LAWS v COLLINS EXPOSED AGGREGATE PTY LTD and ANOR SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL PRIESTLEY, HANDLEY and SHELLER JJA 5 June 1996, 24 March 1997 [1997] NSWCA 186 CONTRACT — sale of land — damages for loss of bargain — valuation of land DAMAGES — loss of bargain — valuation of land VALUATION OF LAND — gravel bearing land — no development approval On 23 October 1990 the appellant (vendor) contracted with the respondent for the sale of rural land containing a large quantity of commercial gravel. The purchaser failed to complete, and the vendor rescinded and sued for loss of the bargain. The trial Judge assessed damages based on a valuation of the land at the date of breach of $862,000, which included the market value of the gravel with a discount for the risk that development approval would not be obtained. On appeal by the vendor HELD: (1) The trial Judge erred in accepting the valuation of $862,000. The appeal must therefore be allowed but the Court could reassess the damages and there was no need for a new trial. (2) Land is to be valued with reference not only to its current use, but also to that for which it may be used in the future. Raja Vyricherla Narayana Gajapatiraju v The Revenue Divisional Officer Vizagapatam [1939] AC 302 at 313 applied. (3) A judicial valuer must value land on the basis of the price a willing vendor might reasonably expect to obtain from a willing purchaser. Yates Property Corporation Pty Ltd v Darling Harbour Authority (1991) 24 NSWLR 166 at 175-6 applied. (4) It is necessary in the assessment of value to estimate the probabilities of the necessary development approvals not being forthcoming. Malec v J C Hutton Pty Ltd (1990) 169 CLR 638 applied. (5) A proper valuation could be obtained from sales of reversions, expectant on gravel leases, in comparable land, increased to reflect the value of the gravel leases. (6) Judges may take judicial notice of the fact that the sum of values for components in land is less than the value of the fee simple. In Re Marshall [1914] 1 Ch 192 CA at 199 applied. (7) The Court should substitute a valuation of $556,628, and reassess accordingly. Priestley JA The facts of this valuation case are set out in Handley JA's reasons. The trial judge reached his decision by accepting the valuation of the respondent's expert valuer and rejecting that of the appellant's expert valuer. I agree with Handley JA's reasons for concluding that neither valuation should have been accepted. Both parties asked the court, if we reached this position, to assess the appropriate valuation figure on the materials available in the appeal papers. Handley JA has done this. I respectfully agree with his method and his result. In my opinion the orders proposed by Handley JA should be made. Handley JA This appeal concerns the value of "Billaboa', a property of about 113 hectares located on the east bank of the Hunter River near its junction with the Goulburn River, which Mr Laws, the appellant, has used for agricultural and 2 UNREPORTED JUDGMENTS pastoral purposes. The question arises in assessing the damages the respondent company must pay for its failure to perform a contract to purchase the property from Mr Laws for $925,000. "Billaboa" contains substantial quantities of readily accessible high quality gravel. The company was interested in acquiring this land to secure title and access to this gravel. On 23 October 1990 it entered into a contract of sale subject to finance. It failed to comply with the "subject to finance" clause. Mr Laws gave the company a notice to complete, and in February 1991, when this was not complied with, he rescinded and forfeited the $21,000 deposit. He retained the property and sued for loss of the bargain. The company cross claimed for negligence against the second respondent, the solicitors who had acted for both parties in the conveyancing transaction. The proceedings were heard by Grove J at Newcastle. His Honour gave judgment on 19 November 1993, holding that Mr Laws was entitled to damages which he assessed at $42,000, giving credit for the deposit. The Judge held that the solicitors had been negligent in failing to advise the company to comply with the "subject to finance" clause, and they were ordered to indemnify it against the judgment in favour of Mr Laws. The Judge's assessment was based on the evidence of Mr Higgs, a valuer called by the purchaser, who valued "Billaboa" at $862,000 as at the date of breach. He rejected the evidence of Mr Irwin, the valuer called for Mr Laws, who valued the property at $425,000. The Judge found that Mr Irwin, on instructions, had based his valuation on the use of "Billaboa" for agricultural and pastoral purposes, and ignored any added value due to the gravel. He rejected a submission for Mr