CATCHWORDS TRADE PRACTICES - claim for damages for misleading statements - causation - applicant's lack of care - methods of assessment - additional or consequential losses - interest under statute - impact of taxation on damages - relevance of carry forward of tax losses - length of time for allowance of continuing losses. Trade Practices Act, 1974 ss.52; 75B; 82(1) Federal Court of Australia Act, 1976 s.51A Judiciary Act, 1964 s.79 Common Law Practice Act (Old), 1972 s.72 Income Tax Assessment Act, 1936, s.26(j) GORDON DOUGLAS NEILSEN v. HEMPSTON HOLDINGS PTY. LTD. & ANOR. OLD G37 OF 1985 PINCUS J. BRISBANE B April 1986 IN THE FEDERAL COURT OF AUSTRALIA ) QUEENSLAND DISTRICT REGISTRY ) QLD G37 of 1985 GENERAL DIVISION } BETWEEN: GORDON DOUGLAS NEILSEN Applicant AND: HEMPSTON HOLDINGS PTY LTD First Respondent AND: STELLA JEAN CHEFFERS Second Respondent DATE OF HEARING: 3, 4, 5, 6, 7, 11, 12 MarchDATE JUDGMENT DELIVERED: 8 April 1986 COUNSEL: for the applicant Mr. N.F. McLauchlan Q.C. instructed by Hawthorn, Cuppaidge & Badgery for the respondents Mr. W.T. McMillan instructed by Watkins Stokes J. A. LYONS ASSOCIATE TO PINCUS 7. 8 April 1986 —9 APR 1986 FepERoL COURT C7 SUSTAALIA mee eaves ae ot}. ee at ool ane ome Awe e poner eee cine wee IN THE FEDERAL COURT OF AUSTRALIA ) QUEENSLAND DISTRICT REGISTRY GENERAL DIVISION ) ~ OLD G37 of 1985 BETWEEN: GORDON DOUGLAS NEILSEN Applicant AND: HEMPSTON HOLDINGS PTY LTD First Respondent AND: STELLA JEAN CHEFFERS Second Respondent MINUTES OF ORDER JUDGE MAKING ORDER: PINCUS J. DATE OF ORDER: 8 April 1986 WHERE MADE: BRISBANE THE COURT ORDERS THAT: 1. There be judgment for the applicant against the respondents in the sum of §160,000. 2. The respondents pay the applicant's casts of and incidental to this application to be taxed. NOTE: Settlement and entry of orders is dealt with in Order 36 af the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA ) QUEENSLAND DISTRICT REGISTRY ) QLD G37 of 1985 GENERAL DIVISION ) BETWEEN: GORDON DOUGLAS NEILSEN Applicant AND: HEMPSTON HOLDINGS PTY LTD First Respondent AND: STELLA JEAN CHEFFERS Second Respondent PINCUS J. 8 April 1986 REASONS FOR JUDGMENT This 1s an application alleging breaches of s.52 of the Trade Practices Act 1974 in respect of a purchase of real property. The application is based on allegations that misleading statements were made as to takings and the like and a claim for damages for deceit is added. The property in question is a motel. In its final form, paragraph SA of the statement of Claim alleged three express representations and an implicit one; I have found it unnecessary to deal with the last. The express representations alleged are that the second respondent claimed an occupancy rate of 80%, that she claimed an occupancy rate of 89% and that she asserted that the gross income and net profit of the i, i |.- t er ere wee Fs nee - ater ne re wo ae e t te yoo: motel for the period 7 March 1983 to 7 March 1984 were respectively $116,209 and $94,546. The case for the applicants was that the occupancy rate was in truth between 20% and 30% and that, although neither the gross income nor net profit for the year in question could be certainly known, both were very much less than the second respondent represented. The parties negotiated in June 1984 for the sale and purchase of the motel, which is at Nanango, near Kingaroy, anda contract was entered into bearing the date 20 June 1984, under which the applicant was to purchase at a figure of $390,000, subject to finance. The contemplated finance was refused, so the parties renegotiated the transaction and entered into a further contract bearing the same date, but in fact executed substantially later, at a price of $345,000, which transaction was completed. The applicant did not pay the first respondent the whole price, since there was a contemporaneous sale the other way of property owned by the applicant, for a price of $250,000. There was an allegation of misrepresentation in relation to that sale, made by way of cross-claim, but during the course of the hearing it was dropped. CREDIT. To some extent the outcome depends on whether the applicant and his witnesses are to be believed as against the second respondent, who controls the first respondent. As may clearly enough appear from what is written below, I found the second respondent not to be a reliable witness. Coming to that ena et I aoe Oe Bs Meee Dk . Wn oy view, I took into account the fact that she had a number of bank accounts, including accounts in false names, and that a tax return, prepared on her instructions, purporting to set out the earnings of the motel business during the year ended 30 June 1983, was admittedly quite false. It may be common enough these days for business people to exaggerate deductions and minimise income in their tax returns and some may think it unrealistic to assume that people who do so are in other respects dishonest; however, in shis instance, the figure returned bore no relation to any of the first respondent's records and seems to have been chosen at random so as to produce a low tax liability. Further, the case was put forward by the second respondent that with the exception of rental received from a property called the "Chuck Waggon", the various bank accounts, documents in relation to which were discovered, contained only takings from the motel; it 1s clear that, in truth, substantial amounts deposited in the accounts were not derived from operation of the motel. MISLEADING STATEMENTS For reasons explained below, there is hardly room for serious dispute about the fact that the second respondent, on behalf of the first respondent, represented during the course of negotiations that the occupancy rate of the motel was 80%; nor is it contested that the occupancy rate was not 80%. It is, therefore, by no means manifest what the defence of the respondents is in respect of that branch of the case. Nevertheless, it seems desirable to set the relevant facts out in some detail. The first respondent was the owner of and the second respondent controlled the motel from March 1983 until 20 August 1984, when the applicant took possession. During that period of time, as I find, the occupancy rate of the motel fell substantially, principally because the number of people working on the construction of the nearby Tarong power station decreased. However, during the first few months of the first respondent's occupancy, business was good. Nevertheless, for some reason, the second respondent soon decided to sell and she soon listed the motel for sale with Raine and Horne, Maroochydore. The listing, which is in evidence, has "95%" typed opposite the word "Remarks". There is no direct evidence as to the source of that estimate, but it was, no doubt, the second respondent. On 12 July 1983 