Versus (Aus) Pty Ltd v A.N.H. Nominees Pty Ltd

Versus (Aus) Pty Ltd v A.N.H. Nominees Pty Ltd - [2014] VCAT 454 - VCAT 2014 case summary — Zoe

[7]

This proceeding arises after prolonged litigation between the parties, which culminated, at least in part, in a determination by the Tribunal on 1 December 2011 ('the Earlier Proceeding').[2] That determination required the Respondent to pay the Applicant damages of $218,599.63 plus interest.
The nature of the dispute comprising the Earlier Proceeding is not far removed to what is before the Tribunal in this proceeding. In essence, the Applicant ('the Tenant') leased retail premises located in Brighton ('the Premises') from the Respondent ('the Landlord') pursuant to a lease agreement dated 10 November 2006 ('the Lease'). The Premises have long suffered from problems associated with moisture ingress and mould, leading to the Premises being unfit for occupation. As a result, the Tenant was awarded damages in the Earlier Proceeding commensurate with its loss occasioned by the inability to occupy and trade from the Premises.
The orders made by the Tribunal on 1 December 2011 awarded damages up until the 31 December 2011[3] and it would appear from the published Reasons that this date was selected on the assumption that the Premises would be repaired and fit for occupation sometime in January 2012. According to the Tenant, this has not occurred. It contends that the Premises were never made fit for occupation and as a result, the Landlord has repudiated its obligations under the Lease, with the consequence that the Tenant terminated the Lease by letter dated 27 March 2013. The Landlord denies that the Premises were not made fit for occupation; although it accepts that the Lease has come to an end.[4]
It is obvious that the central question that underpins this proceeding is whether the Premises were ever made fit occupation and if so, when? It is on that premise that the Tenant couches its claim against the Landlord. In particular, in its Third Further Amended Points of Claim, the Tenant makes various claims against the Landlord. As I understand the Tenant's pleading, it alleges breach of lease, unconscionable conduct and misrepresentation on the part of the Landlord as the legal grounds upon which it relies. The Tenant alleges that certain promises were made by the Landlord that it was to commence remedial work in the early part of January 2012 in order to arrest any moisture ingress and eradicate all mould which had infested the Premises as a consequence of that moisture ingress. The Tenant contends that the Premises were never remediated to a point where the level of mould in the Premises was rendered safe to allow reoccupation of the Premises. As a result, the Tenant alleges that the lingerie business that it had previously operated from the Premises was effectively destroyed with the consequence that it has suffered considerable loss, which it quantifies and claims as follows:
- (a) $358,924.45 for loss of profits from the period 1 January 2012 until the end of the term of the Lease, being 18 May 2016.
- (b) $1,443,005 for the loss of the goodwill value associated with the business.
- (c) $40,000 being the costs of initially purchasing the business, which it says are now thrown away.
- (d) Unliquidated damages representing the loss of opportunity to expand its business.
- (e) $791.01 being electricity charges which it incurred as a result of the Landlord temporarily occupying the Premises for the purpose of undertaking remedial work.
- (f) Exemplary damages.
- (g) Costs.
The Landlord does not dispute that the Premises had, historically, suffered from water ingress problems, with the result that elevated levels of mould were detected within the Premises. Indeed, this was the conclusion reached by the Tribunal in the Earlier Proceeding. However, the Landlord disputes that the Premises were not made fit for occupation. It further disputes that it was obligated to carry out remedial work to arrest water ingress or eradicate mould after the Lease was renewed an 18 May 2011, notwithstanding the fact that it undertook significant remedial works at its own cost after that date.

[16]

On 9 November 2011, Mr Lepp [for the Landlord] engaged Pure Protect to do the work as soon as possible. Even if that work is carried out immediately, because of the need to fully dry out the premises and then take steps to eradicate the mould, I find it highly probable the premises will, at best, not be fit for re-occupation until at least 1 January 2012.
As I have already indicated, the Tribunal determined that the Tenant was entitled to compensation for losses occasioned as a result of the water ingress, mould infestation and other issues that arose during the course of the tenancy. However, the present proceeding relates to losses which occurred after January 2012 and which, in many respects; differ from the heads of damage claimed in the Earlier Proceeding.[7]
According to the Landlord, there were delays in effecting remedial work following the orders made by the Tribunal in the Earlier Proceeding. Mrs Lepp, the director of the Landlord gave evidence that:
1. Part of the Judgment given by Judge Lacava required the Respondent to repair and decontaminate the premises of mould including the wet wall [the west wall].
2. From on or about January 2012 attempts were made to damp proof the wet wall from the outside of the premises. Next to the premises is 15 Church Street which is tenanted to a florist. The most expedient and effective way to rectify the wet wall was to repair the wall from 15 Church Street.
3. The respondent's solicitors attempted to gain access from the other side of the wet wall but were thwarted by the unreasonable demands of the owners of 15 Church Street.
4. Negotiations continued for some months but eventually it was deemed to be too difficult to deal with the owners of 15 Church Street.
For reasons which I discuss below, the remedial works did not commence until January 2013. According to the Tenant, those remedial works did not result in the Premises ever being rendered fit for occupation.
Consequently, by letter dated 27 March 2013, the Tenant sought to terminate the Lease on the ground that the Landlord had repudiated its obligations under the Lease.