Laws that this was appropriate because of the planning constraints which affected the land. Mr Higgs took into account the existence of the gravel, made an estimate of the quantity of gravel, and applied a discount to allow for the possibility that development of the gravel would be obstructed or prevented. The Judge considered that this was the correct approach. He rejected submissions that Mr Higgs had acted on a wrong assumption as to the depth of the gravel and that the recent sale of an adjoining property to the south for $420,000 demonstrated error in his valuation. Mr Palmer QC for Mr Laws submitted that the Judge's decision to reject Mr Irwin's valuation was vitiated by factual errors. He identified these as being findings that Mr Irwin had "ignored any potential value associated with the gravel deposits", and his statement that Mr Irwin did not attempt to evaluate the effect legal obstacles to development would have on potential purchasers. The Judge said that to adopt this approach was erroneous because it "set at nought the actuality of the existence of the deposit". Extraction of the gravel on "Billaboa" required development consent from the Muswellbrook Shire Council, the Water Resources Commission and Mines Subsidence Board. A consent could be subject to onerous conditions. Mr Irwin's valuation stated: "In accordance with your specific instructions we are to assess the current market value of the below described property on a 'rural basis'. To establish this 'rural basis' we have compared the subject property with sales of comparative properties that are not utilised for any purposes other than agricultural or pastoral uses". Mr Irwin confirmed these instructions in cross examination. He stated in his valuation URJ LAWS v COLLINS EXPOSED AGGREGATE PTY LTD and ANOR (Handley JA) 3 "Concurrent enquires to the Department of Water Muswellbrook District Office and in particular the Scientific Officer, Mr Adolfe Parfait, revealed that the Department would oppose any application for the extraction of gravel from the alluvial flood plain within the property... Any attempt to attribute additional value to the assumed insitu gravel deposits would depend upon gaining Development Approvals; and also, the conditions attached to that Approval. Our approach to the valuation of the subject property was to compare it with sales of similar properties, that have Hunter River frontage and that may also have insitu deposits of gravel located thereon; and in particular, without Development Approval for the extraction of gravel... ". Mr Higgs agreed that the consent of the Water Resources Commission to extraction of the gravel would not lightly be given. It is not clear whether the stated attitude of the Commission related to the whole of the area containing gravel, or only a lesser area close to the river. There were also references in Mr Irwin's valuation to the policy of the Commission to restrict the amount of gravel "extracted" from the Hunter River. Again it is not clear whether this policy was restricted to extraction from the actual river bed, or related to a wider area. Mr Collins, the principal of the respondent company, said in evidence that in 1990 he knew he could get the necessary consents, and he appeared to distinguish between the attitude of the Council to development of "the alluvial flats", which would be subject to a lot of scrutiny as compared with "the actual flats". Neither party called Mr Parfait and the precise nature of the Commission's powers to veto or object to the extraction of the gravel on "Billaboa" were not established, nor were the ambiguities relating to the Commission's policies clarified. After Mr Higgs' valuation was made available to Mr Irwin, he examined the sales relied upon by Mr Higgs, and produced two maps showing details of some of those sales which became exhibits M and N. He said in relation to Mr Higgs' valuation: "Q. You did not have regard, as Mr Higgs has,... to the value of the gravel in the ground on the farm? A. I consider that the gravel only assumes value after the appropriate development... consent and approvals are gained from the various authorities. Q. That is obviously a reason why you did not have regard to the extent of the gravel deposits in and around this property. Are there any other reasons? A. Yes... the sales of properties adjoining and in the surrounding area that have gravel deposits... show no discernible difference (from) those that have none or little deposits". Mr Irwin was referring to sales of properties containing gravel where development consent to extraction had not been obtained. He identified a pending sale by Mr Ellery of "Bandalong'', a property on the south western side of the junction of the two rivers, as comparable. This contained gravel