the property was valued by Richard Ellis Ray White, a firm of real estate agents and valuers, at a figure of $450,000 on the basis that its occupancy rate was 485%. The valuer commented: "The motel currently enjoys an occupancy rate of 85% and is well patronised by the companies working at the Tarong power station." The evidence showed, in considerable detail, that the number of employees working on the power station was at its peak about the time of that valuation and declined significantly thereafter. The next piece of evidence relating to an estimate of occupancy rate, being that which the applicant complains about, eae is of a conversation nearly a year later; in June 1984 Mr. R.D. Cooper, then with Raine and Horne, was given an occupancy rate of 80% in a conversation with the second respondent. He passed that information on to Miss B. M. Heine and she informed the applicant. Fach of the first two conversations, that is the second respondent telling Mr. Cooper the occupancy rate was 80% and Mr. Cooper passing that on to Miss Heine, was recorded in writing at the time it occurred. The second respondent was asked about her conversation with Mr. Cooper and her answer was, in part: "l... well, he said, 'What is the occupancy rate', and I said, 'I would not know' and he said, 'I have worked it out,' and I said - I do not know what he said to that, but I know I said I would consider at that particular time that Iwas operating the motel, it would be showing around about 80%." Later in her evidence the second respondent claimed not to recail that conversation and said in the alternative that Mr. Cooper told her that the rate was 80%. However, that is for obvious reasons improbable and I accept that she was the source of the 80% estimate. That is, I find that the second respondent told Mr. Cooper in June 1984 that the occupancy rate of the motel was 80% and that figure was passed on to the applicant, as it was intended to be. That leaves for consideration the allegation that the second respondent toid the applicant in June 1984 that the occupancy rate was 89%, That information was, according to the case of the applicant, conveyed twice, once during an inspection ape pe oe ey re ee Seca ae -¥e wpa see of the motel, by the applicant and other people, on 19 June 1984 and subsequently during an inspection of the property which the applicant was selling contemporaneously to the first respondent. There are significant differences between the versions of the applicant and witnesses cailed on his behalf with respect to that allegation, but JI am nevertheless satisfied that the second respondent made the statement alleged. There is, in this instance, no contemporaneous document to assist in resolving the conflict and I have done so principally onthe basis of my impression of the witnesses. The finding does not have much importance in the case, for the inducing effect of the claim of 89% accupancy must have been weak, in view of the fact that only 80% was claimed, a little earlier. The third representation alleged, relating to gross takings and net profit, was one in writing, and although there is some difference of recollection as to the precise way in which the writing (exhibit 13) was conveyed to the applicant, there is no dispute that it originated from the second respondent; that is, 1t is common ground that the third representation was made. It purported to have been prepared by an accountancy practice of a Mr. Trent and that aspect of the matter is discussed below. FALSITY It is not seriously disputed that when the representation was (as I have found) made, that the occupancy rate was 80%, it was in truth substantially lower than that figure. It 1s of course necessary to try to ascertain the true Tye ot rnp oe er we wee ae ag ere " Safe rate. A suggestion was made that the notion of occupancy rate is equivocal, since it might refer to rooms or beds - i.e. might refer either to the relationship between the number of rooms occupied and the total number of rooms, on the one hand, or that between the number of guests at the motel and the total number of persons who might have been housed in it, on the other. It seems clear that the parties in the present case were talking about the former concept. Of course, if the statement that the rate was 80% related to beds, it was even further from the truth. The case for the respondents was that the occupancy rates may accurately be deduced from exhibit 1, the first respondent's "day books", which show the following average occupancy rates for the first six months of 1984, namely 50.5%, 61.5%, 52.5%, 60%, 62.5% and 53.5%. Those figures average 56.75%. According to the same source, the last month during which the occupancy rate had been equal to or exceeded 80% was September 1983. As will appear, I have formed the view that the true occupancy rates cannot be got from the day books but were in fact significantly lower than the rates shown there. However, even on the basis of the day books, the rates being experienced about the time the claim of 80% occupancy was made, in June 1984, were plainly such as to make that claim false. According to the day books, the average rates from the beginning of the first respondent's ownership up to and including September 1983 somewhat exceeded 80%, but at no time in 1984 could an occupancy rate of over 80% truthfully have been claimed. aL pape yee fin i Tee Sosa tree wees ee os Parr at \ ory a ae casera That is, I find that the second respondent, on behalf of the first respondent, asserted that the occupancy rate was 80% in June 1984 whereas it was in fact much less. I propose to deal also with the truth of the third statement, with respect to the financial results of operation of the business in the year beginning 7 March 1983, a more complex question. The applicant's chief contention under this heading was that the day books, the contents of which gave some support to the representations as to takings, were contradicted by exhibit 2, the "wages book". The latter was a book in which were recorded sums paid to women who came in daily to clean the motel rooms. The book included a record of the number of rooms cleaned by these women, both of whom were called, each day. The applicant argued that the wages book 1s a much more accurate indication of the state of activity 1n the motel than the day books. Then it was said that if the wages book is even roughly accurate, the written representation as to takings must be far from the truth, since the income from the number of rooms mentioned in the wages book could not possibly amount to as much as was represented. It was common ground that each time a guest occupied a room for the night, it was cleaned the following day. The second respondent gave evidence, however, that on many occasions she cleaned