[25]

I do not consider that any contractual obligation to make the Premises fit for occupation arises by order of the Tribunal. Indeed, it is not for the Tribunal to prescribe the contractual obligations of the parties. Its function is to construe the terms of the Lease, rather than write them. Nevertheless, the Tenant seems to rely on the following order made by the Tribunal in the Earlier Proceeding in support of its contention:
1. The rent and outgoings payable by the applicant to the respondent will continue to abate until all mould is eradicated from both the surfaces and in the air at the premises. Before the premises are re-occupied by the applicant, the respondent is to obtain a report, at its expense, from qualified mould remedial specialist certifying that all mould has been eradicated from the surfaces and in the air within the premises.
There are a number of comments which I make in respect of the above order. First, the expert evidence given in this proceeding makes it clear and uncontroversial that some airborne mould will always be present in the Premises, which is an entirely natural phenomenon. Indeed, comparisons were made with the airborne levels of mould found internally with those found externally in order to ascertain suitable levels of airborne mould. Consequently, I do not interpret the orders made by the Tribunal to mean that all mould needs to be eradicated but rather, the order needs to be read down to mean the removal of all excessive levels of mould in order to make the Premises fit for occupation.
Second, I do not construe the orders of the Tribunal to mean that the Landlord has a contractual obligation to make the Premises free of mould or fit for occupation. The order relates to the abatement of rent. It merely provides that no rent is payable until excessive levels of mould is eradicated. It does not necessarily follow that an order for the abatement of rent means that the Landlord is in breach of its obligations under the Lease. For example, it is not uncommon for there to be terms in a lease that provide for the abatement of rent where premises are destroyed or rendered unfit for occupation through no fault of either party. Consequently, I do not find that the orders made by the Tribunal in the Earlier Proceeding create any contractual or quasi-contractual obligation to make the Premises fit for occupation.

[33]

In my view, the extract of the Reasons cited above does not determine the question whether the Lease requires the Respondent to repair or maintain the Premises such that they are suitable for occupation by the Tenant. In that sense, the Reasons must be read in context. In particular, the primary issue before the Tribunal at that time was whether the claim, the subject of the current proceeding was res judicata. That was the position taken by the Landlord when it argued that the cause of action raised by the Tenant in the present proceeding had merged into the judgment of the Earlier Proceeding. In particular, it was argued that the Tenant was merely seeking to sue for a breach of the Tribunal's previous orders. That argument was not accepted on the ground that the cause of action was not based on a breach of the Tribunal's earlier order but rather, based on a breach of the terms of the Lease.
Indeed, the extract of the Reasons set out above merely recognises the contractual basis upon which judgment was entered against the Landlord in the Earlier Proceeding. No doubt, such a finding, although not expressly articulated in the Reasons given in the Earlier Proceeding, was based on a finding that s 52 of the Retail Leases Act 2003 ('the Act') imported a contractual obligation into the Lease to maintain the Premises in a condition consistent with the condition when the Lease was first entered into. It is implicit in the Reasons given by the Tribunal in the Earlier Proceeding that the Tribunal considered that the problems which afflicted the Premises in early 2010 were problems that did not exist at the time when the Lease was first entered into. In that sense, it is common ground that the flooding and to a lesser extent, moisture problems, manifested in early 2010, some years after the Lease was first entered into.
However, the question now under consideration is whether the same applies after the Lease was renewed in May 2011. In other words, does the contractual obligation to maintain the Premises in a condition consistent with the condition at the commencement of the Lease, imported by s 52 of the Act, exist following renewal of the Lease. That question did not arise for consideration in the Earlier Proceeding or in the preliminary hearing.

[42]

It would appear that s 52 of the Act was the basis, in part, upon which the Tribunal found the Landlord liable in the Earlier Proceeding.[11] In particular, s 52 of the Act imported a contractual obligation into the Lease, which required the Landlord to maintain the Premises in a condition consistent with the condition of the Premises when the Lease was first entered into. As indicated above, in 2010 the Premises suffered from significant flooding, which ultimately resulted in considerable remedial work being undertaken by the Landlord. However, the circumstances are somewhat different in the present proceeding. In particular, it is common ground that the current Lease was renewed on 18 May 2011. This is confirmed in a declaration made by the Tribunal in the Earlier Proceeding.
In Ross-Hunt Pty Ltd v Cianjan Pty Ltd,[12] Deputy President Macnamara (as he then was) confirmed that the comparator for the purposes of s 52, is the most recent renewal of the Lease and not the date of commencement of the first term of the lease. In my view, that approach is correct. It is inconceivable that Parliament would have intended for the Landlord to remain responsible for maintaining retail premises in a condition consistent with the condition at the commencement of the original lease term in circumstances where the lease may provide for multiple terms extending over many years. Therefore, the comparator in relation to the present Lease is the condition that the Premises were in as at 18 May 2011. In that respect, the Tenant's case concedes that the Premises suffered from moisture problems and were infested with unhealthy levels of mould prior to that date.
It is common ground that the Premises were in need of repair prior to the Lease being renewed. Indeed, significant repair work was carried out between May and August 2011 in an attempt to repair water ingress issues that had plagued the Premises between November 2010 and February 2011.
Further, Mrs Spaleta, the former director of the Tenant, gave evidence that shortly after taking possession of the Premises, when the shop fitting works were undertaken by the Tenant, it was discovered that the west wall was water damaged. Photographs were tendered in support of that evidence. Indeed, the closing submissions of the Tenant make numerous references to its contention that the condition of the Premises prior to the original Lease being transferred to the Tenant in June 2006 was that the Premises had long suffered with moisture problems. Mrs Spaleta's evidence is consistent with the evidence of Mr Spaleta who said that when he began the shop fitting work, it became immediately apparent that there were water ingress problems affecting the Premises. He said the previous business had shelves over the west wall and once those shelves were removed he could see that there was a moisture problem on the west wall. He said that he observed that the wall and bricks were broken and mouldy.
That being the case, how can it be said that the Landlord had a statutory or quasi-contractual obligation to repair the moisture problems or eradicate the unhealthy levels of mould after renewal of the Lease? As I have already indicated, the parties have not pointed to any particular provision in the Act, the Lease or any other statutory enactment which imposes liability on the Landlord to carry out repairs or eradicate unhealthy levels of mould, other than s 52 of the Act.
It does not appear that this point was discussed or relied upon by the Landlord in the Earlier Proceeding. Therefore, it is not clear to me on what basis the Tribunal found that the Landlord was liable for the Tenant's losses after the Lease was renewed on 18 May 2011. That is one of the difficulties in having proceedings which canvass the same facts or circumstances being heard by a differently constituted Tribunal. Nevertheless, I raised this issue after receiving closing submissions from the parties, whereupon I made orders giving the parties leave to file supplementary submissions dealing with this specific issue. Both parties filed supplementary submissions in accordance with those orders.
Mr Spaleta submitted that the term of the Lease which requires the Landlord to give the Tenant quiet enjoyment of the Premises, carries with it an obligation to ensure that the Premises are fit for occupation. I do not accept that submission. In my view, the requirement to give quiet enjoyment does not, in itself, impose such an obligation. In other words, without there being some positive obligation on the Landlord to make the Premises fit for occupation, the failure to do so is not, in my view, a breach of the term to give quiet enjoyment of the Premises.
In Commercial Tenancy Law, the learned authors state:

[44]

Therefore, if there is no contractual or statutory requirement to make the Premises fit for occupation and the Premises were unfit for occupation at the time the Lease was renewed, then the failure to make the Premises fit for occupation does not amount to a failure to give quiet enjoyment of the demise because that was the state of affairs at the date of grant of the lease.
In the Tenant's supplementary closing submissions dated 25 February 2014, allegations are raised that the presence of asbestos was discovered after a number of floor tiles were lifted in the store room. This occurred after the Lease had been renewed. It was argued that this was a further factor evidencing that the Premises were not fit for occupation. However, this submission does not answer the question posed. In particular, it is not suggested that the presence of asbestos constitutes a condition which manifested during the current term of the renewed Lease. Indeed, it is beyond doubt that the asbestos cement sheet, upon which the ceramic floor tiles were laid, was present well before the original Lease was entered into in 2006.
The issue of asbestos was not raised in the Tenant's Third Further Amended Points of Claim. Indeed, objection was raised by the Landlord when the Tenant sought to adduce evidence going to that issue. In my view, it would be unfair to now consider the impact of the asbestos, given that no expert was called to offer any opinion as to whether the asbestos represented a risk to health or what impact it may have had in terms of re-occupying the Premises. Further, the Tenant, in its supplementary closing submissions, has included extracts of the Occupational Health and Safety (Asbestos) Regulations 2003 in support of its submission that the presence of asbestos made the Premises unfit for re-occupation. However, the extract of the regulation referred to and annexed to the Tenant's supplementary closing submissions speaks about the obligations of the occupier. It does not import contractual terms into the Lease which would require the Landlord to undertake work concerning the removal or otherwise of the asbestos. In my view, the issue of asbestos does not take the matter any further.
Therefore, I find that s 52 of the Act does not import a term into the Lease that requires the Landlord to make good water ingress or mould issues that were manifest prior to the Lease being renewed. However, 52 of the Act is not the sole ground upon which the Tenant submits that the Landlord had an ongoing obligation to make good excessive moisture and mould conditions within the Premises. It contends that this obligation also arises as a result of representations made by the Landlord, giving rise to unconscionable conduct on the part of the Landlord.

[53]

As I have indicated, the Tenant points to certain misrepresentations made by the Landlord concerning the state of the Premises, as constituting the unconscionable conduct on the part of the Landlord. Mr Schlicht submitted that the representations, even if proved to be false, would only be relevant in the sense that they were made at a time prior to entering into the Lease, such that they induced the Tenant to enter into the Lease. He conceded that only in those circumstances, would it be unconscionable for the Landlord to enforce the Lease. However, Mr Schlicht argued that this is not claimed by the Tenant. The unconscionable conduct complained of is the failure to restore the Premises to a fit state pursuant to promises made by the Landlord after the Lease was entered into. Therefore, the unconscionable conduct relates to events that post-date the entering into of the Lease.
The evidence of Mr and Mrs Spaleta, set out in their individual witness statements dated 17 February 2013, each repeat the same allegations concerning this issue verbatim:
1. The respondent entered into the lease with the applicant despite the respondent's knowledge of the serious problems with the premises before it entered into the lease with the applicant.
2. The respondent provided a false disclosure statement to the applicant in 2006, stating that the premises were fit for purpose in occupation in order to lease the premises and for the sole purpose of obtaining financial gain.
3. The respondent tricked the applicant into signing the lease knowing it is leasing a premises unfit for purpose and occupation and knowing that it would not maintain or repair the premises or comply with the lease or the Retail Leases Act 2003 ("the Act"), despite its representations to the contrary.
4. Despite knowing that its premises were not in a fit state for occupation, the respondent made the misrepresentations to the applicant, provided a false disclosure statement and entered into the lease with the applicant for its own financial gain. The respondent committed an act of fraud.
5. The respondent made further misrepresentations during the tenancy and at trial in the R187/2010 proceeding and further in relation to repairs and works performed or to be performed at the premises.

