BARISA PTY LTD v LARGA BROS INVESTMENTS PTY LTD SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL SAMUELS, PRIESTLY and HANDLEY JJA 22 April 1991, 22 April 1991 [1991] NSWCA 21 CONTRACT — Sale of shares — Covenants in contract expressed to be conditions — Vendor's breach of covenants — Purchasers election to complete and claim damages for breach of warranty Whether warranties effected value of shares and reduced value Whether prospective purchaser of company shares entitled to confidential information. held Market value is necessarily affected by all uncertainties and risks associated with future events and it would be artificial to have regard to subsequent events as throwing light on market values. Lynall v Inland Revenue Commissioners [1972] AC 680 Handley JA This is an appeal by a defendant from a judgment in favour of the plaintiff for $125,000 entered by Cole J. The proceedings arose out of a contract for the sale of shares in a company which entitled their owner to occupy part of the company's real estate. The company, Reid House Pty Ltd, at all material times owned the property at 75 King Street, Sydney. Both liability and damages were in issue at the trial but, in the result, the defendant's appeal has proceeded only on the question of damages. The shares in question were submitted to public auction on 10 December 1987 through LJ Hooker International Limited and sold to the plaintiff. The contract of sale contained a number of covenants by the vendor which were expressed to be conditions of the contract. The vendor has been held to have breached its covenants contained in CL7(d), CL7(g) and CL7(h) of the contract. CL7(d) provided that on completion the company, that is Reid House Pty. Ltd would have title to the property free from any mortgage, charge or encumbrance. In fact, on completion the company's title was subject to a registered mortgage which then secured advances totalling $140,000. CL7(g) relevantly provided that so far as is known to the vendor, there were no legal proceedings pending in any court against the company. In fact, at the date of contract as known to the vendor, proceedings were pending against the company in the Equity Division of this Court in which six shareholders had cross-claimed for damages. On 28 November 1986 Needham J found that the company had breached its obligations for quiet enjoyment owed to those shareholders and had referred the assessment of their damages to the Master. At the date of contract those assessments were still pending. CL7(h) was a covenant by the vendor that all liabilities of the company, other than current commitments and accruals, have been fully paid and satisfied. This covenant was directed to the state of affairs at the date of contract. Clearly at that date the company's liabilities to the six shareholders who had taken action against it were not current commitments and accruals and had not been paid or satisfied. Despite these breaches of condition, the purchasers elected to complete the purchase and claim damages for breach of warranty. Settlement took place on 15 April 1988. 2 UNREPORTED JUDGMENTS Cole J found that the conditions in question which had become warranties ex post facto related to matters affecting the value of the shares. These were shares of reduced quality because of the liabilities of Reid House Pty Ltd. The purchaser of the shares could be called upon in due course, as a shareholder, to make payments to the company to discharge its rateable proportion of those liabilities. His Honour therefore applied the prima facie measure of damages for breach of warranties of quality on the sale of shares which is stated in McGregor on Damages, 15th ed at para 1050, as follows: "Where the shares are in some way not up to the promised standard this is in the nature of a breach of warranty of quality and the normal measure is of value as warranted less value in fact." This is, of course, the same prima facie measure which applies in the case of breaches of warranty of quality on a sale of goods, as provided for in s54(3) of the Sale of Goods Act. At the trial the plaintiff led evidence from an expert valuer, Mr Peter McGrath, from Richard Stantons. His written valuation was admitted without objection as Exhibit F In his opinion the market value of the shares as at the date of settlement as warranted was $665,000 and their market value in fact was $540,000, giving a prima facie measure of damages of $125,000. Mr McGrath took into account the settlement between contract and completion of some of the claims against the company. There was no dispute as to these claims. He also took into account the outstanding claims against the company, including the mortgage. The correct figure, including the amount due under the mortgage of $140,000 instead of the amount that he mistakenly thought was due, was $1,096,857.85. Mr McGrath took into account the liability of shareholders in Reid House Pty Ltd to contribute rateably to the payment of these liabilities and deducted the appropriate proportion, namely, 10.409% in relation to the shares the subject of the sale. He was cross-examined as to whether he should have allowed some discount from the face value of the outstanding claims. He said that he had not allowed any discount because a prudent purchaser would not have discounted those claims. He gave as his reason that the purchaser would not have had the knowledge on which to base any estimate of the appropriate discount. This question was not elaborated on either in further cross-examination or in re-examination. The defendant also called expert valuation evidence. It tendered a written statement from a Mr Douglas King. He was not called to supplement his written statement and he was not cross-examined. He expressed the opinion that as at 15 April 1988, the date of settlement, the market value of the shares as warranted