the rooms herself in order to save money, although the eaten Ty at, at —_— —-— cleaning women were not let know. Some support for that may be found in the evidence of Mr. Raymond Cheffers. However, Mr. Cheffers was an unimpressive witness and I gained no assistance from his account of events. The relationship between the number of rooms shown in the day books and the number shown in the wages book varies significantly with time. In the earlier part of the occupancy of the first respondent, most of the rooms shown as occupied in the day book are shown as having been cleaned in the other record. However, from November 1983 on, the ratio changes and in some months, according to these records, half or even less than half of the rooms shown as occupied were recorded as having been cleaned. For example, in March 1984, 52% of the rooms were shown as occupied and only 22% cleaned. Although, as I find, not all of the rooms occupied were cleaned by the outside staff, I am satisfied that, in the latter months of the first respondent's occupancy, the day books exaggerate the number of occupants of the motel and also the income derived from it. It is my opinion that, at all times, most of the rooms occupied were cleaned by outside staff. It appears quite unlikely that, if a substantial proportion of the rooms occupied were not being cleaned by the outside staff, they could have been unaware of the fact, and I reject the evidence of Mrs. Cheffers on this aspect. According to the wages book, the percentages of rooms cleaned in the months June, July and August 1984 were respectively 27.5%, 26% and 27.5%. Apart from the period from 20 - 31 August 1984, the records of the applicant show an occupancy ar eect atediennetend Laay' wien ae Le in SEIFERT a ey OT a mp re ee ye Pen Paes So an eine inter aneliient ieaer ica eal aadenat * nn? "4 10. rate for the balance of 1984, after he took possession, which accords reasonably well with the wages book figure just mentioned. The applicant's figures are September 1984 - 22%, October - 27%, November - 26.5%, and December - 25%. As Mr. McLauchlan Q.C. for the applicant pointed out, ina business of this sort it 1s rather unlikely that the purchaser would encounter a great and immediate drop in business after taking possession; those who would have come to stay would presumably still come. No doubt, if the purchaser runs the business badly that may quickly have an adverse effect, but I think it probable that the applicant conducted the business competently. The percentage of rooms cleaned in the last few months of the first respondent's ownership was fairly uniform; the business seems to have reached a steady state and I infer that this was because the temporary influence of the business from power station workers had largely ceased. An engineer, Mr. Doig, who was a very credible witness, gave evidence from his records of the dates on which he stayed in the motel, which if accepted supports the applicant's case. The answer given to his evidence was principally that employees of his, or other people, often stayed on dates when the day books show him as a guest. I do not accept that and find that on many occasions when Mr. Doig was recorded as having stayed in the motel no one occupied the relevant room. In the result, I find that the occupancy rates from November 1983 until the termination of the first respondent's Lect a eee ll. ownership were fairly close to those set out in the column headed "percent cleaned" in exhibit 3, which shows an analysis of the wages book, but that those figures somewhat understate the degree of occupancy. During that period, the average of the figures given as the percentage of rooms cleaned is about half the average of the figures given as the percentage of rooms booked. The total of takings shown in the day books corresponds approximately with the written representation as to takings. It follows from what I have said that, 1n fact, from November 1983 on the takings were little more than half those represented. To summarise the factual conclusions to this point, they are: 1. Whereas the second respondent represented during the negotiations in June 1984 that the occupancy rate was 80% and also represented that it was 89%, the then current occupancy rates were less than 30%; I mean by "then current" the occupancy rates during 1984, which were fairly uniform. 2. Whereas the written representation was that the takings from 7 March 1983 to 7 March 1984 were $116,209, corresponding roughly with the day books, the latter recorded a considerable quantity of non-existent business. During the eight months up to and including dune 1984, the takings were about half those recorded in the day books. 12. CAUSATION Mr. McMillan for the respondent argued that even if misleading statements were made, it was not established that they caused the applicant to enter into the contract to purchase the motel. The applicant engaged aMr. Pile, an accountant from Victoria, to advise him about the contemplated purchase of the motel. At the suggestion of the second respondent, the applicant asked Mr. Pile to contact a Mr. Trent, the respondent's accountant. He did so and received assurances which were satisfactory to him. Mr. Trent gave evidence that he told Mr. Pile he knew nothing more than was disclosed by the figures set out in a piece of paper (exhibit 13), bearing the name of his accountancy business, which had been given to the applicant, and told him that that piece of paper was merely a copy of figures Mr. Trent had been given by the second respondent. Mr. Trent said that Mr. Pile's visit was "in the nature of a formality" and was quite pointless. I do not accept that. The meeting between Messrs Trent and Pile was one of some importance because, after it, Mr. Pile gave advice to the applicant which resulted in his agreeing to purchase. Mr. Pile struck me as an honest man who would hardly have advised the applicant to purchase on the basis of the conversation he had had with Mr. Trent if that conversation had followed the lines of Mr. Trent's recollection of it. What Mr. Trent claims to have told Mr. Pile would have made the latter have no confidence at all in the figures which were presented in exhibit 13, bearing Mr. Trent's name. I think pam el oer set i ee I " ee me ge oO Me x fe S3 merce wnt os, sf fre am oy seta os tee 4 eso ey >: Shel 13. Mr. Pile assumed that, at least as to the income, the figures had been derived by Mr. Trent himself. The truth was, as Mr. Trent admits, that he just had typed out what his client told him. His conduct in that respect was of a kind which could be seen to be likely to (and did) mislead the applicant into thinking that the figures put forward originated from Mr. Trent. The fact was that they did not so originate and the second respondent