RUMMERY v DORSMAN SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL GLEESON CJ, MEAGHER and SHELLER, JJA 3 October 1995, 21 February 1996 DAMAGES — assessment of- whether Master has power to award costs and interest — appropriate formula — HELD: Power of Master comprises ability to order costs and interest Pt60 r1A. Schedule D Pt3 Supreme Court Rules. Damages to be assessed as at date of judgment not contract of sale. The first respondents, Mr and Mrs Dorsman, leased the Federal Hotel at Alstonville from the second respondent, Dr Castagna, in 1986. The term of the lease was to expire on 23 May 1993. CL39 of the lease required the lessor, if he wished to sell the freehold of the hotel to a prospective purchaser, first to make a written offer of sale to the lessees. The offer was to stand for twenty-one days or until such time as the lessees gave written notice that they did not wish to accept it. On 15 January 1988 the appellant solicitors, Mr and Mrs Rummery, purported to make such an offer on behalf of Dr Castagna advising that he had a purchaser for the freehold of the hotel, subject to the lease, at a price of $620,000. On 25 January they purported to withdraw the offer. The first respondents claimed that the offer was irrevocable and in a letter dated 3 February 1988 accepted it. The first respondents brought an action in the Equity Division for specific performance of the contract of sale. Waddell CJ in Equity held that the offer was in terms irrevocable and that although a claim against the second respondent failed for want of authority the first respondents were entitled to succeed against the appellants for breach of warranty of authority. The matter was referred to a Master to assess damages. Waddell CJ in Eq indicated that damages for breach of warranty of authority should be measured by reference to the value of the hotel as at the date of judgment in the proceedings. On 8 April 1993 the Court of Appeal dismissed the appellants' appeal against this decision by a majority (Mahoney and Priestley JJA, Handley JA dissenting). In March 1994 Master McLaughlin began the inquiry as to damages and in October delivered his decision awarding damages together with interest in the amount of $1,432,590.30 and ordered Mr and Mrs Rummery to pay Mr and Mrs Dorsman's costs of the inquiry. The Master calculated damages by reference to the difference between $620,000, the contract price of the hotel at 15 January 1988 and his assessment of its value as at 16 December 1991, the date of the judgment. The Master based his quantification of damage on a valuation of the hotel Mr and Mrs Dorsman obtained from an independent valuer. Mr and Mrs Rummery appeal from this assessment principally on the ground that the damages were excessive and that the Master had no power to award costs or interest. HELD: (1) The independent valuation, Master McLaughlin adopted, failed to take into account that the subject of the contract was the lessor's interest and the important evidence of the market value of the hotel. Accordingly the determination as to the amount of damages must be set aside. (2) Having regard to the amount of the valuations in evidence, the significant inflation in the value of the lessor's interest between January 1988 and December 1991, a value of $1,240,000 at December 1991 should be adopted. (3) Adding interest assessed at the same rate and for the same period as those chosen by the Master the total amount of the verdict should be $841,104.15 which should be substituted for the Master's award. (4) The decision to assess damages on the basis of the value of the lessor's interest in the hotel as at the date of judgment rather than the date of contract of sale, was correct. 2 UNREPORTED JUDGMENTS Johnson v Agnew [1980] AC 367 at 401 per Lord Wilberforce; Johnson v Perez (1988) 166 CLR 351 applied. (5) The Master's power to assess damages extends to the making of orders for costs of the assessment and orders for interest on the damages assessed. These orders should not be disturbed, but the lower amount of the verdict required that the order that the appellants pay the costs of the inquiry into damages on the indemnity basis should be set aside. ORDERS 1. Appeal allowed; 2. Set aside O.1 made by the Master on 3 February 1995 and in lieu thereof order 1. The damages to which the plaintiffs are entitled from the second and third defendants be assessed in the sum of $620,000 together with interest thereon in the sum of $221,104.15. Entry of judgment against the second and third defendants in the sum of $841,104.15. 3. Set aside the orders of the Master of 7 March 1995; 4. The respondents, Mr and Mrs Dorsman, to pay the appellants, Mr and Mrs Rummery's costs of this appeal but, if qualified, to have an order under the Suitor's Fund Act 1951. Gleeson CJ I have had the benefit of reading in draft form the judgment of Sheller JA. I agree with the orders proposed by his Honour and with his reasons for those orders. Meagher JA I agree with Sheller JA. Sheller JA INTRODUCTION In 1986 the first respondents, Desmond Edward Dorsman and Alice Dorsman, (Mr and Mrs Dorsman) became the lessees from the second respondent, Aldo Caesar Castagna, (Dr Castagna) of the Federal Hotel at Alstonville near Lismore on the New South Wales north coast for a term to expire on 23 May 1993. CL39 of the lease provided that if the lessor wished to sell the freehold of the premises and the lessor's fixtures, he would first offer them by written notice to the lessee at a price and upon such terms and conditions as offered to a-prospective purchaser and the lessee might accept such offer in writing within twenty-one days of the date of the notice of offer. The clause provided that the lessor should not sell the freehold and fixtures to any other person at such or any other price or upon such or any other terms and conditions until the expiration