Bt CATCHWORDS Resumption - Land - Acquisition by Commonwealth - Compensation - Claim by owner of profits a prendre - Basis of assessment - Whether entitled to sum for disturbance - Function of appellate court. Lands Acquisition Act 1955. UNIVERSAL SANDS & MINERALS PTY. LIMITED v. COMMONWEALTH OF AUSTRALIA No. A.C.T. Gll of 1978 Coram: Bowen C.J., Deane and Lockhart JJ. 13 June 1980 Sydney. - IN THE FEDERAL COURT OF AUSTRALIA) AUSTRALIAN CAPITAL TERRITORY No. Gll of 1978 DISTRICT REGISTRY GENERAL DIVISION BETWEEN: UNIVERSAL SANDS & MINERALS PTY. LIMITED Appellant (Plaintiff) AND: COMMONWEALTH OF AUSTRALIA Respondent (Defendant) ORDER JUDGES MAKING ORDER: Bowen C.J., Deane and Lockhart JJ. DATE OF ORDER: 13 June 1980. WHERE MADE: Sydney. THE COURT ORDERS THAT the appeal be dismissed with costs. IN THE FEDERAL COURT OF AUSTRALIA AUSTRALIAN CAPITAL TERRITORY ) ) ) ) No. Gll of 1978 DISTRICT REGISTRY ) ) ) GENERAL DIVISION " BETWEEN: UNIVERSAL SANDS & MINERALS PTY. LIMITED Appellant (Plaintiff) AND: COMMONWEALTH OF AUSTRALIA Respondent (Defendant) CORAM: Bowen C.J., Deane and Lockhart JJ. 13 June 1980. REASONS FOR JUDGMENT ' THE COURT: This is an appeal from a decision of the Supreme Court of the Australian Capital Territory (Connor J.). His Honour held that Universal Sands & Minerals Pty. Limited, the appellant, was entitled to interests in the nature of equitable profits a pendre in certain sand, gravel, top soil and granite deposits in land known = as "Lanyon", "Cuppacumbalong" and ""Ingledene". The Commonwealth of Australia, the respondent, acquired those interests under the Lands Acquisition Act 1955 (cth.) ("the Act") on 2 September 1971 as to "Lanyon" and "Cuppacumbalong" and on 30 November 1972 as to "Ingledene". Nothing turns on the fact that the dates of acquisition differed. The appellant claimed compensation under the Act. On 24 May 1978, Connor J. ordered that judgment be entered for the appellant in the amount of $70,000.00 for compensation for the acquisition of its interest in the three estates. The components of this overall figure were $1,400.00 as to "Lanyon", $12,600.00 as to ""Cuppacumbalong", and $56,000.00 as to "Ingledene". The notice of appeal accepts the learned trial Judge's findings in arriving at the figure of $70,000.00 as proper compensation; but it asserts: "That in determining the amount of compensation payable to the plaintiff, his Honour failed to take into account that, as the profits which his Honour found could have been derived from the exercise of the profit a prendre resumed were calculated after an allowance for depreciation of plant and equipment, and as the plaintiff was compelled to remove or abandon its plant and equipment used to work the profit a prendre resumed, an allowance should have been made to the plaintiff for disturbance, that 1s for the difference between the value to the plaintiff of the plant and equipment as at the date of resumption and the value of such of the said plant and equipment as was re-used or realised by the plaintiff." In its notice of appeal the appellant claimed an additional $208,977.00 for disturbance. On the hearing of the appeal, this amount was confined to a total of $77,155.34. The respondent cross-appealed from so much of his Honour's judgment as declared that the appellant was entitled to the interests in the nature of equitable profits a prendre but the court was told by counsel for the respondent at the commencement of the hearing of the appeal that the respondent was not proceeding with the cross-appeal. During the course of argument before this Court, counsel for the appellant sought leave to amend the notice of appeal by adding a further ground of appeal in these terms: "3. That in determining the amount of $70,000.00 being compensation payable in respect of the exercise of the profit a prendre resumed his Honour erred in calculating that amount on a post-tax rather than a pre-tax basis or in using an erroneous formula with respect to depreciation in obtaining percentage profits in arriving at the sum awarded." The application for leave to amend was opposed by the respondent. We invited counsel for the appellant to make submissions on the substantive questions of law involved in the additional ground of appeal so that we could rule on the application. This he did; and we reserved our decision on the application for leave to amend as well as on the question of disturbance. We turn first to the appellant's claim for further compensation on the basis of disturbance. Disturbance is not a separate head of compensation. In some circumstances, it is a relevant factor in assessing the value of land or an interest in land to the owner for the use to which he was putting it at the date of acauisition. Where relevant, it is calculated by reference to economic loss which can or should have been expected