New South Wales Supreme Court CITATION : Roach & Ors v Page & Ors (No.37) [2004] NSWSC 1048 4-8, 11-14, 18-21, 25-29 August 2003 1, 5, 9-12, 15-19 September 2003 13-17, 20-24, 27-30 October 2003 3-7, 10, 13-14, 20-21, 27-28 November 2003 HEARING DATE(S) : 2, 4, 8-12, 15-19 December 2003 2-6, 9-10 February 2004 11 June 2004 30 July 2004 27 August 2004 JUDGMENT DATE : 15 November 2004 JURISDICTION: Common Law JUDGMENT OF : Sperling J at 1 DECISION : (1) Verdict and judgment for the defendants against the plaintiffs; (2) Plaintiffs to pay the defendants' costs on a party and party basis; (3) Liberty to apply for reconsideration of the order for costs if exercised within seven days from the date of this judgment by notice to the other side and to my associate. CATCHWORDS : Negligence - professional negligence by solicitors - claim for expectation damages - whether claim correctly categorised as being for loss of a chance to exploit an asset or as being for the value of the asset lost - whether an investment in the company was evidence of value - claim for reliance damages - whether reliance damages recoverable otherwise than for expenses incurred in connection with a contract between plaintiffs and defendants Extractive Industries Act 1966 (Vic) Mineral Resources Development Act 1990 (Vic) LEGISLATION CITED : Mines Act 1958 (Vic), s47, s291, s300, s304, s306, s514, s515, s518, s521, s526 Mines (Mining Titles) Regulations 1983 (Vic) Soil Conservation & Land Utilisation Act 1958 (Vic), s17A Transfer of Land Act 1958 (Vic), s42 Astley v Austrust Pty Ltd (1999) 197 CLR 1 Browne v Dunn (1893) 6 R 67 Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 Dominelli Ford (Hurstville) Pty Ltd v Karnot Auto Spares Pty Ltd (1992) 38 FCR 471 Heydon v NRMA Ltd (2000) 51 NSWLR 1 Larking v Great Western (Nepean) Gravel Ltd (1940) 64 CLR 221 M & EM Hull Pty Ltd v Thompson [2001] NSWCA 359 McRae v Commonwealth Disposals Commission (1951) 84 CLR 377 Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] 1 Ch 384 CASES CITED : Montague Mining Pty Ltd v Gore [1998] FCA 1334 NRMA Ltd v Morgan [1999] NSWSC 407 Precision Plastics Pty Ltd v Demir (1975) 132 CLR 362 Roach & Ors v Page & Ors [2004] NSWSC 776 Robinson v Harman (1848) 1 Ex 850 Scalise v Bezzina [2003] NSWCA 362 Wakim v McNally (2002) 121 FCR 162 Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 5 Waribay Ltd v Minter Ellison [1991] 2 VR 391 Yates Property Corporation Pty Ltd v Boland (1998) 85 FCR 84 Walter Edward Roach Sydtech Pty Ltd PARTIES : Winnote Pty Ltd Brian John Downey Page, Brian James Page, Peter Eustace Hollingdale, Rod McLeond, Warren Francis Asprey, Ian Farley Hutchinson, Brian Edmond Thornton, Geza Francis Kim Santow, Thomas Owen Jones, Robert Colin Nicholls, James Henry Graham, Peter Short, Phillip Thornton Taylor, Bruce Kelvin Cutler, Richard A Longes, John Charles Mulally, Kevin William Broadley, James Michael Page, Peter John Arthur Carney, Patricia Helen Brown, Brian John McFadyen, Robert Andrew Channon, Peter John Perry, Douglas Michael Franc, Peter Stanley Ridout, Michael John Gray, Julian Block, Howard Keith Chillingworth Steele, Edward Joseph Wright, Claire Grose, John Hugh Clifford Colvin, Bryan David Weir, George Thomas Forster, John Lindsay Arthur, Roy Merrill Randall, Anthony Joseph Muratore, Sir Clarence Waldemar Harders, Peter Campbell Church, Terence Michael Burke, Richard Stuart Gray, John Kevin O'Sullivan, Gregory Stephen Pearce, Rebecca Anne Davies, Gordon David Cooper, Pamela Gaye Edwards, Stephen David Chipkin, Yukio Hayashi, Lucy Kathleen Farrell, Paul Ashley Cooper, David Myles Bennett QC, Graham John Kelly, Barry Leon Barker, Fabian Gleeson, Helen Irwin Wright, John Martin Green, Iain Ronald Jones, Shaun Gerard McGushin, Mark Russell Cohen, Joanne Christine Seve, Amanda Jane Harkness, John Peirce Angus, Cornelius Daniel Neil Griffin, Murray John Dearberg, Marc Sandford Hutchinson, Timothy Mark Hirshman, Leon Pasternak, Kevin Alan Lewis, Donald Bruce Robertson, Michael Perrin Ryland, Richard Randolph Pearson, Geoffrey Howard Levy, Philip John Christensen, Geoffrey Alan McClellan, David Jacob Hammerschlag, Gavin Terence Bell, John Gilbert Taberner, Michael John Back, Georgina Margaret Gray, Raymond Yuen Ming Kwok, Michael Orlov, Bettie Anne McNee - t/a Freehill, Hollingdale & Page Brian David Kewley, Keith Alfred Robert Skinner, Jeffrey Stephen Kiddle, Denis James Davies, David Leonard Bailey, Martin Moule Hudson, Colin George Polites, Marcus Kirkland Fairbairn, John Alfred Emerson, James Macklin Pfeiffer, Russell David Allen, Peter Algernon Franc Hay, Paul Montgomery, John Balfour Blanch, Richard Geoffrey Eager, Peter Farley Mitchell, Peter Mark Butler, Simon Anthony Yencken, Peter William Stawell, Stephen Marcus Stern, John Linday Cooper, Graeme James Smith, Rayne de Gruchy, Wayne McMaster, Graeme Ross Watson, Maxwell Douglas Ralph Cameron, Frank Parry, Irene Helen Zeitler - t/a Freehill, Hollingdale & Page FILE NUMBER(S) : SC 20950/97 COUNSEL : Mr S Rares SC with Mr A Bell for the Plaintiffs Mr A Meagher SC with Mr M Darke for the Defendants SOLICITORS : Maurice Blackburn Cashman for the Plaintiffs Allens Arthur Robinson for the Defendants - 1 - IN THE SUPREME COURT OF NEW SOUTH WALES COMMON LAW DIVISION Professional Negligence List Sperling J Monday, 15 November 2004 20950/97 Walter Edward Roach & Ors v Brian John Downey Page t/a Freehill Hollingdale Page & Ors Judgment No.37 - Judgment in the cause 1 His Honour: The following is an index to this judgment. Index Introduction [2] Relevant legislation [17] The Mines Act 1958, the Mineral Resources Development [18] Act 1990 and the Extractive Industries Act 1966 Soil Conservation and Land Utilisation Act 1958 [35] Transfer of Land Act 1958 [39] Preliminary dealings between Mr Roach and Mr Luscombe [40] The solicitors' retainer [47] Duty and standard of care [56] Written advice [63] Oral advice [70] Breach of duty by the defendants [90] No continuing duty [94] Events 1988 to 1993 [95] Dealings concerning the Sadler land and the real property lease [98] The fortunes of Mr Roach and the Roach group of companies, 1988 to 1993 [135] The fortunes of Winnote's peat mining business, 1988 to 1993 [148] Winnote loses the peat deposit to Mr Groves [188] The reasons for the decision to sell Winnote in 1993 [223] Mining authorisations obtained in and from 1993 [250] Financial performance of entities exploiting the deposit as from 1993 [270] Winnote would have obtained an exploration licence and a mining lease in 1988 [275] Would the Groves transaction have been completed but for the defendants' negligence? [306] Expectation damages: a valuation case [315] The plaintiffs' discounted cash flow exercise [338] Mr Robertson's performance projection [343] Valuations by Mr Humphreys and Mr Lonergan [376] Mr Humphreys' valuation [383] Mr Lonergan's valuation [394] Mr Bryant's evidence [428] The failure of the plaintiffs' DCF valuation case [432] The Whinners transaction [433] The plaintiffs' alternative valuation exercise [457] The plaintiffs' claim for reliance damages [496] Conclusion [505] Limitation defence [506] Orders [508] Introduction 2 The plaintiffs are Mr W E Roach, an engineer and entrepreneur, Sydtech Pty Ltd (in liquidation), a company owned and controlled by Mr Roach, and Winnote Pty Ltd, a company initially owned and controlled by Mr Roach and Mr K C Luscombe and by Mr Roach alone since March 1993. 3 The first defendants are the partners at the relevant time of Freehill Hollingdale & Page, solicitors, Sydney. The second defendants are the partners at the relevant time of Freehill Hollingdale & Page, solicitors, Melbourne. I will refer to them respectively as FS and FM. 4 The case concerns a deposit of peat at Swan Marsh, Victoria, in the shire of Colac. 5 In 1988, peat was being extracted from the deposit by a company, Revilli Pty Ltd, under a deed of licence with the landowner, Mr G M Sadler. Revilli was controlled by Mr Luscombe. 6 Under the Mines Act 1958 (Vic), minerals covered by the Act were the property of the Crown and could be lawfully extracted only under a mining lease. A royalty was payable to the Crown. The consent of the landowner was not required as a condition for the grant of a mining lease. 7 By proclamation made on 27 October 1982, peat was declared to be a mineral for the purposes of the Mines Act. Peat was, accordingly, covered by the legislation. Mr Sadler and Mr Luscombe were presumably unaware of that. 8 In 1988, Mr Luscombe and the first plaintiff, Mr Roach, agreed that they would form a joint venture to exploit the resource through Winnote, the second plaintiff. Revilli would give up its interest in favour of Winnote. Mr Roach was similarly unaware of the applicability and effect of the Victorian mining legislation. 9 Mr Roach retained FS to advise and draft the appropriate documentation. FS obtained advice from FM concerning Victorian law. FS prepared a real property lease between Mr Sadler as lessor and Winnote as lessee. The lease provided for payment of a royalty to Mr Sadler for peat extracted from the site. It is the plaintiffs' case that this structure was adopted on erroneous advice, communicated by FS to Mr Roach, that peat was not covered by the Mines Act. 10 Mr Roach and Mr Luscombe then carried on the business of extracting peat from the site, through Winnote, in ignorance of the true legal situation. 11 In 1993, Mr Roach and Mr Luscombe decided to sell out to a Mr A Groves. Terms were agreed subject to Mr Groves' solicitors inspecting the real property lease. Mr Groves, however, appears to have learned of the correct legal situation before the transaction was concluded. He applied for and was granted a mining licence. ("Mining licence" was the new terminology under the Mineral Resources Development Act 1990 (Vic) which substantially re-enacted the Mines Act so far as is presently relevant.) 12 It is the plaintiffs' case that, if they had been correctly advised in 1988, Mr Roach or Winnote would have applied for and been granted a mining lease at that time. Such a lease would, they say, have protected them against the loss of their interest to Mr Groves. 13 As for the proposed sale to Mr Groves in 1993, the plaintiffs say that problems in relation to registration of the real property lease, which would not have arisen in relation to a mining lease, and the consequent perception of insecurity of title contributed in a material way to the decision to sell. 14 No claim was pressed on behalf of the plaintiff Sydtech. Mr Roach and Winnote claim expectation or, alternatively, reliance damages. The claim for expectation damages is substantial, $7.5m, before grossing up for tax and before adding interest. 