of the twenty-one day period or the receipt of a written notice from the lessee that the lessee did not desire to accept the offer. On 15 January 1988 the firm of which the appellants, Patrick Joseph Rummery and Mary Elizabeth Rummery (Mr and Mrs Rummery), were partners, wrote to Mr and Mrs Dorsman advising that Dr Castagna had a purchaser for the freehold of the hotel, subject to the lease, at a price of $620,000. A copy of the contract was enclosed. Athol Pidcock Hotel Brokerage (NSW) Pty Ltd (APHB) was nominated as vendor's agent. The letter continued: "Pursuant to CL39 of the Lease our client hereby offers to sell to you the property on the same terms and conditions as set out in the enclosed contract. Option shall remain open for twenty-one days or until your written confirmation that you do not wish to accept the offer." On 25 January 1988 Rummery and Rummery wrote referring to their letter of 15 January and advising "that as the sale referred to therein is not proceeding, the offer to sell to you is hereby withdrawn." On 27 January 1988 Mr and Mrs Dorsman's solicitors wrote to Rummery and Rummery stating that Mr and Mrs Dorsman were considering the offer made in the letter of 15 January and asserting that the offer was irrevocable and could not be withdrawn. Mr and Mrs Dorsman accepted the offer by a letter from their solicitors dated 3 February 1988. URJ RUMMERY v DORSMAN (Sheller JA) 3 In proceedings in the Equity Division begun in 1988 Mr and Mrs Dorsman claimed specific performance by Dr Castagna of the contract constituted by the offer of 15 January 1988 and their acceptance of 3 February 1988. They alleged that Warren Charles Cupitt, a hotel broker representing APHB, had negotiated the sale of the hotel to a Mr Stewart on instructions from Dr Castagna. Dr Castagna instructed Mr Cupitt to arrange for Mr Rummery to prepare a contract. The need to make an offer under CL39 of the lease was raised and Dr Castagna authorised Mr Cupitt to instruct Mr Rummery to make the offer contained in the letter to Mr and Mrs Dorsman of 15 January 1988. Dr Castagna contended that Mr Cupitt was not authorised by him to instruct Mr Rummery either to draw up a contract for the sale to Mr Stewart or to make the offer to Mr and Mrs Dorsman on his behalf. In the alternative, in case they failed against Dr Castagna for lack of authority on the part of Mr Rummery, Mr and Mrs Dorsman claimed damages against Mr and Mrs Rummery for breach of warranty of authority. They also made an unsuccessful claim against Mr Cupitt which it is unnecessary to refer to further. Waddell CJ in Eq heard the proceedings in May 1991. He reserved and published his reasons for judgment on 16 December 1991 with an addendum to that judgment on 20 December 1991. His Honour found that Mr and Mrs Dorsman had not satisfied the onus of establishing that Mr Cupitt had Dr Castagna's authority to instruct Mr Rummery on his behalf. Accordingly their claim against Dr Castagna failed. His Honour also found that the offer made to Mr and Mrs Dorsman, expressed to be pursuant to CL39 and stated to remain open for twenty-one days, was by its terms irrevocable and could not be withdrawn. This meant, in his opinion, that if Mr and Mrs Dorsman had established that the offer was made with the authority of Dr Castagna, his purported withdrawal would have been ineffective. As Mr and Mrs Dorsman had failed to establish that the offer was made with authority, they were entitled to proceed against Mr and Mrs Rummery for the absence of the authority which, by the letter of the offer, Mr Rummery warranted he had. His Honour said: "No reason has been given why the Dorsmans should not be entitled to recover damages for breach of warranty of authority from Mr and Mrs Rummery. There has been some argument as to the measure of damages. The general principle is clear and is stated in McGregor on Damages, 15th ed paral230 as being 'the amount that the plaintiff has lost by being unable, by reason of falsity of the warranty, to sue the alleged principal'. In the present case what the Dorsmans have lost is the right to succeed in the proceedings for specific performance of the contract constituted by the offer and their acceptance of it against Dr Castagna. Dr Castagna has raised no defences to the claim to specific performance other than the absence of authority on the part of Mr Rummery and his purported withdrawal of the offer. If Mr Rummery had been held to have had authority to make the offer the Dorsmans would have succeeded. What they have lost is, therefore, the value of the hotel as at the date of judgment in these proceedings. If this value exceeds the contract price then the amount of damages to which they are entitled is the difference. This is supported by authority. See Johnson v Agnew [1980] AC 367, a decision of the House of Lords and the general principles enunciated by the High Court in Johnson v Perez (1988) 166 CLR 351. As already mentioned, the valuation evidence has yet to be completed. In the meantime, however, there should be an order dismissing the claim of the plaintiffs against Dr Castagna. Provision should be made for the assessment of the damages claimed by the plaintiffs against Mr and Mrs Rummery. Dr 4 UNREPORTED JUDGMENTS Castagna's cross-claims against Mr Rummery and Mr Cupitt do not arise for consideration and should be dismissed." His Honour referred the proceedings to the Registrar for the appointment of a date for hearing before a Master to assess damages. Mr and Mrs Rummery obtained leave to appeal to this Court (the first appeal). The notice of appeal set out the following grounds: "1. That his Honour erred in finding that [Mr Cupitt and APHB] did not have authority from [Dr Castagna] to instruct [Mr Rummery] to offer the Hotel to [Mr and Mrs Dorsman]. 