lack or adequacy of his Honour's reasons at PJ [542] (set out at [362] above). SLHD submitted that by adopting an escalation figure closer to that which had been propounded by Mr Staker, the primary judge implicitly preferred his evidence, though without stating the reasons why. We reject the complaint of absence of reasons. Plainly, in adopting the figure of 1% his Honour took a broad perspective that both experts were not completely correct in their views concerning the appropriate inflation figure to apply for the growth in the costs of FFE life cycle replacement for the first 20 years.
Nevertheless, in adopting the figure of 1%, which was closer to that which had been propounded by Mr Staker (0%) than by Mr Harris (2.5%), it is implicit that his Honour gave greater weight to his finding that "some equipment becomes less expensive in dollar terms over time", than that to his finding that "Mr Staker's figure does not take account of the fact that a hospital will purchase higher functioning equipment which is likely to be more expensive in dollar terms than the equipment which it is replacing": at PJ [542].
SLHD challenges this reasoning by attacking his Honour's underlying finding at PJ [541] that Mr Staker provided "convincing data" that some sorts of equipment were cheaper in dollar terms today than they had been several years ago. Mr Staker had been the FFE Lead Consultant for the "New Bega Hospital", which seems to be a reference to the Bega Valley Private Hospital. The "convincing data" comprised a schedule which was not part of Mr Staker's report and which was tendered by Macquarie during the experts' oral evidence in June 2015. The schedule compared the estimated cost in 2014 of 36 items for the new Bega Hospital compared with the 2004 estimates by Mr Harris for the Hypothetical Hospital, and showed that overall the dollar cost in 2014 was 10% less than the costs in 2004. The 36 items included some high-end equipment such as microscopes and sterilisers, as well as other items such as bassinets and vacuum cleaners. Mr Staker said that the 36 items "had the same description or that close that you couldn't argue that they weren't the same things". It was common ground that Mr Harris had been involved in giving some procurement advice to the new Bega Hospital in 2014.
SLHD submitted that this schedule had little, if any, probative value, characterising it as no more than anecdotal recollections by Mr Staker in relation to a modest number of pieces of equipment. It is not in dispute that there were thousands of items of FFE. In his oral evidence Mr Staker said that the unit prices for specific items in the schedule "varied in swings and roundabouts but overall there was a trend" downwards. Mr Harris responded that a lot of the pricing in Mr Staker's schedule was not Mr Harris' pricing, that the pricing was submitted by the hospital and "[t]hey dictated by how much they wanted to budget for pieces of equipment", noting that "where the numbers are lower than what [they] budgeted here, definitely it would have been them reducing the costs. Mr Harris gave as an example, the estimate for the cost of bassinets where he had estimated for the Hypothetical Hospital "$2000 for a fairly upmarket bassinet and $518 was all they wanted to spend on a plastic trolley thing". Whilst a single example, Mr Harris went on to say that "the costing off here came from the hospital itself. It didn't come from us, the majority of the costing." This aspect of Mr Harris' evidence was not challenged.
Macquarie sought to support his Honour's "convincing data" finding by pointing to other evidence given by Mr Staker that the "totality of, the budget [for Bega] was that those estimates were more than what was required, in totality for what has been purchased for that hospital as of today and yet … those unit rates are less than what was estimated for PAPH in 2004". The difficulty with this submission is that little weight can be given to this part of Mr Staker's evidence in the absence of corroborating evidence that the other FFE items for the new Bega Hospital were comparable to the FFE items the subject of Mr Harris' estimates for the PAPH.
Whilst it was open to his Honour to adopt an escalation figure between the two figures advanced by the experts, we consider that his Honour erred in his evaluation of the expert evidence on this issue. Taken together, the so-called "convincing data" in the schedule prepared by Mr Staker and his generalised evidence concerning the lower FFE costs estimates for the new Bega Hospital in 2014 was of limited weight, given the modest number of items the schedule covered and Mr Harris' evidence referred to above that the lower 2014 costing estimates for the new Bega Hospital reflected the budgeted amounts for FFE, not his advice as to a reasonable estimate.
In evaluating the experts' evidence and balancing the measure of agreement reached between Messrs Staker and Harris (see [361] above), we conclude that the escalation factor should be closer to 2.5% than 0%. If it was necessary to calculate Macquarie's damages, the finding that should be made is that the escalation figure for the growth in the costs of FFE life cycle replacement for the first 20 years, is 2% simple interest.
[43]
Conclusion on appeal grounds 4 and 11-14
Although only relevant on the contingent basis that we are wrong about grounds 1-3, grounds 4 and 11-14 must be allowed. The damages calculation conducted by the primary judge was fatally flawed, in failing properly to take into account and treating as "irrelevant" many of the risks to Macquarie in achieving the lost commercial opportunity being valued.
Success for SLHD on appeal grounds 4 and 11-14 is potentially highly significant. Mr Gower, who approached the question of the risks to Macquarie in enjoying the lost commercial opportunity much more realistically than Mr Coleman, calculated a loss to Macquarie on the Hypothetical Hospital project. The application of that approach gave the following results:
"46. Based on these assumptions, I have assessed that the PAPH project had a negative NPV at the following dates:
(a) 17 March 2000 negative $41.983 million;
(b) 1 July 2000 negative $43.210 million;
(c) 1 July 2001 negative $48.191 million; and
(d) 1 July 2002 negative $53.734 million."
This is consistent with the finding of the primary judge that "it was very difficult to see how in 'the real world' anyone would actually have sub-let or taken an assignment of the Hospital Lease, either for the term of the trespass or for the entire 103 year term." We agree with that conclusion.
Appeal grounds 4 and 11-14 should be upheld.
We turn now from the assessment of mesne profits in relation to the Hospital Site to the assessment made in respect of the Car Park Site.
[44]
Appeal grounds 5 and 6 - the Car Park Use Issue
As noted at [32] above, the primary judge assessed mesne profits in relation to the Car Park Site by reference to the integers identified at PJ [19]. To recap, those integers were:
1. Period of damage: 17 March 2000 up to 9am on 2 November 2015;
2. Number of car spaces: 1026;
3. Users: staff only;
4. Rate: staff rate of $3.00 per day as at 17 March 2000 adjusted annually for CPI with effect on and from 1 July each year;
5. Daily turnover per space to reflect "100%" occupancy: 1.45 times per day;
6. Deductions in favour of SLHD: all proven expenses incurred by SLHD in each year in relation to the maintenance and operation of the car park and the annual rental that would have been payable by Macquarie to SLHD;
7. Interest: at Court rates on the annual net amount, assuming that amount is positive.
Appeal grounds 5 and 6 were in the following terms:
"5 The primary judge erred in holding that, in relation to Lot 11 in Deposited Plan 809663 (Car Park Site), the application of the user principle required his Honour to calculate such award on the basis that, during the period of the trespass by the appellant, all 1,026 car spaces on the Car Park Site would always be occupied (that is to say, occupied 24 hours per day, every day of the week), and in so doing his Honour:
(a) misapplied the user principle;
(b) ignored the limits on the market for the use of the Car Park Site on the weekend;
(c) ignored the use actually made of the Car Park Site;
(d) ignored the use likely to have been made by the respondent had it been in possession of the Car Park Site during the period of the trespass;
(e) reasoned in a manner inconsistent with the fundamental principle of damages for tort, being compensation for loss caused; and/or
(f) ignored the benefit gained by the appellant.
6 His Honour ought to have held that:
(a) measuring the respondent's loss did not require the exclusion of the actual rate of occupancy of the car spaces on weekends during the period of the trespass; and
(b) the respondent's loss should be assessed on the basis of a market for the occupancy of the car spaces on weekends of 22.5 per cent, which was agreed by the parties and which constituted a proper reflection of the market for car space rental on the weekend ([PJ] at [19], [114]-[115], [151]-[181], [185], [283], [342]; [Tax Judgment] at [168])."
[45]
The Car Park Site
As we have explained, the Car Park Site and the Hospital Site are two separate lots in the one deposited plan. Macquarie (with MHC as guarantor) and SLHD entered into the Transaction Documents on 2 December 1996 (see [4] of above). One of the documents, the Construction Deed, required Macquarie to commence, carry out and complete specified works in accordance with an agreed timetable. The works were:
(i) excavate the Car Park Site and the Hospital Site;
(ii) construct the Car Park and the Private Hospital; and
(iii) fit out the Private Hospital.
The relevant parts of the interlocking suite of agreements relating to the Car Park Site are set out at [67] above. The primary judge found that SLHD had no power to determine what Macquarie charged anyone to park in the Car Park. There was no operative contractual specification as to who could park in the Car Park and, in particular, stipulating any particular mix between staff of RPAH (or any future Private Hospital) and visitors.
Macquarie completed the major part of construction of stage one of the Car Park Site by about May 1999. A certificate of practical completion was issued on 15 June 1999. The completed stage one of the Car Park Site contained, and was marked out for, 1,026 car spaces. In subsequent correspondence the Car Park Site was referred to as the "new Private Hospital car park" or the "new Church St Car Park". The contractual reservation of 600 spaces for SLHD in cl 2.4 of the Co-Ownership Deed did not have effect during the term of the Car Park Sub-Lease.
The Car Park Development Approval, as amended, identified a stage two of the Car Park Site which was not to be completed until the construction of the second stage of the Private Hospital, the medical centre and the consulting rooms had commenced. As we have explained, construction of the Private Hospital, the medical centre and the consulting rooms never commenced.
In late August 1999, the Car Park Site was opened. Macquarie did not initially charge RPAH staff for admission. On 7 October 1999, the NSW Nurses Association and other unions associated with RPAH issued a "Joint Union Statement" informing their members that, at the time, Macquarie did not have approval to operate the Car Park Site as a Car Park. The notice included statements that "[a]s representatives of the joint unions, we advise you not to park in the Private Hospital Car Park at this time. Macquarie Health Corporation advises that if your [sic] are considering utilising the Private Hospital Car Park, you do so at your own risk". Despite this advice some RPAH staff did patronise the Car Park, which Macquarie continued to operate notwithstanding its lack of certification.
Macquarie continued to operate the Car Park Site without charging RPAH staff until the end of 1999. From 4 January 2000 until 17 March 2000 (the date SLHD took possession of the Car Park Site), Macquarie operated a voucher system with a daily charge of $3.00 per visit, or the option of purchasing 10 entry tickets for $25 or 20 entry tickets for $40. A caravan was set up near the entrance to the Car Park with an attendant to sell and collect tickets.
On 28 March 2000, Windeyer J dismissed Macquarie's application for possession of the Car Park Site and other interlocutory relief (see [10] above). In doing so, his Honour noted an undertaking from SLHD to:
(i) not sell or lease the Car Park Site or the Hospital Site;
(ii) expeditiously proceed to completion of the Car Park Site with a view to obtaining council permission for its operation; and
(iii) record in a separate account gross revenue from the operation of the Car Park Site and expenses of the process to obtain council approval for operation of the Car Park Site and of maintenance and operation of the Car Park Site.
On 23 June 2000, South Sydney Council, on SLHD's application, issued an interim occupation certificate for the Car Park Site. The building details described in the certificate were:
"Part of building being 600 spaces as indicated on plans submitted to Council on 21 June 2000. Level 5, and 14 spaces on level 3 not to be used. Only 42 spaces on level 1 to be used."
On 23 June 2000, SLHD began operating the Car Park Site immediately after it obtained the interim occupation certificate. RPAH staff members were charged $12.38 per week. A week was identified as five days. Contemporaneous documents refer to the rate RPAH staff were charged as $12.38 per week or $2.47 per day.
RPAH's parking policy document as at September 2002 provided that SLHD was charging $643.76 per annum to park in the Car Park Site for staff (i.e. maintaining the weekly rate of $12.38). This rate was maintained up to and including 5 November 2006. From 6 November 2006 until the morning of 2 November 2015, SLHD charged staff $12.88 per week ($2.58 per day). From that time it also introduced a rate of $6.87 per week for part-time parking and $8.32 per week for after-hours parking.
Notwithstanding the terms of the interim occupation certificate, 1,026 car spaces in the Car Park Site were made available by SLHD from 23 June 2000 until the morning of 2 November 2015 for staff and Visiting Medical Officers (VMOs) of RPAH only (or, in certain circumstances, staff members of Concord Hospital with whom there was a reciprocal parking arrangement). Staff and VMOs were granted general access to the Car Park Site without having specific car spaces allocated to them. For the majority of RPAH staff members, payment for parking was made on a fortnightly basis, through payroll deductions. A few doctors paid annually in advance for parking in the Car Park Site. SLHD never allowed visitors or other public parking at the Car Park Site and never took any steps to make such operation lawful.
[46]
Award of mesne profit for the 1,026 Car Park spaces made by the primary judge
Macquarie's eventual claim for the Car Park Site, having abandoned its loss of profits case, was that mesne profits should be calculated by:
(i) applying the market or "going rate" for 600 staff spaces at 100% occupancy (which Macquarie submitted the experts agreed meant an assumed turnover of 1.45 visits per space per day to account for parking at night and on a part-time basis);
(ii) applying the visitor market rate agreed by the experts (being $14.06 as the average going rate per visit) to the remaining 426 visitor car spaces at 100% occupancy, which it submitted was a turnover of 3.77 visits per day; and
(iii) deducting in favour of SLHD all expenses incurred in operating the Car Park Site and the contracted rent.
It was eventually agreed between the experts for Macquarie and SLHD in putting forward their respective calculations that the demand for RPAH staff usage of the Car Park Site on weekends was much lower and that staff occupation of only 22.5% occupancy was the appropriate figure to use in calculating market rent. This reflected the market, being much lower staff numbers attending the hospital on the weekend. On appeal, Macquarie submitted that the experts agreed only "for the purposes of estimating demand for spaces in the car park and not for the purposes of estimating occupancy in the car park weekends": T319:36-39. As we will explain, Macquarie's expert, Mr Milou, constructed numerous scenarios where he estimated the market for staff occupancy in the Car Park Site on weekends. In Mr Milou's valuation reports, the much lower RPAH staff demand on weekends led to staff occupation of the Car Park of only 22.5%. Ultimately, SLHD's expert, Mr O'Sullivan, agreed with this approach.
The primary judge rejected Macquarie's approach and the alternative calculation offered by SLHD. His Honour concluded that the experts should be tasked with calculating damages on the basis of the inputs he himself identified. In particular, his Honour rejected a principal assumption of Macquarie's model that users of the Car Park Site could have included non-RPAH staff members. Neither party challenged that conclusion on the appeal. The primary judge said:
"19 In relation to the Car Park Site, the Court has concluded that Macquarie is entitled to mesne profits calculated by reference to the 'user principle' (see paragraphs 111 to 118 below) on the basis of the following integers:
(1) Period of damage: 17 March 2000 up to 9 am on 2 November 2015
(2) Number of car spaces: 1,026
(3) Users: Staff only
(4) Rate: Staff rate of $3.00 per day as at 17 March 2000 adjusted annually for CPI with effect on and from 1 July in each year.
(5) Daily turnover per space to reflect '100%' occupancy: 1.45 times per day.
(6) Deductions in favour of the Health District: All proven expenses incurred by the Health District in each year in relation to the maintenance and operation of the car park and the annual rental that would have been payable by Macquarie to the Health District.
(7) Interest: At Court rates on the annual net amount, assuming that amount is positive."
In so concluding, the primary judge found in relation to the Car Park Site that mesne profits were to be calculated "without reference to the numerous hypothetical counterfactuals raised by the Health District". His Honour concluded that SLHD "had the benefit" of all 1,026 car spaces for the entire period of the trespass. The primary judge said:
"185 … Applying cases such as Bunnings and Inverugie, I am therefore satisfied that the calculation is to be made by reference to 100% occupancy of the 1,026 car spaces that were available in the car park during the period of the trespass. I also agree that there must be a deduction in favour of the Health District in relation to expenses incurred and the rent Macquarie was contracted to pay."