had them typed up by Mr. Trent to "make it look good for me", to use the second respondent's expression. I find that the version of the meeting between the two accountants given by Mr. Pile is substantially correct and that the sharply different version given by Mr. Trent is not. It follows that there 1s a clear chain of causation from the presentation of the false figures to the making of the contract. Nevertheless, Mr. McMillan argued that I should not find that such a causal connection exists as to satisfy s.82(1) of the Trade Practices Act, which gives a right to recover loss and damage to one who suffers either "by conduct of another person that was done in contravention of", inter alia, s.52. In my opinion, the word "by" means "by reason or" or "as a result of", as was said in Smolonogov v. O'Brien (1982) 44 A.L.R. 347 at p.362. Mr. McMillan contended that the applicant was at fault, either personally or through his accountant Mr. Pile, in failing to analyse the books and records of the first respondent and relied strongly upon remarks of Gibbs C.J. in Parkdale Custom Built Furniture Proprietary Limited v. Puxu Proprietary Limited (1982) 149 C.L.R. 191 at p.1i99: "Section 52 does not expressly state what persons or class of persons should be considered as the ata t oseulia hasteanedita th cot ae firedietee enrt tart eee eee ee ata ps se + fares 14. possible victims for the purpose of deciding whether conduct is misleading or deceptive or likely to mislead or deceive. It seems clear enough that consideration must be given to the class of consumers likely to be affected by the conduct. Although it is true, as has often been said, that ordinarily a class of consumers may include the inexperienced as well as the experienced, and the gullible as well as the astute, the section must in my opinion by (sic) regarded as contemplating the effect of the conduct on reasonable members of the class. The heavy burdens which the section creates cannot have been intended to be imposed for the benefit of persons who fail to take reasonable care of their own interests." Mr. McMillan argued that, in entering into such a large transaction, reasonable care for one's own interests would at least dictate some examination of the primary accounting records. Counsel said that if it is found that the applicant failed to take reasonable care of his own interests, he cannot succeed under s.52. I do not decide the matter on that basis; I cannot accept that the remarks of the Chief Justice were intended to have the effect just mentioned. It us surprising that no real investigation of the figures presented was attempted, although Mr. Pile was of the view, which he communicated to the applicant, that at least as regards the outgoings, the figures were probably significantly in error. However, acceptance of counsel's contention would confine the availability of relief based on s.52 to a narrower category of applicants than would seem to be covered by the language of the statute. While it is not possible to hold that the applicant, in all the circumstances, took reasonable care of his own interests, I reject the contention that such a finding is a necessary foundation of his right to relief. I am encouraged to do so by the circumstance that the High Court has recently in, e oe an - ee OT ee ms Ro ayy or) - - oom 15. Gates v. The City Mutual Life Assurance Society Limited (unreported, 20 February 1986) accepted that, at least in general, the measure of damages in tort is the appropriate one for cases involving "misleading or deceptive conduct and the making of false statements". Mason, Wilson and Dawson JJ. remarked: "Such conduct is similar both in character and effect to tortious conduct, particularly fraudulent misrepresentation and negligent misstatement." It would seem incongruous to accept the tort damages rule that the applicant is entitled to be placed in the position he would have occupied had the tort not been committed while, on the question of proof of loss, acting on a basis which has never been accepted in the law of deceit: see, for example, Clerk and Lindsell on Tort, 15th ed. p.854:- "Carelessness of plaintiff in not discovering the untruth no defence. A person to whom a misrepresentation is made is not deceived if he actually knows the truth, i.e. knows the falsity of the representation at the time it is made to hin, but it 1s no answer to an action for misrepresentation that the plaintiff might have discovered the falsity by the exercise of ordinary care." The view I have expressed is in harmony with the established rule that carelessness on the part of the respondent is not a necessary element of a s.52 claim. That is, although there may well have been some lack of care onthe part of the applicant, I am satisfied that the applicant suffered loss and damage by conduct of the first respondent that was in contravention of 5.52. The second respondent is also liable, under s.75B, as she was knowingly party to the contraventions. = 16. DAMAGES - METHODS OF ASSESSMENT As mentioned above, the High Court has recently considered the measure of damages- in cases of this sort in Gates v. The City Mutual Life Assurance Society Limited (above) and has accepted that the measure of damages in tort is appropriate in most, if not all, such cases. That is the measure I propose to apply. Fixing the primary damages (difference between price and value) does not present difficulties but the "consequential loss" claimed requires more detailed consideration. In judgments discussing claims of the latter sort, "additional loss" is sometimes spoken of instead of "consequential loss". I propose to use the expression "additional loss", as the loss claimed may arise at the same time as the primary loss and need not be in any sense consequential upon it. As to the primary loss, the only evidence relied on is 4 valuation by Mr. L.B. Johnston, who was asked to assess the value of the motel as at 19 June 1984 on the basis, inter alia, that the average room occupancy rate for a six month period prior to 19 June 1984 was 26.25%. This is fairly close to the true rate. He arrived at the figure of $230,000. Assuming an average return for the letting of each room of $30 per day, he took reasonable figures for expenses and arrived at an income of only $8,573 per annum. Mr. Johnston was of opinion that a buyer would pay substantially more for the motel than a price reflecting that low return. That is, in my view, correct. However, I am unable to concur in the next step taken by Mr. Johnston. He said that one should make a calculation of value on the basis that the motel Wren se . af . wy a ieee 17. had the average occupancy rate for the Kingaroy-Nanango area in 1984 as revealed by statistics from the Australian Bureau of Statistics, namely 57.75%. On