to be sustained or costs which can or should have been expected to be incurred by the claimant as a natural and reasonable consequence of the acquisition. "Its relevance to the assessment of the amount which will compensate the former owner for the loss of his land lies in the fact that the compensation must include not only the amount which any prudent purchaser would find it worth his while to give for the land, but also any additional amount which a prudent purchaser in the position of the owner, that is to say with a business such as the owner's already established on the land, would find it worth his while to pay sooner than fail to obtain the land. But a prudent purchaser in the position of the owner would not increase his price on account of the special advantage he would get by not having to move his business, unless the amount he would have been prepared to pay apart from that special advantage was the value of the land considered as a site for that kind of business. Disturbance, in other words, is relevant only to the assessment of the difference between, on the one hand, the value of the land to a hypothetical purchaser for the kind of use to which the owner was putting it at the date of resumption and, on the other hand, the value of the land to the actual owner himself for the precise use to which he was putting it at that date. It follows that 1f in the first instance the land is valued on the basis of its suitability for some more profitable form of use, there can be no justification for making an addition to the value so ascertained because of disturbance.": per Dixon C.J. and Kitto J. in Commonwealth v. Milledge (1953) 90 C.L.R. 157 at p.164. See also Report No. 14 of The Australian Law Reform Commission titled "Lands Acquisition and Compensation", published earlier this year, paraaraphs 241-246. The appellant's business was the extraction of basic raw materials in the Australian Capital Territory and elsewhere. The appellant operated several sites in the Canberra area including those the subject of these proceedings. The appellant claims compensation for such of its plant and equipment as it asserts was rendered useless or unrealisable by the acquisition including a Linkbelt dragline or shovel, a crusher known as a Jacques crusher, hoppers, and conveyors. No claim is made for mobile equipment such as dump trucks. In our opinion the approach of an appellate court to findings of a trial Judge on questions of valuation in compensation cases under the Act is as stated by Dixon J. in Commonwealth v. Reeve (1949) 78 C.L.R. 410 at p.423: "In Commissioners of Succession Duties (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. (1947) 74 C.L.R. 358, at p.367 the following passage occurs in the judgment of Latham C.J., Rich and Williams JJ.: 'It would not be proper for this court on an appeal of this nature to substitute its own opinion for that of the court below unless it were satisfied that the court below acted on some wrong principle of law, or that the value was entirely erroneous.' Their Honours then refer to the statement of Lord Buckmaster in Charan Das v. Amir Khan (1920) L.R. 47 Ind. App. 255 at p.264 that the 'Board will not interfere with any question of valuation unless it can be shown that some item has improperly been made the subject of valuation or excluded therefrom, or that there is some fundamental principle affecting the valuation which renders it unsound.' The rule thus laid down is almost indispensable to the administration of justice in compensation cases. For the estimation of a money sum is usually so much a result of judgment and sound discretion and so little the product of analytical reasoning, that, were it otherwise, every appeal would mean an assessment of compensation de novo, without any assignment of error in the reasoning or conclusions of the court appealed from." Although Reeve's Case concerned the Lands Acquisition Act 1906 (Cth.) this passage from his Honour's judgment is equally applicable to the Act. See also Commonwealth v. Milledge (supra) per Dixon C.J. and Kitto J. at p.159. It was submitted, on behalf of the appellant, that the compensation of $70,000.00 assessed by the learned trial Judge was inadequate in that his Honour wrongly omitted to make any allowance in the amount awarded by reference to disturbance in respect of the plant and equipment which the acquisition necessarily involved. It is true that his Honour did not include any allowance for disturbance as a component of the sum of $70,000.00 which he awarded. It would seem, however, that this was seen by his Honour as the logical consequence of certain conclusions which he reached as to plant and equipment and which underlay the ascertainment of the amount of the compensation which he in fact awarded. Those conclusions were that the relevant items of plant