Whilst it was controversial at the trial, the primary judge concluded that the "staff rate" of $3.00 should be fixed as the daily rate for parking, multiplied by a factor of 1.45 to reflect turnover, and adjusted for CPI. This was because the rate of $3.00 per day was the rate that Macquarie actually charged when in occupation. His Honour said:
"211 Macquarie continued to operate the car park without charging RPAH staff until the end of 1999. From 4 January 2000 up to 17 March 2000 (the date the Health District took possession of the Car Park Site), Macquarie operated a voucher system with a daily charge of $3.00 per visit, or the option of purchasing 10 entry tickets for $25 or 20 entry tickets for $40. A caravan was set up near the entrance to the car park with an attendant to sell and collect tickets.
212 An RPAH memorandum of 17 March 2000 entitled 'Car Park Management Proposed System of Operation' written by RPAH's Area Transport Manager, Mr Bob Mavin (who gave evidence on the enquiry), and the Area Security manager, Mr Stephen Page recorded:
'Car Parking Charges
The MHC daily charge is $3.00 per car with reductions for pre-paid vouchers. Whereas the Hospital Rate is $3.00 per week, a variance of around $12.00 per car per week.
There are three options:
I. Maintain the current Hospital charge and carry the $12.00 per car per week deficit. This option would allow for an average 960 car entries per day before approaching the $750k (gross) income barrier. Current car park usage is estimated at 200 car entries per day. Transport forecasts are a maximum of 450 entries when the Harold Park arrangement closes.
II. Take the opportunity to review car parking charges e.g. Canterbury rate is $11 per week, while Concord is $2.50.
III. Maintain MHC charges. This case would not be difficult to argue given the circumstances.
Whatever the case, pre-sold vouchers should be honoured.'
…
272 … Putting it simply, on 17 March 2000 Macquarie was offering every available space in the car park to staff at the rate of $3.00 per day. The staff could have filled all the spaces on that day for that rate. There is no suggestion that was a 'loss leader' or 'honeymoon' rate. In my view, it is the best evidence of the market rate for staff parking in the Car Park as at 17 March 2000. For the purposes of Macquarie's mesne profits claim that amount should be increased annually by reference to the CPI."
The primary judge concluded that this rate should be applied to "hire out individual car spaces" (1,026 in number), not the right to operate the Car Park. In relation to this issue the primary judge said:
"Issue 4 - Should damages be awarded by reference to the 'entire' Car Park or the 1,026 spaces?
225 Macquarie submitted that damages should be calculated by reference to it being deprived of the ability to make available the 1,026 spaces. The Health District, focussing on what it submitted was the contractual right said to have been interfered with, contended that what should be valued was the deprivation of the right to operate the car park. I understood this to be equivalent to treating the car park as an entire business, something distinct from but including the 1,026 spaces.
226 In Bunnings the Court proceeded by reference to the hiring charge for individual pallets. In Inverugie damages were calculated by reference to the rates obtained by tour operators for each of the hotel rooms. There is some force in the Hospital District's submission as a matter of theory. However, looking at the matter practically, it is the deprivation of the ability to hire out individual car spaces that was the essential feature of the trespass for which compensation must be provided. In my view the better analogy is between the individual parking spaces and the hotel rooms in Inverugie, nevertheless recognising that the analogy is not exact because it could never have been suggested that Mr Hackett was operating his 30 apartments with 30 different leases as a singular business (i.e. he was not running a hotel within a hotel). It was the loss of the capacity to hire out the individual rooms for which he was compensated.
227 Putting it slightly differently, the Court accepts Macquarie's submission that in relation to the car park, Macquarie was not in the business of hiring out the car park business as such. It was in the business of making individual spaces available to individual users. Damages should be awarded by reference to the individual spaces."
The only matter which was the subject of appeal in relation to the Car Park Site damages calculations was the finding of the primary judge that daily turnover per space should reflect 100% occupancy, 1.45 times per day, 7 days per week. SLHD did not challenge that part of the finding that it should pay damages for mesne profits on the basis that $3.00 per day [x1.45] for 1,026 Car Park spots on weekdays.
SLHD's challenge was to the primary judge's conclusion that it should pay mesne profits at the $3.00 daily rate [x1.45] for weekend occupation by staff of all 1,026 car par spaces, in circumstances where it was Macquarie's case (and the experts agreed) that the available market for RPAH staff usage of the Car Park Site during the weekend was much smaller. The primary judge's reasoning in relation to his calculations was summarised in the Principal Judgment as follows:
"342 In their joint report of 27 June 2014 Messrs Milou and O'Sullivan agreed that 'given the available evidence, 1.45 x is a reasonable estimate of daily staff turnover'. The Court accepts that figure. One-hundred per cent occupancy of the Car Park for the purposes of the user principle must take into account that it could and would never be full at night because fewer staff were on duty. A multiplier of 1.45 reflects that phenomenon. No allowance needs to be made for weekend rates or lower occupation at weekends because damages for the Health District's use are calculated by the weekly staff rate applied for the period of the trespass. This rate applies whether the staff member's five days include any part of a weekend." (Emphasis added.)
That is, his Honour's reasoning accepted "lower occupation" of the Car Park Site on the weekend by RPAH staff. His Honour's dispositive reason, at least initially, for rejecting SLHD's submission accepted "lower occupation" of the Car Park Site on the weekend by RPAH staff but rested on the conclusion that damages for SLHD's use were calculated by the reference to the "weekly staff rate" applied for the period of the trespass. It is clear that his Honour was referring to the "weekly" rate offered by SLHD to RPAH staff. Macquarie did not offer a weekly rate to SLHD staff during its period of occupation. Macquarie did offer the option of purchasing 10 entry tickets for $25 or 20 entry tickets for $40. If this were what his Honour was referring to it would yield a figure of $2.50 or $2.00 per visit, less than the $3.00 figure fixed by his Honour as the market rent for the calculation of mesne profits.
The weekly staff rate offered by SLHD was, it will be recalled, $12.38 per week or $2.47 per day (rising to $12.88 per week - $2.58 per day) calculated on the basis of a five day week. His Honour's identification of an appropriate daily rate to pay for all 7 days of the week, whilst purportedly resting on the "weekly" charge levied by SLHD, awarded damages far in excess of any calculation based on the "weekly staff rate" actually levied by SLHD.
SLHD complained that his Honour's calculation thereby involved a significant overcompensation for Macquarie. It had been an agreed component of the methodology used by both Car Park experts that the demand for weekend occupancy of the Car Park Site by RPAH staff was only 22.5%. The matter was the subject of further argument. In his subsequent Tax Judgment of 18 September 2017, the primary judge rejected SLHD's application to re-consider the weekend component of the damages calculation for the Car Park and gave the following reasons:
"168 By reference to the paragraphs of the Principal Judgment which I have set out above, I reject the Health District's application to revisit this aspect of the car park damages calculation. The application ignores what the Principal Judgment concluded was the proper operation of the user principle in this case. For the reasons set out in the Principal Judgment, in my opinion it is not open to the Health District to rely upon the lower occupation, in fact, of the car park by staff on weekends. To make that allowance would be to ignore that the Health District's trespass for which the Court has found Macquarie is entitled to be compensated related to all of the 1,026 car spaces for all day every day of the trespass, irrespective of whether it was a week day or a weekend."
[47]
Submissions on appeal
SLHD submitted that the primary judge assessed mesne profits by disregarding critical evidence about the market for the Car Park Site during the period of the trespass, which his Honour concluded was limited to staff at RPAH.
SLHD submitted that the primary judge's finding that it was not open to SLHD to "rely upon the lower occupation, in fact, of the car park by staff on weekends" was an error.
SLHD submitted that the experts had agreed on a weekend occupancy rate of the Car Park Site of 22.5%. That rate should have been found by the primary judge to constitute a proper reflection of the relevant market for car space rental on weekends. By assessing market rental on the basis of 100% occupancy on weekends, the primary judge adopted an approach contrary to authority (Bunnings and Inverugie) and either overcompensated Macquarie (applying compensatory principles) or found that the benefit obtained by SLHD by reason of its trespass was greater than it was by reference to the market for car space rental (on restitutionary principles).
Macquarie submitted in writing that the experts had agreed that the turnover rate of 1.45x applied to a "weekly rate", which might include weekends. It was thus irrelevant that there was lower occupation of the Car Park spaces in fact on weekends. It was submitted that until the Principal Judgment had been delivered by the primary judge, the appellant had not submitted that less than 100% occupancy should be assumed for weekends.
Macquarie also submitted in writing that the 1.45x per day agreed by the experts applied to both the weekends and weekdays. It was submitted that for the purposes of assessing mesne profits, to reduce the Car Park occupancy rate to below 100% was inappropriate as the 1.45x per day calculation had already taken that matter, lower weekend occupancy, into account.
Macquarie submitted that the experts had not agreed that only 22.5% of RPAH staff worked on weekends. It was submitted that Macquarie's expert, Mr Milou, had merely agreed that 77.5% of RPAH staff were present on weekdays. Macquarie submitted that the number or proportion of staff working on the weekend was used to determine Total Staff Peak Demand, which was a different concept to occupancy of the Car Park Site. The lower numbers of staff working on the weekend was merely evidence of lower demand, not necessarily evidence of lower Car Park occupancy.
Macquarie submitted that, as 100% of the 1,026 Car Park spaces were offered each weekend by the Health Authority, it followed that the primary judge was correct to assess mesne profits on the basis of 100% occupancy, 7 days per week, regardless of whether in fact that occupancy was ever achieved. It was submitted that the primary decision in Bunnings, where McDougall J had applied the market rate for pallet hire and a 90% usage rate, which reflected the evidence that, as a matter of choice or business model, there was a lesser usage rate in fact, supported this conclusion because no such business model applied to the present case.
In oral address, Macquarie developed a more detailed analysis of the expert evidence which it was submitted could support a finding that there was demand such that there may have been almost 100% occupancy of the Car Park Site on weekends. This was not an analysis the primary judge engaged in.
The starting point of Macquarie's analysis was that the experts' calculation of demand for the Car Park Site forming part of their calculation of the market rent was based on a construct of the number of staff who worked at the hospital on an equivalent full-time basis (FTE staff). The total number of FTE staff at RPAH was calculated to be 4,971: Exh 59P 73 2.2.9. Messrs Milou and O'Sullivan used five integers to calculate the total peak demand for staff parking on a weekday and on weekends. The experts agreed about all but one of those integers. The experts agreed that the proportion of FTE staff at RPAH who were present at work on the weekdays was 77.5%: Exh 59P 17 1.1.2. The experts eventually agreed that the proportion of FTE staff at RPAH who were present at work on the weekends was 22.5%: Exh 59P 74.
The experts then used an algorithm to calculate total daily demand for staff parking. Macquarie concentrated on Mr O'Sullivan's calculation. Mr O'Sullivan commenced with the number of FTE staff, 4,971, multiplied by the percentage of staff present on weekdays, 77.5%, and the percentage of staff driving, 70%, divided by the average staff per car, 1.15: Exh 59P 17. This calculation derived the total number of staff wishing to park on a weekday, being 2,345. Using the turnover factor of 1.45, a figure of 1,617 car spaces (above the maximum capacity) was derived for total daily demand for staff parking on weekdays. To this figure Mr O'Sullivan added 170 car spaces for shift changeover allowance. This brought the total staff peak spaces to 1,787: Exh 59P 17.
Macquarie submitted that Mr O'Sullivan's calculations demonstrated that the total number of spaces needed to be provided in order to meet peak daily demand on weekdays of 1,787 was far above the levels of capacity of the Car Park's 1,026 spaces. Macquarie submitted that the expert analysis by Mr O'Sullivan "does not say, we say, anything about the level of occupancy of the car park on the weekend": T327:27-28. Macquarie submitted that taking the FTE figure of 4,971 multiplied by 22.5%, multiplied by 70% proportion of staff driving, dividing by 1.15 average, leads to 681 spaces being required on weekends which was approximately 63% occupancy of the Car Park Site: T330:3-7.
[48]
Consideration of Car Park Use Issue
As has earlier been explained, the user principle is concerned with a trespasser's actual use of, in this case, land. This is done by calculating a market rent for that use. As we have said at [107] above, in Inverugie Lord Lloyd explained the "user principle" as entitling a plaintiff "to recover a reasonable rent for the wrongful use of his [or her] property by the trespasser." His Lordship went on to say that "[s]imilarly, the trespasser may not have derived any actual benefit from the use of the property. But under the user principle he [or she] is obliged to pay a reasonable rent for the use which he [or she] has enjoyed."
The "user principle" invites attention to the use in fact enjoyed by the defendant of the plaintiff's land because it is that use for which compensation is due. The critical cases in addressing the claim for mesne profits in respect of the Car Park Site are Inverugie and Bunnings, which we have addressed above [115]-[123] and to which we will return.
The primary judge, in various places, stated the correct principle, namely that Macquarie was entitled to the market value of the right to possession of the Car Park spaces it was deprived of. In calculating that market rent, however, the primary judge made an error in calculating $3.00 per day [x1.45], 7 days per week, as representing the market value of Macquarie's right to possession of the Car Park Site. The primary judge's dispositive reasoning in the Principal Judgment on this issue was limited:
"342 … No allowance needs to be made for weekend rates or lower occupation at weekends because damages for the Health District's use are calculated by the weekly staff rate applied for the period of the trespass. This rate applies whether the staff member's five days include any part of a weekend."
As we have earlier pointed out, the finding that "damages for the Health District's use are calculated by the weekly staff rate" is inconsistent with the statement made by the primary judge that $3.00 per day was selected as being the correct amount because it was the amount Macquarie had charged per day for parking when it was in control of the Car Park: see [402] above. Macquarie did not offer a weekly rate for parking.
The only "weekly staff rate" which the primary judge could have been referring to was charged by SLHD of $12.38 per week. Whilst it is true that this rate applied regardless of whether the staff member parked on the weekend, the amount of $2.47 per day was calculated on the basis of a 5 day week, not a 7 day week. That is, the reason the primary judge gave for rejecting the need to make allowance for weekend rates, or lower occupation at weekends, was the use of a "weekly staff rate" applied by SLHD which was quite inconsistent with the basis upon which the primary judge chose $3.00 per day as being the appropriate figure to apply to the Car Park Site for all 7 days of the week.
The primary judge also erred in the Tax Judgment at [168] in failing to reconsider his decision on the basis that it was "not open to the Health District to rely upon the lower occupation, in fact, of the car park by staff on weekends." Macquarie and SLHD in the expert evidence which was being drawn to his Honour's attention were not relying on lower occupation of the Car Park Site on weekends in fact. Neither expert was using data about "actual usage" of the Car Park. Macquarie's model, which was applied with some different assumptions by SLHD's expert, was a model designed, relevantly, to calculate staff demand for the Car Park Site and thus the market rent payable for SLHD's use. One of the integers of Macquarie's model was the demand for parking by RPAH staff on weekends. This demand calculation led to an estimate by both experts of demand for the Car Park Site by staff and occupation by RPAH staff of the Car Park Site on weekends. This was for the purposes of calculating the market rent payable for SLHD's use of the Car Park Site. The estimates of demand were built on data of staff usage of the Prince of Wales Private Hospital Car Park provided in the report of Ms Lynn dated 14 April 2014 (the Lynn report or the Lynn data), which both experts agreed contained the most closely comparable and reliable data in determining a market rent for SLHD's use of the Car Park Site.