that basis, he claimed, the motel would be worth $260,000, but he thought he should discount that figure by $30,000, to allow for the time a purchaser would take to get the occupancy rate up to the average for the area. I cannot accept that this reasoning is correct. In my Opinion, a purchaser aware of the true occupancy rate of the motel in mid 1984 and aware that that rate had been fairly steady since late 1983 would not readily assume that he would be able to bring the motel to the much higher occupancy level enjoyed by other motels in the Kingaroy-Nanango area. If he did have confidence 1n his ability to do so, he would, in my opinion, be unwilling to pay a price which substantially gave the vendor the benefit of that assumption; the purchaser would take it that if he managed to double (as Mr. Johnston's calculations assume) the occupancy rate, the benefit of that should, at least very largely, flow to him. It is not necessary, however, to pursue this point further because in view of the fact that counsel sought no higher sum, all I have to consider is whether the claimed value of $240,000 at June 1984 is too low. In my opinion, 1t plainly is not and I therefore assess damages on the basis claimed by the applicant, namely a valuation of $240,000. That produces a difference between price paid and value of $105,000. wa7 coe yoAgte WOT yatta = or -* meee -} Pe a see tye, 18. The claims for additional loss, which are set out in more detail below, are in three categories: interest on money borrowed to purchase the motel, losses suffered in conducting the motel business and earnings which, it is said, would have been made using the applicant''s capital but for the purchase of the motel. Each claim is calculated up to a date shortly before the trial. It is useful to consider claims for such additional loss, in the first instance, in a general way. It should, however, be stated at the outset that the applicant would, in my view, not be adequately compensated by being confined to the figure of primary loss, $105,000, mentioned above. T have found it hard to determine by what principle the additional loss should be assessed. One answer is simply to say that its assessment is a factual, jury, question and that all losses truly resulting from the wrong done should be allowed. However, an examination of the authorities culminating in the recent decision of the High Court in Gould v. Vaggelas (1984) 56 A.L.R. 31 shows that there are questions of legal principle involved in the resolution of this recurring problem. Arguments may be devised to support a number of outcomes, including an allowance of: {a) Interest under the terms of provisions corresponding to s.51A of the Federal Court Act, or under that section itself, calculated on the primary loss (difference between price and value) from settlement of the transaction until judgment. nyt Tome eee on te le oR eee 19. (b) A sum arrived at by comparing the applicant's financial position at the outset with that position at the end of the applicant's association with the business; this was the method used in Gould v. Vaggelas. (c) The cost of borrowing money paid to buy the business or costs of terminating an earlier investment and, perhaps, other losses: per Lockhart J. in Milner v. Delita Pty. Ltd. (1985) 61 A.L.R. 557 at 581. (a) Interest under Statute. The provisions of s.51A of the Federal Court Act do not affect the matter, because that section came into operation on 22 November, 1984 and applies only "in respect of a cause of action that arises after the commencement of this section". There is, however, a Queensland provision which may allow this court, by the operation of s.79 of the Judiciary Act, to make an award of interest; it is s.72 of the Common Law Practice Act which was inserted in that statute in 1972. So far as relevant to this case, the terms of the provision are similar to those of s.51A of the Federal Court Act; it 15 necessary to set out the opening words only: "In any proceedings in respect of a cause of action that arises after the commencement of the Common Law Practice Act Amendment Act 1972 in a court of record for the recovery of money {including proceedings for debt, damages or the value of goods), the court may order that there shall be included in the sum for which judgment is given interest at such rate as it thinks fit ..." There is now a series of decisions of this court on the applicability of provisions of this. sort. That in which the < spt ee roe cre eis ee nett rene sy7 -t y 4 Steen = i a ord tom, oa, ee a v SU TUT TS ero pote aq quee were coe yoo of or 20. matter is most comprehensively discussed is Milner v. Delita Pty. Ltd. (above) especially at pp.576 to 580 of 61 A.L.R. The expression "a court of record" in the Queensland section means a Queensland court of record, but that does not prevent s.79 of the Judiciary Act from making it applicable in cases in this court. State statutes picked up by s.79, especially those relating to "procedure evidence and the competency of witnesses", must be so drawn as to apply to State courts only and when s.79 makes such statutes binding on "all courts exercising Federal jurisdiction in that State ..." it must mean to make them binding as if they referred to the latter category of courts. As Gibbs J. (as he then was) remarked in Maguire v. Simpson (1977) 139 C.L.R. 362 at 376: "... a State law may be rendered applicable by s.79 to a court exercising federal jurisdiction, which 1s not a State court, notwithstanding that the law according to its own terms is limited in its application to the courts of the State." His Honour derived that from the decision in John Robertson & Co. Ltd. v. Ferguson Transformers Pty. Ltd. (1973) 129 C.L.R. 65, in which he gave (at p.88) some examples of cases in which s.79 of the Judiciary Act had been read as requiring the High Court to apply to itself State statutes which, on their own proper construction, were intended to apply only to the courts of the State. Here, the State statute applies to courts of record generally, and not merely to a particular named State court; the problem referred to by Mason J. in Australian National Airlines ores, 21. Commission v. Commonwealth of Australia (1975) 6 A.L.R. 433 at 435-436 therefore does not arise. It follows that there is a discretion, indistinguishable from that given by s.51A of the Federal Court Act, to award interest, but that discretion only applies to interest on the damages awarded. The decision of Muirhead J. in Ward v. Premier Ice Skating Rink Pty. Ltd. (unreported, 13 March 1986), the reasons in which I have found of considerable assistance, illustrates the nature of the uncertainties attending an attempt to award additional losses by methods other than awarding interest, under the statute, on the primary