[58]

However, there is no direct evidence that the Tenant relied upon what it submits were representations to make the Premises fit for occupation or that it was induced to renew the Lease based on any such representation. Indeed, there is no evidence to suggest that the scope of work, set out in that email correspondence dated 23 April 2010, was not completed or at least substantially completed during the period May to August 2011, being the period that the Landlord undertook substantial remedial work.
Moreover, there is no evidence of any representation being made prior to 18 May 2011 to the effect that the respondent would ensure that the Premises would be fit for occupation. In my view, the representations only go so far as to promise that certain works, primarily concerned with arresting water ingress to prevent further flooding, would be undertaken by the Landlord. In fact, remedial work was undertaken by the Landlord between May and August 2011 in order to deal with water ingress issues. It was only after that time that concern over the infestation of mould started to play a prominent role in the dispute between the parties.
In passing, I note that in the Tenant's supplementary closing submissions, Mr Spaleta contends:
1. If the Respondent had not made its representations in 2010 and 2011 and given its undertakings to the Tribunal and the Applicant, including at hearing on 12 May 2011, where it asked the Tribunal to close the premises in order for it to perform its works at the premises for 2 to 3 weeks, the Applicant would not have exercised its lease option in February 2011, or renew the lease on 18 May 2011. By virtue of its representations and undertakings from April 2010 to May 2011 to the Tribunal and the Applicant that it will repair the premises, the Respondent enticed the Applicant into renewal of the lease, despite its knowledge that it failed to comply with OHS Regulations 2007 and failed to remove asbestos from the premises.
It is not clear to me what representations were made in 2010 to 2011, which the Tenant contends it relied upon or induced the Tenant to renew the Lease. The alleged representations pleaded in the Applicant's Third Further Amended Points of Claim, which were filed during the course of the hearing of the current proceeding, relate to email correspondence commencing 21 November 2011 through to 19 March 2012. Those 'representations', referred to as email correspondence, post-date the date of renewal and therefore cannot constitute representations which induced the Tenant to renew the Lease. Moreover, there is nothing pleaded, nor set out in the witness statements filed on behalf of the Tenant, to shed any light on what representations it asserts were made at the hearing on 12 May 2011.
In my opinion, there is no basis to claim against the Landlord on the ground that it engaged in unconscionable conduct by reason of it having represented that it would make the Premises fit for occupation. The mere fact that representations may or may not have been made prior to the entering into of the original Lease is of no consequence, insofar as the present proceeding is concerned, given that the Lease was renewed on 18 May 2011. That being the case, there is insufficient evidence for me to find that representations were made by the Landlord prior to the Tenant exercising its option to renew, which induced the Tenant to renew the Lease.
Nevertheless, the evidence before me indicates that the parties certainly had some mutual understanding that further remedial work was to be undertaken by the Landlord after the Tribunal handed down its decision in December 2011. That work concerned arresting excessive levels of moisture and eradicating excessive mould found to exist in the Premises. It is self evident that the Tenant persisted in maintaining the tenancy based on a belief that the Premises (and the shop fittings and other chattels removed from the Premises) would be remediated in a timely manner. Although this 'understanding' may not have had a contractual basis, given that there is no fresh consideration, it is reasonable to infer that it nevertheless altered the Tenant's position. For example, had the Landlord indicated that it was going to rely upon its strict contractual rights and not undertake any work to remediate the Premises, then it is likely that one of two things would have occurred:
- (a) the tenant would have sought to end the tenancy, given that it says it was unable to carry out its business without remedial work being done; or
- (b) the Tenant would have carried out the remedial work itself.
Neither of these circumstances eventuated. This is because the Tenant assumed that the Landlord would undertake the remedial work. That assumption was not baseless. There were numerous e-mails emanating from the Landlord indicating that it was poised to undertake remedial work and indeed, it is common ground that that is exactly what occurred, albeit late.
In my view, it was reasonable for the Tenant to believe that the Landlord would undertake the remedial work, given that the Landlord had indicated that it was poised to carry out that work. Although the Tenant has couched its claim in terms of unconscionable conduct inducing it to renew the Lease, it seems to me that the circumstances really give rise to equitable estoppel. The following passage from the judgment of Brennan J in Walton's Stores (Interstate) Ltd v Maher [18] seems to better encapsulate the way in which the Tenant has couched its claim under this particular head of damage:

[104]

Mr Siket prepared another report, dated 16 May 2013, and gave further oral evidence on 21 May 2013. His evidence was that he still found elevated moisture readings in various parts of the Premises. He opined that there was still a risk that the Premises could be hazardous if re-occupied if those moisture levels did not dissipate. He formed that view because he believed that elevated moisture levels could create an environment for mould growth beyond the normal mould ecology range. However, he qualified his opinion by stating that he did not know what remedial work was undertaken to arrest the problems associated with excessive moisture and therefore, was unsure whether the moisture levels would dissipate in time after the Premises had an opportunity to dry out.
During cross-examination, Mr Siket was criticised on the methodology used by him to measure moisture levels in the concrete slab floor. He conceded that the methodology employed by him was not in accordance with the relevant Australian Standard. He further conceded that the testing undertaken by him was indicative only.
Mr Siket confirmed that his moisture readings were taken in May, at a time after the remedial work had been completed to the concrete floor. His evidence was that the moisture readings taken by him were similar to the readings taken prior to the remedial work being undertaken. When asked about the scope of work undertaken by Mr Considine, he confessed that he was unfamiliar with the waterproofing work and conceded that he was not an expert in the field. It was put to Mr Siket that in order to properly read moisture in a concrete floor, it was necessary to drill holes into the concrete and to insert probes into those holes. Mr Siket agreed. He said that he did not adopt that process but merely rested the probes against the concrete floor.
Further, Mr Lark, the mycologist engaged by the Landlord, gave evidence that airborne sampling of the Premises conducted on 20 April 2013 revealed that the levels of airborne mould detected in the samples collected from within the premises were rated as Normal Mould Ecology on microscopy.[29]
In my opinion, Mr Siket's methodology to measure moisture levels in the concrete floor is questionable and I do not consider that his evidence can be taken as an accurate reflection of the moisture level in the concrete floor. In that respect, it seems unlikely in light of the evidence of Mr Considine, that the concrete floor would record the same moisture levels prior to and after the remedial work was undertaken. In my view, that conclusion undermines the credibility of Mr Siket's testing. I do not, therefore, accept that the moisture readings of the concrete slab were necessarily elevated post the remedial work.
Nevertheless, it is common ground that Mr Siket discovered some surface mould from the samples taken in the false ceiling. During cross-examination, Mr Siket was asked whether that area appeared to be dusty. He conceded that it was and it appeared not to have been cleaned as part of the remedial work undertaken to eradicate surface mould from the Premises. That evidence is not controversial, given that the Landlord conceded that there were some discrete areas which Premier Restorations missed when cleaning the Premises of all surface mould. Indeed, evidence was given by Ms Taylor-Blake, environmental consultant employed by the Landlord, that she instructed Premier Restorations to return to the Premises and re-clean those specific areas.
Moreover, evidence given by Mr Lark on 20 May 2013, the mycologist, who oversaw the analysis of the mould samples taken from the Premises at various times, was that he could not say, one way or the other, whether the Premises were fit for occupation as at that date.
On 14 August 2013, the Landlord obtained a report from Ivan Cupic of LRM Global Pty Ltd, which was also tendered in evidence. That report concludes:

[110]

[17] Whenever parties make a contract it is possible that they have conducted themselves in such a way that it can be said by implication that they have agreed to rescind their bargain: Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd [1957] HCA 10; (1957) 98 CLR 93, 114; Commissioner of Taxation of the Commonwealth of Australia v Sara Lee Household & Body Care (Australia) Pty Ltd [2000] HCA 35; (2000) 201 CLR 520, 534. This was dealt with by Isaacs J in Summers v Commonwealth [1918] HCA 33; (1918) 25 CLR 144. In that case the parties had entered into a contract for the supply of a specified number of blocks of marble each of a certain dimension. For some time neither party took any step to perform the contract. It was held that the parties had abandoned or abrogated the contract. Isaacs J said (at 151-152):

"Whatever the terms of contract may be, it is possible for the parties so to conduct themselves as mutually to abandon or abrogate it. A position not too altogether dissimilar arose in the case of De Soysa v De Pless Pol [1912] AC 194. There, neither party had repudiated or refused to perform the contract, nothing in the nature of recision had occurred, but, said Lord Atkinson for the Privy Council: - 'One party to a contract is not bound to give the other unlimited time after a day named to do that which the other has contracted to do. There must be some point of time at which delay or neglect amounts to refusal ... In truth, the project seems to have been, to a great extent, if not altogether, abandoned by all the parties concerned.' In my opinion, that is the legal position here. Informally, but effectively, the parties have so acted in relation to each other as to abandon or abrogate the contract."

Summers v Commonwealth has been applied by the High Court in D T R Nominees Pty Ltd v Mona Homes Pty Ltd [1978] HCA 12; (1978) 138 CLR 423. This case concerned a contract for the sale of land. The purchaser purported to rescind the contract on the basis that the vendor had repudiated the contract by not complying with a condition. The vendor asserted that the purchaser's rescission constituted a wrongful repudiation and that the contract was thereby at an end. Stephen, Mason and Jacobs JJ (with whom Aickin J concurred) said (at 434):

"[T]here can be no doubt that ... when these proceedings were commenced, neither party, whatever may have been their reasons, regarded the contract as still being on foot. Neither party intended that the contract should be further performed. In these circumstances the parties must be regarded as having so conducted themselves as to abandon or abrogate the contract."

[18] In my view, the authorities to which I have referred establish not only that an agreement can be abandoned by conduct, but also that the question whether an agreement has been abandoned does not require one to examine whether the parties actually had the intention of abandoning the agreement; only whether their conduct, when objectively viewed, manifests that intention. This conclusion accords with the objectivist theory of contract which is now irrevocably entrenched in our law: Taylor v Johnson [1983] HCA 5; (1983) 151 CLR 422. See also Air Great Lakes Pty Ltd v K S Easter (Holdings) Pty Ltd (1985) 2 NSWLR 309, where McHugh JA (as his Honour then was) said (at 336) that "[t]he weight of authority in favour of the objective theory is too great".

[122]