One of his Honour's key findings, which was not challenged by either side on the appeal, was that for the purposes of calculating mesne profits only staff should be treated as being permitted to park in the Car Park Site. It may be accepted that Macquarie's expert did not proceed on that assumption in constructing his model. Under most of the variations or "scenarios" created and tested by Mr Milou, Macquarie's damages were greater when fewer RPAH staff used the Car Park Site on weekends, as the remaining Car Park spots were assumed to be used by visitors and charged at a higher rate and with a higher turnover factor. Ultimately, the experts agreed that in calculating a market rent for Macquarie, demand by RPAH staff on weekends led to a joint conclusion that the market for occupation of the Car Park Site by RPAH staff on weekends was only 22.5% of its capacity.
On the basis of his Honour's unchallenged finding that only staff should be treated as having been permitted to park in the Car Park Site for the purposes of calculating mesne profits, it was an error for his Honour to treat as irrelevant that the market rent for the Car Park Site should be calculated, as the experts agreed, on the basis that it would only be demand for parking leading to 22.5% occupancy of the Car Park by staff on weekends.
The flexibility inherent in fixing an appropriate market rent to address mesne profits is illustrated by the cases referred to by the primary judge, Inverugie and Bunnings.
In Inverugie, the Privy Council found that an appropriate market rent for mesne profits should be set for all of the units the subject of the claim, regardless of whether in fact they had been occupied. Nevertheless, in fixing the relevant rate to be used in calculating a market rent, the Privy Council approved the use of the published room rates for the hotel complex in summer and winter, reduced by a rate of 65% and 35% respectively. This differential reflected in a broad brush way the likely occupancy of the rooms and the wholesale prices which could have been achieved in the hotel complex in the high and low seasons over the period of the appellant's more than 15 year trespass. This was the market rent, described as the "going rate", which had to be applied in the assessment of damages. In differentiating between summer and winter occupancy rates, the Privy Council recognised that the objectively achievable actual occupancy rate differed between seasons.
In Bunnings, Allsop P applied the (lower) Wesfarmers' rate in relation to the appellant's conversion and detinue of the respondent's pallets after 8 August 2006 and maintained the primary judge's usage of 90% of the pallets upon which his Honour calculated mesne profits, as that lower rate reflected the evidence about actual usage rates of the respondent's pallets: see [121] above.
The primary judge's rejection of the appellant's submission that the correct application of principle necessarily involved consideration of what was an objectively achievable weekend occupancy rate for the 1,026 car spaces was an error. Occupancy is driven by demand. In the present case, the experts had agreed that, objectively, the market rate for Car Park occupancy by RPAH staff based on demand for staff parking was such that only 22.5% of the Car Park spaces would be filled by staff on weekends. On the evidence before him, the primary judge should have so concluded.
[49]
Macquarie's alternative submission
As outlined at [413]-[416] above, although no notice of contention was filed, in oral submissions Macquarie developed a more detailed analysis of the expert evidence which it was submitted could support a finding that there was demand such that there would have been at least 63% occupancy of the Car Park Site on weekends.
To consider this submission, it is necessary to outline the way this issue developed. Macquarie's expert on this issue, Mr Milou, developed a model and "core scenarios", a number of which took into account the occupancy of the Car Park Site by Hospital staff which was objectively achievable in the market, including on the weekend. As we have said, Mr Milou did not rely on data from the Car Park Site, as it was common ground that expenses of the Car Park, after the Car Park rental, always exceeded revenue, so in fact it was always making a loss. Messrs Milou and O'Sullivan relied on data from the Prince of Wales Private Hospital Car Park, which the experts agreed was sufficiently comparable to model the demand for the Car Park Site and derive the market rent.
By the time of Mr Milou's final report, a number of scenarios were modelled. Although none of these scenarios reflected the approach which the primary judge ultimately adopted, they were each predicated on a fixed number of 600 Car Park spaces being made available for RPAH staff, and depending on the scenario, different assessments were made of the number of Car Parking spaces available to employees of the Hypothetical Hospital (assuming that it had been built) and to visitors to RPAH or the Private Hospital. In addressing each of the relevant scenarios, Mr Milou applied different assumptions about the numbers of Car Parking spaces available to employees of the Hypothetical Hospital and to visitors. Different amounts were assumed to be recoverable from each of these types of users of the parking spaces. Mr O'Sullivan did not accept many of the assumptions made by Mr Milou, nor the outputs of his model.
What Messrs Milou and O'Sullivan agreed about, however, was that in fixing a market rent the demand for Car Park spaces and consequent occupancy of Car Park on weekends by RPAH staff would be dramatically lower than during the week. In his final report Mr Milou stated in relation to RPAH staff that "[f]or weekends and public holidays I have adopted an occupancy rate of 20% which … is in line with demand estimates for weekends and public holidays." Mr O'Sullivan eventually agreed with Mr Milou that the appropriate staff occupancy rate for the Car Park Site for weekends and public holidays was 22.5%. Mr O'Sullivan stated that as of 27 June 2014, he and Mr Milou agreed on the 22.5% staff occupancy figure for the Car Park Site on weekends. Mr Milou did not respond to this evidence and there was no cross-examination about it (see below at [442]).
After the Principal Judgment, Messrs Milou and O'Sullivan prepared a further joint report dated 8 February 2017. Mr O'Sullivan's calculation for the purpose of that joint report was based on an assumption that the primary judge in selecting $3.00 per day and referring to "weekly rates" had intended that a weekly rate should actually be used in the calculations. $3.00 per day was extrapolated as $15.00 per week, being a five day working week. Mr Milou's calculations were prepared on the basis that the $3.00 daily rate should be multiplied by 1.45x for 7 days per week.
In his 4 May 2017 report, Mr O'Sullivan calculated the difference in damages awarded by adopting what had been the joint position about weekend occupancy of the Car Park spaces by RPAH staff, 22.5%, and the identification of 100% as the appropriate figure to adopt for weekend occupancy made by the primary judge. That difference was between $25,072,585 (comprising $15,932,781 in damages and $9,139,803 in interest, which at that time the primary judge's calculation yielded) and $14,530,510 (comprising $9,486,564 in damages and $5,043,946 in interest) which was the figure for damages (all other things being equal) when 100% of the 1,026 car spaces were assumed to be occupied on weekdays (x1.45) and 22.5% of the car spaces were assumed to be occupied by RPAH staff on weekends. As we have outlined, before the primary judge Macquarie did not respond to or dispute that calculation, assuming the 22.5% weekend staff occupation figure to be correct.
It will be recalled that the primary judge's ultimate order was slightly higher than Mr O'Sullivan calculated, being $16,192,068 in mesne profits for the Car Park Site and $11,486,926 in Court interest up to but not including 18 October 2019 and a further $39,565.15 in Court interest up to but not including 29 November 2019.
The criticisms in this appeal by Macquarie of the data from the Lynn report which were adopted by the experts and formed the basis of the Milou and O'Sullivan reports about weekend patronage of the Car Park were unwarranted. Whilst the parts of the Lynn report relied upon related to occupancy of the Prince of Wales Private Hospital Car Park, the experts regarded the data as sufficiently comparable to make reliable assessments of staff demand for occupancy at the relevant Car Park Site for the purposes of determining a market rent for the 1,026 car spaces.
The obvious problems in using occupancy data derived from the Car Park Site itself needed to be addressed by the parties in attempting to fix a market rent. As we have said, it was common ground that expenses of the Car Park Site, after the Car Park rental, always exceeded the revenue, so it was always making a loss. T368:44-369:13.
For the purposes of the lengthy damages inquiry, in claiming mesne profits for the Car Park Site, Macquarie was content to rely upon Mr Milou's report, based in this relevant respect on the Lynn data. The weekend staff occupancy rate was calculated by reference to the Lynn data. In particular the Lynn data was used to derive the percentage of staff driving, and the average staff per car. Both experts considered the Lynn data to provide the most relevant evidence in calculating a market rent. The primary judge did not reject the experts' agreement about 22.5% staff occupancy demand for the Car Park Site on the weekend on the basis of any problem in the underlying Lynn data. No notice of contention was filed by Macquarie seeking to support the findings of the primary judge on the basis that the Lynn data, and thus the Milou/O'Sullivan agreement, should have been disregarded.
Contrary to the written submission made by Macquarie, the turnover rate of 1.45x which was agreed by the experts was calculated on the basis of a five-day working week. We reject Macquarie's submission that the turnover rate of 1.45x had "already taken [the possibility of lower patronage on weekends in comparison to weekdays] into account".
The daily rate of $3.00 adopted by the primary judge also distracts from the present inquiry; it had no bearing on the adopted turnover rate of 1.45x. The primary judge selected a rate of $3.00 per day on the basis that it was the rate Macquarie was offering to staff immediately prior to the trespass. There was no cross-appeal from that finding.
We reject Macquarie's submission that the expert reports of Messrs Milou and O'Sullivan do "not say … anything about the level of occupancy of the car park on the weekend" for three reasons.
First, Mr O'Sullivan gave evidence to which Mr Milou did not respond and which was not the subject of cross-examination that in addressing the appropriate market rent for the Car Park Site, he and Mr Milou agreed about the demand for and level of staff occupancy of the Car Park Site on the weekend such that a market rent for that occupancy could be quantified. Mr O'Sullivan said:
"3. Weekday versus Weekend Evidence
During the hearing (2013-2015) substantial evidence was tendered on the issue of weekday versus weekend staff numbers and resulting weekend car park usage & revenue.
As of 27 June 2014, Chris Milou (CM) & Alan O'Sullivan (AOS or I, or me) agreed that the appropriate staff utilisation on weekends percentage was 22.5% (Appendix 1 - A1.19, A1.21, A1.26). This was based on a Report on RPA car parking demand by Parking & Traffic Consultants (PTC) dated 8 April2014 (sometimes referred to as the CL Report - after the principal of PTC - Cristina Lynn).
The 22.5% was not specifically derived from RPA data (which was not available in that detail), but was based on data from Prince of Wales Hospital (Randwick) which CL considered to be a comparable campus (as do I).
Just for clarity, this means that if total staff was 1,000 then 775 of those would be on-campus Monday-Friday and 225 would be on campus on weekends. This is the actual number of staff members on-campus on those days & is irrespective of whether individual staff work Monday-Friday (most) or Wednesday-Sunday, or any other combination of 5 days.
There are some simple & readily observable reasons for this. The vast majority of administration staff don't work on weekends, medical clinics and medical suites are rarely open on weekends; & sometimes hospitals tend to run lower in-bed occupancy on weekends & clinical staff is 'minimised' to the level necessary to service that level of occupancy." (Footnotes omitted.)
Secondly, the primary judge's finding for the purposes of his assessment of market rent on the user principle assumed occupancy by staff of the Car Park Site on the weekend was lower than during the week. His Honour rejected SLHD's submission on the need for allowances to be made for lower occupation at weekends as irrelevant on the basis of a misunderstanding or misapplication of the "weekly staff rate" offered by SLHD to RPAH staff.
Thirdly, while it is correct as Macquarie submitted that the experts' reports about weekday demand being (slightly) greater than the capacity of the Car Park Site left open the possibility that occupancy of the Car Park Site on the weekend could be greater than the 22.5% that the experts agreed should be assumed in assessing a market rent for the Car Park, the primary judge made no such finding. Macquarie did not file a notice of contention seeking to support his Honour's orders about mesne profits for the Car Park Site on the basis that if not 100% on weekends it should be some figure higher than the 22.5% occupation that the experts agreed. The possibility that demand by 22.5% of staff on weekends would give rise to occupancy greater than 22.5% but less than 100% of the Car Park spaces on the weekend was not raised at the trial. In particular, the suggestion that the correct occupancy figure to calculate market rent on weekends was not less than 63% was made for the first time in oral address on the appeal. If such a case were advanced by Macquarie there would no doubt have been evidence led by SLHD and submissions made about it. The parties should be limited to the case which was conducted before the primary judge. We reject Macquarie's alternative submission.
[50]
Conclusion on Car Park mesne profits
The authorities in relation to the assessment of damages by way of mesne profits to which we have referred make clear that care must be taken to arrive at a market rent and not to overcompensate the successful claimant.
In arriving at a reasonable market rent for the Car Park Site, the primary judge was required to assess the state of the market in question which was limited, on his Honour's unchallenged findings, to staff parking. The experts on this topic agreed that 22.5% staff occupancy of the Car Park Site on weekends was the appropriate figure to use in calculating a market rent for SLHD's use of the Car Park Sites. By declining to assess mesne profits on that basis, the primary judge misapplied the user principle.
As we have explained, there was no dispute between the parties at the trial that if, in calculating the Car Park Site market rent, all other things being equal, 22.5% was the appropriate figure for weekend occupancy of the Car Park Site, the amount of $25.1 million, which the primary judge's calculation yielded, should have been only $14,530,510. To that figure must be added interest from 4 May 2017, the date of Mr O'Sullivan's report. The difference, of over $10 million less than the figure awarded to Macquarie by the primary judge, was the extent to which Macquarie was overcompensated in calculating a market rent for SLHD's use of the Car Park Site.
Appeal grounds 5 and 6 should be allowed.
[51]
Appeal grounds 7 and 8 - the Duration Issue
Appeal grounds 7 and 8 of SLHD's Notice of Appeal relate to the date the appellant's trespass on the site ended. Appeal grounds 7 and 8 provide:
"7. The primary judge erred in holding that the period of the appellant's trespass ended on 2 November 2015, being the date on which the respondent regained actual possession of the Car Park Site and the Hospital Site.
8. His Honour ought to have held that such period ended at least from 10 June 2011, being the date that the High Court of Australia refused to grant special leave to the appellant to appeal from the orders made by this Court on 13 December 2010, but the respondent refused to take possession, inter alia, on the erroneous basis that it had no right to do so until 2 November 2015, being the date on which the stay ordered by this Court on 13 December of the order for possession of the two sites in favour of the respondent was formally discharged ([2016] NSWSC 1587 at [140]-[150])."
As noted at [18] of this judgment, on 14 October 2010 the Court of Appeal delivered its judgment in the appeal from Nicholas J. On 13 December 2010, this Court made orders noted at [19] above but, by order 7, stayed the operation of the orders, including the order for possession of the Car Park Site:
"7. Stay the operation of the balance of the orders:
(1) for 28 days after date of making of these orders unless within that time an application for special leave to appeal to the High Court of Australia is filed;
(2) until further order, but subject to any order of the High Court of Australia, if within 28 days after the date of making of these orders an application for special leave to the High Court of Australia is filed;
provided that, for the purposes of the enquiry, the date of being restored to possession shall not operate until any stay of the order for possession in order [4(1)] above has been lifted."
On 10 January 2011, within 28 days of this Court's orders, SLHD filed an application for special leave to appeal to the High Court. On 10 June 2011, the High Court refused SLHD's special leave application: see Sydney South West Area Health Service v Macquarie International Health Clinic Pty Ltd [2011] HCATrans 155. The High Court made the following order: "Special leave is refused with costs."
Shortly thereafter, the matter returned to this Court. Following a further brief hearing before Hodgson JA (see Macquarie International Health Clinic Pty Ltd v Sydney Local Health Network [2011] NSWCA 231), Macquarie elected for an inquiry as to damages as opposed to an account of moneys received by SLHD from its occupation of the two sites during the period of the trespass. This election was contemplated by order 4(13) made by this Court on 13 December 2010. Neither party sought to agitate the question of the stay.
The damages inquiry ordered by this Court then proceeded, as has been recounted in the opening section of this judgment. In the course of that damages inquiry, it became apparent that the parties maintained different views about the effect of the order made by the High Court upon the conditional stay granted by this Court on 13 December 2010. Macquarie's position was that the stay remained in place until specifically lifted by further order of this Court. SLHD's position was that the stay was spent following the order made by the High Court refusing special leave.