loss. By using the latter approach, the court avoids having to be concerned with the question whether losses sustained by the applicant were "inherent in" (to use the language of Gibbs C.J. in Gould v. Vaggelas at p.39 of 56 A.L.R.) the situation from the outset, whether the purchaser "unreasonably" carried on the business and matters of that sort. Further, it has to be conceded that merely awarding interest on the primary loss would, if adopted as a practice, lead to greater predictability of judicial decision and place such applicants as the present, in general, onan equal footing with one another instead of penalizing the more proficient purchasers. It also avoids the risk of compensating an applicant more than once for the loss-making propensity of the business. While I accept that simply awarding interest under the statute ata proper rate is often a suitable course, here it . oh + 22. would not, in my view, adequately compensate the applicant. (b) Comparison of Initial and Final Financial Position of Purchaser. Insofar as Australia is concerned, this method derives its authority principally from the decision in Gould v. Vaggelas (above). It is true that there the aggrieved parties were not purchasers, but were controllers and financiers of the purchasing company. It seems clear, however, that the approval given by a majority of the court to the approach used by the primary judge in that case should not be read as intended to apply only where the loss is claimed by people in the position of the Goulds; the High Court decision followed that of the Court of Appeal in England in Doyle v. Olby (Ironmongers) Ltd. (1969) 2 Q.B. 158 where the plaintiff was a purchaser, and the same method was used. It is important, therefore, to determine the basis on which, in according with Gould's case, additional losses may be awarded. The trial judge had given damages on the basis that the Goulds had reasonably carried on the business in question, much of their loss flowing from their having done so. It was argued there, as appears from p.39, that the carrying on of business was not induced by the deceit. As to that contention, the Chief Justice said at p.40, speaking of the conduct of the defrauded parties: "... the evidence supports the view that quite early during 1976 they did become suspicious that they had been deceived. It was, of course, then open to them to arrange for the company to try to dispose Poe yoo ree pao s * eactes aan meng tt eri mT ar op em ame sare ne vey - ye 2 are tee ae nage ee 23. of the business and to commence proceedings against the respondents. However, a suspicion that they had been defrauded is very different from a full knowledge of the extent of the fraud, and the fact that they had an opportunity to take action that might have averted further losses does not necessarily mean that it was unreasonable to fail to do so. The critical question is whether it was unreasonable for the Goulds to continue to allow the company to trade ..." Wilson J. on the same subject, speaking of the trial judge's treatment of Doyle v. Olby (Tronmongers) Ltd. (above) said at p.52: "However, Connolly J. rightly deduced from Doyle's case that the vital question for him to ask in relation to the Goulds' conduct was whether they had hung on too long. He answered it as follows: 'In the circumstances of this case, I do not think it can be said that the Goulds, in their position as the controlling shareholders and directors of Goulds Holdings, brought their misfortunes upon themselves ...'" Wilson J. went on to say, in effect, that knowledge of the detailed facts of the matter was not essential and held, as TI understand him, that when the "disparity between representation and reality" was "demonstrated by experience", then the Goulds should have sold. Brennan J. at p.61 declined to interfere with the finding that the Goulds had behaved reasonably in carrying on the business. Dawson J., especially at p.71 and 72, dealt with this point in a way which depended upon the particular facts of that case and cannot be applied here. Murphy J.' did not discuss the matter, but agreed with the assessment made by Connolly J. It has to be conceded that some at least of these views create difficulties for the applicant here. He was immediately aware that the occupancy rate was greatly below that represented, —— en —— as were the takings; he wrote within a fortnight formally complaining about the matter. No doubt it is possible that he could have sold fairly soon at the reduced price of $240,000. If it 1s correct, as some of the discussion referred to above may imply, that full knowledge of the falsity of the vendor's statements ordinarily puts an end to the right to recover additional losses associated with carrying on the business, the rights of recovery here must be severely curtailed. I cannot accept, however, that there is an inflexible principle that once the buyer discovers the true situation, his losses must be taken to be no longer a result of the misleading statements made. It does not follow from Gould v. Vaqgelas, as I read that case, that the necessary causal link between losses associated with running the business and the misleading statements may be held to exist only so long as the applicant remains misled. He may reasonably take the view that, rather than sell straight away at a considerable loss, his interests are better served by holding on in the hope of an improvement. In this case, there is very little 1n the evidence to assist in fixing a time during which additional losses should be taken to run. It is, however, clear, in my view, that there is no justification in logic or otherwise for arbitrarily taking them up to about the date of hearing - that being, as I have said, the applicant's claim. I return to this point below. It should be added that there is no necessity in this case to apply the third approach referred to above, or to consider its relationship with that used in Goulid's case. 25. TAXATION AND DAMAGES It is necessary to consider the impact of taxation on the additional losses. The first element of the claim is the interest which has been paid on the sum borrowed to buy the motel. The reason for suggesting that income tax should be taken into account is that if it is not, the applicant may be overcompensated, for he has the benefit of tax deductions by reason of these payments. If he has not used these deductions to reduce his tax liability up to the present, he may do so in future, having seven years in which to turn the loss to account: see s.80(2) of the Income Tax Assessment Act 1936. The same argument applies to the second element of the consequential loss, namely the actual losses incurred in running the motel. Plainly, taking into account the benefit of deductions can involve considerable