15 The defendants dispute the plaintiffs' claim on legal and factual grounds. Their defences include an assertion that the plaintiffs' claim is statute barred by reason of failure to commence the proceedings within six years from accrual of any cause of action. 16 The foregoing introduction is brief and necessarily incomplete. Relevant legislation 17 In this section I review the relevant Victorian legislation. The Mines Act 1958, the Mineral Resources Development Act 1990 and the Extractive Industries Act 1966 18 The Mines Act 1958, with amendments as at 1988, applied to minerals, including any substance declared to be a mineral for the purposes of the Act. By proclamation made on 12 October 1982, peat was declared to be a mineral within the meaning of the Act. 19 By s291(4) and (5), a substance so declared to be a mineral became and remained the property of the Crown. 20 But for the proclamation, peat was or may also have been subject to the Extractive Industries Act 1966, which regulated the extraction of substances caught by the definition of "stone" in that statute. However, that Act applied only to extraction which exceeded two metres in depth below the natural surface of the land, which was deeper than the extraction contemplated at Swan Marsh. 21 The Mines Act 1958 made provision for the grant of mining leases in relation to private land and for the grant of exploration licences. 22 By s300(3), a mining lease gave the holder the right to enter on the land, to mine the mineral, to install plant and machinery, and to erect and occupy buildings on the land, subject to prescribed conditions and provisions, and subject to conditions and provisions in the lease. Because no other lease would be issued in relation to the same land, the right to the mineral in the area covered by the mining lease was exclusive. 23 By s47, a mining lease had to contain a covenant to employ a number of workmen in mining operations or to expend a sum of money specified in the lease upon such operations. There was provision in the section for relief against such a covenant in the discretion of the Minister. (Section 47 related to mining leases on Crown land, but was made applicable to leases on private land by s300(3).) 24 By ss 304 and 306, compensation was payable to the owner or to the owner and occupier of the land, including compensation for deprivation of possession of the surface of the land and any damage to the surface or to improvements. Rights under a mining lease were conditional upon the lease holder having paid or tendered compensation to the owner (or to the owner and occupier), or having entered into an agreement with the owner (or owner and occupier) as to such compensation and as to payment. Failing such agreement, the compensation could be determined by an independent authority, as provided for in the Act. 25 By operation of the Mines (Mining Titles) Regulations 1983, the royalty payable to the Crown was 2.75 per cent of the value of peat sold. 26 Exploration licences were dealt with under Pt 5 of the Mines Act 1958. By s514, the Minister could grant a licence to explore for minerals, the property of the Crown, on any land in Victoria. The area for which an exploration licence could be granted was substantially greater than the maximum area for a mining lease. 27 By s515, a fee was payable on application. It was not significant. 28 By the same section, a proposed scheme for exploration had to be submitted with the application. By s515(5), the proposed scheme had to provide for a geological survey or other survey of the land and contain particulars of the geological survey or other survey or other operations the applicant proposed to carry out, the periods within which the applicant proposed to carry them out and the sums the applicant proposed to expend in carrying them out. 29 By s514(3), the holder of an exploration licence was entitled to carry out such surveys or other operations as were authorised by the licence, for the purpose of exploring the land for any minerals. 30 By s514(15), the Minister could, when granting a licence, fix any special conditions to which the licence would be subject. (That could include a requirement for minimum expenditure.) 31 By s518, the applicant for an exploration licence was required to lodge a bond with a surety condition for the due observance of the licence. 32 By s521, a licensee was liable to compensate the owner or occupier of private land for any damage arising from exploration operations, as agreed or as independently assessed in the event of a dispute. 33 By s526, once an application was made for an exploration licence, a mining lease could not be granted without the consent of the applicant for or the holder of the exploration licence. 34 The Mineral Resources Development Act 1990 re-enacted in substance the foregoing provisions of the Mines Act 1958. Under the Mineral Resources Development Act, a mining licence was equivalent to a mining lease under the earlier statute. Mining leases and exploration licences granted under the earlier statute continued to have effect. Soil Conservation and Land Utilisation Act 1958 35 The statute relates to soil conservation and reclamation. 36 Section 17A was in effect as at 1988. It provided that any person who removes soil, sand or other material between the natural surface and two metres below the natural surface and, in so doing, breaks the surface to the total extent of not less than 2,000 m2, whether in one or more excavations, without the consent of the Director-General, or in contravention of or non-compliance with a condition to which consent is given, is liable to a penalty of $500 and a further penalty of $200 for each day the offence continues. 37 It is common ground that – subject to the 2,000 m2 proviso – the section operated in relation to the extraction of the Colac peat in and from 1988 to and including 1993, and irrespective of whether a mining lease / licence had been obtained. 38 An area of 2000 m2 (which is equivalent to 2 ha) can more readily be visualised as a plot of 50 by 40 m, a patently small area in the context of a commercial peat mining operation. Transfer of Land Act 1958 39 Section 42(2) provided, at all relevant times, that land included in a folio of the register or in a registered instrument is subject to the interest of a tenant in possession of the land, notwithstanding that the interest is not recorded as an encumbrance on the relevant folio of the register. (This provision became relevant in relation to the real property lease which came into existence.) Preliminary dealings between Mr Roach and Mr Luscombe 40 Little is known about Mr Luscombe's background. He had been extracting peat from the Colac site for some time under the Revilli deed of licence. With what commercial results is not known. There is nothing to suggest he was doing so at a profit. 41 Mr Roach held a degree in civil engineering from the University of Sydney. He had a broad interest in innovations and was a former president of the Inventors' Association of Australia. He had extensive professional experience in the mining industry. He also had extensive experience as a civil engineer. 42 Mr Roach also had business experience through Roach Industries Pty Ltd and Sugetu Pty Ltd, companies of which he was a director. Roach Industires carried on business under the business name "Sydney Business and Technology Centre" (known as the SBTC). Its field of operation was commercial research and development. Sugetu developed a complex of some 53 factory premises at 2 Railway Parade, Lidcombe. The concept was to sell off the factory premises in conjunction with business development services provided by Roach Industries. It is not clear from the evidence to what extent that concept was implemented, except for the sale of developed factory sites. 43 Mr Roach was, for a time, a member of the state executive of the Australian Small Business Association. 44 In June 1988, Mr Roach was contacted by Mr Luscombe, who said he had a lease over a peat deposit at Swan Marsh in Victoria and that he was looking for venture capital in order to develop the deposit. On 28 June 1988, there was a meeting between Mr Roach and Mr Luscombe, at which Mr Luscombe produced a copy of the deed of licence. The deed provided for the extraction of peat by the licensee in return for payment of a royalty to the landowner. 45 There were several meetings between Mr Roach and Mr Luscombe between 28 June 1988 and 29 July 1988, at which the proposal was discussed in further detail. On 29 July 1988, Mr Roach visited the Swan Marsh deposit with Mr Luscombe. He met Mr Sadler and his wife on that occasion and the development of the peat deposit was discussed further. 46 On 21 July 1988, Mr Roach and Mr Luscombe signed a short joint venture agreement, drafted by Mr Roach, which provided for a company to be formed as the vehicle for the joint venture, that all decisions by the directors of the new company were to be unanimous and that what were described as "the total rights [under] the lease on the peat deposit" were to be vested in the new company. Winnote Pty Ltd was acquired, with Mr Luscombe and Mr Roach holding one share each. The solicitors' retainer 47 In late July 1988, Mr Roach was approached by Mr R Nicholls, a partner in FS. In early August 1988, Mr Roach met Mr Nicholls at his office. Mr Roach told Mr Nicholls that there was an existing lease or licence in favour of Revilli Pty Ltd, a company controlled by Mr Luscombe, Mr Roach's joint venture partner. Mr Roach said that the instrument seemed to him to be poorly worded, that he wanted to secure the deposit for the joint venture for as long as possible, that he wanted to know what kind of licence the joint venture would need from the Victorian government, that he understood a mining licence was required to mine peat in New South Wales but that he did not know the situation for Victoria, and that he wanted FS to prepare the appropriate documentation to secure the peat and a joint venture agreement. Mr Roach said he wanted a tight lease with the landowner and that he wanted to do whatever was necessary to enable him to secure and control the deposit. 48 Mr Nicholls' response included that Freehills was one of the leading firms in mining law in Australia and could attend to what was required. He said that they would go through the relevant Victorian legislation and ensure that Mr Roach had control of the peat and that everything with the appropriate authorities would be done properly. He said that if the Sydney office was not able to resolve the matter, they had an office in Melbourne, which would make all the necessary investigations in Victoria. The agreement with the landowner would not be a problem. Mr Nicholls said that he would arrange for someone in the firm to handle the matter and they would make contact with Mr Roach. 