and equipment of the appellant were unsatisfactory, that they would have to be substantially replaced before the appellant could expect to carry on its operations at the relevant sites at a profit and that at the date of acquisition it was operating there at a loss. Examination of the evidence demonstrates that his Honour was plainly entitled to reach the above conclusions in relation to plant and equipment. We refer to some of that evidence. On 28 February 1972 Mr. B.H. Smith, a member of a firm of chartered accountants, Messrs. B.O. Smith & Son, was appointed receiver of the appellant by a secured creditor. In a letter dated 9 October 1972 to the Secretary to the Department of the Interior, Messrs. B.O. Smith & Son, as agents for Mr. B.H. Smith, said that the plaintiff: --. is operating at a loss. This is due partly to the imposition of Commonwealth restrictions and increasing repair costs on equipment which is old and which was to have been replaced." In a submission of Messrs. B.O. Smith & Son accompanying that letter they state: "In the course of the last three months, it has become apparent that at its present rate of operations and with its present age, unsatisfactory machinery, circumstances for which were outlined earlier in this submission, the company's Tharwa area operations are unprofitable. »-. The decline in profit is due partly to reduced output following the imposition of the Department's restrictions, and partly to rapidly increasing repair costs on equipment which is old, out of date and was to have been replaced." Evidence was given by a Mr. Monk, a professional engineer and former managing director of Blue Metal Industries Limited. He had many years' experience in relation to sand and gravel extraction activities. He said that the plant and eauipment used by the appellant at the sites relevant to these proceedings was inappropriate. As to the Linkbelt dragline or shovel for which more is claimed by the appellant by way of disturbance allowance than any other item of equipment, Mr. Monk said that it was a three and one half yard dragline and thus was capable of very much greater output than was required at the relevant sites. He said it was bigger than all draglines in Australia except one employed on the Nepean River near Sydney. A more appropriate size would be one yard. Evidence was given by a Mr. Gallagher who at the date of acquisition was employed in the Land Administration Branch of the Department of the Capital Territory overseeing and controlling extractive industries, of a conversation between himself and a Mr. Manning, the manager of the appellant, in February 1963 when Mr. Manning told him, with reference to the relevant plant: "They were having a lot of problems with it, that it wasn't the right type of equipment and that it was breaking down fairly regularly and proving expensive to repair. He also said at that stage that he had been pressing the receiver to purchase a suction dredge to operate there which he indicated to me he thought would save somewhere in the region of thirty thousand dollars per annum in wages." Connor J. accepted the evidence of Mr. Monk and Mr. Gallagher. His Honour held that although the appellant was not working the deposits profitably at the dates of acquisition, it did have a prospect of making profits which was destroyed by the acquisition. His Honour concluded that a permissible approach to compensation was that if $210,000.00 was expended on second-hand replacement plant and equipment and $50,000.00 was devoted to the project by way of working capital, the appellant could reasonably expect to earn a pre- tax profit of some $40,000.00 per year for a period of five years. His Honour said that it would not be prudent to assume that the second-hand plant and eguipment which had been purchased would have any great residual value after the expiration of the period of five years. In our opinion the appellant's claim for a disturbance allowance in addition to the compensation awarded of $70,000.00 must fail. The very basis of his Honour's finding that the sum of $70,000.00 should be allowed for compensation was that the appellant's "aged and unsatisfactory" plant and equipment would have to be replaced by more appropriate second-hand equipment. The disturbance involved in the removal of the existing plant and equipment was an underlying assumption of his Honour's conclusion that profits were available to be made and, for that reason, that compensation should be awarded. As will be seen, the amount of $70,000.00 awarded by his Honour for compensation exceeded the amount which could be attributed to disturbance if 1t were relevant to fix an independent amount for disturbance. In these circumstances for his Honour to have awarded additional compensation for a disturbance allowance over and above the - 10 = $70,000.00 would