As noted at [31] above, on 1 October 2015, SLHD filed a notice of motion seeking an order that the stay of the orders made by this Court on 13 December 2010, to the extent that it was still on foot, be dissolved or lifted. On 15 October 2015, Gleeson JA made the following order: "Stay ordered by this Court by order 7(2) made on 13 December 2010, be discharged with effect from 9.00am on Monday 2 November 2015": see Macquarie International Health Clinic Pty Ltd v Sydney South West Area Health Service [2015] NSWCA 323. Gleeson JA's order was made without prejudice to the ability of SLHD to advance the submission on this appeal that the stay had already been dissolved or lifted automatically upon the making of the order by the High Court refusing special leave.
On this issue, the primary judge found that the end date of the trespass was 9:00am on 2 November 2015, when Gleeson JA's order was given effect. The primary judge rejected SLHD's submission that the High Court's order dismissing Macquarie's special leave application automatically brought the stay to an end. The reasoning of the primary judge in the Principal Judgment was as follows:
1. the proper construction of the CA orders did not require recourse to material outside the four corners of the orders themselves: at PJ [141]:
2. the proviso in order 7 ("provided that, for the purposes of the enquiry, the date of being restored to possession shall not operate until any stay of the order for possession in order [4(1)] above has been lifted") meant that for the purposes of the inquiry, the date of being restored to possession would be the date which the stay of the order for possession of the Hospital Site and Car Park Site was lifted. The primary judge arrived at this conclusion for two reasons:
1. "First, it would appear that the CA Orders have been drafted on the basis that the making of the order for possession constitutes restoration to possession. So much is apparent from the contrast with order 6, ('stay the operation of the judgment in 3(2) above (sic), including any form of enforcement of such judgment, until the conclusion of the inquiry or further order of the Court'), which expressly refers to enforcement of the judgment (which is for a money sum). The absence of an express reference to enforcement of the order for possession is consistent with a view that the date of being restored to possession was intended to be the date the stay was lifted on the basis that nothing more (e.g. enforcement by the issue of a writ) was required": at PJ [143]; and
2. pursuant to Uniform Civil Procedure Rules 2005 (NSW) r 36.4, the order for possession took effect as at the date it was made on 13 December 2010: at PJ [144]; and
1. the primary judge found that SLHD's submission that the High Court's dismissal of the special leave application brought the stay to an end might have been correct if order 7(2) had simply said "until further order" and had not gone on to say "but subject to any order of the High Court of Australia". The primary judge stated:
"146 The Health District's submission that the High Court's dismissal of the special leave application brought the stay to an end might have been correct if order 7(2) had merely said 'until further order' and had not gone on to say 'but subject to any order of the High Court of Australia'. In accordance with the classical use of the expression 'until further order' referred to by JC Campbell J in Fatimi (see paragraph [138] above), the order dismissing the special leave application could have been understood as the 'further order'.
147 The difficulty for the Health District is the express reference to 'any order of the High Court of Australia'. If those words are to have any work to do they cannot be the type of order encapsulated in the expression 'until further order'. This means that the opening of order 7(2) must be read as though it said 'until further order [of this Court], but subject to any order of the High Court of Australia'."
Accordingly, the primary judge read the opening words of order 7(2) as "until further order [of this Court], but subject to any order of the High Court of Australia" as meaning that the High Court's order dismissing the special leave application with costs did not affect the operation of this Court's orders, including the stay.
In those circumstances, the primary judge found that the stay created by order 7 of this Court's order operated until further specific order of this Court. That "further order" was only made by Gleeson JA in 2015. The primary judge found that 9:00am on 2 November 2015 was the time and date the Court should use "for the purposes of the enquiry" pursuant to the proviso to order 7.
The essence of SLHD's submission on this issue was that in circumstances where the High Court was the final arbiter of SLHD's liability to Macquarie, the better construction of order 7(2) was that the stay ordered by this Court was terminated upon the High Court's order refusing to grant special leave, unless the High Court otherwise ordered. The words "subject to any order of the High Court of Australia" refer to an actual order of the High Court altering what would otherwise be the position automatically on the refusal of a grant of special leave to appeal, the lifting of the stay.
Three preliminary issues which were debated by the parties should be addressed:
1. SLHD is correct that the primary judge found that the proviso in order 7 meant that for the purposes of the inquiry, the date of being restored to possession would be the date which the stay of the order for possession of the Hospital Site and Car Park Site was "lifted" and that no notice of contention challenging this finding was filed;
2. Macquarie's submission that a refusal of special leave "binds no-one" should be rejected. In Smith Kline & French Laboratories (Aust) Ltd v Commonwealth (1991) 173 CLR 194 at 218; [1991] HCA 43, it was held that the jurisdiction to grant or refuse to grant special leave to appeal involves "the exercise of judicial power" culminating in "a determination in the form of a curial order". Macquarie's submission that the order refusing special leave did not involve the making of any order in any proceedings is not correct; and
3. SLHD's submission that an order made "until further order" is usually construed as interlocutory, made until a particular date or the happening of some specified event or until a further order, should be accepted: see Klewer v Official Trustee in Bankruptcy (No 2) [2010] NSWCA 258 at [6]. Despite what follows in the present case, there may be circumstances where an order of the High Court refusing special leave to appeal will affect a discharge of a stay granted by this Court "until further order".
The correct construction of this order, in the context it was made, raises issues in a narrow compass. The starting point in determining the true construction of this order is the last phrase of the order: "until any stay of the order for possession in order [4(1)] above has been lifted".
Macquarie's submission that, in context, "lifted" is contemplated to be a specific judicial act by which the stay is "lifted", is correct. The relevant context makes that clear. Here the stay was of a judgment for possession, relevantly, of an operating car park. The elaborate nature of the order, and the specific reference to the stay being "lifted", is explicable by reference to that context. So too is the fact that the parties returned to this Court before Hodgson JA in effect for directions after the refusal of special leave and before the damages inquiry ordered by order 4(13) commenced.
The refusal of special leave by the High Court did not, in this case, have the effect of lifting the stay. The High Court was not taxed with a debate about whether the stay of the judgment should be "lifted". This order, fairly read, contemplated, that there would be a specific order, either of this Court or, potentially, the High Court which "lifted" the stay. It follows that the primary judge was correct to conclude that the stay was only "lifted", within the meaning of the order, upon the giving effect to the order made by Gleeson JA.
Finally on this issue, SLHD submitted that it remained in possession of the Car Park Site and the Hospital Site following the order of the High Court until 2015 with Macquarie's implied consent: see Plenty v Dillon (1991) 171 CLR 635 at 647-648; [1991] HCA 5 per Gaudron and McHugh JJ. Macquarie submitted that this issue was not litigated before the primary judge and could clearly have been the subject of evidence: see Suttor. Macquarie's submission should be accepted. The question of implied consent in the present case involved, at least potentially, a more thorough examination of the background facts. SLHD should not be permitted to litigate the issue of implied consent for the first time on appeal in this Court.
Appeal grounds 7 and 8 should be dismissed.
[52]
Appeal grounds 9 and 10 - the Taxation Issue
As has been explained, we have set aside the award of damages assessed as mesne profits for the Hospital Site. In accordance with the principle in Kuru at [12], however, we will address the question of whether damages for the Hospital Site should be "grossed up" against the contingency that our principal conclusion is incorrect.
As has been noted, the primary judge delivered the Principal Judgment on 10 November 2016. The primary judge fixed a further hearing on 14 February 2017 to address any outstanding issues arising from the Principal Judgement. Whether Macquarie's damages for the Hospital Site should be "grossed up" for tax was one of those outstanding issues.
SLHD's case before the primary judge was that "grossing up" for tax was not appropriate as this was not a case where damages were being awarded in the "true sense or strict sense" of compensation by putting Macquarie in the position it would have been in if the wrongful conduct had not occurred. SLHD submitted that as damages had been assessed in relation to the Hospital Site in accordance with the "user principle" they should not be "grossed up" for tax. It was submitted that the damages awarded by the primary judge in this case were not compensatory in the true or strict sense. Accordingly, the question of "grossing up" for tax never arose.
The primary judge dealt with this issue in the Tax Judgment. The primary judge relevantly held that Macquarie's damages in relation to the Hospital Site should be "grossed up" for taxation. This was because:
1. damages are compensatory (Tax Judgment at [90]);
2. where damages are, or are arguably, going to be taxed, the question is "whether justice requires that taxation be taken into account in the amount of the award" (Tax Judgment at [90])
3. the mesne profits awarded in relation to the Hospital Site were compensatory, despite the process of assessment being governed by the user principle; and
4. justice in the present case required that taxation be taken into account in the amount of the award (Tax Judgment at [129]).
The methodology for "grossing up" for taxation was also controversial, however, SLHD did not appeal from his Honour's preferred methodology to effect the "grossing up" for tax. The tax experts on this issue opined that the Commissioner of Taxation would likely take the view that the damages award for the Hospital Site gave rise to a disposal of an "asset" for the purposes of the capital gains tax provisions of the Income Tax Assessment Act 1997 (Cth), as either CGT Event C1 or C2. The experts could not agree about the correct characterisation of the asset, the cost base of the asset or the availability of roll-over relief. None of these matters need be discussed further. The primary judge ordered SLHD to indemnify Macquarie for any tax it was ultimately held to be liable to pay on the judgment sum awarded in relation to the Hospital Site.
The subject of taxation being taken into account in the award of damages may be traced to the decision of the House of Lords in British Transport Commission v Gourley [1956] AC 185 (Gourley). Until then, the English courts "had not reduced awards of damages on the ground that the amount, for the loss of which the damages represented compensation, would have been diminished in the claimant's hands by the incidence of taxation." (Footnote omitted.): JJ Edelman (ed), McGregor on Damages (20th ed, Sweet & Maxwell, 2018) at [18-002]. That is, Gourley was the first in a series of decisions in England and Australia relating to personal injury damages or unfair dismissal claims, where the award of damages was reduced to take account of the fact that a non-taxable lump sum was being received as damages rather than taxable (or partly taxable) amounts which should have been received but for the tort or breach of contract.
In Atlas Tiles Ltd v Briers (1978) 144 CLR 202; [1978] HCA 37 (Atlas Tiles) Stephen J (in dissent) applied Gourley and held that Australian courts must take into account the tax which would have been payable by the injured party if he or she had received the payments which would have been made but for the tort. His Honour identified two conditions applying in that case. First, the award of damages "must represent compensation for loss of income (or for loss of earning capacity manifested by a loss of income) which income would have been subject to tax had it been received by the plaintiff", and, secondly, "the award of damages must itself not be subject to tax": at 234. As will be seen, in subsequent cases, these "conditions" must be understood in context which, as always, is critical. At the time Atlas Tiles was decided a capital gains tax had not yet been introduced in Australia. There were, however, circumstances in which an award of damages in tort or contract was itself subject to taxation. A great deal of tax planning in relation to awards of damages and settlements of legal proceedings was designed to ensure that tax was not payable on the amount received based, inter alia, upon the principles in McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381; [1961] HCA 9 and Allsop v Federal Commissioner of Taxation (1965) 113 CLR 34; [1965] HCA 48 which the Commonwealth Taxation Review Committee Full Report (January 1975) (the Asprey Committee) had unsuccessfully advocated be abolished by legislation. Complexities arising from what would now be understood as the disposal of an asset, and the exceptions thereto, for the purposes of the Income Tax Assessment Act 1997 did not arise. For these reasons we do not accept, as SLHD submitted, that the particular conditions identified by Stephen J in Atlas Tiles should be applied to all awards of damages today, outside the particular context his Honour was addressing.
In Atlas Tiles, Gibbs J (also in dissent) observed that one of the foundations for the decision in Gourley was the fundamental principle that damages awarded for personal injuries are compensatory. Gibbs J said (at 227) that "it is necessary to take tax into account in order to determine, in the fairest way possible, the compensation that the respondent should receive for the wrong done to him".
While Gibbs and Stephen JJ were in dissent in Atlas Tiles, the approach taken by their Honours prevailed in Cullen v Trappell (1980) 146 CLR 1; [1980] HCA 10 (Cullen). There, Gibbs J held that "[t]he decision in … Gourley rested on the broad principle 'that the tribunal should award the injured party such a sum of money as will put him in the same position as he would have been in if he had not sustained the injuries', from which it followed that a plaintiff should have his damages assessed 'upon the basis of what he has really lost'": at 11.
In Gill v Australian Wheat Board [1980] 2 NSWLR 795 (Gill), Rogers J held that "[t]he whole essence of the decision in Cullen's case is that the reality of the impact of taxation must be recognized and allowed for": at 807. Rogers J held that the net amount of losses should be calculated and the tax liability payable by the plaintiff should also be awarded so that after paying that liability the amount of compensation received by the plaintiff is equal to his net losses. Gill is an important decision as it is an explanation by Rogers J of the application of principle, ultimately sourced in Gourley and the cases which followed, leading to an increase in damages awards in commercial cases by reason of the subsequent tax treatment of awards.
In Haines, Mason CJ, Dawson, Toohey and Gaudron JJ at 63 held, by reference (inter alia) to Gourley, that "compensation is the cardinal concept" in respect of the assessment of damages in contract and tort.
In New South Wales Cancer Council v Sarfaty (1992) 28 NSWLR 68 (Sarfaty), Gleeson CJ and Handley JA adopted the approach of Stephen and Gibbs JJ, as followed by Rogers J in Gill, and made allowance for the impact of taxation on a damages award so as to allow the whole amount of the compensation to remain in the hands of the plaintiff after its receipt has been subject to tax.
Daniels v Anderson (1995) 37 NSWLR 438; (1995) 118 FLR 248 (Daniels) is an important case in understanding the principles engaged in this field of discourse. In that case Clarke and Sheller JJA distilled the relevant principles in the context of a hard fought commercial dispute. Their Honours' judgment should be understood as addressing claims in tort, including for breach of statutory duty and contract. After a survey of all the relevant cases referred to above, their Honour's said (at 585-586):
"From the cases to which we have referred the following propositions can be derived.
1. If an award is made for loss of earning capacity and the verdict is not taxable it is appropriate to assess the amount of verdict by reference to net earnings after tax.
2. In making such an assessment and using tables to determine the present value of future economic loss regard should be had to the notional tax on the income assumed to be derived from the amount awarded for the future economic loss.
3. If a comparison between taxable receipts for which damages are recoverable and the taxability of the compensatory verdict are so uncertain and depend upon such imponderables as the degree to which the plaintiff can for example carry forward losses from previous years the appropriate course is to ignore taxation considerations.
4. If on the other hand it is unjust not to take account of identifiable and quantifiable taxation impacts both on the lost receipts and the compensatory damages then these may be taken into account in assessing damages.
The fourth of these propositions was the justification for Rogers J's conclusion in Gill. But in the present case AWA argues that the directions and orders were made on the assumption that it would be better off by receiving the verdict after judgment rather than the amount of income lost in the tax year in which the loss was suffered. AWA advanced a number of hypotheses which tended against the validity of the assumption, such as the availability of tax losses to set off against the increased income.
As Walsh J said in Williamson the principle of remoteness means that not all the consequences of the loss complained of are to be taken into account in assessing damages. The need after judgment for inquiry about the consequences of the changed rate of company tax is a telling indicator that they are too remote to be taken into account. Even if a judicious blend of principle and expediency should determine the account to be taken of the impact of tax, in our opinion such an adjustment cannot be supported in the present case. AWA has adverted to circumstances which would make it difficult if not impossible to arrive at an amount which would allow appropriately for the tax consequences of the reduction in the company rate. In most cases if damages to be awarded to a plaintiff are taxable, taxation should not be taken into account in their assessment. There may be exceptions, but this case is not one."