49 Within a day or so of his meeting with Mr Nicholls, Mr R Cottee, a solicitor employed by FS, contacted Mr Roach, saying that he had been asked by Mr Nicholls to handle the matter. Mr Roach told him that there was an existing lease to Revilli, a company controlled by Mr Luscombe, his joint venture partner, that the lease seemed poorly worded, that he wanted to secure the deposit for the joint venture for as long as possible, that he wanted to know what kind of licence the joint venture would require under Victorian law, that he wanted the joint venture documentation prepared and a lease with the landowner prepared, that he understood a mining licence was required in New South Wales to control and mine peat, that he wanted to know whether such a licence was required in Victoria, that he wanted advice whether a lease from the landowner was the correct procedure and that it was very important to secure the peat deposit properly before substantial sums of money were invested by his companies. 50 Mr Cottee said he would have FM check the legislation, that Freehills were very experienced in this area, that it would take about a month to obtain advice about the correct legal procedures and that he would have another solicitor deal with the shareholders' agreement and confidentiality agreement which were contemplated. 51 On 5 August 1988, Mr Roach sent Mr Cottee a copy of the deed of licence between Mr Sadler and Revilli. 52 The parties to the retainer and its content are to be determined objectively, having regard to what was said at the time and the surrounding circumstances as known to the parties. 53 It is apparent that Mr Roach was consulting FS as agent for Winnote. That is sufficiently apparent from his statements to Mr Nicholls and Mr Cottee that he wished to secure the deposit for the joint venture. It is also apparent that, in other respects, Mr Roach was consulting FS on his own behalf also, for example, in relation to the shareholders agreement. 54 The content of the retainer was that FS would provide the following services: (a) Advice as to the Victorian legislation applicable to the extraction of peat; (b) Preparation of documentation to secure Winnote's interest in the deposit; (c) Preparation of a shareholders' agreement and a confidentiality agreement to regulate the relationship between Mr Roach and Mr Luscombe in relation to the joint venture. 55 I find that in relation to (a) and (b) above, the retainer was with Winnote and not with Mr Roach personally. Duty and standard of care 56 FS owed a contractual duty to Winnote to take reasonable care in relation to the provision of the foregoing services. Where a duty arises in contract, a duty of care also arises in tort: Astley v Austrust Pty Ltd (1999) 197 CLR 1, per Gleeson CJ, McHugh, Gummow and Hayne JJ at [44]. 57 The standard of care is the same in contract and in tort: Heydon v NRMA Ltd (2000) 51 NSWLR 1 at [147] per Malcolm AJA, [363] per McPherson AJA and [649] per Ormiston AJA. 58 The standard of care owed by legal practitioners was stated as follows in Heydon, per Malcolm AJA at [146]: Both barristers and solicitors owe a duty of care to those whom they advise or for whom they act. In the present context, their duty is to exercise reasonable care and skill in the provision of professional advice. The standard of care and skill is that which may be reasonably expected of practitioners. In the case of practitioners professing to have a special skill in a particular area of the law, the standard of care required is that of the ordinary skilled person exercising and professing to have that special skill. 59 In relation to legal practitioners holding themselves out as having specialised skill or knowledge, the duty was stated as follows in Yates Property Corporation Pty Ltd v Boland (1998) 85 FCR 84, per Drummond, Sundberg and Finklestein JJ at 105: When a client retains a firm that is or professes to be specially experienced in a discrete branch of the law that client is entitled to expect that the standard of care with which his retainer will be performed is consistent with the expertise that the firm has or professes to have. Such a client would no doubt be justifiably dismayed if he was told that the firm that he has retained because of its experience is only required to act in accordance with the standards laid down for a solicitor who has only a general or even only a little knowledge of the law that is to be applied to the facts of the client's case. 60 In a similar vein, Wilcox J, in Montague Mining Pty Ltd v Gore [1998] FCA 1334, specified the standard of care expected of a specialist solicitor in the following terms: (i) The scope of the matters in relation to which a solicitor has a duty of care to his or her client depends on the terms of the solicitor's retainer and the ambit of any additional assumed responsibility; (ii) In relation to matters within the solicitor's duty of care, fulfilment of the duty is not necessarily confined to carrying out the client's specific instructions; in order properly to discharge the duty and protect the client from a real and foreseeable risk of economic loss, it may be necessary for the solicitor to initiate action; (iii) Where a client engages a solicitor who professes special expertise in a particular field of law to do work within that field, the relevant standard of care is that of the ordinary skilled solicitor exercising and professing special expertise in that field. It follows from these propositions that, if an ordinary skilled solicitor exercising and professing special expertise in an area of law would foresee a real risk of economic loss to a client in respect of a matter within the solicitor's retainer or additional assumed responsibility, unless particular action was taken, the solicitor is under a duty to take that action, or advise the client to do so. (Wilcox J's judgment was reversed for other reasons but not in relation to that passage.) The foregoing statement of principle was cited with apparent approval in Wakim v McNally (2002) 121 FCR 162, per Branson, Mansfield and Stone JJ at [43]. 61 In the present case, FS held itself out as having special expertise in mining law. As will appear, FS, as foreshadowed to Mr Roach, retained FM to advise in relation to Victorian mining law. FM also held themselves out (through FS) as having such special expertise. FS and FM accordingly became subject to a duty of care owed to Winnote, to exercise care to a standard consistent with the special expertise which FS and FM professed to have. 62 I am of the opinion that neither FS nor FM owed a duty of care to Mr Roach personally in relation to advice concerning the applicability of Victorian legislation or as to the preparation of documents to secure Winnote's interest in the peat deposit. That is because there was no contractual relationship between either defendant and with Mr Roach personally in relation to those matters and because it could not reasonably be foreseen that he might suffer harm otherwise than as a shareholder in Winnote. Written advice 63 On 23 August 1988, Mr Cottee wrote to Mr Roach, saying that a proposed lease had been drafted, with a view to registration in Victoria. The benefits of registration were mentioned. Features of the draft were mentioned: there was provision for payment of rent and for payment of royalty in relation to the extraction of peat; there was provision for termination of the existing licence; the lessor's and lessee's covenants closely tracked the provisions of the existing licence; the lease would terminate 20 years from 30 June 1988, with a right to renew for 20 years on the same terms and conditions by notice on or before 30 June 2008. The letter included the following: Our Melbourne office has confirmed that peat is "stone" for the purposes of the Extractive Industries Act and therefore does not fall within the ministerial consent provision of the Mining Act [ sic ]. However if you do extract peat over a depth of 2 metres, environmental impact studies and various other approvals are required. Our Melbourne office have stated that there is an interim development order over the whole of the shire which would require you to obtain a permit from the local council before extracting peat. 64 The plain implication arising from the terms of the letter and from the drafting of a real property lease as the suitable instrument was that a mining lease under the Victorian legislation was not necessary or available to secure mining rights in relation to the peat deposit. 65 A further letter, dated 23 August 1988, was written by Mr Cottee to Mr Roach, enclosing what was referred to as "the advice received from our Melbourne office in relation to the Legislative Scheme that may be applicable in relation to your Lease". 66 The FM letter of 23 August 1988 went out under the initials "JF: RGE". Mr R G Eager was a partner in FM with extensive experience in relation to Victorian mining law. In the letter, a number of Victorian statutes were discussed, including the Extractive Industries Act and the Mines Act. In relation to the Extractive Industries Act, it was said that a question arose as to whether peat was a "stone" for the purposes of that legislation. As to that, the letter said: We express no concluded opinion on the matter. However, we have contacted the Victorian Mines Department who have informed us that their practice is to treat peat as being within the meaning of "stone" as defined, and therefore, on this basis, the extraction of peat is deemed to be an extractive industry for the purposes of the Act. Concerning the Mines Act, the letter said: We have considered the provisions of the Mines Act 1958 in order to determine what effect it will have, if any, on your client. The Act applies to "minerals" as defined. The definition specifically excludes "stone within the meaning of the Extractive Industries Act 1966 ". If it is accepted that, in accordance with the Victorian Mines Department practice, peat is included within that Act's definition of "stone", then the Mines Act 1958 does not affect your client's operations. 67 The advice in this letter was far from definite. It was stated that the author did not have a concluded opinion and that the applicability of the Mines Act, which, if applicable, would make a mining lease the only appropriate instrument to secure mining rights over the deposit, was in doubt. It was also stated, however, that there was a practice in the Victorian Mines Department to treat peat as being outside the ambit of the Mines Act. 68 The letter failed to recognise that peat had been proclaimed as a mineral for the purposes of the Mines Act and, accordingly, that peat was within the ambit of the statute irrespective of whether it was also a "stone" under the Extractive Industries Act and irrespective of any departmental practice. 