2. That his Honour was in error in concluding that the offer made by [Mr Rummery]: (a) was made pursuant to CL39 of the Lease of the Hotel; and (b) was irrevocable for the period of 21 days. 3. That his Honour was in error in concluding that [Mr and Mrs Dorsman] had made out a case of breach of warranty of authority in circumstances where, prior to the purported acceptance of the offer, [Mr Dorsman] had full notice of [Mr Rummery's] lack of authority to make such offer. 4. That his Honour was in error in concluding that the measure of damage for the breach of warranty of authority was the value of the Hotel as at the date of entry of the orders on 20 December 1991." On 8 April 1993 the Court by a majority (Mahoney and Priestley JJA, Handley JA dissenting) dismissed the first appeal. On 1 March 1994 the hearing to assess damages began before Master McLaughlin. After hearing the evidence and submissions the Master reserved his decision which he delivered on 13 October 1994. The Master assessed the damages to which Mr and Mrs Dorsman were entitled from Mr and Mrs Rummery, as at the date of judgment 16 December 1991, in the sum of $1,056,000 and ordered Mr and Mrs Rummery to pay the costs of Mr and Mrs Dorsman of the inquiry as to damages. On 3 February 1995 the Master awarded interest in the sum of $376,590.30 and directed entry of judgment for Mr and Mrs Dorsman against Mr and Mrs Rummery in the sum of $1,432,590.30. The Master ordered that the costs of the application by Mr and Mrs Dorsman for interest be costs in the inquiry as to damages. On 7 March 1995 the Master ordered that Mr and Mrs Rummery pay the costs of Mr and Mrs Dorsman of the inquiry as to damages from and including 21 April 1993 on the indemnity basis together with the costs of their notice of motion of 1 March 1995. This second appeal concerns the quantification of damages and the Master's power to award either costs or interest. Mr and Mrs Rummery submitted that the award of damages was excessive. In addition they challenged the basis upon which the Master assessed damages in so far as this adopted the Chief Judge in Equity's formulation in the passage which I have quoted. As well as Mr and Mrs Dorsman, Dr Castagna, Mr Cupitt and APHB were named as respondents. On 21 August 1995 an order was made removing Dr Castagna as a respondent. Neither Mr Cupitt nor APHB appeared at the hearing of the second appeal. BREACH OF WARRANTY OF AUTHORITY In Bowstead on Agency, 15th ed, Article 112 the principle by which a person is made liable for breach of warranty of authority, as settled by Collen v Wright (1857) 7 El and BI 301; (1857) 8 El and BI 647; 119 ER 1259; 120 ER 241, is stated in the following propositions: URJ RUMMERY v DORSMAN (Sheller JA) 5 "(1) Where a person, by words or conduct, represents that he has authority to act on behalf of another, and a third party is induced by such representation to act in a manner in which he would not have acted if such representation had not been made, the first-mentioned person is deemed to warrant that the representation is true, and is liable for any loss caused to such third party by a breach of such implied warranty, even if he acted in good faith, under a mistaken belief that he had such authority. (2) Every person who purports to act as an agent is deemed by his conduct to represent that he is in fact duly authorised so to act, except where the nature and extent of his authority, or all material facts known to him from which its nature and extent may be inferred, are fully known to the other contracting party, or the purported agent expressly disclaims any present authority." The doctrine applies where one person expressly or by implication holds himself or herself out as having competent authority to do an act and thereby draws another party into a reciprocal engagement. The "essentials are (1) assertion of authority; (2) inducement by asserting; (3) transaction which but for that assertion the other party would not have entered into. Where they coexist there is a warranty."; Leggo v Brown and Dureau Ltd (1923) 32 CLR 95 at 106 per Isaacs J. By acting as if an agent, the actor professes the existence of authority. The natural inference calls for clear displacement. In Suart v Haigh (1893) 9 TLR 488 at 489 Lord Watson said: "Tt does not, in my opinion, admit of doubt that a contract professing to bind B as a principal executed on his behalf by A in the character of his agent conveys to the other contracting party an implied, but very distinct, assertion by A that he has full authority from B to make the contract...That assertion is the natural inference from an act done by the appellants, which can only be valid if they have authority. An inference of that kind cannot be displaced except by words which amount to a distinct intimation and the other contracting party had notice that the agreement made was not meant in certain circumstances to be effectual." In Leggo at 107-8 Isaacs J said: "That case, which appears to contain a recognition of Story's phrase 'natural if not necessary implication,' seems to require a very clear displacement of the inference usually arising from a contract, if it is honestly made and not a mere sham. It is, of course, possible that the party agreed to take a personal risk: it is possible that he was not content to take the assurance but determined to investigate for himself, and so found out all the facts; but these displacements are matters to be proved before it can be said that he did not rely on the assertion of the agent evidenced by his act." In Dickson v Reuter's Telegram Company (1877) 3 CPD 1 at 5 Bramwell LJ said: "Collen v Wright establishes a separate and independent rule, which, without using language rigorously accurate, may be thus stated: if a person requests and, by asserting that he is clothed with the necessary authority, induces another to enter into a negotiation with himself and a transaction with the person whose authority he represents that he has, in that case there is a contract by him that he has the authority of the person with whom he requests the other to enter into the transaction." The view Bramwell LJ expressed and its formalisation in terms of contract is said in McGregor on Damages, 15th ed, paral229 to be important in formulating the proper measure of damages. 