Perhaps reflecting the significant and continuing influence on the resolution of commercial disputes in Australia of Rogers J, damages in commercial cases are routinely calculated and awarded on the basis of the fourth principle in Daniels, derived from Gill. This is so despite the conclusion in Daniels that "in most cases if damages to be awarded to a plaintiff are taxable, taxation should not be taken into account in their assessment": at 586. Following the introduction of capital gains tax in September 1985, all awards of damages are usually taxable, save if a specific exception applies, as is now the case for awards of personal injury damages: s 118-37 Income Tax Assessment Act 1997.
The question posed here, whether damages based on an award of mesne profits for the Hospital Site on the basis of the user principle should be "grossed up" for tax, falls to be answered by a consideration of the principles described above. It may readily be accepted, as SLHD submitted, that an award of mesne profits based on the user principle may not be compensatory, at least in the sense that the purpose of such an award is not to put the injured party in the position in which they would have been had the trespass not been committed.
On the other hand, as we have explained, the award of mesne profits in relation to the Hospital Site in this case was based on a damages methodology based on a discounted cash flow model developed by Macquarie's experts. The primary judge made findings allowing the insertion of various integers into that model. The damages calculated were, by reason of the method adopted, in effect compensation for a lost commercial opportunity suffered by Macquarie.
As we have explained in addressing appeal grounds 4 and 11-14, the exercise of valuing Macquarie's lost commercial opportunity without properly taking into account the risks to realising that opportunity miscarried. Nevertheless, on the assumption upon which we address these grounds of appeal, that the exercise undertaken by the primary judge was appropriate and that his Honour correctly identified the integers to be inserted by the experts in the damages model, his Honour was correct to "gross up" the damages award for taxation.
The cash flows used by the damages model for the Hospital Site were (as we have explained) post tax cash flows. That is, the experts calculated the cash flows on the basis Macquarie derived those cash flows and paid tax on them at the time they were derived. It was consistent with the method by which Macquarie's damages were calculated for tax to be taken into account, if it reasonably could, in the ultimate award of damages. As we have said, the method by which the primary judge did this, including the indemnity granted by his Honour, was not the subject of this appeal.
This was a case within the fourth principle in Daniels, itself based on Rogers J's decision in Gill. It would have been unjust not to take into account identifiable and quantifiable taxation impacts on the damages, which were in truth compensation for a lost commercial opportunity, albeit that the commercial opportunity was not correctly identified or valued.
On the contingent basis we have identified, appeal grounds 9 and 10 should be dismissed.
[53]
Conclusion on the notice of appeal
For the forgoing reasons we have concluded that the appeal must be allowed. SLHD is entitled to succeed on appeal grounds 1, 2, 4, 5, 6, 11, 12, 13 and 14. Appeal grounds 7-10 (inclusive) should be dismissed.
[54]
Ground 1 of the cross-appeal - the Discount Issue
Ground 1 of Macquarie's cross-appeal contends that the primary judge erred by adopting one aspect of Mr Stone's application of the Residual Land Value methodology for calculating the cumulative notional annual rent of the Hospital Site for 15 years, which his Honour found to be representative of the amount of mesne profits to be awarded to Macquarie. This ground related to what was referred to as the Step (6) discount.
Given our principal conclusion about damages for the Hospital Site, this issue does not arise. Nevertheless, on the contingent basis we have identified we will address this issue.
[55]
The Step (6) discount
There is no dispute as to his Honour's statement of the Residual Land Value methodology at PJ [544], which it is convenient to set out in full:
"[544] The mechanics of the methodology which the Court considers should be applied may be taken from the summary of Mr Palassis:
(1) Input the necessary expenditure to complete the balance of the development and the cash outflow (including ground rent) for the duration of the hypothetical term;
(2) Assuming an opening of the private hospital on 1 July 2004, input the revenue assumed to be received through the operation of PAPH for the duration of the hypothetical term;
(3) Derive a figure being the difference between (1) and (2);
(4) Discount that figure by an assumed discount factor to arrive at an annuity or annual rental payment;
(5) Denote that annual payment the 'reasonable letting value' of the hospital site per annum; and
(6) Derive an aggregate figure for market rental by calculating the net present value of the reasonable letting value for the duration of the trespass."
His Honour subsequently acknowledged in the Tax Judgment that Mr Palassis was not the author of the summary at PJ [544], rather this summary reflected the Court's understanding of his methodology based primarily on his report and the method as explicated by Macquarie's senior counsel: see Tax Judgment at [80].
Following delivery of the Principal Judgment the experts, Mr Coleman for Macquarie and Messrs Gower and Palassis for SLHD undertook their initial calculation of damages by the application of the Residual Land Value methodology. There was a further hearing on 14 February 2017 which addressed a number of outstanding issues and the experts gave evidence concurrently. Macquarie says that the experts agreed at this hearing that the application of Step (6) in the Residual Land Value methodology did not involve any discount. This issue was revisited by his Honour at hearings on 20 October and 13 and 17 November 2017. The experts who ultimately gave evidence on the application of the Residual Land Value methodology, Mr Coleman for Macquarie, and Mr Stone for SLHD, agreed on the applicability of the methodology and the mathematical outcome of Steps (1) to (5). Thus, there was agreement that:
1. with respect to Steps (1) to (3), as at 17 March 2000 the net present value (NPV) of the Hospital Site was $35,356,000;
2. as to Step (4), the conversion of that NPV into a post-tax notional rental for the first year of the SLHD's trespass using a discount rate of 8.94% resulted in a figure of $2,187,000; and
3. as to Step (5), the post-tax notional rental of $2,187,000, when increased by an agreed interest rate of 2.5% annually for the 15 years of the SLHD's trespass resulted in a cumulative notional rent for the 15-year period of $41,203,000.
The point of difference between the experts was Step (6). Mr Stone was of the view that the cumulative notional rental of $41,203,000 should be discounted at Step (6) by the application of the discount rate of 8.94%: see SJ [105]. His Honour referred to as "Stone 1".
Applying the discount at Step (6), Mr Stone calculated the NPV of the cumulative notional rental of $41,203,000 as $21,791,000 to which he added simple interest at Supreme Court rates calculated from 17 March 2000 totalling $30,772,000 to give a total damages figure of $52,563,000: see SJ [105].
Mr Coleman did not apply a discount at Step (6). Instead he took the undiscounted cumulative notional rental of $41,203,000 and added to it simple interest at Supreme Court rates calculated at the mid-point of each of the 15 rental years totalling $28,820,000 to give a total damages figure of $70,022,00: see SJ [104].
His Honour concluded that Macquarie's damages in relation to the Hospital Site should be calculated in accordance with Stone 1, summarising his reasons at SJ [112]:
"[112] For the reasons which follow, Macquarie's damages in relation to the Hospital Site should be calculated in accordance with Stone 1. My reasons may be summarised as:
(1) As a matter of law, the damages should be assessed when Macquarie's cause of action arose, which was at the commencement of the trespass.
(2) Quite apart from the legal position, I accept Mr Stone's evidence that the logic of the Residual Land Value methodology adopted by the parties requires a further discounting back to the commencement of the trespass.
(3) I accept Mr Stone's criticism that Mr Coleman's method produces an unreasonable and disproportionate result."
In amplification of the first reason concerning the date of assessment of damages, in addition to referring to the general rule in Johnson v Perez (1988) 166 CLR 351 at 355-356; [1988] HCA 64 (Johnson v Perez), his Honour rejected Macquarie's description of the SLHD's trespass as a "continuing trespass" in the technical, legal sense because the present case was not one of something brought onto the land and wrongfully left there, adopting the views of the current editors of Fleming's The Law of Torts (10th ed, Thomson Reuters, 2011) at 53: at SJ [115] and [116].
In rejecting Macquarie's submission that damages ought not be discounted to the date the trespass commenced, being the date the cause of action arose, his Honour observed that "Macquarie's submission gives the analogy of an annualised notional market rental (which the parties were using by reference to the Residual Land Value methodology) a determinative role which is apt to distract from the task at hand": at SJ [118]. His Honour found that no new cause of action accrued to Macquarie every day of the trespass or upon a notional annual failure to pay the notional annual market rent: at SJ [120].
His Honour found that there was no compelling reason to depart from the general rule in this case and explained at SJ [121] what was contemplated by Step (6):
"… There is no such compelling reason to depart from the general rule in this case. On the contrary, the Residual Land Value methodology adopted by the parties enables the Court, when the step contemplated in paragraph [544(6)] of the principal judgment is taken, to answer the question which is at the heart of the Damages Enquiry: what sum of money, if paid to Macquarie as at the date of the commencement of the trespass, would have adequately compensated Macquarie for the loss it suffered as a result of its exclusion for some 15 years thereafter from the Hospital Site? …"
In support of the second reason, his Honour said at SJ [123]:
"Second, and quite apart from the legal answer, I also accept Mr Stone's evidence that the logic of the Residual Land Value methodology required the additional discount represented by the step in paragraph [544(6)] of the principal judgment to be done. The notional annual market rentals were the product of a discounting process. I accept Mr Stone's criticism that simply to add them up without discounting them further would be to ignore the element of uncertainty that had been built into the process from the start and would, in effect, be to convert uncertain cash flows into certain cash flows."
In support of the third reason, his Honour said at SJ [125]:
"At this final stage, reasonableness can be tested. It cannot be a reasonable outcome of a principled assessment of damages that a trespass for 15 years of a 103 year lease gives Macquarie a greater damages figure (even without interest) than the net present value of the entire project at the commencement of the lease. It is precisely that kind of outcome which the rules of compensatory damages, sensibly and flexibly applied, would avoid producing."
[56]
Submissions
Macquarie submitted that his Honour erred in preferring Mr Stone and finding that the discount factor should be applied at Step (4) and, according to the submission, again at Step (6), for four reasons:
1. contrary to his Honour's view, the application of the discount rate was not contemplated by Step (6) of the Residual Land Value methodology;
2. his Honour erred in finding that there was no legal significance in describing the trespass as a continuing trespass;
3. his Honour erred in finding that the logic of the Residual Land Value methodology requires the discount at Step (6), because to do otherwise will convert uncertain cash flows into certain cash flows;
4. his Honour erred in finding that the approach taken by Mr Coleman in not applying a discount at Step (6) produces an unreasonable result.
SLHD submitted that Step (6) of the Residual Land Value methodology expressly involved a NPV calculation of the cumulative notional annual rental for the period of the trespass as at the date the cause of action arose, relevantly, 17 March 2000. SLHD emphasised that whilst Macquarie did not challenge the agreed methodology in Step (6), its expert - Mr Coleman - had ignored that final step in his calculations.
SLHD also submitted that Macquarie's characterisation of the discount at Step (6) as a "double" discount was a misconception of what was occurring. According to the submission, Step (6) did not involve double discounting in the sense of discounting the one figure twice; rather, Step (4) and Step (6) involved discounting each of the two cash flows once.
[57]
Whether error in applying the discount at Step (6)?
There are three essential difficulties with Macquarie's challenge to the primary judge's adoption of Mr Stone's application of Step (6) of the Residual Land Value methodology.
First, as indicated, Macquarie does not specifically challenge Step (6) of the Residual Land Value methodology in its notice of cross-appeal or written submissions. That is fatal to this ground. Secondly, Macquarie's submissions are based on the proposition that the primary judge erred in applying the general rule that damages in tort are assessed as at the date on which the cause of action arose, here 17 March 2000. However, as his Honour found, there was no reason to depart from the general rule in this case. Thirdly, Macquarie's submission that it is "hardly surprising" that the market value of a 15 year period of a 103 year lease is "a significant number", does not stand analysis. On Macquarie's case, it should be compensated in damages, before interest, in an amount of $41,203,000 for the cumulative market value of the 15 year period of the lease, being an amount, before interest, which substantially exceeds the NPV of the Hospital Site of $35,356,000, assuming a lease for 103 years.
[58]
At what date are damages for trespass to be assessed?
Reference has already been made at [69]-[70] above, to the guiding principle in the assessment of damages is compensatory, that is, "the injured party should receive compensation in a sum which, so far as money can do, will put him in the same position as he would have been if … the tort had not been committed": see Butler at 191 (Taylor and Owen JJ) and that "a plaintiff cannot recover more than he or she has lost": see Haines at 63.
The general rule is that damages for torts or breach of contract are assessed as at the date of breach or when the cause of action arose: Johnson v Perez at 355-356 (Mason CJ). However, the general rule is not inflexible and as Mason CJ explained in Johnson v Perez at 355-356, "it must give way in particular cases to solutions best adapted to giving the injured plaintiff the amount in damages which will most fairly compensate him for the wrong he has suffered." Wilson, Toohey and Gaudron JJ were effectively of the same view (at 367). Brennan J (at 371) remarked that the general rule as to the date of assessment of damages "is subject to the principle governing the measure of damages". Deane J (at 380) described the "general rule" as a "prima facie general rule" that can "be displaced or modified by other factors whose identity or comparative weight may vary in different categories of case and in the circumstances of the particular case". Dawson J (at 386-387) referred to the underlying principle and its application, noting that even in contract, the rule that damages are assessed at the date of breach "is not absolute and fairness may require a departure from the date of breach".
In the present case, Macquarie did not seek to establish that a departure from the general rule - that the date for assessment of damages is the date the cause of action arose - is necessary in order for it to be properly compensated. Rather, Macquarie sought on the damages inquiry to circumvent the general rule by describing SLHD's trespass as a "continuing trespass" whereby a new cause of action arose when each notional annual rental was not paid.
In this Court, Macquarie repeated its submission on the damages inquiry that SLHD's trespass was a "continuing trespass", arguing that a new cause of action arose on each day after 17 March 2000 until possession of the Hospital Site was restored in 2015. Reference was made to Clerk & Lindsell on Torts (19th ed, Sweet & Maxwell, 2006) at [33-08] for the proposition, which also appears in a more recent edition (22nd ed, Sweet & Maxwell, 2017) at [32-08], that "every fresh continuance is a fresh cause of action".
The editors of Clerk & Lindsell on Torts explain at [31-20], that "a continuing trespass must be distinguished from the consequences of a trespass, which …. must be compensated once and for all". An example of a continuing trespass is a claim of wrongful imprisonment, where each day a person is wrongfully detained is a fresh cause of action, because "every continuance of the imprisonment is in point of law a new imprisonment": see Hardy v Ryle (1829) 109 ER 224 at 226; (1829) 9 B & C 603 at 607. Another example is claim for damage caused by the withdrawal of support to land, where a fresh action may be brought as each fresh subsidence occurs, although the various subsidence's result from the one excavation: see Darley Main Colliery Company v Mitchell (1886) 11 App Cas 127 at 145-146 (Lord Bramwell).
By contrast with these examples, the editors of Clerk & Lindsell on Torts state at [31-20]:
"Thus where a man wrongfully interferes with another's land otherwise than by placing some foreign substance on it, as for instance where he digs a hole in it, although such interference may, as a consequence of the trespass, create a continuing source of injury, he is liable only to pay compensation for the original trespass, and is under no further obligation to prevent the continuance of the state of things which he had created." (Footnotes omitted.)