was $775,000 and their market value in fact was $675,000 or $100,000 less. However, this abatement of $100,000 was based on an assumption that the company's outstanding liabilities were exactly $1 million. Mr King said: "In my opinion, an informed market would acknowledge that the value to be placed upon the shares of a particular shareholder/occupant would be affected adversely by the liquidated and unascertained liabilities of Reid House Pty Ltd. I agree with the Richard Stanton valuation that an informed market would be prepared to pay less than it would be prepared to pay for the same shares in the absence of any such liabilities. Thus, if Barisa Pty Ltd was the owner of 10% of the issued capital of Reid House Pty Ltd, an informed market would attempt to quantify the extent of liabilities, ascertained and unascertained, of Reid House Pty Ltd and reduce the figure which it would have otherwise have been prepared to pay for the URJ BARISA PTY LTD v LARGA BROS INVESTMENTS PTY LTD (Handley JA) 3 shareholding of Barisa Pty. Limited by 10% of the amount of those liabilities. To that extent, I agree with the general approach taken in the Richard Stanton valuation." Both valuers therefore agreed that the value of the shares in fact should be reduced by their rateable proportion of the company's outstanding liabilities. Moreover, neither contended that any process of discounting should be applied to the unascertained liabilities of the company under the assessments pending before the Master of the Equity Division. While in some cases it may be appropriate for such a discount process to be applied, it must be a question of fact in each case whether this is so. The market value of these shares was treated as being substantially equivalent to the space in the building, making proper allowance for the company share title and the owner's liabilities. The question in the end relates to the way in which purchasers of such shares take into account the outstanding liabilities of corporate owners. Both valuers agreed that prudent purchasers do not attempt to assess the amount for which pending claims will ultimately be quantified but allow for such claims at face value. Mr Campbell QC for the appellant, however, contended that by the date of trial, the true amount of the owners' liabilities had been ascertained by the assessments of Master Gressier, even though those assessments were then under appeal to this Court. He also contended that the Court should prefer the facts as now known, to the prophecies as at 15 April 1988. However until the liabilities of the company to its shareholders were fully ascertained by agreement or by decisions of the courts, there would be continuing uncertainty. This uncertainty involved an element of risk to the shareholders and consequently to any purchaser. The final disposal of the proceedings would remove this uncertainty and the associated risk. The value of the shares in fact on 15 April would necessarily have been affected by the uncertainties relating to those outstanding claims and the consequent risks which would be encountered by purchasers of the shares. The plaintiffs' prima facie measure of damages earlier referred to depends on the true market value of the shares that day. Neither the plaintiff nor any sub-purchaser of those shares on 15 April could then have known what the outcome of the pending litigation would be. The parties on any resale that day would necessarily be faced with prophecies as to the outcome of the litigation with the attendant uncertainties and risks. Those uncertainties, however, are only some of the uncertainties that affect markets and market prices. Any purchaser of land is relying consciously or otherwise on prophecies as to inflation, rates of interest, general trends in the market for real estate, government policies and other matters. A purchaser who knew how those matters worked out in the next year or two would be prepared to pay a price for property that was different from that which would be paid by a prudent purchaser who had to rely upon prophecies rather than facts. In this case the plaintiff's prima facie measure of damages depends upon the market value of the shares on a particular date. This is a real and not a fictional market value. Accordingly the Court cannot have regard to facts as they subsequently emerge over the next two, three or four years in order to throw light on that market value. That value is necessarily affected by all the uncertainties and risks associated with future events. 4 UNREPORTED JUDGMENTS There is a further problem faced by the appellant, namely, the question whether any purchaser of these shares would have been entitled to obtain information from Reid House Pty Ltd relating to the outstanding claims and any legal advice the company had obtained as to its prospects of success in the pending proceedings. No attempt has been made to establish that a purchaser of shares in Reid House Pty Ltd had, either under the articles or on any other basis, a right to obtain what is prima facie confidential information of the company relating to its pending litigation. It seems to me that it would be entirely artificial to have regard to subsequent events as throwing light on market values at an earlier time when at the relevant date a purchaser or a person in the position of a purchaser would not be able to obtain that information. Compare Lynall v Inland Revenue commissioners [1972] AC 680. For these reasons, in my opinion, the appeal fails and I would propose that it be dismissed with costs. Samuels JA I agree. Priestley JA I also agree. The order of the Court therefore is that the appeal is dismissed with costs. Counsel for the Appellant: J Campbell QC and K Lindgren Counsel for the Respondent: R Bainton QC and S Motbey Solicitors for Appellant: Morton and Harris Solicitors for Respondent: SA Teen