have amounted to duplication. This was the view taken by his Honour and, in our opinion, correctly (see Commonwealth v. Malledge (supra); Horn v. Sunderland Corporation [1941] 2 K.B. 26, especially per Sir Wilfrid Greene M.R. at p.35; and Standard Fuel Co. v. Toronto Terminals Railing Co. [1935] 3 D.L.R. 657). Even if, contrary to our view, an allowance for disturbance should properly have been made, it would have been substantially less than $77,155.34. The basis on which the appellant calculated the amount of $77,155.34 was the alleged difference between the value of certain plant and equipment in situ and the value of that plant and equipment as items to be removed from the land. It is plain that, even accepting that approach, the claimed amount is substantially excessive and the appropriate amount would be considerably less than the $70,000.00 which his Honour allowed for compensation. This is demonstrated by reference to some of the relevant items of plant and equipment. One major item of equipment, a Jacques crusher, was not shown to have been installed on any of the relevant sites at the dates of acquisition. Indeed, it appears to have been fixed at a different site. A disturbance allowance of $4,061.00 is claimed for it. Evidence was given by a Mr. Wheeler, an accountant called by the appellant, that five items of equipment owned by the appellant were sold soon after acquisition for figures about twenty-five percent less than their book values. 'These items of equipment were not the subject of the claim for disturbance allowance; but Mr. Wheeler conceded in cross-examination that this average drop in value of about twenty-five percent from the book values of the five items of equipment would apply equally to other items of plant and equipment of the appellant. There is obvious force in the submission by counsel for the respondent that if any claim were to be allowed at all for disturbance it would have to be discounted by approximately twenty-five percent on the figures put forward by the appellant, as these were themselves based on book values. The main item of equipment, a Linkbelt Dragline, had been acquired by a company associated with the appellant in July 1970 and reconditioned. The total cost of acauisition and reconditioning was $17,935.00. Following an inter-company transaction involving its sale to the appellant, it was shown as having a book value of $40,000.00. Its written-down book value as at 30 June 1973 was $30,485.00. The appellant's calculations were based on the simple assumption that this represented its real value as at the date of acquisition. The evidence was that it was both aged and "unsatisfactory". We have said sufficient to show that even if a claim for a disturbance allowance were permissible, which it is not, clearly the appellant would not be entitled to anything like the sum of $77,155.34. It is also clear that the appropriate amount of any such allowance would be substantially less than the $70,000 which his Honour allowed on the assumption that -12- the relevant items of plant and quipment would be replaced. We turn to the application for leave to amend the notice of appeal. This application is made to permit the appellant to attack the compensation awarded by the learned trial Judge of $70,000.00 on the grounds that his Honour was in error in having regard to the effect of income tax, and that in calculating the percentage return on invested capital he failed to take into account the effect of the reduction in employed capital which would result from the fact that a depreciation allowance had been made for plant before determining the estimated profit. We have already mentioned that his Honour held that the appellant's plant and equipment at the date of acquisition was unsuitable and that it would be necessary for second-hand replacement plant and machinery to be acquired before the appellant could expect to carry on its operations at a profit. His Honour's approach that if $210,000.00 was expended by the appellant on second-hand replacement plant and equipment and $50,000.00 was applied to the project by way of working capital, the appellant could reasonably expect to earn a pre- tax profit of about $40,000.00 per year over a period of five years, was based essentially on the evidence of Mr. Monk, although to some extent upon the evidence of a Mr. Singer, an expert valuer called by the appellant. His Honour then set out to determine the sum, if any, which a prudent operator, in the appellant's position, "Would have paid to keep their rights rather than lose them". -~13- In our opinion his Honour was correct in this general approach to the question. See Dangerfield v. Town of St. Peters (1972) 129 C.L.R. 586 especially per Barwick C.J. at pp.589 and 590 where the Chief Justice said: "The basis of assessing compensation for the taking