His Honour referred at SJ [115] to the passage to similar effect in Fleming's The Law of Torts at 53:
"If a structure or other object is placed on another's land, not only the initial intrusion but also failure to remove it constitute an actionable wrong. There is a 'continuing trespass' as long as the object remains; and on account of it both a subsequent transferee of the land may sue and a purchaser of the offending chattel or structure be liable,' because the wrong gives rise to actions de die in diem until the condition is abated. Likewise, if the chattel was initially placed on the land with the possessor's consent, termination of the licence creates a duty to remove it; and it seems that, according to modern authority,' a continuing trespass is committed by failure to do so within a reasonable time. In all these cases, the plaintiff may maintain successive actions, but, in each, damages are assessed only as accrued up to the date of the action. This solution has the advantage to the injured party that the statute of limitations does not run from the initial trespass, but entails the inconvenience of forcing him to institute repeated actions for continuing loss.
The doctrine of 'continuing trespass' applies only to omissions to remove something brought on the land and wrongfully left there; not where a defendant fails to restore the land to the same condition in which he found it, as where he digs a pit in his neighbour's garden and fails to fill it up. Here the plaintiff can only treat the initial entry as trespass and must content himself with one action in which damages are recoverable for both past and future loss." (Footnotes omitted, emphasis added.)
Macquarie accepted in this Court that the omission to remove something brought onto another's land, in contradistinction to a failure to restore the land, is a "continuing trespass", but submitted that is not the case here. The submission continued that in this case, the exclusion was a trespass from day to day and thus a new cause of action arose on each day after 17 March 2000 until possession of the Hospital Site was restored in 2015.
We reject Macquarie's continuing trespass submission. As this Court declared on 13 December 2010, when upholding the appeal from the decision of Nicholas J, SLHD's eviction of Macquarie from the Hospital and Car Park Sites on 17 March 2000 was a trespass against Macquarie: see order 4(11) set out at [20] above. As Macquarie itself submitted the consequence of, SLHD's trespass was that it "deprived [Macquarie] of 15 years of a 103 year lease which conferred a commercial opportunity to build and operate a private hospital". Macquarie is not to be compensated for 15 separate damages claims accruing annually on 17 March 2000 to 17 March 2014, being the loss of the notional annual rental payable for each of 15 years of a 103 year lease. Nor is it to be compensated for separate damages claims accruing daily from 17 March 2000 for 15 years.
If it were necessary to assess Macquarie's damages, what is to be compensated is the consequences of a trespass involving the wrongful denial of Macquarie's property rights. The trespass is to be compensated once and for all, assessed as at the date the cause of action arose.
[59]
What was required by Step (6)?
Step (6) of the Residual Land Value methodology expressly contemplated that an aggregate figure for the market rental of the Hospital Site for 15 years would be derived by calculating the NPV of the reasonable letting value for the duration of the trespass, that is, the first 15-years of a hypothetical lease for a term of 103 years. As indicated, Macquarie does not challenge Step (6) of the Residual Land Value methodology. Plainly, Step (6) required the calculation of the NPV of the cumulative notional annual rental stream for 15 years to be discounted back to the date the cause of action arose.
Macquarie complained that the primary judge ignored what it submitted was an agreement between the experts at the hearing on 14 February 2017 that Step (6) did not require any discount, and that the summary of the Residual Land Value methodology at PJ [544] reflected the Court's direction that discount rate was only to be applied once. Reference was made the evidence of Mr Palassis agreeing with a question posed by his Honour that the discount factor of 8.94% was to be applied at Step (4) of the methodology and only there.
The difficulty with this submission is that, as his Honour acknowledged in his Supplementary Judgment at [97(3)], there was a real possibility of confusion at the hearing on 14 February 2017, both because it was apparent that Mr Palassis was not the author in terms of the summary of the Residual Land Value methodology in Principal Judgment at [544], and also because there may have been some doubt as to whether what was really being argued about was the use of different discount rates at different points in the analysis. In addition, his Honour made plain in his Supplementary Judgment that Step (6) required the experts to calculate the NPV of the cumulative notional annual rental for the duration of the trespass for 15 years.
In its closing written submissions on the damages inquiry, Macquarie submitted that it could not receive the assessed NPV of the market rent over the period of the trespass as a single upfront payment, but it would receive the derived annual market rent (less ground rent) over the period of the trespass. This submission highlighted the conflation in Macquarie's submissions between the consequences of the trespass and that date for assessment of damages. Accepting that damages for trespass are to be assessed as at the date the cause of action arose, his Honour was correct to accept Mr Stone's approach of discounting at Step (6) the future receipt of the cumulative notional annual rental for 15 years to 17 March 2000.
[60]
Whether the logic of the Residual Land Value methodology requires a discount at Step (6)?
Macquarie submitted that the Step (6) discount is not required because "[t]he figure that has to be paid to notionally acquire 15 years of the 103 year Hospital Lease has been determined by Steps (1) to (5)." The submission continued that "[p]roperly understood, the net present value referred to in PJ [544(6)] is the net present value as at the date of judgment." We reject these submissions as being inconsistent with the assessment of damages as at the date the cause of action arose. Step (6) in PJ [544(6)] cannot be read as referring to a NPV as at the date of judgment.
As SLHD correctly submitted, the calculation of the NPV required by Step (6) called for a discounting of a stream of future cash flows being the annuity stream derived from the performance of Step (4) back to a point in time (17 March 2000) through the application of a discount rate. It was that discounting exercise which yielded a NPV as at 17 March 2000 of the reasonable letting value of the Hospital Site of $21.791 million for the period of the trespass of only 15 years. Contrary to Macquarie's submission, that did not involve a "double discount" of one set of cash flows. We accept SLHD's submission that the discount rate was applied only once at Step (6) in a second set of cash flows to the annuities representing the notional annual rental to ascertain the NPV of the reasonable letting value of the Hospital Site for the 15 years of trespass.
In its written reply submissions Macquarie challenged the use of the discount rate of 8.94% at Step (6). According to the submission, given the application of the discount rate of 8.49% at Step (4), any risk or uncertainty with respect to the annuity can only relate to the risk of non-payment, and there was no element of risk given that the lessor of the Hospital Site was effectively the State of New South Wales. Macquarie complained that the primary judge did not make a finding as to what discount rate should be applied to account for the potential risk of the non-payment of the market rent and submitted that that it was not a discount rate of 8.49%.
In oral argument, Mr Hutley submitted that the discount rate should have been the "risk-free" rate, whilst accepting that Mr Coleman did not advance any alternative discount rate under Step (6): T363:27-30, T448:47-450:16.
The difficulty with these submissions is that Macquarie adopted an all or nothing approach on the damages inquiry relying upon the evidence of Mr Coleman, that no discount should be applied at Step (6). While counsel then appearing for Macquarie made a rhetorical observation in passing before the primary judge that "one then wonders at what risk is there of not receiving the annuity?", Macquarie did not advance any alternative submission that some lesser discount rate to the 8.94% discount should be applied at Step (6), in particular, Macquarie did not seek a finding that a "risk-free" discount rate should be applied at Step (6).
In these circumstances, his Honour cannot be criticised for using the discount rate of 8.94% at Step (6). Nor should Macquarie be permitted to advance a new point on appeal, as to which Mr Coleman did not give evidence, and if the point had been raised evidence could have been called by SLHD: see Water Board v Moustakas (1988) 180 CLR 491 at 497; [1988] HCA 2; and Whisprun Pty Ltd v Dixon (2003) 77 ALJR 1598; [2003] HCA 48 at [51].
[61]
Whether the approach taken by Mr Coleman in not applying a discount at Step (6) produces an unreasonable result?
Macquarie submitted that the primary judge erred in finding, accepting Mr Stone's evidence, that the approach taken by Mr Coleman in applying the discount factor at only Step (4) produces an unreasonable result: see SJ [124].
Mr Stone identified the unreasonableness and lack of commerciality in Mr Coleman's approach as being that Macquarie would receive by way of damages, ignoring interest, an amount that is higher than the total NPV of the Hypothetical Hospital as at March 2000, which had been calculated by Mr Coleman over 100 years (actually 103 years). His Honour found that cannot be a reasonable outcome of a principled assessment of damages: at SJ [125].
According to Macquarie's submission, "it is hardly surprising that the market value of a 15-year period of a 103-year lease is a significant number". That generalised submission is no answer to his Honour's finding of unreasonableness.
The submission continued that the Residual Land Value methodology does not require a discount at Step (4) and Step (6), and "doing so results in a value that is not the market rent of 15 years of the 103-year term of the Hospital Lease of which [Macquarie] was deprived." That submission conflated the cumulative notional annual rent for the 15 years of a 103 year lease with the NPV of the reasonable letting value of the Hospital Site over the course of the period of the trespass of only 15 years.
In its written reply submissions, Macquarie sought to defend Mr Coleman's approach by submitting "that the cumulative value of the market rent (increased annually by inflation) is greater than the net present value of the Hospital Lease is simply a function of the market yield of that capital value". That is no answer to the unreasonableness finding. As we have said, in assessing damages for SLHD's trespass as at the date the cause of action arose the future instalments of the cumulative notional annual rent for the 15 years of a 103 year lease must be discounted back to 17 March 2000.
We reject ground 1 of the cross-appeal.
[62]
Ground 2 of the cross-appeal - the Interest Grossing-Up Issue
Given our principal conclusion about damages for the Hospital Site this issue does not arise. However, on the same contingent basis we will address the issue raised.
The primary judge was asked, in addition to grossing up the damages award for taxation, to "gross up" for taxation the award of pre-judgment interest.
The expert evidence Macquarie filed on damages made no claim for interest awarded to be "grossed up". Mr Coleman, Macquarie's expert said:
"It is appropriate to expect that the compensation to Macquarie Health will be treated as a taxable sum in the financial year in which the damages are awarded to the Plaintiff. The assessment of loss specified in the Judgement is calculated on an after-tax basis consistent with the fact that the cash flows and the discount rate are assessed on an after-tax basis. This amount is then grossed up to a pre-tax sum so that, after tax is paid on the compensation, and interest and costs are added, the Plaintiff is left in the same position it otherwise would have otherwise been in. That is, in order to put the Plaintiff in the same position, but for the complained of conduct, it is necessary to gross-up the value of the loss for the tax payable on the compensation (but not interest thereon)." (Emphasis added.)
In this Court, Macquarie submitted that the question was one of law:
"MR HUTLEY: [Mr Coleman] hasn't thought through, with all due respect to him, the implications. Usually you don't. This is just a question; the judgment sum's affected by the pragmatic approach taken to ensure not over-compensation."
Macquarie's case on this issue was described to the primary judge by Mr Richmond SC (who appeared on this aspect of the case for Macquarie in the proceedings below) in the following way:
"RICHMOND: … what we say which is that the interest forms an integral part of the compensation provided because what it's doing is compensating the plaintiff for non-receipt of the 15 annual instalments of rent when they would have fallen due under the notional lease and it's simply part of the mechanism to compensate the plaintiff for not having that rent when it fell due in the notional world that we're in, the fact that the trespass that occurred and so it forms an integral part of the judgment sum and that will be taxable in the same way as the balance of the amount is taxable, that is to say, under which CGT event so it will be taxable and the same reason for grossing up applies to that portion as does to the other portion, we would say. It shouldn't be treated differently. …"
The primary judge concluded that the award of interest should not be "grossed up" for tax.
Both parties agreed that their researches had identified only one case, in the District Court of South Australia, in which interest awarded had been "grossed up" for taxation: see Jackson v Abram (No 3) (District Court (SA), 24 September 2014, unrep) (Jackson). (Whilst the case went on appeal (Jackson v Abram (2015) 124 SASR 339; [2015] SASCFC 175), this conclusion in the District Court was not the subject of that appeal). The ex tempore reasons of Judge Clayton in Jackson reveal that his Honour was not prepared to gross up the award of damages for tax, as his Honour was not satisfied that the award would be taxable but that, as the award of pre-judgment interest would attract income tax, in accordance with Whitaker v Commissioner of Taxation (1996) 63 FCR 1; [1996] FCA 1716 (Whitaker), it should be "grossed up" for tax. One problem immediately apparent with reliance on Jackson is that Hill J's conclusion in Whitaker, that pre-judgment interest was income according to ordinary concepts, which was relied upon by Judge Clayton as authority for this part of his decision, was reversed in the Full Court: see Whitaker v Commissioner of Taxation (1998) 82 FCR 261; [1998] FCA 262. The Full Court held that pre-judgement interest in that case, a personal injury case, was on capital account. A second problem with Jackson is that no reason (beyond reference to Hill J's overruled decision in Whitaker) was given for rejecting the submission that the lump sum pre-judgment interest in that case was a gross award, and not an award net of tax.
In Cullen, Gibbs J (at 22) said that the award of interest should always be approached in a broad and practical way and should not be allowed to assume disproportionate importance in the resolution of the dispute. Whether or not there should be a gross up for pre-judgement interest is an even more remote question and his Honour's caution should be kept firmly in mind.
There is some limited authority dealing with a related question, whether it is appropriate to "gross up" for tax the amount of an award which itself represents an amount "grossed up" for tax. In Westpac v Jamieson [2016] 1 Qd R 495; [2015] QCA 50, the issue was described thus by McMurdo P at [6]:
"6 The relevant provisions of the Income Tax Assessment Act are set out in Applegarth J's reasons at paragraphs [196] and [197]. It is uncontentious that Mr Jamieson's damages of $489,129 were assessable under the Income Tax Assessment Act. The question in this aspect of the cross appeal is whether the award of $200,992 for grossing up to ensure Mr Jamieson was fully compensated for his loss is an assessable recoupment under s 20-20. If so, in order to properly compensate Mr Jamieson, it would be necessary to mathematically calculate a higher award of damages, effectively grossing up the entire award of damages other than interest ($690,121). That was referred to in this appeal as "grossing up the grossing up".
The Queensland court rejected the attempt to recover damages as in effect a "gross up" for tax of the amount which had been grossed up for tax. It is correct, as Macquarie submitted, that the ratio of this case, that s 20-20 of the Income Tax Assessment Act 1997 had not been shown to be applicable, is far removed from the present issue. SLHD is, however, correct to submit that each of their Honour's analysis is inconsistent with interest being treated as the same way as a compensation payment and being itself "grossed up" for tax. This is especially so in considering the reasons of Appelgarth J at [198]-[202] where his Honour describes, by references to authority, the lack of support for an approach of "grossing up" for tax the "grossed up" amount for tax.
There are cases where courts have concluded that an award of interest should not be "grossed up" for taxation: see Mulvaney Holdings Pty Ltd v Thorne (No 2) [2012] QSC 146 and the cases referred to therein. No complete or satisfactory explanation for why that view was taken is contained in those cases. We propose therefore to approach the question from first principles.
In Batchelor v Burke (1981) 148 CLR 448; [1981] HCA 30, Gibbs CJ described the purpose of an award of interest as being to compensate the plaintiff for the detriment that he or she had been suffered by being kept out of his or her money: at 455.
In MBP (SA) Pty Ltd v Gogic (1991) 171 CLR 657; [1991] HCA 3, seven judges of the High Court described the "detriment" suffered for which interest is awarded as not being part of the loss occasioned by the tort but, rather, as a loss due entirely to delay in the payment of money ultimately held to be due and not recoverable as part of the damages.
Whilst the damages awarded to Macquarie as mesne profits were, relevantly, paid to compensate Macquarie for its lost commercial opportunity, the award of interest had a different purpose; namely to make good the loss due entirely to delay in the payment of money ultimately held to be due. The interest component was not recoverable as part of Macquarie's damages.
As we have explained, on the contingent basis, contrary to our principal conclusion, that the primary judge did not err in his assessment of damages in respect of the Hospital Site, it was appropriate to "gross up" for tax the damages award here as the cash flows forming the basis of the model which calculated Macquarie's damages were after tax cash flows, calculated on the basis that tax had been paid as those cash flows were derived. It makes sense in those circumstances to "gross up" the award of damages to put Macquarie in the position it otherwise would have been in by compensating it for tax notionally paid as part of the discounted cash flow model.