6 UNREPORTED JUDGMENTS "This measure is now established as not that for the tort of deceit, ie restoring the status quo ante, but the general contract measure. Lord Esher MR put the measure for breach of warranty of authority concisely in Firbank's Executors v Humphreys (1886) 18 QBD 54 at 60. 'The damages under the general rule are arrived at,' he said, 'by considering the difference in the position he [viz the person acting in reliance or the warranty] would have been in had the representation been true and the position he is actually in in consequence of its being untrue'." In the case of warranty of authority to contract on the principal's behalf "the basis of the damages is the amount that the plaintiff has lost by being unable, by reason of falsity of the warranty, to sue the alleged principal; Richardson v Williamson (1871) LR 6 QB 276 at 279; Heskell v Continental Express [1950] 1 All ER 1033 at 1043. For what the agent has promised is not that the principal will perform the contract but that he will be bound by it. If therefore the plaintiff would have been unable to sue the principal even if the agent had had the warranted authority, he has been deprived of no gain by the agent's breach and can recover no damages for the loss of his bargain." McGregor, paral230 and paral231. In the present case it follows that if Mr and Mrs Dorsman failed to establish that they acted in reliance on the inducement of Mr and Mrs Rummery's warranty of authority or if Dr Castagna would not, upon Mr and Mrs Dorsman's acceptance of the offer to sell, been contractually bound to do so, because ie offer had previously been withdrawn, the action of the breach of warranty of authority would necessarily have failed. In his judgment of 16 December 1991 Waddell CJ in Eq concluded that the offer made pursuant to CL39 "by its terms" was irrevocable and could not be withdrawn which meant that if Mr and Mrs Dorsman had established that the offer was made with Dr Castagna's authority, its purported withdrawal would have been ineffective. His Honour went on to say that as Mr and Mrs Dorsman had failed to establish that the offer was made with authority, they were entitled to proceed against Mr Rummery for the absence of the authority which he warranted he had by the letter of the offer. In the first appeal Mr and Mrs Rummery appealed against this conclusion (ground 2 of the notice of appeal). Mahoney JA said that it was correct and on this both the other members of the Court agreed. Having found that if the offer had been made with authority its withdrawal would have been ineffective, Waddell CJ in Eq said, in the passage that I have quoted, that no reason had been given why Mr and Mrs Dorsman should not be entitled to recover damages for breach of warranty of authority from Mr and Mrs Rummery. The argument was as to the measure of damages. Mr Downes QC, who with his junior Mr Maston, appeared for Mr and Mrs Dorsman before the Chief Judge in Equity, on the first appeal, before the Master and on this appeal, in written submissions said that at the hearing before the Chief Judge the parties agreed, with his consent, that the determination of damages should be deferred but that the Judge should give directions as to the measure and proper basis of assessment of damages and refer any actual assessment to a Master. At the conclusion of the hearing submissions were put about the measure and proper basis of assessment of damages. Mr and Mrs Rummery did not argue that there was no reliance. Nor did they submit that damages might be nominal or confined to conveyancing costs or limited to actual expenditure up to any particular date or that damages should be assessed other than by reference to the value of the hotel. Senior counsel for Mr URJ RUMMERY v DORSMAN (Sheller JA) 7 and Mrs Rummery, at the hearing before the Chief Judge, who did not appear on subsequent occasions, although his junior, Mr Weber, did, simply put submissions as to the time at which the hotel should be valued. However undoubtedly, as the transcript of argument shows, reliance was raised on the first appeal. As Mr Rayment QC, who appeared on the first appeal and on the assessment of damages and who appears on this appeal for Mr and Mrs Rummery, said: "The question is, was their a representation of authority and was there reliance upon it." Mr Downes met this argument, inter alia, by pointing to the fact that Mr and Mrs Rummery persisted up to and during the hearing of the first appeal with the assertion that Mr Rummery had DI Castagna's authority to make the offer to Mr and Mrs Dorsman. Mr Downes said: "Reliance is ordinarily presumed. There is of plenty material here to show reliance. There was no cross examination of Mr Dorsman about reliance...and I do not recollect that any specific reliance argument in any event was put below." Reliance is a necessary ingredient in the cause of action. There are two possibilities: (1) that on 3 February 1988 Mr and Mrs Dorsman accepted the offer in reliance upon Mr Rummery's warranty that he had the authority to make it; (2) that Mr and Mrs Dorsman, before acceptance of the offer on 3 February 1988, incurred expenditure in reliance on the warranty of authority until they learned that Dr Castagna had not authorised Mr Rummery to make the offer after which Mr and Mrs Dorsman did not act in reliance on the warranty of authority. The confusion which arises from a failure to distinguish between these two possibilities is increased by the failure to distinguish the separate question of