69 Mr Cottee's cover letter, forwarding FM's letter, did not say that the advice conveyed by his earlier letter (that a mining lease was not required) now needed to be qualified. Oral advice 70 There are minor discrepancies, as one would expect, between the account given by Mr Roach and the account given by Mr Cottee as to what was said between them prior to the letters of 23 August 1988. I need not traverse those discrepancies. They are not material. 71 Concerning communications between FS and FM, Mr Cottee says that on or about 10 August 1988, he telephoned Mr Eager and asked him to provide the relevant advice concerning the Victorian legislation. He says that, on 23 August 1988, Mr Eager telephoned him, saying that peat was classified as a "stone" for the purpose of the Extractive Industries Act, and therefore did not come within the ambit of the Mines Act; that under the Extractive Industries Act, a licence was only required if material was to be extracted below a depth of 2 m; but that there was also a local government order in relation to the Colac Shire, which required a permit from the local council for the extraction of peat. 72 Mr Cottee said that it was following that conversation with Mr Eager that he sent Mr Roach the first of the letters dated 23 August 1988. The letter provided advice in the same terms as Mr Cottee says had been given to him by Mr Eager. As mentioned above, Mr Cottee sent, with the letter, a draft real property lease, the terms of which were reviewed in the letter. 73 On 10 August 1988, Mr Eager made a handwritten file note of his initial conversation with Mr Cottee in relation to this matter. There is also a typed file note over Mr Eager's name, relating to the telephone conversation. It is consistent with the handwritten note. In the typed file note, Mr Eager included the following: I cannot see that the Mines Act would have any application. Later in the note, Mr Eager recorded that Mr Cottee was drawing up the proposed documentation which he would send to FM and that FM were "to consider the application of Victorian laws as appropriate". In that regard, Mr Eager recorded in the typed note: Apart from anything else, we should consider the Town Planning Laws as they might affect the particular land in question in relation to excavation to a depth of two metres. The tenor of the note is that Mr Eager thought there was no question of the Mines Act applying. It was other legislation to do with the proposed documentation which he had in mind to check out. 74 It may be observed that Mr Eager's records are consistent with Mr Cottee's foregoing account of the conversation between them. 75 No witness statement by Mr Eager was tendered by the defendants and he was not called to give oral evidence. There was no explanation for his absence. Inferences adverse to the defendants in relation to his part in the events can the more readily be drawn from the evidence. 76 In the course of cross-examination, Mr Cottee frankly conceded that all his evidence relating to conversations was reconstruction rather than recollection. Mr Roach made no such concession. However, both men were giving evidence of conversations which had occurred some 12 years before they made their respective witness statements and 15 years before giving evidence. To the extent that either of them believed that they had a true recollection of what had been said in any of the conversations which occurred, such recollections would be so blurred by the passage of time and so coloured by reconstruction from the documentary evidence and by the natural influence of self-interest that any such purported recollections cannot be reliable. I am accordingly dependant on documentary evidence, context and inherent likelihood in resolving the order in which events occurred and the content of conversations. 77 I have no difficulty in accepting Mr Roach's evidence concerning the initial conversations with Mr Nicholls and Mr Cottee because, as narrated, they are what I would expect to have been said and there was no dispute about them. However, in relation to later conversations, the foregoing observations apply. 78 I find that, when Mr Cottee wrote his letter of advice to Mr Roach on 23 August 1988 (the first of his two letters of that date), he had spoken to Mr Eager and had received advice from Mr Eager that peat was not covered by the Victorian mining legislation. He had not received FM's letter of that date. (Whether the FM letter had been drafted and finalised at that stage I do not know.) 79 My reasons for those findings are as follows. Mr Cottee says he had spoken to Mr Eager and received such advice from him before writing his first letter to Mr Roach on 23 August 1988. As I have said, I do not give weight to that evidence. However, I do not believe that Mr Cottee would have given the written advice he gave concerning the Victorian mining legislation without advice from FM. Nor do I think Mr Cottee would have given the written advice he gave on 23 August 1988 on the basis of FM's letter of that date. From a lawyer's perspective, the letter provided no assurance that peat was outside the ambit of the Victorian mining legislation, and any departmental practice would have been open to challenge if it did not accord with the legislation. Then there is Mr Eager's handwritten note of 10 August and his file note of 11 August 1988 which indicate it was Mr Eager's opinion that the Victorian mining legislation did not apply. It is consistent with those notes that Mr Eager so advised Mr Cottee. In these circumstances, I do not doubt that Mr Cottee gave his written advice on 23 August 1988 on the basis of oral advice by Mr Eager that the Victorian mining legislation did not apply and before he received FM's letter of that date. 80 What, if anything, Mr Cottee did in response to FM's letter of 23 August 1988 is in issue. According to Mr Cottee, on 29 August 1988 or thereabouts, he had a telephone conversation with Mr Roach. He says that, in the course of that conversation, he told Mr Roach that the advice from FM concerning the applicability of Victorian legislation was inconclusive in a number of respects, including an ambiguity as to whether or not peat was a "stone" and therefore covered by the Extractive Industries Act. Mr Cottee says that he told Mr Roach that they should ask for further, more conclusive advice, to which Mr Roach responded that he did not want to spend any more time or money on the issue and that FS should get on with finalising the lease. Mr Roach denies that there was any such conversation with Mr Cottee. 81 Again, I do not regard uncorroborated evidence such as this, concerning what was said or not said in a conversation which took place so long ago, as being of any weight. Again, I am dependent on documentary evidence, context and inherent likelihood. 82 A later document is relevant to this issue. On 6 October 1988, Mr Cottee prepared a memorandum to file prior to going on leave for two weeks. The memorandum includes the following: Whilst it is clear that right to extract the peat from the property would be a profit a prendre which is an interest in land we have gone the route of requiring an actual lease so that Winnote's interest with appear on the certificate of title of the property and therefore will run with the land. There is advice from Freehills in Melbourne that not only would we be able to register the lease as a lease but we may also wish to take out a caveat over the land to reinforce our client's right in respect of the profit a prendre. Given the term of the lease it is imperative that we get some form of registrable instrument on the title and not just a mere licence. As Mr Sadler is nearly 60 years of age our client is quite concerned about this point. ... We have been advised by our client (and have had such advice confirmed by Freehills in Melbourne) that provided Winnote does not extract peat from a depth greater than 2 metres there are no government approvals other than local council approvals required for the extraction of peat. If our client were to extract at a greater depth than 2 metres, then a fullblown EIS would be needed. Nonetheless peat is classified as stone and as such no royalty is payable to the government in Victoria. 83 This note conveys acceptance by Mr Cottee of advice by FM (conformably with Mr Eager's notes) that the Victorian mining legislation did not apply because peat was classified as a stone. 84 I find that there was no further conversation between Mr Cottee and Mr Roach following receipt by Mr Cottee of the FM letter of 23 August 1988 in the terms asserted by Mr Cottee. Mr Cottee's evidence in that regard is inconsistent with his own note of 6 October 1988. It is also unlikely in the extreme that someone in Mr Roach's position would have declined to give instructions to investigate the matter further, if so advised, having regard to the importance of the question from a business perspective. It is also unlikely in the extreme that, if such a conversation had occurred, a solicitor in Mr Cottee's position would not have written to the client qualifying the written advice given on 23 August, that he would not have made a file note of the conversation and that he would not have written to the client confirming that his advice had been rejected. 85 It follows that, having received FM's letter of 23 August 1988, Mr Cottee did nothing in response to that letter, except to send a copy of it to Mr Roach. 86 Mr Cottee gave evidence of what, at the time, he thought of FM's letter of 23 August 1988. I give no weight to that as evidence of a reliable recollection by Mr Cottee of his state of mind so long ago. However, it is more than feasible that Mr Cottee did think, at the time, that the letter should be disregarded. Mr Eager was a partner in FM and was an experienced mining law practitioner. As I find the facts, Mr Cottee had his oral advice in plain terms and had acted on that advice. The FM letter bore Mr Eager's initials but it bore other initials also, and there was good reason to doubt the expertise behind the letter from a bare reading of it. 87 It would also have been reasonable for Mr Cottee to assume that Mr Roach would not read the FM letter as being inconsistent with the advice which Mr Cottee had given in his earlier letter to Mr Roach. The FM letter said there was a practice. In the context of the unequivocal advice given in Mr Cottee's earlier letter to Mr Roach, the implication for a non-lawyer was that the practice referred to in the FM letter could be relied upon. 88 I do not believe Mr Roach saw the FM letter as being inconsistent with the earlier written advice by Mr Cottee. If he had, I do not doubt that he would have raised the matter with Mr Cottee. There is nothing to suggest that he did. Had he done so, I would have expected further notes and correspondence. 