estimated in Mr Higgs' valuation at 9,800,000 tonnes. The purchase puce was $420,000, but Mr Irwin said that the property was subject to a lease for the extraction of gravel (gravel lease), and to his knowledge the sale 'included the owners' rights in respect to the lease". He did not deal expressly with any other comparable sale. Land must be valued, not only as currently used, "but also by reference to the uses to which it is reasonably capable of being put in the future". Raja Vyricherla Narayana Gajapatiraju v The Revenue Divisional Officer Vizagapatam [1939] AC 302 at 313. Where land has unusual potentiality a valuer, including a judicial 4 UNREPORTED JUDGMENTS valuer, "in determining its value will have no market value to guide him, and he will have to ascertain as best he may from the materials before him, what a willing vendor might reasonably expect to obtain from a willing purchaser, for the land in the particular position and with those particular potentialities". The Raja's case at 313. See also Yates Property Corporation Pty Ltd v Darling Harbour Authority (1991) 24 NSWLR 156 at 175-6. It is apparent that Mr Irwin's rural valuation was forced on him by his instructions. As he said, Y could adopt no other approach" (97, 103). He had sought his client's approval to obtaining geo technical advice, and advice as to the conditions which would probably be imposed on any development consent for the extraction of gravel, but this was not given (97). The proper approach was for the valuer to ascertain "as best he may from the materials before him" what a willing vendor might reasonably expect to obtain from a willing purchaser for "Billaboa", having regard to the presence of the gravel. It was necessary therefore to determine the value of the gravel, the extent of the planning restrictions, the probability or chance that the necessary approvals could be obtained (cf Malec v J C Hutton Pty Ltd (1990) 169 CLR 638), and the cost and delay involved. Mr Irwin did not follow this approach because he was disabled by his instructions from doing so. To that extent, his valuation was erroneous, and the Judge was correct in refusing to act on it. Mr Irwin however said that sales of comparable properties, with and without gravel, led him to conclude that the presence of gravel only increased the value of the land if the necessary development consents had been obtained. If that was correct, purchasers either considered that there was no realistic chance of obtaining such consents, or the demand for gravel could be met from other areas. The comparable sales said to support this conclusion were those plotted on exhibits M and N. The Judge did not deal with this part of Mr Irwin's evidence, but this Court must, since the comparable sales were not in dispute, and questions of credit are not involved. This alternative approach of Mr Irwin is not open to challenge on legal grounds, and if sustained, would support a valuation which ignored the presence of the gravel. The only challenge to this alternative conclusion was founded on the existence of gravel leases affecting some of the comparable sales. Mr Irwin referred to the sale of "Bandalong" for $420,000 in October 1993. He considered that this was a comparable sale, no doubt because of the presence of an estimated 9,800,000 tonnes of gravel, its proximity to "Billaboa", and the date. The price is broadly comparable with Mr Irwin's rural value of $425,000 for "Billaboa" as at February 1991, and remarkably out of line with Mr Higgs' valuation of $862,000. Exhibit N shows not only the sale prices for "Bandalong" in February 1987 and October 1993 of $350,000 and $420,000 respectively, but also Mr Higgs' valuation of the gravel lease at $99,000 although no development consent existed for the extraction of gravel. Another comparable sale recorded on exhibit N related to "Rose Park" on the east bank some distance south of "Billaboa". This property, which had the benefit of a development consent granted in April 1983 for the extraction of gravel, was shown as containing 5,750,000 tonnes of gravel, yet the freehold was sold in December 1985 for $230,000. However there is an available inference that this was a sale of the freehold reversion to the tenant holding under a gravel lease. "Alberon", the property immediately to the north of "Rose Park', was said to contain 8,550,000 tonnes and had no development consent but was sold for URJ LAWS v COLLINS EXPOSED AGGREGATE PTY LTD and ANOR (Handley JA) 5 $260,000 in June 1988. 