of land which has a special use, as undoubtedly the land had, has long been settled. Lord Moulton said, speaking for their Lordships of the Privy Council in Pastoral Finance Association Ltd. v. The Minister [1914] A.c. 1083, at p.1088 "Probably the most practical form in which the matter can be put is that they' (the dispossessed owners) 'were entitled to that which a prudent man in their position would have been willing to give for the land sooner than fail to obtain it.' That is to say, one supposes that the owner of the land, with his knowledge of it and its suitability for the special purposes to which he has been putting it, was considering buying that land for that purpose from a willing seller. The sum he would pay to secure that land for those purposes rather than lose it will be the value of the land to him. The knowledge and experience he had of the particular use to which it could successfully and lawfully be put must be reflected in that sum." For the purpose of determining the sum which the prudent operator would have paid to keep his rights rather than lose them the learned trial Judge referred to a number of considerations. One of these was the impact which income tax would have been expected to have on a profit of $40,000.00 earned by a company. Another was the percentage return on capital which it would be necessary to invest to earn the profits in question. It is somewhat difficult to ascertain the precise part that his Honour's reference to the effect of income tax played - 14 - in his ultimate determination of the appropriate figure for compensation. It is likewise difficult to ascertain whether the percentage return on capital which his Honour calculated was affected by an error resulting from a depreciation factor, for the reason that the evidence does not disclose whether the estimated profit had been calculated after an allowance for the establishment of a sinking fund which would not involve progressive reduction of capital employed in the business, as distinct from an allowance for depreciation at a flat rate, say twenty percent, which would involve such progressive reduction. What is clear is that his Honour fastened on $70,000.00 as the sum which a prudent operator in the appellant's position would have been prepared to pay for the opportunity of earning a pre-tax profit of $40,000 per year for a period of five years on the basis that he would be required, at least initially, to have capital of $260,000.00 invested by way of Plant and working capital. Whatever view is taken as to the part played in his Honour's reasoning in reaching a figure of $70,000.00 by considerations of income tax and a reduction in employed capital resulting from a depreciation factor, in our opinion that figure was clearly not an inadequate assessment of the sum which a prudent operator would have been prepared to pay to keep the appellant's rights rather than to lose them. His Honour said that some allowance needed to be made for risks and contingencies. Plainly, an allowance must be made -15 - for the cost of capital employed. His Honour pointed out that there was a real question as to "whether prudent operators, rather than lose rights to the profits a prendre", would make any payment at aJl for them in a context where the necessary capital outlay and the return by way of profit were of the order suggested earlier. His Honour pointed out that there was necessarily an element of conjecture in the determination of the sum of $70,000.00. We are satisfied that it could not be established that the learned trial Judge acted on a wrong principle of law or that his valuation was erroneous (see Reeve's Case, supra). In these circumstances there is no point to be served in granting leave to the appellant to amend the notice of appeal. Other considerations reinforce this conclusion. The appeal books were prepared by arrangement between the parties on the basis that the appeal (as distinct from the cross appeal) involved only the question of a disturbance allowance. Counsel for the respondent informed us that if leave were granted to amend the notice of appeal, the respondent would have to seek an adjournment to enable it to determine whether it desired further material to be added to what is already reproduced in the appeal books. In the event that it was necessary for such further material to be added, the cost of its reproduction and of a further adjourned hearing would be incurred. The application for leave to amend the notice of appeal is refused. In the result, we are of the opinion that the appeal should be dismissed with costs. a TL | I certify that this and the 15 (ffir) 5 "on noe a true copy cf the 's a Tr ben preceding pares Reasons fer Ji «t- tein afters Honours ae oat . 365 tne Chief TuagZ, 27 1ge+ 2 Me Sushi. Deane } Jus Ck a and My Justice Lockhart , ; Deted + /3 A €o