uncertainties. The question whether the effect should be taken into account does not involve any great sum in this case, but is one which must be resolved. In Barrell Insurances Pty. Ltd. v. Pennant Hills Restaurants Pty. Ltd. (1981) 34 A.L.R. 162, the question was as to the proper amount of damages to be awarded to the plaintiff who had, by the default of its broker, been left with an obligation to make periodic payments of compensation to a worker. It was argued that since those payments would be a tax deduction, that circumstance should be taken into account in favour of the defendant. Of the members of the High Court who dealt with the point, Gibbs J. (as he then was) said that tax deductions in oy soe ee caer: . soe 26. respect to the payments of workers' compensation should he ignored for reasons set out at pp.170 and 171, Stephen J. took them into account only as a reason for declining to treat as relevant tax liability on income notionally derived from the sum awarded (p.187). Mason J. took a similar course to that of Stephen J.(p.203) and Wilson d. agreed with Mason J. (p.207). The only one of these judges who considered the question of the deductibility of the payments as a separate issue was Gibbs J; all the others treated 1t as merely an element in the decision whether to take into account, in favour of the plaintiff tax on earnings from the award. Without quoting the whole passage from Gibbs J., I point out that his Honour remarked at p.170: "Pennant Hills may cease to carry on business, so that no deduction is claimable, or for some other reason a tax deduction, if allowable, may be of no value to it, but questions of this kind are collateral to the issue of damages and must be entirely disregarded. It would be a misapprehension of the method discussed in Cullen v. Trappell to set off, against notional tax, expected real tax benefits." Another specific treatment of the point is that of Lockhart J. in Milner v. Delita Ptv. Ltd. (above). His Honour's reasoning, especially at p.576, echoes the language of Gibbs C.J. in Barrell Insurances, at least to some extent. Without seeking to cast the least doubt upon the result arrived at by Lockhart J., however, it appears to me that in a case such as' the one before me an allowance should be made for the deductibility of losses. In Barrell Insurances, Gibbs J. was alone, as I read the reasons of the various judges, in treating the benefit of ae ere oe =e pangs .7 RTE Se men > us wtstmeee "Tac mae se wor morse. TST mn ee we w eta y cae nat a ny : whe as oe ver era ge ee 27. deductions as inherently "collateral to the issue of damages". Fach of the other judges had regard to the benefit of deductibility of the payments in question, if only as a reason for declining to take into account tax liability on income from the sum awarded. In taking the latter course, their Honours consciously departed from the general rules laid down in Cullen v. Trappell (1980) 146 C.L.R. 1, namely that, as Stephen J. said at p.186: '"l.. it is ... upon net after tax loss of income that awards of damages for future economic loss are to be expressed. In addition, regard is to be had to the income tax notionally payable on the income which would be produced were the sum awarded in respect of future economic loss to be invested." There is an element of unfairness in taking into account, as Cullen v. Trappell dictates one must do, tax notionally payable on the income from damages (an element in favour of the claimant) and declining to take into account counter-balancing tax benefits he may receive. Each of these elements is, of course, difficult to take into account in advance of the facts, but that does not appear to be a good reason for ignoring either completely. In company accounts, the benefit of tax losses is commonly regarded as a matter requiring disclosure to give a true and fair view, but it is not necessary to deal with the question of the impact of losses on a company's affairs. At least where the tax advantage arising from the loss accrues to a natural person, the lawas to carrying it forward is not complex and no sufficient reason appears for ignoring that advantage. I have decided to deduct an eighth of the losses to take account of the tax advantage. Pars " ok orien aaa aeatalien ee a toot sty Se ? , 8 want 28. The other question of tax effect is whether an allowance should be made in favour of the respondents for the tax which would have been payable on income earned by use of the capital the applicants invested in the purchase of the motel. The principle of British Transport Commission v. Gourley (1956) A.C. 185, which is to be applied, requires that that tax effect be considered only if the relevant component of the damages is not itself taxable. In my view, that component is taxable under s.26(j) of the Income Tax Assessment Act 1936 and therefore no allowance should be made in favour of the respondents. In arriving at this conclusion, I have not overlooked the possibility that tax will not, in fact, for one reason or another, be paid on that component of the damages. It appears to me that Gourley''s case does not require the court to go beyond the legal exigibility of tax on the sum in question. CONCLUSIONS AS TO DAMAGES The claims described in a general way above are: (i) $36,428.74 interest on moneys borrowed to purchase the motel, the loan being alleged to be $148,000. {ii) $34,665 for losses suffered by the applicant in conducting the motel business. (iii) $48,067.19 for sums which, it is said, the applicant would have earned from use of his capital but for the purchase of 29. the first respondent's motel. I am asked to assume a $250,000 motel earning 20%. The figure of $250,000 seems to me incorrect. It follows from the discussion under the preceding heading that an allowance for tax effect against the applicant should be made in respect of the first two components, but no allowance for tax effect should be made for the third head. It is necessary to note that two decisions of the High Court suggest the desirability, in view of the fact that the assessment is being made on the assumption that that element is taxable, of segregating out the amount awarded under the third head: McLaurin v. F.C.T. (1961) 104 C.L.R. 381, Allsop v. F.C.T. (19655) 113 C.L.R. 341. There was a suggestion at the hearing that the claimed losses in running the business should be discounted on the basis that such losses may not be truly stated. Experience suggests that, as mentioned above, 1t is common enough for accounts of businesses to reflect a degree of bias on the part of the proprietor in his own favour and it may be thought unrealistic to assess damages as if business people were not commonly influenced, in their keeping of records, by tax considerations. However, it