whether damages recoverable are reliance damages designed to put Mr and Mrs Dorsman into the position they would have been if the representation had not been made or expectation damages designed to compensate Mr and Mrs Dorsman for the loss of their bargain. On the first appeal the Court of Appeal did not expressly deal with the reliance argument. Mahoney JA dealt with a submission that the damages for the breach of warranty of authority should be at most nominal. But this argument was based on a submission that the offer of 15 January 1988 was effectively withdrawn on 25 January 1988. His Honour said: "The withdrawal of the offer on 25 January 1988, if effective, would be relevant to the assessment of damages. It is not necessary for present purposes to consider whether that withdrawal, if effective, would result in the damages awarded being at most nominal. It is therefore relevant to determine the effectiveness of the purported withdrawal." By this I think his Honour meant no more than that the question of whether the offer was effectively withdrawn was relevant to the assessment of damages but, if the offer had been effectively withdrawn, it was not necessary to decide whether the damages would be nominal. His Honour concluded that the offer was irrevocable and, in consequence, not effectively withdrawn. The appeal against this part of the judgment failed. Mahoney JA continued: "Tt does not follow from this that the damages to be assessed against Mr and Mrs Rummery are to be assessed upon a particular basis, eg, that they would otherwise have had a valid contract. Because there was no authority to make the offer, the offer was not capable of forming a contract in fact. The effect of this upon the measure of the damages for a breach of warranty of authority in these circumstances is a matter which will require consideration upon any assessment of damages. 8 UNREPORTED JUDGMENTS In my opinion, therefore, the appeals and cross appeals should be dismissed with costs." Mr and Mrs Rummery submitted to the Master and this Court that Mahoney JA meant by the penultimate paragraph to overrule the Chief Judge's conclusion about the basis upon which damages should be assessed. In particular Mr and Mrs Rummery submitted that it was open to them on the assessment of damages to re-argue reliance if only on the footing that damages were limited to those out of pocket expenses incurred, in reliance on the warranty of authority, before Dr Castagna indicated that Mr Rummery did not have his authority to make the offer. Ground 4 of the notice of appeal in the first appeal challenged the Chief Judge's conclusion that the measure of damages for breach of warranty of authority was the value of the hotel as at the date of entry of the orders on 20 December 1991. Mr and Mrs Rummery argued that ground 3 raised the question of reliance. The Court of Appeal dismissed the appeal. The language of the penultimate paragraph of Mahoney JA's judgment throws no doubt upon the Chief Judge's conclusions as to how damages should be assessed. The Court would not have dismissed the appeal if it intended to overrule these conclusions. In my opinion the Master was correct to proceed, as he did, upon the basis that the Chief Judge had set the framework for the assessment of damages. The Court of Appeal, though invited to do so on the first appeal, did not disturb this framework. Mr Rayment ran an interesting argument that the modern development of the law of estoppel makes anachronistic the action for breach of warranty of authority and that, to the extent the action survives, the measure of damages should be limited to monetary compensation for detriment suffered. Whatever force this argument may otherwise have it was too late to raise it on the assessment hearing. Had it been raised at the hearing before the Chief Judge evidence may well have been led to show what that detriment was. If an appeal on this ground was ever possible in light of the way the trial was run, Mr and Mr Rummery's opportunity to pursue it was in the first appeal. DAMAGES Mr and Mrs Rummery relied on the evidence of Ronald Edward Roberts a member of the Australian Institute of Valuers who, since 1978, had had wide experience in valuing hotels and in particular had valued lessor's and lessee's interests in hotels on behalf of several brewery companies. In a valuation of the hotel as at 16 December 1991 made following inspections in February 1991 and July 1993 Mr Roberts expressed the opinion that the market value fee simple in possession of the freehold hotel "(without an encumbered lease)', including the land and improvements, the licence, plant, furniture, fixtures and fittings, the goodwill as a going concern (but excluding stock) was $832,000. As of the same date Mr Roberts said that the market leasehold value of the hotel, being the possessional interest as per the terms and conditions of the lease and incorporating tenure on the licence, land and improvements, together with plant, furniture, fixtures and fittings (those being the property of the tenant) and goodwill as a going concern (but excluding stock) was $79,000. The valuation was made by applying an undisclosed assessed capitalisation rate to the determined achievable annual net profitability "giving consideration to the prevailing market values and activity". Of the leasehold valuation Mr Roberts said that, after assessing the achievable annual net profitability, the value (or cost to the purchaser) of the leasehold (being the possessional tenure) must be URJ RUMMERY v DORSMAN (Sheller JA) 9 amortised over the remaining period of tenure after allowing for the lessee's equity in the fixtures and fittings that were the property of the tenant. Separately and at a much earlier date Mr Roberts had valued the lessor's interest in the freehold hotel for Dr Castagna as at 12 December 1988. The same method was