89 I have considered whether it is consistent that Mr Cottee sent the letter of 23 August to Mr Roach if he thought it should be disregarded in relation to the applicability of the Victorian mining legislation. I think the explanation for that is obvious enough. Mr Cottee was in an awkward position. FM would be charging for their letter. The client was unlikely to see the letter as being inconsistent with the oral advice given previously. So there were unlikely to be repercussions. There were other ways of handling the situation, but what Mr Cottee did was one way of doing so. Breach of duty by the defendants 90 There was breach by FM of their duty of care in tort owed by them to Winnote. FM failed to advise that peat was covered by the Victorian mining legislation. Solicitors holding themselves out as having special expertise in Victorian mining law should have known or should have ascertained that peat had been brought within the ambit of that legislation by proclamation. 91 The same cannot be said of FS. Mr Cottee properly sought advice on that question from FM. As I find the facts, he was incorrectly advised by Mr Eager that the Victorian mining legislation did not apply. In view of that advice and Mr Eager's standing, he was entitled to treat the FM letter of 23 August 1988 as being unreliable insofar as it expressed a doubt in that regard. 92 It may be that FS came under a contractual obligation to provide Winnote with as reliable an opinion on the applicability of the Victorian mining legislation as reasonable care and skill could provide. Such a contractual warranty may have arisen from the assurances of expertise given by Mr Nicholls and Mr Cottee in terms which related both to FS and FM. But it is unnecessary to resolve that question because any cause of action in contract was statute barred when the proceedings were commenced. 93 Subject to the limitation defence, FM but not FS are, accordingly, liable in tort for whatever damage was suffered by Winnote as a result of the incorrect advice that the Victorian mining legislation was inapplicable and (the corollary) for failure to advise that it would be necessary for Winnote to obtain a mining licence and/or exploration licence under that legislation in order to mine peat lawfully and to secure its interest in the deposit. No continuing duty 94 It was initially submitted that the defendants were under a continuing duty to provide the correct advice until the retainer was terminated. That approach was not pressed and properly so: see Larking v Great Western (Nepean) Gravel Ltd (1940) 64 CLR 221, 236 and Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] 1 Ch 384, 403. Events 1988 to 1993 95 As mentioned in the introductory section of this judgment, Mr Roach and Mr Luscombe decided to sell out to Mr Groves in 1993 but, instead of that occurring, Mr Groves undercut Winnote's interest in the peat deposit by obtaining a mining licence. 96 The Groves transaction stands at the confluence of three streams in the flow of events during the period 1988 to 1993. These are: (a) Dealings concerning the Sadler land and the real property lease; (b) The fortunes of Mr Roach and the Roach group of companies; (c) The fortunes of Winnote's peat mining business. 97 I will deal separately with each of these themes. Dealings concerning the Sadler land and the real property lease 98 On 14 September 1988, FS sent an account dated 5 September 1988 for $3,745.10 for drafting the real property lease. It included $3,650 for professional costs. The account was paid, promptly, on 13 October 1988. 99 On 6 October 1988, a shareholders' agreement, drafted by FS, was executed by Mr Roach, Mr Luscombe and Winnote. 100 Following negotiation between the solicitors for the respective parties concerning the terms of the proposed real property lease, that document was executed in final form on 7 November 1988. 101 I note the following features of the lease as executed: (a) The parties are Mr Sadler as lessor and Winnote as lessee. Revilli and Mr Luscombe are parties for the purpose of provisions terminating the previous arrangements. (b) The lease is dated 7 November 1988, but ran from 30 June 1988. (c) The property is described as Crown allotments 89, 90, 91 and 92A, being part of the land contained in Certificate of Title Vol 8847 Fol 239. (d) The lease provides for a "Peat Area" not exceeding 80 ha within the demised property to be determined in a manner agreed between the lessor and lessee. (e) The lessor is prohibited from extracting peat or granting to any other person the right to extract peat from the peat area. (f) There is provision for a "Work Area" within the peat area, not exceeding 16 ha, also to be determined in a manner agreed between the lessor and lessee. When the peat has been extracted from a work area, the lessee has the option to nominate a further work area in substitution for the previous one, to which the same terms and conditions apply. (g) The lessee has the right to extract all the peat within the work area and successive work areas. The right and title to the peat passes to the lessee upon its extraction. (h) There is also provision for a "Storage Area" not exceeding 5 ha and being adjacent to the peat area. (i) The lessor retains farming and grazing rights over the whole of the property demised other than the storage area and that part of the work area from which the lessee is extracting peat from time to time. (j) The term of the lease is five years from 30 June 1988. There is a rolling option to renew, exercisable a maximum of seven times, which would result in an aggregate term of 40 years. (k) The rent reserved is $10 per annum payable on or before 30 June each year. (l) Royalty at $4/m3 of peat is payable each month, with a minimum of $10,000 per year expiring on 30 June, payable by the following 15 August. (m) There is a right of assignment with the consent of the lessor, such consent not to be unreasonably withheld, provided the lessee is not in default. (n) Prior to expiration or termination of the tenancy, the lessee is to leave the property in a clean and tidy manner, with useable material removed and unusable material spread or stored. The lessee is also required to leave a high area in the middle of the excavated area to serve as an island on the filling of the excavation with water. (o) The lessee is to observe and comply with the requirements of any statute relating to the operation. The lessee is also to obtain all necessary consents, permits and approvals to carry on the business of extracting the peat. (p) The lessor may terminate the tenancy in the case of breach or non-observance, or non-performance of any material covenant or condition. (q) The lessee is to maintain in the joint names of the lessor and lessee a public liability and property damage insurance policy in the sum specified. (r) The lessee is to lodge a bond with the lessor for the surety amount specified, securing compliance with the conditions of the lease. The amount specified is $20,000, indexed, or one-sixth of the royalties payable for the previous year, whichever is greater. (s) The lessor and Revilli discharge each other from their obligations under the prior arrangements. (t) There is provision giving the lessee a pre-emptive right in relation to the extraction of peat from any part of the demised property other than the peat area if the lessor proposes to allow such extraction by any other person or to extract peat himself from the property outside the peat area. (u) There is provision for registration of the lease and of any renewal of the lease. 102 The provisions for registering the lease (cll 16.2 and 5.3) are not entirely clear. It is sufficient to note that registration was expected and that the lessor had an obligation to do all things necessary to enable registration to be effected. He may also have had a further obligation actually to register the lease, but that is not a critical consideration. 103 Notwithstanding that the lease provided for registration of the lease, it appears that registration was unnecessary. As I have recorded earlier in this judgment, the Transfer of Lands Act provided that land on the register was subject to the interests of a tenant in possession. Indeed, prior to the terms of the lease being negotiated in final form, Mr P Falkiner, acting for Mr Sadler, had written to FS on 9 September 1988 as follows: In Victoria, it is most unusual to register Leases. Our client would not propose registering the Lease in this instance. However, as I have said, as settled in final form, the lease provided for registration. 104 On 18 November 1988, Mr Roach wrote to Mr Cottee, saying that Mr Sadler was intending to sell part of the property and asking for Mr Cottee's confirmation that the lease had been registered and would be binding on the new owners. There appears to have been no direct response to the enquiry. On 19 December 1988, Mr Cottee faxed to Mr Roach a letter of that date from Larkins McCarthy, saying that they were awaiting assessment of stamp duty. That indicated that registration was not yet possible. 105 On 30 December 1988, FS sent a further account for $13,983.30, including $6,100 for their professional costs. Disbursements included FM's costs at $6,641.45 and costs in the sum of $345 rendered by Sewells, solicitors, who had acted as agents on execution of the lease. 106 The account was not paid until 23 August 1989. 107 Meanwhile, on 1 February 1989, Mr Roach spoke to Mr L Lewis, who had taken over the matter from Mr Cottee when Mr Cottee left the firm in January 1989. Mr Lewis said the lease had not yet been registered, and he would call Larkins McCarthy and find out why. Mr Roach was very angry about the delay in registration of the lease. 108 On 14 February 1989, Mr Lewis wrote to Mr Roach, advising that FM and Larkins McCarthy had approached the Controller of Stamp Duty in Melbourne with a view to expediting the assessment of stamp duty. 109 On 15 February 1989, Mr Roach instructed FS, pursuant to advice from them in that regard, to proceed to lodge caveats. That was done. 110 Earlier, on 27 November 1987, Mr Sadler had lodged an application for a new certificate of title, with a view to effecting a subdivision of the land. 111 As at 7 November 1988, when the lease was executed, no subdivision had occurred. At that time, the register showed the land as consisting of the Crown allotments by reference to which the land was described in the lease. That was confirmed by search prior to execution of the lease. 