Similar correspondence was produced in relation to a proposed distribution agreement for Eva Madaschi. Mr Spaleta gave evidence that in 2008 he began to negotiate with another clothing manufacturer, namely Spanx, to be its sole distributor in Australia. He said by August 2008 he was unable to continue with negotiations concerning the distribution agreement because the dispute had adversely impacted the Tenant's financial position with the consequence that it was not able to provide credible financial statements sufficient to satisfy the requirements of Spanx.
During cross-examination, Mr Spaleta was asked why the Tenant did not re-establish its business in other premises, following the favourable judgment made on 1 December 2011, which awarded damages to the Tenant in the amount of $218,599.63. Mr Spaleta conceded that by that time, it was too late to re-establish the business in other premises because the supply contracts had been rescinded and the Tenant had lost its suppliers. He said that the Tenant would have been in a fantastic position in January 2012 to expand but for the fact that it had lost its suppliers.
There is no evidence as to when the distribution agreements were actually rescinded or lost. Nothing is pleaded in the Tenant's Third Further Points of Claim other than to say that, but for the actions of the Landlord, the Tenant would have entered into an alternative lease that would have allowed it to acquire further exclusive distribution contracts for products. However, it appears from the evidence of Mr Spaleta that the existing supply contracts were lost at some point prior to January 2012. Indeed, a claim for loss of business goodwill formed part of the claim made by the Tenant in the Earlier Proceeding, although for reasons that were not explained to me, that part of the claim was abandoned during the course of that hearing. In my view, if the loss of the supply contracts occurred prior to the hearing of the Earlier Proceeding, then any loss arising from that circumstance should have been prosecuted in the Earlier Proceeding and not resurrected as part of this proceeding. In that respect, I consider that it is critical for the Tenant to establish, on the balance of probabilities, that the rescission of the supply contracts:
- (a) occurred at a point in time after the Earlier Proceeding was heard; and
- (b) that this factor has led to (caused) the Tenant's business being destroyed.
Ultimately, I consider that there is insufficient evidence to find, on the balance of probabilities, that the rescission of the supply contracts occurred after the Earlier Proceeding was heard. Importantly, however, even if it were established that the supply contracts were rescinded after the Earlier Proceeding was heard, there is insufficient evidence tying that factor to the destruction of the Tenant's business in order to draw the necessary causal link. No doubt the loss of supply contracts may have adversely impacted on the profitability of the business, however, that is a far cry from concluding that the business has been completely destroyed. In my view, further evidence would need to have been adduced that any attempt to re-establish supply contracts was unsuccessful and that this led to a situation where the Tenant was unable to trade profitably. There is no direct evidence establishing that.
In my view, the evidence going to the issue that the Tenant's business has been completely destroyed, such that it is no longer viable to re-establish that business, is speculative. I am not persuaded, based on the general comments made by Mr and Mrs Spaleta, that the business conducted by the Tenant was unable to be re-established during the currency of the Lease, had it run its full term. No doubt, the Tenant may have suffered ongoing losses but that is a very different head of damage to a claim for damages based on the business having been completely destroyed.
Moreover, the quantum claimed in respect of the destruction of the business or business goodwill is premised on an assumption that the business would have expanded to ten retail outlets. Again, the evidence going to that issue is speculative and I am not persuaded that this goal could have been achieved. In particular, there are so many variables which may affect the growth of a retail business from year to year and its ability to expand its operations to more than one retail outlet. These variables include factors such as the state of the retail market from one year to another, the availability of other retail premises and the likely profit that might be derived by those other retail outlets, especially when located in other locations that might have a very different demographic to the retail market in Brighton. The only evidence given in relation to these factors are general comments, reflecting the ambition of the Tenant to expand its business. No expert opinion evidence was adduced in support of this aspect of the Tenant's claim. The evidence was largely given by Mr Spaleta, who is not qualified as an expert witness. Consequently, I find that the Tenant's claim, in so far as it relates to the head of damage categorised as the destruction of the Tenant's business or loss of goodwill is unproven.
My finding is reinforced by the comments of Street CJ in Gurnett v Macquarie Stevedoring Co Pty Ltd:[36]

[143]

Authorities such as Blair v Curran[46] and Ramsay v Pigram[47] make it clear that the expression 'same question' in the first component of the doctrine of issue estoppel does not refer to the ultimate question, as identity in the ultimate question would give rise to a res judicata. Rather, the first component refers to an issue which established the legal foundation or justification for the judicial decision. Accordingly, the doctrine of issue estoppel can apply notwithstanding that the ultimate question for decision in a subsequent proceeding is different.
In my view, the findings made by the Tribunal in the Earlier Proceeding concerning the Projected Sales and Cost of Sales for the calendar years up to and including 2011 are conclusions reached by the Tribunal based on the facts, assumptions and inferences drawn from the evidence presented in that proceeding. It is no longer open to revisit those findings, despite the accounting evidence adduced on behalf of the Landlord.
Therefore, what was found to be the Projected Sales in 2011 represents the springboard or platform upon which I am to calculate whether the Tenant suffered any further loss of profit in the years that followed. In forming that view, I accept that I am not bound to adopt the same methodology of calculation as was adopted by the Tribunal in the Earlier Proceeding. As I have already indicated, I am required to assess projected or future profits based on the evidence adduced in this proceeding, subject to my assessment being premised on a finding made in the Earlier Proceeding as to the amount of Projected Sales assumed for 2011.
In the present case, no expert accounting evidence was relied upon by the Tenant. The Tenant relied solely on the evidence of Mr Spaleta, who conceded that he had no formal accounting qualifications. By contrast, the Landlord relied upon the expert opinion evidence of Mr Fettes, a forensic accountant. Mr Fettes prepared a report dated 8 February 2013, which he adopted as his evidence in this proceeding.
The opinion of Mr Fettes differs from the assumptions or calculations advanced by the Tenant in three material aspects. First, Mr Fettes disagrees that the Tenant's Sales would have grown at 6% compounding annually. Therefore, Mr Fettes' assessment of the Projected Sales for 2012 and following is markedly different to the amount claimed by the Tenant. Second, Mr Fettes has calculated the Cost of Sales (ie, purchases of stock) by reference to the Gross Profit Margin applicable to the Tenant's sales, rather than using historical data provided by the Tenant and then uplifting that data by a percentage figure each year. Third, Mr Fettes opines that the Tenant's Actual Expenditure is higher that the amount adopted in the Tenant's calculations. I shall consider each of these issues in turn.

[148]