adopted. The value "for mortgage purposes" was put at $434,000. In cross examination it was put to Mr Roberts that the arms length contract between Dr Castagna and Mr Stewart in December 1987 for the sale of the hotel for the price of $620,000 showed that this was an under value. Mr Roberts would not accept this. Mr and Mrs Dorsman relied on the valuation of Bernard Anthony Hunt of 5 February 1992. Mr Hunt, although a registered property valuer, was not a specialist in valuing hotels. Over a period of ten years before the hearing he had valued about thirty. On an unrestricted freehold value basis Mr Hunt placed the market value of the hotel as at 16 December 1991 at $ 1,750,000. Mr Hunt had made earlier valuations of the hotel property. On 15 May 1989 he had valued it on a freehold in possession basis, as at 1 July 1988 at $1,025,000 and as at 1 May 1989 at $1,400,000. On 12 April 1991 he said that the unrestricted freehold value of the property currently was $1,750,000, the lessor's interest $1,500,000. In his valuation of 5 February 1992 Mr Hunt approached the matter in two ways, by capitalisation of net income and by sales comparison. Depending on a rate of capitalisation between 17 and 19 percent, the first approach produced a range of value from $1.556 million to $1.740 million, the second from $1.6 million to $1.75 million. In cross examination Mr Hunt was asked whether in January 1988 a price of $660,000 [sic] represented a considerable undervalue for the sale of the freehold unencumbered. There was some confusion in this evidence not only about the sale price but also about whether it was for a sale subject to the lease, which it was. Cross examination touched upon the significance of the contract price but was not pressed to any great extent. The parties cross examined both valuers about the details of their valuations. The Master, in his reasons for judgment, compared the steps the valuers took in making their valuations and referred to the criticisms made of them. He said: "Tt seems to me, in regard to the various items of expenditure and depreciation, and the item relating to the poker machine takings, that Mr Hunt and Mr Roberts have adopted totally different approaches. The approach of Mr Hunt is based on the actual receipts of the Dorsmans and their actual outgoings. Mr Roberts however, in making his calculations applied standard figures, rather than the figures of the actual takings and expenditure of the Dorsmans. It seems to me that Mr Roberts throughout consistently disregarded the actual facts in relation to this particular hotel, and preferred the application of norms relative to some hypothetical hotel. Accordingly, so far as the calculations are concerned (to which are applied the capitalisation rates, and which constitute the basis for the valuation by Mr Roberts and the basis for one of the valuation approaches of Mr Hunt), I prefer the evidence and the expert views of Mr Hunt. They seem to be grounded in the realities of the situation in relation to the Federal Hotel at Alstonville far more firmly than are the conclusions of Mr Roberts. The conclusions of Mr Roberts seem to apply, not to the takings and the expenditure (and the consequent gross profit and net profit) of the Federal Hotel at Alstonville, but to some hypothetical 10 UNREPORTED JUDGMENTS hotel conducted in accordance with proven norms and standards applied by Mr Roberts to the valuation of hundreds of hotels throughout New South Wales. It was, in my view, an incorrect approach for Mr Roberts to ignore how this particular hotel was operated, and to take a norm or average (often without even a justifiable basis for such norm or average) in preference to the actual items of income and expenditure for the Federal Hotel. There was no objective way by which the basis adopted by Mr Roberts could be tested. That basis was described by Mr Downes of Queen's Counsel, for the plaintiffs, as being the 'trust me approach', that is, Mr Roberts, on account of his vast experience in valuing hotels, adopted the approach that he was entitled to say that something was a norm or an average without giving a basis for that assertion, and, in consequence, the validity of that assertion could not be tested. Iam in agreement with that criticism mounted by Mr Downes to the evidence and conclusions of Mr Roberts. As the cross examination of Mr Roberts progressed, it became increasingly evident that Mr Roberts, although a supremely confident witness, was perhaps was a little too confident and a little too arrogant concerning the correctness the views which he expressed." Later the Master said that he preferred the evidence and calculations of Mr Hunt to those of Mr Roberts. The Master said: "Tn assessing the value of the hotel as at 16 December 1991 I consider the fact that the Dorsmans were the lessee at that date to be of no consequence. That fact certainly would not justify any reduction in the value to be attributed to the hotel as a result of the foregoing calculations (be they the calculations of Mr Hunt or be they those of Mr Roberts)." The Master then said that, while he appreciated the reasoning which resulted in Mr Hunt's adopting the upper most figure in the range of $1.6 million to $1.75 million, in the circumstances a mid-range value of $1.675 million should be adopted. Since this exceeded the contract price of $620,000, applying the formula Waddell CJ in Eq enunciated, the amount of damages to which Mr and Mrs Dorsman were entitled was the difference between these two figures, being $ 1,055,000. To this he added agreed out of pocket expenses of $1,000. In my opinion the Master's assessment contained a fundamental error. The proposed sale to Mr Stewart was subject to the lease. All that Dr Castagna could offer to the lessees pursuant to CL39 was his interest as lessor in the property. What the Master should have valued was that