The interest awarded in this case, however, was not calculated on the same basis. It was an amount added to the award of damages. It was an amount paid to compensate Macquarie for the detriment that it had suffered by being kept out of its money. Although it may be accepted that in assessing tax the award of pre-judgment interest took its character from the award of mesne profits to which it was applied, the amount of pre-judgment interest was a gross award, and not an award net of tax. In those circumstances Macquarie failed to prove that it was unjust not to take account of identifiable and quantifiable taxation impacts on the pre-judgment interest component of the damages it was awarded.
On the contingent basis we are addressing ground 2 of the cross-appeal, it too should be dismissed.
[63]
Conclusion and orders
We have concluded that the following orders should be made:
1. Appeal allowed;
2. Cross-appeal dismissed;
3. Set aside orders 1-7 and 9 of the orders made by Kunc J on 29 November 2019, and, in their place, make the following orders:
1. Judgment for Macquarie as follows:
1. mesne profits of $14,530,510 (comprising $9,486,564 in damages and $5,043,946 in interest) in relation to the Car Park Site together with interest under s 100 of the Civil Procedure Act 2005 (NSW) on that total amount from 4 May 2017;
2. $1,048,800 in damages for additional building and consultancy costs; and
3. $301,990 (excluding GST) in damages for remediation and excavation work.
1. Macquarie pay SLHD's costs of, and incidental to, the appeal.
It was agreed at the hearing of the appeal that the parties would be given an opportunity to make submissions about the costs of the trial after these reasons had been delivered. In order to resolve any disputes about those issues, the following orders are made:
1. By 9 November 2020, SLHD to file submissions not exceeding 15 pages about the question of costs and such additional orders, if any, it is submitted that Court should make (including the amount of interest to be awarded since 4 May 2017 referred to order 3(a)(i) and whether any order for restitution should be made);
2. By 16 November 2020, Macquarie to file submissions not exceeding 15 pages about the question of costs and such additional orders, if any, it is submitted that Court should make (including the amount of interest to be awarded since 4 May 2017 referred to order 3(a)(i) and whether any order for restitution should be made);
3. By 20 November 2020, SLHD to file submissions in reply not exceeding 5 pages.
The present intention of the Court is to deal with those issues on the papers and any application for further oral hearing should be addressed in the written submissions.
[64]
Amendments
08 December 2020 - Errata to coversheet in decision section as follows:
[65]
in order (5):
"... costs and such additional orders, in any, ... " is changed to "... costs and such additional orders, if any, ..."; and
"... since 4 May 2017 referred to order 3(a)(ii) ..." is changed to "... since 4 May 2017 referred to order 3(a)(i) ..."
[66]
in order (6):
"... costs and such additional orders, in any, ... " is changed to "... costs and such additional orders, if any, ..."; and
[67]
"... since 4 May 2017 referred to order 3(a)(ii) ..." is changed to "... since 4 May 2017 referred to order 3(a)(i) ...".
[68]
In the judgment at [549], the above changes are also made to subparagraphs (1) and (2).
DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.
Decision last updated: 08 December 2020
stay of orders made by Court of Appeal - whether stay of orders needed to be expressly lifted by Court of Appeal.
Legislation Cited: Civil Procedure Act 2005 (NSW) s 100
Income Tax Assessment Act 1997 (Cth) ss 20-20, 118-37
Uniform Civil Procedure Rules 2005 (NSW) r 36.4
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WR Cole, The Law and Practice in Ejectment
(H Sweet, 1857)
WS Holdsworth, A History of English Law (2nd ed, Methuen, 1937)
Category: Principal judgment
Parties: Sydney Local Health District (Appellant)
Macquarie International Health Clinic Pty Limited (Respondent)
Representation: Counsel:
Clayton Utz (Appellant)
S Moran & Co (Respondent)
File Number(s): 2019/404200
Decision under appeal Court or tribunal: Supreme Court of New South Wales
Jurisdiction: Equity Division
Citation: [2016] NSWSC 1587; [2017] NSWSC 1249;
[2019] NSWSC 916; [2019] NSWSC 1590
Date of Decision: 10 November 2016
Before: Kunc J
File Number(s): 2000/34949; 2010/90340
[This headnote is not to be read as part of the judgment]
In 1996, Macquarie International Health Clinic Pty Ltd (Macquarie) entered into a series of agreements with Sydney Local Health District (SLHD) in relation to the development of a private hospital and car park on two lots of land (the Hospital Site and the Car Park Site) in Camperdown, NSW. On 17 March 2000, SLHD purported to terminate the Construction Deed, the Car Park Sublease and the Hospital Lease, and re-entered and took possession of the Hospital Site and the Car Park Site. At this time, Stage 1 of a Car Park had been built, although planning approval to occupy the Car Park had not been obtained. No private hospital had been constructed on the Hospital Site.
On 14 October 2010, this Court upheld a claim by Macquarie that, on or about 17 March 2000, SLHD committed a trespass by retaking possession of the Hospital Site and the Car Park Site.
Following the dismissal of an application for special leave to appeal to the High Court, Macquarie elected for an inquiry as to damages in respect of the trespass to the two sites. Macquarie initially sought compensation by way of damages for loss of commercial opportunity to develop the Hospital Site and loss of profits in respect of the Car Park Site.
After some 40 days of the hearing of the inquiry as to damages, Macquarie amended its claim, abandoning the claim for damages for loss of commercial opportunity and consequent loss of profits and instead sought damages by way of mesne profits as a result of the trespass to both the Hospital Site and the Car Park Site.
After a hearing over a number of years resulting in multiple judgments, the primary judge awarded Macquarie approximately $55 million (including interest) by way of mesne profits for the trespass to the Hospital Site, and approximately $30 million (including interest) in relation to the trespass to the Car Park Site.
The principal issues which arose on appeal were:
1. In relation to the Hospital Site:
1. whether the primary judge erred in his approach to the assessment of mesne profits;
2. whether SLHD had argued at first instance that mesne profits were available only in respect of the actual use of the trespassed upon site in its existing condition at the time of trespass (the Existing State/Actual User Argument).
1. If the approach of the primary judge to mesne profits for the Hospital Site was appropriate:
1. whether the primary judge was correct to discard matters going to the likelihood and risk that the private hospital (the Hypothetical Hospital) would have been built upon the Hospital Site had Macquarie remained in occupation, in his use and consideration of the financial model relied upon by Macquarie for the assessment of damages;
2. whether the primary judge erred in the equity beta used and the resultant discount rate which was applied to the cashflows used in the financial model, which formed a critical part of the Residual Land Value methodology followed by the primary judge;
3. whether the primary judge erred in his selection of an earnings margin used to derive the net revenue of the Hypothetical Hospital in his calculation of damages;
4. whether the primary judge erred in his estimate of the capital cost of fixtures, fittings and equipment (FFE) required for the Hypothetical Hospital.
1. In relation to the Car Park Site:
1. whether the primary judge erred in his assessment of damages for trespass to this site, in calculating the market rent on the basis of 100% occupancy of the car park by RPAH staff on weekends.
1. Generally:
1. in relation to the duration of the trespass, whether the trespass ended when the High Court refused special leave to appeal from the 2010 decision this Court, or only ended in 2015 when this Court formally lifted a stay which had been made by it in 2010 in relation to the orders it had made, including an order permitting Macquarie to retake possession of the Hospital Site and the Car Park Site (the Duration Issue);
2. whether or not the damages awarded by way of mesne profits for the Hospital Site should be grossed up for taxation purposes (the Taxation Issue).
1. In relation to Macquarie's cross-appeal:
1. whether the primary judge erred in calculating Macquarie's damages by way of mesne profits for the reasonable letting value of the Hospital Site for the first 15 years of a hypothetical lease for a term of 103 years by discounting the aggregate notional market rental of the Hospital Site for the first 15 years back to the date the cause of action arose;
2. whether the damages award should be "grossed up" for tax on the interest component of damages.
The Court held (Bell P, Gleeson JA, Payne JA) allowing the appeal:
1. In relation to the Hospital Site:
1. The primary judge erred in his approach to the assessment of mesne profits, resulting in a significant overcompensation to Macquarie. By assessing damages for trespass with respect to a hypothetical, operating private hospital which had not yet come into existence, the primary judge failed to focus on the actual use of the land by SLHD in its existing state as an unimproved block of land, and significantly departed from the principle that mesne profits is a remedy for trespass to the right to immediate possession of land. The primary judge erred by seeking to value contractual rights (namely, Macquarie's right to operate a private hospital on the Hospital Site), which was not an assessment of mesne profits for trespass to the land: [216]-[238].
2. Discussion by the Court of the history of and principles relating to mesne profits ([79]-[137]):
Ashman and Ministry of Defence v Thompson [1993] 2 EG 107; Attorney-General v Blake [2001] AC 268; Bunnings Group Limited v CHEP Australia Ltd (2011) 82 NSWLR 420; [2011] NSWCA 342; Gaba Formwork Contractors Pty Ltd v Turner Corporation Ltd (1993) 32 NSWLR 175; Inverugie Investments Ltd v Hackett [1995] 1 WLR 713; Lamru Pty Ltd v Kation Pty Ltd (1998) 44 NSWLR 432; Penarth Dock Engineering Co Ltd v Pounds [1963] 1 Lloyd's Rep 359; Roberts v Rodney District Council [2001] 2 NZLR 402; Stoke-on-Trent City Council v W.& J. Wass Ltd [1988] 1 WLR 1406; Strand Electric and Engineering Co Ltd v Brisford Entertainments Ltd [1952] 2 QB 246; Turner v Minister of Public Instruction (1956) 95 CLR 245 at 268; [1956] HCA 7; Waugh v Attorney-General [2006] 2 NZLR 812; Whitwham v Westminster Brymbo Coal and Coke Co [1896] 2 Ch 538, considered.
1. Mesne profits are damages for the defendant's actual use or usage of the plaintiff's real or personal property: [128]-[131].
2. Mesne profits are damages for the defendant's use of the property in its existing state at the time of the commencement of the trespass: [132].
3. The usual measure of damages for or by way of mesne profits will be the market rent for the premises or for the hire of the goods in their state during the period of the trespass. The calculation of the market rent must have regard to the particular context of the case and characteristics of the property or goods in question: [134].
4. Whilst the usual measure of damages for or by way of mesne profits will be the market rent for the premises in their state during the period of the trespass, there may be special circumstances associated with the defendant which warrant a departure from that yardstick: [135].
5. The market rent may be conceptualised or influenced by reference to the particular characteristics of the trespasser or the plaintiff: [136].
6. The particular circumstances of the parties and the property in question may be especially relevant in a case where there is no usual or standard market for the rental or hire of the property in question: [137].
7. The primary judge erred in concluding that SLHD had not made the Existing State/Actual User Argument at first instance. By reference to the history and record of the proceedings, particularly the parties' closing written submissions and the transcript of closing oral submissions, it was clear that not only was this argument made but that it was understood by Macquarie to have been made: [160]-[196].
1. On the alternative basis that the primary judge was correct to follow the methodology he did in his assessment of the market rental for the Hospital Site:
1. The primary judge erred by characterising as irrelevant evidence and submissions relating to the likelihood and risk that the Hypothetical Hospital would have been built had Macquarie remained in occupation. Matters the primary judge deemed "irrelevant" went directly to the likelihood of the obligation to construct the hospital being fulfilled and, by not taking those risks into account, the primary judge awarded mesne profits for the loss of a commercial opportunity without engaging in an analysis of whether the commercial opportunity ever existed and, if so, the contingencies affecting the market value of that lost commercial opportunity: [261]-[271].
2. The primary judge erred in the equity beta and discount rate he adopted. By accepting the evidence of Macquarie's expert, whose lower assessment of risk informed his lower beta figure, the primary judge proceeded on an unrealistic assessment of risk to the project, and did not address the fact that this expert's identification of key risks was made in the context of his instructed assumption that the Hypothetical Hospital would be built: [278]-[281].
3. The primary judge erred in his selection of an EBIT margin figure for use as part of his damages calculation. His Honour did not accept the 17% or 13% EBITDA margin figures as propounded by Macquarie's and SLHD's experts respectively; rather, he selected an EBIT margin figure of 15% based on a model prepared by an expert called by SLHD in 2007 for a different purpose, without addressing the other aspects of that expert's reasoning, thereby falling into error. By adopting a 15% EBIT figure, the primary judge failed properly to take into account the risks to the Hypothetical Hospital Project: [282]-[286], [317]-[328].
4. The primary judge erred in his assumption as to the FFE costs for the initial construction period of the Hypothetical Hospital. Although his Honour was entitled to adopt a "broad brush" approach and select a figure between the "too low" figure propounded by Macquarie's expert and the "too high" figure propounded by SLHD's expert, the primary judge erred in commencing his analysis using the experts' estimates following the first conclave, as opposed to the final conclave report. In so doing, the primary judge overlooked the significance of the various concessions and adjustments made by the experts: [348]-[357], [377]-[380].
Nikolaou v Papasavas, Phillips & Co (1989) 166 CLR 394; [1989] HCA 11; Fink v Fink (1946) 74 CLR 127; [1946] HCA 54, considered.
1. In relation to the Car Park Site:
1. The primary judge erred in his assessment of damages for trespass to the Car Park Site. Although the relevant experts agreed that in calculating a market rent for SLHD's use of the Car Park Site a figure of 22.5% was the appropriate figure for weekend occupancy of the Car Park Site, the primary judge instead assessed market rental on the basis of 100% occupancy on weekends. By disregarding critical evidence about the market for the Car Park Site during the period of the trespass, the primary judge misapplied the user principle, with his calculation resulting in a significant overcompensation for Macquarie: [421]-[432], [449]-[452].
Bunnings Group Limited v CHEP Australia Ltd (2011) 82 NSWLR 420; [2011] NSWCA 342; Inverugie Investments Ltd v Hackett [1995] 1 WLR 713, considered.
1. Generally:
1. In relation to the Duration Issue, the primary judge was correct to conclude that the trespass only ended on 2 November 2015, when this Court formally lifted a stay which had been made by it in 2010 in relation to the orders it had made, including an order permitting Macquarie to retake possession of the Hospital Site and the Car Park Site. The primary judge was correct in holding that the refusal of special leave by the High Court did not have the effect of "lifting" the stay, and that the stay was only "lifted" upon the giving of effect to the order by this Court in 2015: [462]-[468].
Klewer v Official Trustee in Bankruptcy (No 2) [2010] NSWCA 258; Smith Kline v French Laboratories (Aust) Ltd v Commonwealth (1991) 173 CLR 194 at 218; [1991] HCA 43;
1. In relation to the Taxation Issue, the Court held that if it was incorrect in its earlier conclusion with respect to the assessment of mesne profits relating to the Hospital Site, and the exercise undertaken by the primary judge was appropriate, the primary judge was correct to "gross up" the damages award for taxation. The cashflows used by the damages model for the Hospital Site were post-tax cashflows; that is, the experts calculated the cashflows on the basis that Macquarie derived those cashflows and paid tax on them at the time they were derived. The Court held that it would have been unjust not to take into account identifiable and quantifiable taxation impacts on the damages, which were in truth compensation for a lost commercial opportunity: [483]-[488].