112 On 19 December 1988, after the lease had been executed, a second application for a new certificate of title was lodged by Mr Sadler, with a view to effecting a different subdivision of the land. 113 Larkins McCarthy took the view that the description of the property in the lease would now have to be amended for the lease to be registered. They suggested, for consideration, an amendment to the description by reference to certain of the lots specified on the plan of subdivision in lieu of the Crown allotments referred to in the lease. They said that, subject to their client's agreement, the lease could then be lodged for registration. 114 On 6 April 1989, FS wrote to Mr Roach advising that the lease had now been assessed for stamp duty and conveying the suggested revision of the description of the property in the lease. The letter stated that, although the newly-described lots appeared to coincide with the Crown allotments specified in the lease, FS were unable to confirm that this was so without further searches. Mr Roach was asked in the letter whether he was happy with the newly-described lots, in which case FS would instruct the lessor's solicitor to proceed with the registration of the lease. 115 It appeared to Mr Roach – correctly, as it turned out – that the proposed new description omitted parts of the land as described in the lease. He decided that he would have to make enquiries at the Colac Shire Council. That was his choice, rather than taking up FS's offer to carry out further searches in order to clarify the position. 116 There appears to have been no response by Mr Roach to FS's letter of 6 April 1989. 117 On 21 June 1989, FS wrote to Mr Roach asking if the proposed amendments to the title description were acceptable. 118 There appears to have been no response by Mr Roach to that letter either until 23 August 1989, when Mr Roach telephoned Mr Lewis, saying that he would be carrying out his own enquiries and, meanwhile, Mr Lewis was to do nothing. 119 Mr Roach was at Colac in late August and early September 1989. On 4 September 1989, he wrote to FS, saying that he had spoken to the Deputy Shire Engineer and a local surveyor. Mr Roach said in the letter: The sub-division of the crown allotments should have been identified if a search was conducted by yourselves. Sadler has applied to the Shire Council at Colac to have a new subdivision approved which amalgamates most of these lots into two sub-divisions. It would appear that this sub-division will be approved through Colac Shire Council in the next week. It would appear that a search is required to identify the extent of Crown Allotments 89, 90, 91 and 92A and that the lease is registered as soon as possible. The alternative is to wait until the new sub-division is registered, but this may cause a delay. 120 Mr Lewis said that this letter was not on the file. He said he had no recollection of receiving it. However that may be, Mr Roach does not then appear to have done anything further about registration of the lease for a further nine months. If his letter of 4 September 1989 was sent, he did not follow it up. 121 On 31 May 1990, Mr Roach wrote to Mr G Pearce at FS, now expressing urgency. He said in that letter: We have not received a copy of the above lease (although prepared in 1988). It appears the lease has never been registered. It also appears no search was done on the property when the lease was prepared and "old" titles appear on the document. A new subdivision has recently been granted (approved). It is urgent that this matter be resolved. [Emphasis in original] 122 Mr Roach knew the lease had not been registered. The evidence does not reveal any development at that time which made registration urgent. It is understandable though that Mr Roach may have decided, at this stage, that he would like to have the conveyancing finalised, notwithstanding his apparent lack of interest in doing so up to that point. This appears to have been his way of reviving the topic. 123 Mr Roach said in his statement that he knew Mr Pearce in relation to other work and wrote to him because he had not, he says, been able to obtain satisfaction from other members of the firm. Mr Roach said he did not recall speaking to Mr Pearce at that time, but had left a message for Mr Nicholls, asking him to look at what Mr Roach had written on 31 May 1990. 124 On 13 June 1990, Mr Lewis telephoned Mr Roach. Mr Lewis and Mr Roach had left messages for each other. Mr Roach told Mr Lewis that he was very concerned that the lease had not been registered. He said that it appeared to him that part of lot 89 and all of lot 92A were omitted from the suggested new description of the property. Mr Roach said that there needed to be a title search in order to ascertain the correct references to title, so that the lease could be registered. Mr Lewis suggested that he instruct FM to carry out a further search and Mr Roach asked him to do that. 125 On 14 June 1990, Mr Lewis wrote to Mr Roach confirming the instructions to carry out a further title search and listing other matters which appeared to be outstanding in relation to the lease. There was a discussion of those matters on 22 June 1990 between Mr Roach and Ms C Wong, who was an associate solicitor assisting Mr Lewis. 126 On 4 July 1990, FM wrote to FS. There are two plans of subdivision referred to in the letter, the first apparently being the subdivision into 46 lots which had apparently gone into effect, and the second another lodged for approval. FM recommended redescription of the land by reference to the first of these plans of subdivision. They said it appeared that, in addition to the lots nominated by Larkins McCarthy as substituted descriptors, part of the land in four other new lots was within the land described in the lease by reference to the Crown allotments. FM identified all the new lots containing land within the original description in the lease. FM proposed a redescription for the purpose of registration as follows: That land being those parts of Lots 1C, 2C, 3C, 4C, 5B, 6B, 7, 8, 9, 10, 11, 12, 13, 14, 42, 43 and 44 on Plan of Subdivision 4909 as are comprised in Crown Allotments 89, 90, 91 and 92A and being parts of the lands comprised in Certificates of Title Volume 9877 Folio 499, Volume 9877 Folio 500, Volume 9877 Folio 501 and Volume 9877 Folio 498. FM went on to say that it would be necessary for the Titles Office to be satisfied with the description. FM suggested that the wording be submitted to the Titles Office by Larkins McCarthy for approval. 127 On 5 July 1990, Mr Lewis wrote to Mr Roach with an account for further fees, dated 26 June 1990, in sum of $2,590.24, including $1,685 professional costs and $402.80 for FM's further costs. (The balance was for the Sewells' account for $345 which might not have been paid on 23 August 1989, and $157.44 for postage, facsimile and other expenses.) 128 On 11 July 1990, Mr Roach telephoned Mr Lewis objecting to the account and complaining about delay in relation to further searches and registration. Mr Lewis had not forwarded FM's letter of 4 July 1990 to Mr Roach. 129 On 12 July 1990, Mr Lewis sent Mr Roach a copy of that letter and suggested that Mr Roach contact Mr Eager at FM if he wished to discuss the results of the search. It does not appear that Mr Roach contacted Mr Eager to clear up any such queries. 130 On 9 August 1990, Mr Roach wrote to FS objecting to the account for fees rendered on 5 July 1990. He asserted that the description of the property in the lease was incorrect, for lack of a search when the lease was prepared. (That does not appear to be correct.) He did not acknowledge that the new description proposed by FM was correct but he suggested that, if it was, it might be difficult to convince Mr Sadler's solicitor, who had a mortgage over the property, to agree to the new description. Mr Roach also said that the situation was now complicated by the further subdivision. The letter concluded as follows: Our Company referred this lease to Freehill Hollingdale and Page because it was a commercial transaction requiring particular attention because of its commercial nature. However it has been an expensive exercise with many of the problems directly related to a lack of experience of your staff. Every time we ring your staff we seem to get a $2500 bill, when the problems invariably results [sic] from incompetence of Freehill Hollingdale and Page in the beginning. Our Company has spent a very large sum of money on behalf of our joint venture on the property and it now appears we have an unregisterable lease. This makes the lease virtually worthless on the market. We want to know how the matter is to be corrected and we assume it is to your account. 131 On 28 August 1990, FS responded to Mr Roach's criticism of their handling of the matter. They said the lease was not unregisterable and worthless. They said that, as at the date of execution of the lease, the description of the property by reference to the Crown allotments was correct and that this was confirmed by a search conducted on 16 August 1988. The application for subdivision was lodged on 19 December 1988, after the lease was executed. There was unlikely to be any difficulty in obtaining Mr Sadler's co-operation in relation to redescription of the property, since it was his solicitors who first requested that the title description be amended to enable registration of the lease. FM's proposed wording was merely a refinement of the redescription proposed by Mr Sadler's solicitors. Mr Roach was asked to pay the outstanding account or instruct other solicitors. 132 On 9 October 1990, Mr Roach wrote to FS, again objecting to payment of the outstanding account. 133 On 13 December 1990, FS wrote to Mr Roach, stating that they were ceasing to act. 134 The lease remained unregistered and never was registered. The fortunes of Mr Roach and the Roach group of companies, 1988 to 1993 135 Sugetu held all the significant assets of Mr Roach and the Roach group of companies during the period 1987-1993, with the exception of two houses owned by Mr and Mrs Roach (the family home at Wahroonga and a beach house at Avoca) and a commercial unit at Turramurra owned by Sydtech. 136 Sugetu owned the property at 2 Railway Street, Lidcombe on which Roach Industries commenced the building of 53 factory units in 1987. The development was funded by bank loans. Roach Industries also borrowed on overdraft account. 137 In September 1990, Sydtech borrowed $400,000 or thereabouts to finance the purchase of the commercial unit at Turramurra. 138 There are no consolidated accounts. According to Sugetu's accounts, its nett asset position fluctuated between $1.5m and $2.5m, over that period. It was about $2m as at June 1992 and as at June 1993. There was no independent valuation of assets to support these accounts. 