The ABS data confirms that that sector of the retail market experienced negative growth in 2010 and 2011, which is inconsistent with the Tenant's contention that its business would have experienced a growth rate upwards of 6% over that same period.
Mr Spaleta submitted that it was not appropriate to use information from the ABS to gauge the projected financial performance of the Tenant's business because the business was unique and not necessarily analogous to other businesses within the Australian clothing, footwear and accessories retailing market.
However, Mr Fettes also pointed to the fact that in 2009, there were no business disruptions experienced by the Tenant. However, the gross sales for that calendar year had dropped by 21.8% from 2008. He states further:
1. The disruption from the building work concluded in August 2008. In September and October 2008 Versus recorded better results than they had in September and October 2007, this suggests that the effects of the disruption were over.
2. Sales in November 2008 were 37% lower than 2007 and sales in December 2008 were 27% lower than 2007.
3. That sales improved after the disruption, before declining again, suggests the cause of the decline from November 2008 was not the disruption in May to August 2008.
4. Given the mixed performance over the year, I believe that the most appropriate estimate of growth in 2008 would be the growth level recorded in the Australian Bureau of Statistics ("ABS") for Clothing Footwear and Accessories Retail sales (ABS series ID A 3350270 L). This was 0.987%.
Further, when comparing the two uninterrupted years, namely 2007 and 2009, sales receipts have fallen. In particular, according to data furnished by the Tenant, sales in 2007 amounted to $120,945. That reduced to $95,462 in 2009, leaving a deficit of $25,483. This represents a 21% drop in revenue. Interestingly, the sharpest decline occurred in the comparative December to January period of both years. As I have indicated, there is no evidence before me to explain why the revenue dropped so significantly in 2009. It is not suggested that there were any business disruptions and it appears that the vicissitudes of the retail market resulted in less lingerie being purchased over the Christmas period in 2009, compared with what was purchased in 2007.
Therefore, I am of the view that to continue to extrapolate an arbitrary growth rate of 6% is without foundation and contrary to Mr Fettes' expert evidence. Regrettably, however, neither party have provided any evidence as to what growth rate should be adopted for the years 2012 and following. As indicated above, the Tenant's submission is simply limited to a contention that I should continue to add 6% to the Projected Sales for 2011, compounding for each year thereafter. On the other hand, the Landlord's submits that it would be unsafe to adopt that methodology.
Doing the best I can with the evidence before me, I am of the opinion that the projected growth rate for 2012 and 2013 should be calculated by reference to the ABS growth rate data applicable to the clothing footwear and accessories retail market, averaged over the four year period from 2008 to 2011. This equates to 0.59%, based on the data set out in the table under paragraph 130 above. Adopting that growth rate, I determine that the Projected Sales for 2012 and 2013 are as follows:

[149]

The Cost of Sales essentially represents the cost of stock purchased in order to generate sales. In calculating its Cost of Sales for the years 2012 and following, the Tenant has adopted what the Tribunal found to be the Cost of Sales in 2011 and then added 6% for each following year in order to achieve parity with the growth rate it has applied to its Projected Sales. This was the approach taken by the Tribunal in the Earlier Proceeding for the period up to 2011:
1. My calculations have used the actual cost of sales plus 6% to arrive at the gross profit figures. In doing this, I have assumed that if gross sales increase each year by a growth rate of 6%, then so too should the costs of sales. In making the calculation, I have assumed more stock would have to be purchased to meet the increased sales and this should be reflected in increased actual cost of sales. The actual cost of sales was highest in the first two years (2007 and 2008) reflecting heavy purchases of stock in those years to get the business up and running. This resulted in modest actual gross profit in each of those years.[50]
In that regard, I note that the data used by the Tribunal in the Earlier Proceeding was furnished by the Tenant and is set out in a number of spreadsheets recording its Sales, Cost of Sales and Expenses over the years 2006 to 2011. Those spreadsheets were also tendered in evidence in this proceeding ('the Sales and Expenses Spreadsheets').[51] As indicated above, in the Earlier Proceeding, the Tribunal took the Costs of Sales figures set out in those spreadsheets for each of those years and then added 6% uplift, in order to achieve parity with the 6% growth rate adopted by it for the years 2008 to 2011.
Mr Fettes opined that the methodology adopted by the Tribunal in the Earlier Proceeding appears to have been based on a cash accounting system. He said that an accruals accounting system should have been used, as it more accurately reflected profit and loss of the type of business under consideration. Mr Fettes explained that under a cash accounting system, stock is expensed when it is paid for. However, under an accruals accounting system, stock is expensed when it is sold. Therefore, he was of the view that in calculating profit and loss, one should use an accruals accounting system, otherwise profit and loss will not be matched over the same accounting period. For example, if sales are recorded for the 2008 financial year but the stock sold was purchased in the preceding year, then the net profit recorded in 2008 may not accurately reflect the cost of sales. He stated further:
1. On a cash accounting basis purchasing stock in 2006 represents an expense in 2006. If that stock is sold in 2008, 100% of the proceeds of the sale will be booked as profit because the expense has already been registered, i.e. the Gross Profit Margin would be 100%.
2. Under an accruals system, when stock is purchased there is no immediate expense booked. This is because the purchase of stock represents a conversion of one asset (cash) into another (stock). The expense is only booked into the accounts when that stock is sold.
3. On an accruals basis, when a sale is made an asset is received from the customer (cash) and the stock is transferred to the customer. The difference between the cash received from the sale of the stock and the purchase price of the stock is the Gross Profit. The cost of the stock is registered at a cost of sale when sold because this is when the asset (stock) has left the business.
4. For any given period gross profit should be calculated as follows:

[159]