Allsop v Federal Commissioner of Taxation (1965) 113 CLR 34; Atlas Tiles Ltd v Briers (1978) 144 CLR 202; British Transport Commission v Gourley [1956] AC 185; Cullen v Trappell (1980) 146 CLR 1; [1980] HCA 10; Daniels v Anderson (1995) 37 NSWLR 438; (1995) 118 FLR 248; Gill v Australian Wheat Board [1980] 2 NSWLR 795; Haines v Bendall (1991) 172 CLR 60; [1991] HCA 15; Kuru v State of New South Wales (2008) 236 CLR 1; [2008] HCA 26; McLaurin v Federal Commissioner of Taxation (1961) 104 CLR 381; [1961] HCA 9; New South Wales Cancer Council v Sarfaty (1992) 28 NSWLR 68; (1992) 44 IR 1;
1. In relation to the cross-appeal, if it were necessary to decide:
1. The primary judge did not err in calculating Macquarie's damages by way of mesne profits by discounting the aggregate notional market rental of the Hospital Site for the first 15 years of a hypothetical lease for a term of 103 years back to the date the cause of action arose.
2. The primary judge did not err in refusing to gross up for taxation the award of interest.
One of the difficulties of conducting an extended process of the assessment of damages over a number of years is that his Honour eventually found, in a judgment delivered two and a half years after his Principal Judgment (at SJ [130]), that:
"… I do not accept that 'commerciality' is a useful comparator when, at least as I understand it, the basis for the adoption of the Residual Land Value methodology was a recognition that it was very difficult to see how in 'the real world' anyone would actually have sub-let or taken an assignment of the Hospital Lease, either for the term of the trespass or for the entire 103 year term. Rental in the context of the Residual Land Value methodology was notional. …." (Emphasis added.)
The fact that it was "very difficult to see how in the real world anyone would have actually sub-let or taken an assignment of the Hospital Lease" was a large part of SLHD's point. We agree with SLHD's submission that if the user principle permits damages to be obtained for the actual use of Macquarie's bundle of rights and obligation to build and operate the Hypothetical Hospital, then in principle the court must have regard to and make an assessment about the probabilities of rents from that Hypothetical Hospital being realised. Not to do so would result in the court awarding damages for the loss of a chance without engaging in an analysis of whether the lost chance ever existed and, if so, the contingencies affecting the value of that lost chance.
At para 38 of its written submissions on appeal, SLHD submitted:
"In rejecting as irrelevant SLHD's contentions and evidence which were (wrongly) found to be at odds with the user principle, the primary judge disregarded a substantial part of SLHD's case. In so doing, the primary judge constructively failed to exercise his jurisdiction and denied SLHD procedural fairness." (Footnote omitted.)
It will be abundantly clear that the primary judge assessed the reasonable rent for the vacant Hospital Site on the assumption that the Hypothetical Hospital would be built, without ever squarely addressing the probability or possibility of that occurring. His Honour found that "the methodology adopted was the same as that which would have applied for the compensatory principle: what (on the balance of probabilities) would have happened had the PAPH been built?": at Tax Judgment [129(1)] (Emphasis added.) Macquarie's repeated submission on appeal (T245:44-46) that the primary judge "did not proceed on the basis that there existed or, for that matter, that there would exist, a private hospital" cannot be accepted. As we have explained when addressing appeal grounds 1-3, the Coleman/Lonergan Report containing just that assumption was fundamental to Macquarie's claim for damages and his Honour's ultimate assessment of damages.
Macquarie's principal response to appeal ground 4 was that the Residual Land Value methodology was an "agreed methodology" between the parties to determine the reasonable market rental for the Hypothetical Hospital, and that the primary judge had taken into account all relevant risks, including the risk that the Hypothetical Hospital may not be built, in determining the inputs to the valuation model used by the parties.
We reject this submission for a number of reasons.
As we have explained, Macquarie's case was that it was entitled to mesne profits on the basis of a lost commercial opportunity to build the Hypothetical Hospital and receive rents from it. The starting point is that the Residual Land Value methodology was not an "agreed methodology" in the sense that SLHD never accepted that it may be assumed, rather than proven, that the Hypothetical Hospital would or even might be built. It is correct that Mr Burton appearing for SLHD in the course of closing oral submissions before the primary judge in 2015 made this submission:
"HIS HONOUR: Thank you, that's helpful, but what I wanted to make perfectly clear, because it's a very important point as far as I'm concerned, is it common ground between the parties that the method of calculating what are called [mesne] profits in this case in relation to the hospital lease is what Mr Palassis describes as a methodology akin to a residual land value assessment? Is that common ground?
BURTON: Subject to the matters I've mentioned, which include that negotiation on the actual amount paid, I think the actual method of doing it - you discount the cash flows back and end up with an NPV and it's either negative or positive, and then what you do with that is at issue, but the method of doing that is not at issue as we understand it, yes."
This was not a concession that, in applying the Residual Land Value methodology, it was appropriate to assume, as the assumption made in the Coleman/Lonergan Report did, that the Hypothetical Hospital would be built or that any of the risks, for example termination risk, were "irrelevant" in determining the market rent for the Hypothetical Hospital. So much is clear when considering the reports of the experts called by SLHD in addressing the valuation approach that had been introduced into the case by the Coleman/Lonergan Report. Those experts, unlike Macquarie's experts, did not assume that the Hypothetical Hospital would be built but, rather, assessed the risks to the project, including the risks that the project would not be built at all, or that the Lease might be terminated. The experts called by SLHD took those risks into account. The primary judge, however, concluded that vast swathes of evidence and submission identifying and seeking to quantify those risks were irrelevant.
The fact that SLHD's experts addressed the Residual Land Value methodology did not constitute an abandonment of SLHD's fundamental point that Macquarie's claim was novel and that mesne profits for trespass to land, as conventionally understood, were concerned with actual usage of the trespassed upon land in its existing state. We have dealt with this topic at length under appeal ground 1 above, but it is as well to recall the primary judge's observation at PJ [154] that SLHD described the manner in which Macquarie advanced its claim for mesne profits "as 'ambitious and novel' because 'the value of the claimed loss is dependent on the fulfilment of its contractual obligations to realise an opportunity'."
The Residual Land Value methodology is a well understood method to value contractual rights attaching to land. As with all valuation methodologies, the Residual Land Value methodology relies upon assumptions. As has been noted, a critical assumption underlying the Coleman/Lonergan Report, which was the centrepiece of Macquarie's case and which was particularised as the basis upon which it was entitled to mesne profits for the Hospital Site, was that the Hypothetical Hospital would be built, whether by Macquarie or some other entity as assignee. The failure by Macquarie to prove an essential assumption which underlay assessment of the risks of the commercial opportunity which it asked to be valued was a critical problem in the award of mesne profits for the Hypothetical Hospital.
Macquarie submitted that the primary judge did not need to make a finding about the likelihood that the Hypothetical Hospital would be built when assessing the market rent for the use of the Hospital Site (T224:26-40):
"BELL P: Mr Hutley, did the judge find, on the balance of probabilities, or at all, and did he need to find, that the hospital would have been built?
MR HUTLEY: No.
BELL P: What, no he didn't find that and he didn't need to find it? Is that what you are saying?
MR HUTLEY: He did not need to find it. He did not need to find it at all. Your Honour, let it be assumed that somebody had tried to sell these rights, or lease them, without any breach, without anything. The expert tells us there would be a valuation process done according to this methodology, and somebody would pay for it on that basis."
Whilst we of course accept that Macquarie's bundle of rights and obligations in relation to the Hypothetical Hospital were able to be valued, the assumption which underpinned Macquarie's valuation evidence, that Macquarie or an assignee would have built the Hypothetical Hospital, needed to be proved if the financial model giving effect to the Residual Land Value methodology was to be at all meaningful. Macquarie's retort, that "it lies not with the trespasser to take advantage of speculative advantages" (T235:24-25), did not address this critical issue.
The right to operate the Hospital Site was necessarily predicated and sourced in the obligation to construct the hospital. The value of Macquarie's implicit right to operate the Hypothetical Hospital depended upon an assessment of the likelihood or otherwise of that obligation being performed, whether by Macquarie or an assignee of Macquarie.
SLHD was correct in its submission that the primary judge, in assessing the market rental of the Hospital Site by reference to the Residual Land Value methodology, was wrong to exclude from consideration SLHD's evidence and submissions about the risks to Macquarie, or a third party, of fulfilling Macquarie's contractual obligations under the various agreements which the parties entered into on 2 December 1996. Failure to do so meant that the primary judge did not value the commercial opportunity Macquarie actually had, but a commercial opportunity based on a certainty that the Hypothetical Hospital would be built. On the contingent hypothesis, contrary to our conclusion on appeal ground 1 that this exercise was legitimate, that approach resulted in a vast overcompensation to Macquarie.
Expressed slightly differently, the approach adopted by the primary judge did not identify a market rent for the commercial opportunity represented by the rights and obligations Macquarie actually enjoyed. By not taking those risks into account, the primary judge awarded mesne profits for the loss of a commercial opportunity without engaging in an analysis of whether the commercial opportunity ever existed and, if so, the contingencies affecting the market value of that lost commercial opportunity.
The application of orthodox principles of valuation required the primary judge to address whether the assumptions upon which the valuation of contractual rights advanced by Macquarie had been proven. On the contingent hypothesis that what the primary judge thought it was necessary to value was correct, the primary judge was required to assess the risks that the Hypothetical Hospital would not be built or that Macquarie's contractual rights would legitimately be terminated. The primary judge's approach to the assessment of mesne profits did not do so. This was in error.
Macquarie's submission that the primary judge's finding that the risk of the Hypothetical Hospital being built was considered by the primary judge in determining the inputs to the "agreed" Residual Land Value model and applying the "agreed valuation method" should also be rejected.
In order to demonstrate why this is so, the damages model and some of the critical integers in that model need be addressed. The first matter to emphasise is that Macquarie's experts never produced modelling on a basis other than that it was to be assumed that the Hypothetical Hospital would be built.
In answering Macquarie's experts, SLHD relied on a number of experts who did not make that assumption but, rather, sought to identify the risks to the project based on all of the evidence. Mr Palassis, an expert called by SLHD, who was incorrectly identified by the primary judge as being the author of the "agreed" methodology at PJ [544] cf SJ [80], squarely addressed the question of risk:
"4.3 Questions 1 (c)
What are the prospects (if any) that New Tenants would be prepared to enter into the New Leases, in light of those key risks?
In my opinion, the New Tenant would be extremely unlikely to enter into the New Leases for the risks provided above. The major reasons or risks that prohibit the entering of the New Leases are:
Default Risk - as the risk of termination of the Head Lease exists, no investing party would invest in the environment that the tenancy could be terminated; and - Term Risk - the term required is too short for any commercial investment to be viable.
Other risks may also impact on this decision, but the above two risks are threshold risks that would prohibit a New Tenant even commencing due diligence on other aspects or in further detail, let alone investing in a facility development."
Default Risk and Term Risk were not the only significant risks to the Hypothetical Hospital identified by Mr Palassis. Mr Palassis did not accept that the other risks to the project he identified could be put to one side. All of the risks he identified were as follows:
"The key risks that a new tenant would have regard to, include:
4.1.1 Default
It is understood that at the time of entering into the New Leases, MIHC is in default of its obligations to SLHD. To the extent that such prolonged and extended into the period in which a New Lease would exist, the prevalence of this default would provide a significant risk and barrier to any party entering into the New Leases. No party would enter into a Sub-Lease with an unresolved default and termination of the Hospital Lease being possible.
4.1.2 Cross Default
The presence of a default under the Carpark Lease provides a further risk that is outside the control of the Sub-Lessee and therefore such presence of cross-default further increases the lack of ability to enter into a Sub-Lease for the Hospital.
4.1.3 Term
The term of the arrangements proposed under the New Leases would not be enough for the Sub-lessee to recover the capital cost invested into the Hospital and thus the Hospital would not be viable. Further explanation of this risk is provided in the response to Question 1(e) below.
4.1.4 Hospital Design
As instructed in paragraph 10 of your letter of instruction, the Sub-Lessee would be constructing a pre-designed facility in accordance Exhibit A26P. This would provide a risk that:
The facility design is not appropriate for the purposes of the Sub-Lessee's proposed undertakings and clinical services; and
The facility design is not optimal or efficient for purposes of the Sub-Lessee's proposed undertakings.
4.1.5 Development Consents and Building Approvals
A Sub-Lessee would consider the risks of achieving the obligations contained within the existing planning and building approvals. Such approvals may provide onerous obligations that are not capable of viably being complied with.
4.1.6 Obligations under the Transaction Documents
The transaction documents between the SLHD and MIHC create obligations on the various parties. The obligations created upon MIHC and any obligations passed-through to the Sub-Lessee would require examination to determine their ability to be complied with and further risk.
In addition, given MIHC's previous history of default, any obligations that remained with MIHC and were not transferred to the Sub-Lessee would require examination to ensure MIHC could comply with such obligations.
4.1.7 Market Risks
A potential Sub-Lessee would have regard to the demand and supply for private hospital services in and around the appropriate catchment for the Hospital. This would seek to determine the risk that a viable patient demand profile existed.
4.1.8 Construction Cost
This refers to the risk of construction costs for the Hospital being greater than anticipated.
4.1.9 Clinician Attraction
This refers to the ability to attract clinicians to admit and perform services at the Hospital.
4.1.10 Workforce Attraction
This refers to the risk associated with attracting the staff to work at the facility.
4.1.11 Health Fund Agreements
This refers to the risk that a Hospital operator may not receive agreements, or favourable agreements, from private health insurers to make the Hospital viable.
4.1.12 Tenant Risk
The design provides for third party tenancies to occupy part of the Hospital, including medical practitioners in suites and commercial retailers. The ability to attract such at a viable commercial rate would be a risk to the project. This is especially the case given the limited term for the Sub-Lease."
On the contingent hypothesis that the approach adopted to valuing the Hypothetical Hospital by the user principle was justified at all, the critical difficulty with the approach by the primary judge to valuation of Macquarie's lost opportunity to exploit its contractual rights is that the Coleman/Lonergan assumption at the heart of Macquarie's model simply assumed away the risks of the Hypothetical Hospital being built at all. The primary judge rejected as irrelevant the evidence and submissions by SLHD which sought to identify and quantify the extent of the risks to the Hypothetical Hospital which should have been taken into account in conducting a valuation of the market rent payable to Macquarie for trespass to its rights.
It will be recalled that the primary judge treated as irrelevant evidence led by SLHD and submissions made about the following topic:
"Issue 33: Feasibility and valuation outcomes
Was the private hospital project feasible and what is the outcome for mesne profits with respect to the leasehold of the hospital site?"
The finding by the primary judge that it was "legally and commercially correct" (at PJ [548]) that it should be assumed in calculating the value of the lost commercial opportunity to exploit Macquarie's contractual rights that that the Hypothetical Hospital was built and generated assumed cash flows for 103 years, without regard to evidence and submissions about whether that project was even feasible was, with respect, untenable.
This conclusion highlights fundamental problems with the primary judge's valuation approach. The bundle of rights and obligations actually held by Macquarie was not correctly valued by assuming away as "irrelevant" the risks that the Hypothetical Hospital would never be built or that the Transaction Documents would be validly terminated. No principle of valuation or of calculation of mesne profits permitted the primary judge's approach. Far from it being an "agreed" approach, SLHD's experts sought to quantify the relevant risks. The approach of the primary judge adopted Macquarie's approach, which simply assumed a number of critical risks away.
In the proper application of the Residual Land Value methodology, the critical differences between the parties were each determined by the primary judge adopting inputs which did not pay regard to the actual risks to the Hypothetical Hospital project. Even assuming that the exercise itself was a valid one, this produced numbers grossly exceeding reasonable market rent to Macquarie. A close examination of two topics, equity beta/discount rate and project cash flows - EBIT/EBITDA margins sufficiently demonstrates that, by treating as irrelevant a vast amount of evidence and submissions about the risks to the Hypothetical Hospital, the primary judge's valuation exercise miscarried.