interest. He erred in saying that the fact that the Dorsmans were the lessees as at 16 December 1991 was of no consequence. Mr Hunt's valuation of February 1992 took no account of the lease. Mr Roberts in his December 1991 valuation, said the leasehold value was $79,000. The Master's assessment of damages leaves unexplained the inflation from an arms length contract price in December 1987 of $620,000, subject to the lease, to a value over two and a half times greater, four years later in December 1991. The Master appeared to ignore completely (as also to a large extent did the parties) the significance of the contract price of $620,000. Although there was never any actual sale at that price, it is surely of considerable importance that this was the price which Dr Castagna and his purchaser had in contemplation, and represents important evidence of an arm's length value. In his 15 May 1989 valuation Mr Hunt said that for the past twelve months or so the demand for hotels along the "coastal strip" had been firm to strong. Furthermore recent changes and proposed changes to the Liquor Act would be likely to see demand heighten. "Extension of trading hours being optional will URJ RUMMERY v DORSMAN (Sheller JA) 11 unlikely have any significant effect on this property but the potential to install up to an additional five video poker machines will likely create a stronger demand as these have proved good cash flow generators in many hotels (and this one is no exception)." However in his valuation of 12 April 1991, wherein he said that the value of the lessor's interest was $1.5 million, Mr Hunt said: "Economic conditions have generally been adversely affecting hotel turnover and there has been some slowing in demand for hotels. Opinions obtained from hotel brokers vary from the market being quiet to patchy to satisfactory. There have been few sales since mid 1990 though we understand that two Lismore Hotels and one coastal or near coastal village hotel are currently changing hands. In 1990 some disquiet arose with a proposal to deregulate the industry but it appears that pressure has been successful in having this proposal abandoned. The current market value assessed is a price within an acceptable range at which an owner and an assumed intending purchaser would come together on the stated date in the current market conditions after allowing reasonable exposure for the particular market and being neither a special nor a forced sale value unless an exceptional market so dictates. Our valuation is relevant to the market at the date of the assessment. However, market conditions do fluctuate with time and can affect value levels and the relevance of this assessment. Market trends should be noted." These comments far from explaining seem to undermine the worth of freehold valuations of $1.4 million made in the context of what might be regarded as a bullish market conditions in May 1989 and of $1.75 million, an increase of 25 percent, in less favourable market conditions in April 1991. In his 5 February 1992 valuation Mr Hunt said the following about the condition of the market: "In spite of many hotels experiencing varying degrees of downturn in trade due to the recession, hotels are still selling steadily at prices which show little if any fall off in value levels. In the past twelve months two hotels at Ballina have sold, one at Byron Bay and two at Lismore. Brokers report satisfactory enquiry for hotels in this area but there are very few properties on the market. Some difficulty is being experienced by prospective purchasers in obtaining sufficient funds due to conservative lending However, it is noted that the three most recent sales on the coastal strip have been for large sums of money, so sales are still taking place. The market value assessed is a price within an acceptable range at which an owner and an assumed intending purchaser would come together on the stated date in the then existing market conditions after allowing reasonable exposure for the particular market and being neither a special nor a forced sale value." In my opinion the Master's assessment of damages based, as it was, on a valuation which took no account of the fact that the subject of the contract was the lessor's interest, which failed to explain an inflation in value which appeared from the terms of earlier valuations to be improbable and which failed to take account of the important evidence of market value, namely a contract for the sale of the hotel, cannot be supported and must be set aside. 12 UNREPORTED JUDGMENTS Because I have not approached the issue of valuation upon the basis adopted by Mr Hunt, it is unnecessary to consider certain detailed criticisms of aspects of Mr Hunt's valuation and, in particular, his approach to making allowances for certain costs of repairs, and for depreciation of plant. In the event that the Court set aside the Master's assessment the parties joined in asking it to reassess damages. The task is not an easy one. There is force in the submission that Mr Roberts' valuation as at 12 December 1988 of the lessor's interest at $434,000 was a significant undervalue in light of the contract price twelve months earlier of $620,000. Even so Mr Roberts considered that the value of the hotel property, after deducting the value of the leasehold, three years later in December 1991 was $753,000, an increase of 75 percent. It seems to be common ground between the valuers that there would have been a significant inflation in the value of the lessor's interest between January 1988 and December 1991. Part of this is explained by the approach of the expiry date on 23 May 1993. If the correct value at the time Mr Roberts made his earlier valuation was $620,000 rather than $434,000, the addition of an amount of 75 percent over the following three years to take account of the reduction in the unexpired period of the