Mr Fettes further contended that the projected expenses relied upon by the Tenant in its calculations have been underestimated by it. In that respect, the Tenant contends that its projected expenses for 2012 are $75,244.08 and that this amount is said to increase by 3% for each of the following years. It is not clear to me how this amount has been calculated or derived.
According to Mr Fettes, in an affidavit filed by Mr Spaleta in September 2012, he deposed to the fact that the expenses for the calendar year 2011 were $102,574. However, that affidavit was not produced in evidence. Nevertheless, the Tenant has filed a forensic accountants report prepared by Munday Wilkinson dated 6 August 2012. Although the author of that report was not called to give evidence, the report states that it received instructions from the Tenant that its actual expenses in 2011 were $102,575, which is consistent with what Mr Fettes contends are the Tenant's actual expenses in 2011.[56]
The 2011 expenditure amount of $102,575 is inconsistent with the Sales and Expenses Spreadsheets tendered in evidence. According to that document, the aggregate expenses for the calendar year 2011 were only $50,238, which is $39,573 less than what is recorded for the 2010 calendar year. This is partly explained by the fact that the 2010 Sales and Expenses Spreadsheet recorded bank interest in the amount of $22,737; however, the 2011 Sales and Expenses Spreadsheet only recorded $11,702 in bank interest. This is curious because according to Mr Spelata, that interest related to an overdraft facility that was paid out on 14 June 2012. There is no explanation as to why only a part of that interest component was recorded in the 2011 Sales and Expenses Spreadsheets, given that it spans the whole calendar year. Moreover, the expenditure spreadsheets attached to the Munday Wilkinson report records bank interest of $21,864 in 2010 and $22,737 in 2011, with no interest recorded in the projected expenditure for 2012 (presumably reflecting the Tenant's intention to discharge that overdraft facility during that year).
The Sales and Expenses Spreadsheets for 2011 records rent and outgoings of $31,289. However the schedule to the Lease states that the rent payable from 18 May 2010 was $67,530.52 plus GST, making a total of $74,283.57 per annum. Upon renewal, the rent was to be reviewed according to market.
There is no evidence before me as to what the market rent was as of May 2011 or what arrangements were in place concerning rent reviews during the second term of the Lease. Accordingly, for the purpose of my calculations, I will assume that the market rent did not change from the rent payable in the last year of the first term of the Lease (74,283.57).[57]
In order to calculate projected loss of profit, it must be assumed that the Tenant would have been liable to pay the full amount of rent and outgoings, given that the calculation is premised on an assumption that there were no disruptions to the business. Therefore, approximately $43,000 of projected expenses would need to be added to the expenses recorded in the Tenant's Sales and Expenses Spreadsheets for the calendar year 2011, if one is to examine profit and loss on the assumption that the business suffered no disruption. In addition, $11,035 would need to be added in respect of bank interest, in order to reflect the Tenant's liability under its bank overdraft facility. That would mean that the Tenant's projected expenses for the 2011 calendar year would be approximately $104,273. In my view, that rudimentary calculation is consistent with Mr Fettes' statement that he understood the Tenant's liability in respect of fixed expenses for the calendar year 2011 to be $102,574. It also approximates what is stated in the Munday Wilkinson report ($102,575). Given the unexplained discrepancies between what the Tenant has set out in its Sales and Expenses Spreadsheets for 2011 to what it contends is its fixed expenditure, and having regard to its obligations under the Lease, I find Mr Fettes' evidence to be the most reliable. Therefore, I find that the Tenant's actual expenses for 2011was $102,574.[58]
As indicated above, Mr Spaleta gave evidence that the overdraft facility was paid out on 14 June 2012. Therefore, interest only accrued for the first half of the 2012 calendar year. Assuming that the same interest rate applied, $12,487 in interest was no longer payable after 14 June 2013 for the 2012 calendar year. Moreover, there are two items of expenditure listed in the 2011 Sales and Expenses Spreadsheet, which I consider unique to the current dispute and therefore not what I regard as a 'fixed expenses' ordinarily to be carried forward into subsequent years. These are Legal/Prof/Registration in the amount of $2,887 and Security Storage in the amount of $1,251. Neither of these 'expenses' have been carried forward in the projected expenses set out in the Munday Wilkinson report.
Therefore, assuming that the expenses otherwise remain constant; the adjusted expenses for 2012 are reduced to $85,949. That does not include any uplift for inflation or any further increase in the rent that may have occurred from 19 May 2012.
Following that logic, no interest on the overdraft facility was payable in the 2013 calendar year. Therefore, 2012 projected expenses of $84,949 will now have all of the remaining interest deducted ($10,250) leaving the total projected expenses for the 2013 calendar year at $75,699. Again, this does not include any uplift for inflation or increase in rent that may have occurred from 19 May 2013.
Given the lack of evidence going to this issue, I consider that those projected expense amounts best reflect the projected or assumed expenses for the calendar years 2012 and 2013. Moreover, the aggregate of those two amounts is also consistent with the projected expenses set out in the Munday Wilkinson report over the same period.[59]

[162]

The Tenant claims that the Landlord is liable to pay for all electricity charges levied against the Premises since May 2011. It makes this claim on the ground that since that date, the Tenant gave the Landlord access to the Premises to allow the Landlord to effect repairs. The Tenant contends that all electricity usage from May 2011 to date related to usage by the Landlord.
A schedule of electricity charges was tended in evidence by the Tenant. It shows usage charges for the period to June 2011 to October 2013 totalling $956.06.
Mr Schlicht submitted that the power used by the Landlord from 12 May to 20 May 2011 was $14.96. He contends that all charges claimed by the Tenant are supply charges to the account of the Tenant. He argues that the Tenant could have avoided all these supply charges by terminating its supply contract when it closed the business in May 2011.
In my view, electricity charges from May to November 2011 should have been claimed as part of the Earlier Proceeding. There is no reason why that claim did not form part of the claim made in the Earlier Proceeding.
The balance of the electricity charges cover the period where the Tenant was unable to operate its business as a consequence of the Landlord requiring access to carry out remedial work. In my view, it is unreasonable to expect the Tenant to cancel its supply contract in circumstances where it reasonably assumed that remedial works would be completed by the Landlord, following which, it would resume occupation and recommence its business operations. The fact that it was unable to resume occupation in early 2012 results from the failure on the part of the Landlord to effect remedial work in a timely manner. Although, there are militating circumstances which had the effect of delaying remedial work, I am of the opinion that the Landlord carries the risk of not completing the remedial work in a timely manner. Therefore, I accept that the Tenant should not be liable to pay for electricity charges over the period that the Premises were unable to be occupied by it. Obviously, those electricity charges do not extend past the date that the Lease was determined, being 9 April 2013. Therefore I will allow the electricity charges claim for the period January 2012 until April 2013 in the amount of $393.76, calculated as follows:

At a glance

Court

Decision date

Source

Judgment (211 paragraphs)

Versus (Aus) Pty Ltd v A.N.H. Nominees Pty Ltd (No2) (REVISED) (Retail Tenancies) [2014] VCAT 454 (22 April 2014)

Parties

Legislation Cited (5)

Cases Cited (18)