139 Roach Industries' nett asset position, according to its accounts, deteriorated over the period, from a deficit of approximately $14,000 as at June 1988 to a deficit of approximately $767,000 as at June 1993. 140 In the early 1990s there was a recession in Australia. Capital was in short supply and interest rates were high. Mr Roach responded to the situation in a business-like manner, selling off assets to retire debt. Sugetu's bank debt was reduced from about $2.5m as at June 1990 to about $1.0m as at June 1993. 141 The only income producing assets owned by the group were the Lidcombe factory units. Rental income on these was insufficient to service borrowings in each of the years 1990 to 1993, although the shortfall was reduced over that period from about $250,000 for the 1990 financial year to about $75,000 for the 1993 financial year. 142 Reduction in the group's bank debt was achieved by the sale of factory units. Whilst development for sale was the basic business plan, in December 1990 all units and the vacant land intended for a later stage of development were advertised for sale. As at February 1992, 41 factory units had been built, of which 29 had been sold. 143 In February 1992, the bank required Mr Roach to sell the Avoca beach house by April 1992. The sale was completed in May 1992. In March 1992, the Turramurra unit was sold. Then, in July 1992, the family home at Wahroonga was sold. The proceeds of the three sales was used to reduce debt. Whether there was any equity in the properties is not apparent from the evidence. The sales were at least necessary to reduce the cost of servicing the loans secured on those properties. 144 During 1992 and 1993, the selling programme continued at Lidcombe. In January 1993, land acquired for further development was again offered for sale. As at October 1993, 34 of the 41 factory units had been sold. 145 During 1992, financial difficulties were exacerbated when Mr Roach engaged in foreign currency trading, through Roach Industries, utilising some of the funds generated by factory unit sales. As at June 1993, a loss of nearly $150,000 had been incurred in foreign currency trading. 146 Mr Roach and his companies survived the recession but at a cost. Most of the factory units and the commercial unit at Turramurra had been sold. So had the family home and the beach house. Mr Roach was not yet out of the woods. In January 1994, the Advance Bank required partial attornment of rental income of $5,000 per month, recording that, even at that stage, sales had been insufficient to cover commitments. 147 Mr Roach provided particulars of substantial advances made by banks to his group of companies in the period 1988 to 1991. But, conformably with his evidence concerning the recession, no further advance of any substance was made until June 1995, when development of the Lidcombe site appears to have resumed and further factory units were sold. The fortunes of Winnote's peat mining business, 1988 to 1993 148 Winnote's peat mining business was not profitable in the years 1988 to 1993. 149 Mr Roach said he had a business plan for the development of Winnote's peat mining business which involved the following steps: securing rights over the deposit, defining its size and that of other deposits in the area, developing the mining method and the production method, research and development including market research, trial sales, further research and development to identify potential markets for value-added products (such as processed peats), refine mining and production methods, develop sales including export and import replacement sales, and approaching venture capitalists for development funds, including for infrastructure developments such as the construction of processing plants. 150 The Swan Marsh deposit was black peat. He understood that black peat used in Australia, particularly by the mushroom growing industry, was substantially imported from abroad. 151 Concerning the role of the SBTC (operated by Roach Industries), that entity was to co-ordinate the research and development aspects of the business plan. 152 Funds for the development of the business were to be provided by the Roach Group itself. Sydtech was the group's designated venture capital company. 153 There was a licence agreement between Winnote and SBTC for the occupation of commercial space by Winnote at the SBTC premises at Lidcombe. 154 Technical advice was obtained with a view to optimising sales into the mushroom growing market in particular. Mr Luscombe's company Revilli was retained to carry on the day to day activities and operations involved in extracting, bagging, transporting and marketing the peat. Tests were carried out by Mr Luscombe and Mr Roach. Alternative methods of extraction were studied. Visits were made to mushroom farms. It was decided to promote sale of the peat under the name Auspeat. Dr Arnold was a principle consultant. He carried out trials and reported favourably on the quality of Colac peat. Samples were provided to Mr Saddington, who was the manager of Melbourne Mushrooms, the dominant producers of mushrooms in Victoria. He reported favourably. 155 In November 1988, South Geelong Earth Boring and Drilling Contractors were commissioned to carry out test boring. Mitford Soil Engineering Pty Ltd were commissioned to carry out core sampling on six bore holes at the deposit. A copy of their report could not be found. According to Mr Roach, the report gave him to understand that the deposit was far more extensive than appeared from outcrops of peat apparent on a visual inspection of the surface of the ground. (Evidence relating to the report was admitted only as evidence concerning Mr Roach's state of mind.) 156 On 19 January 1989, the following resolutions were passed at a meeting of the directors of Winnote: 1. All operations in Winnote Pty Ltd to be conducted in other Companies. No contracts are to be engaged in this company without approval from both directors. 2. As of the 31/12/88 Winnote Pty Ltd Winnote Pty Ltd owes Sugetu Pty Ltd and its subsidiary companies $117,251.00 157 At that stage, some invoices payable by Winnote had been paid by companies in the Roach group. In his statement, Mr Roach said that the first of the resolutions passed on 19 January 1989 was adopted to protect Winnote against the possibility of having its lease terminated on the ground of the company's insolvency. Mr Roach said it was his intention to reconcile the inter-company accounts at a later time, but there was little point in doing so after the collapse of the project when a mining licence was obtained by Mr Groves. 158 In February 1989, the business name Auspeat was registered. A surface survey of the deposit was arranged. Road works were carried out. Tests continued. Export markets were explored. Samples were sent to Dubai and requests for samples were received from Japan. 159 Newspaper advertising commenced in August 1989. Marketing activities continued. 160 In August 1989, according to Mr Roach, he was informed by the Colac office of the Department of Conservation, Forest and Lands that they would not require a permit under s17A of the Soil Conservation and Land Utilisation Act until he was into large-scale production; and that he should apply as soon as he had a viable product and was in a position to extract peat commercially and in large quantities. 161 For the year ended 30 June 1989, Winnote recorded a loss of $141,615. 162 In February 1990, Mr Saddington of Melbourne Mushrooms ordered 700 bags of peat per month for April, May and June 1990, and 1,400 bags per month for July to December 1990. In June 1990, Mr Saddington said Melbourne Mushrooms would require a further 3,000m3 of Colac peat and that they had had excellent results with the peat to date. 163 In June 1990, Mr Roach retained Mr N Galante, solicitor, to arrange for registration of the business name "Anything Grows". Registration was obtained. 164 Mr Roach stated that, from about this time, his strategy was to cease to invest money in the project and to take up "a holding pattern". He says he was not prepared to invest in research and development, or to improve techniques and infrastructure without security over the resource. Winnote was committed to paying a minimum of $10,000 a year in royalties to Mr Sadler. Mr Roach says he was content with some income from the sale of bulk peat to companies such as Melbourne Mushrooms and, in bag form, to nurseries. That was business on a smaller scale than had been envisaged, he said. As an example of the policy he adopted at that time, he says he refrained from investing in a processing plant to eradicate hostile organisms, which he estimated would cost $200,000 to $300,000. Emphasis, he says, was now placed on selling off the stockpiles of peat which had been excavated. 165 During the year ended 30 June 1990, Winnote sold its stockpile of peat to Roach Industries for $129,000. The combined results of Winnote and Roach Industries for that year showed a profit of $101, 217. (Counsel for the defendants submits that this figure is inflated by the $129,000. I am not sure that is so. I will take the peat business to have made a profit in the 1990 year.) 166 Favourable test results continued to be provided by consultants. As at July 1990, Mr Roach had decided to market bagged, unprocessed peat to nurseries. The trade name "Pixie Peat" was developed. Mr Roach applied himself to marketing sales to nurseries, including the appointment of distributors. There were meetings with distributors. Sales through distributors continued. 167 For the year ended 30 June 1991, the combined results of Winnote and Roach Industries showed a loss of $27, 594. 168 For the year ended 30 June 1992, Winnote recorded a loss of $31,717. 169 On 21 July 1992, Mr Falkiner of Larkins McCarthy recorded a conversation with Mr Roach in which Mr Roach and he discussed "lack of results" and in which Mr Roach acceded to Mr Falkiner's suggestion that he (Mr Falkiner) speak to Mr Sadler about agreeing to termination of the lease. (At that stage the lease had about 11 months to run before Winnote would have the option to renew or not, as it wished.) 170 On 14 September 1992, Mr Roach was informed by Mr Falkiner, acting for Mr Sadler, that Winnote was required to make an application under s17A of the Soil Conservation and Land Utilisation Act for the consent of the Department of Conservation and Environment to the excavation. In that letter, Mr Falkiner asserted that peat extraction without such consent constituted breach of the lease. 171 By September 1992, Mr Roach had firmly in mind to dispose of Winnote's interest in the peat deposit one way or another. He recorded in his diary on 23 September 1992 "Organise sale of peat bog", on 11 October 1992 "Sell peat", and on 14 October 1992 "Resolve all matters of peat". 