lease and inflation generally produces a value of $1,105,000 for the lessor's interest as at December 1991. Some account should no doubt be taken of the further twelve month period between December 1987 and December 1988. Having regard to the whole of the evidence, I consider that a fair result would be achieved by adopting a value of $1,240,000 at December 1991. This amount is considerably more than Mr Roberts' valuation, but is justified by the fact that his earlier valuation was an undervalue and his later valuation, like his earlier valuation, took no account of the contract price. It is less than the value Mr Hunt calculated. But for reasons which I have given and which include his failure to take account of the contract price I am satisfied that the value he arrived at was so improbable as to be wrong. Accordingly, in my opinion, the damages should be assessed based on a difference between the contract price, $620,000 and the value of the property as at December 1991, $1,240,000, the difference being $620,000. To this should be added interest, assessed at the same rate and for the same period as those chosen by the Master. of $221,104.15, which gives a total verdict of $841,104.15. DATE ON WHICH DAMAGES SHOULD BE ASSESSED Mr and Mrs Rummery submitted that damages should have been assessed not at the date of judgment, 16 December 1991, but as at February 1988. This was a ground of appeal in the first appeal and was argued, apparently unsuccessfully. In any event, in my opinion, the decision to assess damages as at the date of judgment was correct. In Johnson v Perez in their joint judgment at 367 Wilson, Toohey and Gaudron JJ said: "As a general rule, 'damages for tort or for breach of contract are assessed as at the date of breach' (Lord Wilberforce in Miliangos v Frank (Textiles) Ltd [1976] AC 443 at 468). The rule will yield if, in the particular circumstances, some other date is necessary to provide adequate compensation;". See also per Mason CJ at 355-6, who referred, with apparent approval, to Johnson v Agnew [1980] AC 367 at 400-1; per Brennan J at 370-1; Deane J at 380 and Dawson J at 386, who also referred, with apparent approval to what Lord Wilberforce said in Johnson v Agnew. In Johnson v Agnew at 401 Lord Wilberforce, with whose speech the other members of the House of Lords agreed, said: "In cases where a breach of a contract for sale has occurred, and the innocent party reasonably continues to try to have the contract completed, it URJ RUMMERY v DORSMAN (Sheller JA) 13 would to me appear more logical and just rather than tie him to the date of the original breach, to assess damages as at the date when (otherwise than by his default) the contract is lost." In the present case Mr and Mrs Dorsman continued at least until the hearing before the Chief Judge in Equity to claim specific performance of the contract. The absence of authority, which Mr Rummery warranted he had, defeated this claim. Accordingly logic and justice suggests that assessment of damages as at the date of judgment is necessary to provide adequate compensation. The Chief Judge in Equity was correct when he said that Dr Castagna having raised no defences to the claim for specific performance other than the absence of authority on the part of Mr Rummery and his purported withdrawal of the offer, if Mr Rummery had been held to have had authority to make the offer, the Dorsmans would have succeeded and, therefore, what they lost was the value of the hotel as at the date of judgment in the proceedings. I am not convinced that this ground of appeal was available on the second appeal, but if it was, it fails. INTEREST AND COSTS Mr and Mrs Rummery submitted that the Master had no power to make the orders he did for costs and interest. The Master's powers derive from s118 of the Supreme Court Act 1970 and include such powers of the Court in the particular Division as are, by or under the Act, conferred upon a Master assigned to the Division (subs(2)). A divisional Master in any division shall constitute the Court in that Division for the purpose of the exercise of the powers mentioned in subs(2); (subs(5)). A Master may exercise the powers of the Court in any matter, not tried or to be tried with a jury, referred to the Master by an order of a Judge; Pt60 (1A) and para4 of Pt3 of Schedule D of the Supreme Court Rules. I have no doubt that the Chief Judge's reference to the Master to assess damages embraced making orders for costs of the assessment. Perhaps with a little doubt I am also satisfied that it embraced the making of orders for interest on the damages assessed. In my opinion these grounds of appeal fail. Since the amount of damages including interest of $841,104.15 is less than the compromise offer of $1,100,000 made by Mr and Mrs Dorsman on 20 April 1993 the Master's orders for indemnity costs should be set aside. I would not disturb the order made by the Master on 1 March 1994 that Mr and Mrs Rummery pay the costs of Mr and Mrs Dorsman of inquiry as to damages. CONCLUSION I propose the following orders: 1. Appeal allowed; 2. Set aside O.1 made by the Master on 3 February 1995 and in lieu thereof order 1. The damages to which the plaintiffs are entitled from the second and third defendants be assessed in the sum of $620,000 together with interest thereon in the sum of $221,104.15. 2. Entry of judgment against the second and third defendants in the sum of $841,104.15. 3. Set aside the orders of the Master of 7 March 1995; 4. The respondents, Mr and Mrs Dorsman, to pay the appellants, Mr and Mrs Rummery's costs of this appeal but, if qualified, to have an order under the Suitor's Fund Act 1951. Counsel for the Appellant: BW Rayment QC, RJ Weber 14 UNREPORTED JUDGMENTS Solicitors for the Appellant: Ebsworth and Ebsworth Counsel for the Respondent: GK Downes QC, JB Maston Solicitors for the Respondent: Stone and Partners