is in my view clear that, at least in this case, no discount should be made in respect of that matter. While the failure to make a discount may often lead to an applicant's being, in truth, overcompensated, it would seem unorthodox to make an arbitrary reduction in the losses claimed to cover the th - 30. general likelihood that, in many cases, the accounts may exaggerate the loss. Here the applicant has put forward the figures as being correct and there is neither evidence, nor any specific reason, to justify a contrary finding. As to the third head of additional loss, the claim for earnings which would otherwise have been made with the capital used in purchase of the motel, I reject the applicant's suggested basis for assessment of those earnings; it has been derived from an hypothesis that the applicant would, but for the purchase of this unprofitable motel, probably have bought another, profitable, one. Again Gates' case (above) is the guide: "Because the object of damages in tort is to place the plaintiff in the position in which he would have been but for the commission of the tart, it is necessary to determine what the plaintiff would have done had he not relied on the representation. if that reliance has deprived him of the opportunity of entering into a different contract for the purchase of goods on which he would have made a profit then he may recover that profit on the footing that it is part of the loss which he has suffered in consequence of altering his position under the inducement of the representation. This may well be so if the plaintiff can establish that he could and would have entered into the different contract and that it would have yielded the benefit claimed ... The lost benefit is referable to opportunities foregone by reason of reliance on the misrepresentation." (Per Mason, Wilson and Dawson JJ. at p.12.} I accept that the applicant was, at the time, looking fora motel, as ais evidenced by his having entered into the instant transaction. Whether he would, had he not entered into it, in fact have bought another motel seems to be entirely speculative and the return he would, in that event, have received is equally 31. so. Any purchaser who has been induced by misrepresentation to buy an unprofitable business is likely to be able to assert, at least if the business is one of a common kind, that had it not been for the misrepresentation, he would probably have bought a similar but profitable business; yet it has never been the practice to award such claimants damages on the basis of their having made a hypothetical successful purchase. This general possibility is not, in my opinion, what the members of the High Court had in mind when they spoke of deprivation of "the opportunity of entering into a different contract ... on which he would have made a profit". In my view, the way to calculate the value of the use of the capital is to take a rate of interest appropriate to a reasonably safe loan assumed to have been made by the applicant. Calculation of damages on the basis of the fiqures presented on behalf of the applicant involves a considerable amount of estimation and, indeed, assumption. Nevertheless, some arithmetic is necessary to reach a final figure, albeit one arrived at by some simplifying assumptions and rounding off. One assumption, underlying the figures of lasses claimed during the applicant's occupancy of the motel, is that, but for this transaction, the applicant would have worked and earned a salary; the losses are arrived at after making allowance for the value of the applicant's labour. Another is the extent to which the tax losses will be of use. But perhaps the greatest uncertainty is the length of time during which it is right to regard the additional losses as caused by the misleading statements found. For the reasons explained above, I am not prepared to accept that FE ern Sg ne ete Soe A a ec ocncs go 32. the right to recover additional sums ceases upon knowledge of the true facts. Sufficient time should be allowed, in this case, for the applicant to consider his position and to find a buyer. I have come to the conclusion that a period of about nine months is right, to arrive at a result which is just but not extravagant; in fixing the period I have taken into account that the damages are being assessed well after the occurrence of the loss. Of course, the applicant did not sell after nine months and has, so far as the evidence shows, made no attempt to do so. I donot hold the view that his conduct in that respect 1s "unreasonable" in any true sense. No doubt the applicant has done what seems to him most advantageous, but the additional losses cannot run on indefinitely. The first claim is in respect of interest on moneys said to have been borrowed to purchase the motel, namely $148,000. The amount actually borrowed was $180,000, but that was reduced by payments of principal. It seems to me that for simplicity of calculation, the payments of principal should be ignored and on that basis the notional interest paid for the whole period claimed was $44,868.69. The second claim is in respect of losses suffered in conducting the motel business totalling $34,665 and that figure I accept for the purpose of this calculation. The addition of those figures gives one $79,533.69. To reduce the sum claimed (over about 18 months) to that appropriate to a nine month period I divide the total hy two. Toya we pocter mm ye anne, % 33. I appreciate that this introduces an inaccuracy, but it is not one which can be entirely removed. Then, the sum of the interest and losses is a little under $40,000; deducting one-eighth for the benefit of carried forward tax losses gives a figure of about $35,000. The total of the purchase price and associated expenses was close to $360,000. Having taken the sum borrowed to bea constant $180,000, then the capital regarded as having been invested is also $180,000. Interest at 15% on that sum for nine months comes to $20,250 which I round off to $20,000. The interest rate is intended to represent a figure obtainable from a reasonably safe investment during the relevant period. Tt should be reiterated that (contrary to the basis on which the applicant made the claim) I have made no deduction from that figure of $20,000 for tax effect, on the basis that the relevant component of the damages is taxable. To summarise, the additional losses are: Expenditure on interest; trading losses $35,000 Compensation for lost income on capital $20,000 $55,000 In the resuit, there will be judgment for the applicant for $160,000 with costs. per irtiee sereeneg AER yT a o - ay a es ee ee 34. | certify that this-and the 33 preceding pages are a true copy of the reasons for judgment herein of His Honour Mr, Justice Pincus Pr. 'Associate Dated 7-4-#6. ce TE ver e mw