'l~iribong Farm", immediately to the north of "Billaboa", was said to contain 4,186,000 tonnes, and had no development consent but was sold in July 1989 for $490,000. However, exhibit N showed a gravel lease over it valued by Mr Higgs at $92,000. Mr Palmer QC submitted that the prices realised on the sale of the freeholds at "Bandalong", "Alberon", and "Miribong Farm" supported Mr Irwin's valuation on his alternative basis. Mr Irwin's evidence on this issue was not challenged in cross examination, and ordinarily this might lead to its acceptance. However, however there was undisputed evidence in exhibit N and in Mr Higgs' valuation of the existence and value of gravel leases on both "Bandalong" and "Miribong Farm". Mr Higgs was not cross examined about those matters. Mr Palmer QC submitted that this Court should draw the inference that the sales of the freeholds of "Bandalong", "Rose Park" and "Miribong Farm" included the value of their gravel. The proper conclusion in his submission was that those sale prices reflected the full value of the land, and not merely the value of the freehold reversions subject to the gravel leases. Mr Higgs' valuation provided further information about those gravel leases. The lease over "Bandalong" expired in 2000. The rent was $500 pa, and there was a royalty of $1,000 per extraction month, both indexed. His valuation stated: "T consider the market value of this lease in 1991 to be $99,000. I am informed that Ellery's property '*Bandalong" is on the market with the owner asking $420,000. I would consider that the value of the gravel is within the asking price". The gravel lease over "Miribong Farm", if all options of renewal were exercised, would expire in 2010. The rent was $500 pa and a royalty of $1 per cubic metre was also payable, both indexed. If the gravel estimated at 2,325,000 cubic metres were extracted over the full term of the lease, the landlord would receive royalties of $2,325,000 indexed. The value of the lease to the tenant can only have been computed on this basis. Mr Palmer QC submitted that Mr Higgs' statement in his valuation that "the value of the gravel" was within the owner's asking price for "Bandalong" meant that the whole value of the gravel was so included. I am unable to accept this submission. Mr Higgs separately valued the gravel lease. The major, if not the only, benefit of this lease to the tenant was the right to extract gravel. The exercise of that right was subject to the obligation to pay the indexed royalty. The value of the gravel to the landlord during the lease would be the present value of the estimated rental and royalty income, allowing for the contingencies of development approval and a decision by the tenant to proceed with extraction. When the lease expired the gravel would revert to the landlord who would be free to sell it with the freehold, or alienate it by a new lease. Until then the value of the reversion included the present value of those rights allowing for the various contingencies. In my judgment therefore, the value of the gravel to the landlord referred to by Mr Higgs comprised the present values of the estimated royalty stream and of the rights to the gravel when the lease expired. The value of $99,000 for the lease included the value of the tenant's right to extract the gravel, allowing for the contingencies. It should reflect the views of the willing but not anxious vendor and purchaser of the value of the gravel, and the chance of obtaining development consent. A prudent purchaser would not pay 6 UNREPORTED JUDGMENTS anything in 1991 for a gravel lease expiring in 2000 unless he considered there was a realistic chance of obtaining development approval in time to exploit the deposit before the end of the lease. The sales of the freehold reversions of "Bandalong" and "Miribong Farm" cannot, without more, support Mr Irwin's rural valuation of $425,000 for the absolute freehold of "Billaboa". These sales would have to be adjusted before they could provide worthwhile guidance, and Mr Irwin made no such adjustments. It follows in my judgment that this Court should not accept the alternative basis for Mr Irwin's valuation. The Judge accepted Mr Higgs' valuation of $862,000 which took into account the value of the gravel, saying that his was the only estimate on the appropriate basis. He rejected criticisms that Mr Higgs did not make sufficient allowance for the possibility that development would be obstructed or even prevented. He disposed of the criticism that Mr Higgs had wrongly assumed that the gravel on "Billaboa" extended to a depth of about 15 metres by finding that Mr Collins' knowledge of the area supported the probability of such a depth. Mr Higgs, in arriving at his valuation, relied heavily on a sale of "Cawsey Park" which he regarded as comparable. This property is located on the west bank of the Hunter River east of Denman. In 1990 another company was producing 600 tonnes of aggregate per day on this property under a development approval of May 1981 which restricted production to that quantity. On 3 November 1989 that company purchased an area of 30.02 hectares at this site for $500,000. It subsequently obtained a further development approval authorising the removal of up to 1,000 tonnes per day. Mr Higgs stated that at the time of the sale the purchaser expected the site to contain 3,680,000 tonnes of gravel. In September 1991 the potential of the site was revised to 4,820,000 tonnes of gravel and 728,000 tonnes of topsoil loam. Mr Higgs independently valued the site in September 1990 at $810,000. With reference to "Billaboa", he said: "Conservatively the area for extraction is some 23 hectares with an estimated depth of 8 metres. This is a volume of 1,800,000 cubic metres or 3,680,000 tonnes. A direct comparison exists between the 'Cawsey Park' sale at $500,000 and the potential gravel deposit on 'Billaboa'. An astute purchaser with years of experience of gravel deposits within the Denman locality would be prepared to assume that the 13 and 15.5 metre depths proved by percussion drilling at "Cawsey Park'... would flow downstream to the "Billaboa' deposit. An allowance of... 25 percent margin over the conservative 8 metre depth to say 10 metres would increase the volume of the deposit to 2,300,000 cubic metres or 4,600,000 tonnes. It is felt that this 25 percent assumption of increased depth and potential tonnage would adequately cover the risk factor of obtaining approval to mine and the lack of drilling to prove a depth that existed on 'Billaboa' in comparison to "Cawsey Park"'. He therefore estimated the market value of the sand and gravel deposits on "Billaboa" at $500,000. The 8 metre depth of gravel on "Billaboa" assumed by Mr Higgs was not independently proved. In September 1990 Mr Boardman, a surveyor retained by the company, estimated the gravel on "Billaboa" at 600,000 square metres or approximately 1,200,000 tonnes, based on an assumed depth of 2 metres (exhibit P). A private prospectus prepared for the company in October 1990 contained estimates of 3,680,000 cubic metres and 6,624,000 tonnes of gravel on "Billaboa" (exhibit Q). Mr Collins gave evidence that when he first went on to URJ LAWS v COLLINS EXPOSED AGGREGATE PTY LTD and ANOR (Handley JA) 7 "Billaboa" he took a machine with him which bored test holes verifying the existence of gravel to a depth of "4, 5, 6 metres" before he hit water when he stopped drilling (152). There was no evidence to support a gravel depth greater than 6 metres. Mr Collins, an astute purchaser with years of experience of gravel deposits within the Denman locality", did not say in evidence that he or anyone else with his experience would be prepared to assume that the 13 and 15.5 metre depths proved at "Cawsey Park" would also be present at "Billaboa". No inference to that effect should be drawn in favour of the company. Cf Commercial Union Assurance Co v Ferrcom Pty Ltd (1991) 22 NSWLR 389 at 418-9. Mr Higgs' "conservative" assumption that the gravel was 8 metres deep with a potential further depth of 2 metres, and an assumed depth of 13.5-15 metres, was not established. As he said in evidence, "without drill tests there was no way of being precise about the depth of gravel" (166). He gave hearsay evidence of "discussions" with Mr Boardman, who was not called, and of other "discussions" with Mr Collins who was, but no attempt was made to lead evidence of their content. He attempted to allow for "the risk factor of obtaining approval to mine", but was not shown to have relevant expertise, and gave no evidence of enquiries at the Council, or at the Water Resources Commission. Mr Collins confidently asserted that in 1990 his company could have obtained development consent for gravel extraction from "Billaboa', but gave no evidence that others could have done so. The Court must determine the value of "Billaboa" at the date of the breach in order to assess the damages. The company cannot be included in the class of hypothetical willing but not anxious purchasers for this purpose. The company, although willing to purchase, was not able to do so. The ability of Mr Collins to obtain the necessary consent was only relevant if other purchasers were in the same position, but there was no evidence of this. Mr Higgs' opinion that "Cawsey Park" was comparable with "Billaboa", and that its sale for $500,000 on 3 November 1988 was of assistance in establishing a value for "Billaboa" in February 1991, should not be accepted. Prior to that sale, the purchaser had been operating a sand and gravel extraction business on the property under a development consent granted in 1981. The obvious inference is that the purchaser had been in possession under a gravel lease, so that the property sold was the freehold reversion. The terms of the lease were not proved, nor was the value of the lease at the date of sale. In September 1990 Mr Higgs valued the freehold in possession of "Cawsey Park" at $810,000, the site at the time being thought to contain 3,680,000 tonnes of winnable gravel. The property had the benefit of a development consent for 1,000 tonnes a day, and was the site of an established gravel business. The 1989 sale of "Cawsey Park" related to an area of 30.02 hectares. It does not appear whether the whole of this land was gravel bearing. "Billaboa" comprised 129.5 hectares, but only some 23 hectares were said by Mr Higgs to be gravel bearing. The balance had to be valued on a rural basis. The gravel bearing area of "Billaboa" was therefore substantially smaller and the depth of the gravel below 6 metres a matter of speculation. "Billaboa", unlike "Cawsey Park", had no development consent and the prospects of other purchasers obtaining such a consent were not established. There was evidently no demand for freehold gravel land in this area in February 1991 as Mr Laws was not able to resell the property to a buyer interested in the gravel. 8 UNREPORTED JUDGMENTS The value of $810,000 attributed by Mr Higgs to "Cawsey Park" in September 1990, combined with the sale of the freehold reversion for $500,000 in November 1989, might have enabled a value to be placed on the gravel lease at that time, but the Court cannot do this because the necessary information is not available. The principal difficulty in using either the sale or valuation of "Cawsey Park" as comparables is that the quantity of gravel in "Billaboa" and the effect of the planning restrictions were not proved. In my opinion therefore the Judge erred in accepting Mr Higgs' valuation. Both parties invited the Court to reassess, rather than order a new trial, and the only question is whether the Court can fairly do so on the existing materials. Neither party submitted that there would be any procedural unfairness in the Court doing so. Both valuers accepted the broad comparability of the sales of "Bandalong" to the south west, and "Miribong Farm" to the north. Since these properties were subject to gravel leases, those sales included the value of the gravel to the owners. Mr Higgs' valuation of the gravel leases as at 1991 reflected the value of the gravel to the lessees. The value of the gravel leases and the prices paid for the reversions should also reflect assessments of the chances that development consent would be obtained and extraction of the gravel would commence during the leases. The valuations of "Billaboa" on a rural basis were remarkably similar, Mr Irwin's being $425,000 and Mr Higgs' $434,000. It seems safe in these circumstances to adopt a figure of $429,500. Mr Irwin included nothing for the value of the gravel, while Mr Higgs added $428,000 for it. Since the comparable sales of the reversions included the value of the gravel to the landlords, it is only necessary to add the value of the gravel leases to the value of the reversions to obtain figures which are truly comparable with the sale of the absolute freehold of "Billaboa'. Both valuations of "Billaboa" had taken into account the sales of these freehold reversions and whatever adjustments were necessary because of differences in the quantity and quality of the land and the gravel should have been made. The major adjustment which this Court should make is to add the value of the gravel leases to the sale prices for the reversions. The gravel lease over "Bandalong" due to expire in 2000 was valued at $99,000. The quality of gravel assumed by Mr Higgs in his valuation was 5,778,000 tonnes or $17,134 per million tonnes. The lease over "Miribong Farm", assuming all options were exercised, was due to expire in 20109 the estimated quantity being 4,185,000 tonnes or $21,983 per million tonnes. This lease bound the lessee to an indexed royalty of $1 per cubic metre, whereas the corresponding obligation under the lease of "Bandalong" was to pay an indexed fee of only $1,000 per extraction month. There is no evidence that the gravel in these properties was different in quality. The inference which should be drawn is that the lower value of $17,134 per million tonnes for "Bandalong" showed that the difficulty of obtaining development consent and the associated delays during the shorter term outweighed the effect of the lower royalty. These gravel tonnages were not independently proved, and the figure adopted by Mr Higgs for "Billaboa" was unreliable for the reasons already given. However, he valued the gravel leases on the basis of his estimates of the quantities present, and the presumption must be that he adopted a consistent approach. His estimates, whether reliable or not. should therefore provide an appropriate basis for comparing the properties for present purposes. URJ LAWS v COLLINS EXPOSED AGGREGATE PTY LTD and ANOR (Handley JA) 9 Since "Billaboa" is freehold, the more comparable value for its gravel is that derived from the lease of "Miribong Farm', which had 19 years to run if the options for renewal were exercised. Applying the rate of $21,983 per million tonnes derived from this lease to Mr Higgs' estimate for "Billaboa'" of 4,600,000 tonnes produces a figure of $101,122 as the amount to be added to the rural value of "Billaboa" to properly allow for its gravel. Judges may take judicial notice of the fact that the sum of the separate values of undivided interests in land is less than the value of the entirety. See In re Marshall [1914] 1 Ch 192 CA at 199. A value of "Billaboa" obtained by adding the value of its gravel derived from the value of an adjoining gravel lease to its rural value derived from the sale of freehold reversions expectant on such leases will be less than the value of the absolute freehold. The evidence does not enable the Court to estimate the difference with accuracy, but the Court must do the best it can and in my view an allowance of a further 5 percent for this factor would not do an injustice to any party. In my judgment therefore the market value of "Billaboa" at the date of the breach was not less than $556,628. The appellant's damages, after allowing for the forfeited deposit of $21,000, should therefore be $347,372. Interest on this amount at the rate of 10 percent adopted by the trial Judge from 11 February 1991 to 19 November 1993, the date of the judgment below, amounts to $96,217. The judgment for the appellant to be substituted should therefore be $443.589 with effect from 19 November 1993. A judgment in the same amount should be substituted in favour of the cross claimant against the cross defendant. The trial Judge ordered the cross defendant to pay the cross claimant's costs of the cross claim, but not the costs incurred by the cross claimant in defending the plaintiff's action, or the costs it was ordered to pay to the plaintiff. The cross claimant has cross appealed claiming to be entitled to recover such costs as part of its damages. Legal costs may be recovered as part of a plaintiff's damages either in tort or in contract. See Hammond & Co v Bussey (1887) 20 QBD 79 CA, and McGregor "Damages", 15th Ed, 1988, p439-p451. Recovery of these costs as part of the cross claimant's damages depends on whether its decision to defend the proceedings brought by the plaintiff was reasonable. The plaintiff's claim for damages for breach of contract was really unanswerable, and in my judgment the costs of defending the claim on the issue of liability were not reasonably incurred. The trial Judge was correct, and the cross appeal should be dismissed. The first respondent acted reasonably in resisting the appeal and was partially successful in doing so. Accordingly the second respondent should be ordered to indemnify the first respondent against the costs of the appeal. The following orders should be made: (1) Appeal allowed. (2) Judgments for the plaintiff against the first defendant and for the cross claimant against the cross defendant except as to costs set aside. (3) Substitute judgments for the plaintiff against the first defendant and for the cross claimant against the cross defendant for $443,589 with effect from 19 November 1993. (4) The first respondent to pay the appellant's costs of the appeal. (5) The second respondent to pay the first respondent's costs of the appeal and indemnify it against the costs of the appeal ordered to be paid to the appellant. (6) No order as to the costs of the cross appeal. 10 UNREPORTED JUDGMENTS (7) The second respondent to have a certificate under the Suitors' Fund Act. Sheller JA I agree with Handley JA. 5 (1) Appeal allowed. (2) Judgments for the plaintiff against the first defendant and for the cross claimant against the cross defendant except as to costs set aside. (3) Substitute judgments for the plaintiff against the first defendant and for the cross claimant against the cross defendant for $443,589 with effect 10 from 19 November (4) The first respondent to pay the appellant's costs of the appeal. (5) The second respondent to pay the first respondent's costs of the appeal and indemnify it against the costs of the appeal ordered to be paid to the appellant. 15 (6) No order as to the costs of the cross appeal. (7) The second respondent to have a certificate under the Suitors' Fund Act. Counsel for the appellant: G Palmer QC/T Alexis Solicitors for the appellant: Baker Love, Newcastle Counsel for the respondent (1): R Taperell Solicitors for the respondent (1): Trisely & Kilmurray, Newcastle 25 Counsel for the respondent (2): M Slattery QC Solicitors for the respondent (2): HD McLachlan Chilton & Co3545