172 On 28 October 1992, a notice of default under the lease was sent to Winnote. In the same letter, Larkins McCarthy confirmed that a contract of sale of Mr Sadler's land had been entered into, and stated that the purchaser required evidence of compliance with planning legislation and s17A of the Soil Conservation and Land Utilisation Act. 173 On 20 November 1992, Mr Roach consulted Mr Galante of O'Brien & Galante, solicitors, and instructed him to act for Winnote in relation to the notice of default. On that date, he wrote to Mr Galante. He said the lease had not been registered because of the problem concerning title description. A considerable amount of money had been spent on research and test marketing. Mr Roach went on to say: It is a difficult product to market in the current recession. However we are interested in selling the lease prior to the end of our five years, or, having a joint venture partner in Victoria sell the product in the Melbourne Market. ... Over the past five years we have not remove than [sic] about 500 cu. m. a year. Over the past year this has been almost zero. 174 Mr Roach went on, in the letter, to mention a conversation in 1988 with Mr White at the Department of Conservation, Colac office. (According to Mr Roach's evidence that was actually in August 1989.) Mr Roach said in the letter that the venture had not achieved a continuous commercial operation of the kind said to have been mentioned by Mr White on that occasion. 175 Mr Roach, in his letter, said he wished to have Mr Galante's advice before lodging an application with the Department of Conservation. There was a need to respond to Larkins McCarthy. That was a reference to the default notice. 176 On 20 November 1992, O'Brien & Galante telephoned Larkins McCarthy and received an assurance that Mr Sadler did not intend to deny Mr Roach the lease, but wanted his co-operation in relation to obtaining the s17A permit. 177 On 21 November 1992, Mr Roach wrote to the Department of Conservation and Natural Resources with an application under s17A. His letter included the following passage: At this point we have not been able to compete successfully with the imported peats. This is not due to the quality of the peat, but rather due to the lack of capital in Australia for new ventures involving research and development. We have tested the site and removed some peat (about 2-3000 cu. m) (using rubber tyred scrappers) and the 2 stock piles have been used for research and test marketing. We have no continuous commercial use at present and there appears little hope that this may eventuate. We are hoping to continue over the next 8-10 months to find a commercial venture capitalist. If not, we will not be proceeding with the development. Subject to the above, we are hoping to give it one last go. 178 The letter states that 2000 m3 to 3000 m3 of peat had been removed as at November 1992. Assuming 2000 m3 of peat had been removed to a depth of 1 m, that equates with a surface area of 2000 m2, the figure mentioned in s17A. It appears, therefore, that a s17A permit would not have been required for some time after Winnote commenced operations in 1988, but that the need for a permit had since arisen or was at least imminent. I would infer from Mr Roach's reaction to the assertion of breach of the conditions of the lease for want of such a permit, that the need for the permit had in fact arisen by November 1992. 179 A filled-out application form was enclosed with the letter. The form called for the anticipated duration of the operation, to which Mr Roach stated, "five years". The form called for details of the method of extraction. As to that, Mr Roach stated: A trial bed has been completed using rubber tyred scrapers. No further trials are contemplated until the feasibility is completed. 180 The form asked whether plant and equipment or buildings would be installed on the site. Mr Roach answered: No buildings or plant/equipment are contemplated until after the commercial feasibility has been assessed. At this stage the site/peat appears uncommercial. 181 On 26 November 1992, O'Brien & Galante wrote to Larkins McCarthy providing evidence of insurance, a copy of Winnote's planning permit and a copy of the s17A application 182 On 20 January 1993, the Department of Conservation and Environment wrote to Mr Roach in response to the s17A application. The letter stated that the department was not prepared to issue the permit for lack of information contained in the application and for other reasons including that, as a matter of policy, the department would prefer the application to come from the landowner. It was further stated that if Winnote wished to continue with the application, it would need to provide an assessment of the present flora and fauna values of the area to the satisfaction of the department and proposals and detailed plans for development, utilisation and restitution of the area. 183 There are no half-yearly accounts which record Winnote's financial performance for the six months to December 1992, but I would infer it was poor. For the year ended 30 June 1993, Winnote recorded a loss of $118, 261. 184 To summarise, as best as can be discerned the peat mining business ran at a loss in four of the five years ended 30 June 1989 to 1993, including the last three of those years. In the last of those three years the loss exceeded $100,000. As at January 1993, the business had run continuously at a loss for some two and a half years at least, and there was no immediate prospect of improvement. 185 The loss incurred by Mr Roach in foreign currency trading during 1992 was relied upon by counsel for the plaintiffs as evidence of a capacity in the Roach Group to generate the funds which were lost and hence of at least some capacity to fund the peat mining business. 186 That is true as far as it goes. Funds were being generated from asset sales. But priority was being given to utilising those funds for debt reduction. The foreign currency trading losses represented cash flow which would otherwise have been applied in that way. Mr Roach presumably utilised some of the funds from asset sales in foreign currency trading because he thought that would be profitable, thereby generating additional funds for debt reduction. The utilisation of funds for foreign currency trading in these circumstances is not evidence that funds were available for the peat mining business on an ongoing basis. 187 The fact is, of course, that the Roach group had the capacity to fund Winnote's losses up to and including the year ended 30 June 1993 out of its own resources. That presumably was out of asset sales, there being no significant bank borrowing transactions to account for the capacity. This does not mean that the business was viable. All it means is that Winnote was a drain on Mr Roach's programme to save his business enterprise from ruin by selling unproductive and other assets to reduce debt. Winnote loses the peat deposit to Mr Groves 188 In January 1993, according to Mr Roach, Mr Luscombe asked Mr Roach if he would mind if he (Mr Luscombe) tried to find a purchaser for Winnote's interest in the peat. According to Mr Roach, he (Mr Roach) said he did not mind. It should not be thought, however, from the way this was put, that Mr Roach was less than eager to sell out. In that regard, I have referred to Mr Roach's conversation with Mr Falkiner in July 1992, his diary entries in September and October 1992 and his letter to O'Brien & Galante in November 1992. 189 Thereafter, and before 29 January 1993, Mr Luscombe told Mr Roach that he had found a prospective purchaser interested in paying about $40,000 to acquire Winnote's lease. Mr Roach said he would be prepared to sell Winnote and the peat stock pile for $40,000, to be paid to Roach Industries, that company having paid for the cost of extraction and the royalties. Mr Roach says that Mr Luscombe agreed with that and said he would contact the person. 190 On 29 January 1993, Mr Groves wrote to Mr Roach with an offer in the following terms: I would like to make you an offer of $40,000 for the company Winnote Pty Ltd, the trading names Auspeat, Pixie Peat and the leases over the black peat deposit at Swan Marsh. 191 On 9 February 1993, Mr Roach and Mr Luscombe wrote to Mr Groves as follows: We would be prepared to accept your offer on the following basis: 1. $40,000 be paid for the existing stock piles of peat to our operating company Roach Industries Pty Ltd. 2. The company and its shares (Winnote Pty Ltd) transferred to you or your nominated company for $1 each. 3. The cost of all legals to complete the sale be paid for by yourselves. 4. Our current bank guarantee be replaced by your own guarantee, as per the lease conditions. A copy of the lease is attached. ... The next 5 year option has to be renewed shortly and we are currently arranging for the sale of the deposit through a broker. In this regard we have to place a time limit on your acceptance of fourteen (14) days from the above date. (The reference to sale through a broker appears to have been puff.) 192 This was an offer by Mr Roach and Mr Luscombe to sell their shares in Winnote to Mr Groves or his nominee for $1 each on terms that Mr Groves would lodge a security bond to replace that currently held by the lessor. Secondly, it was an offer on behalf of Roach Industries, which owned the stockpile of peat, to sell that peat to Mr Groves for $40,000. Thirdly, Mr Groves was to pay the legal costs of the transaction. 193 Under this offer, ownership and control of Winnote would pass to Mr Groves or his nominee with whatever Winnote owned. That, substantially, consisted of Winnote's rights under the lease, such as they were. If the sale had proceeded, arrangements would presumably have been made, at the instigation of Mr Grove's solicitors, to ensure that Winnote would pass to Mr Groves free of debt. 194 Meanwhile, Larkins McCarthy had received a copy of the departmental letter of 20 January 1993 refusing Winnote's application for a s17A permit. On 10 February 1993, they wrote to O'Brien & Galante asking to be informed of Mr Roach's intentions and requiring matters relating to the default notice (which involved the s17A permit) to be satisfied by 1 March 1993. 195 On 12 February 1993 (the letter is incorrectly dated 1992), O'Brien & Galante wrote to Mr Roach, stating that they had received correspondence from Larkins McCarthy requesting clarification of Mr Roach's intentions in relation to the outcome of what was described in the letter as "the Extract of Industries Application". (This was an intended reference to the s17A application.) The letter went on to state: Since dictating the initial part of this letter, I have received a telephone call from the Solicitors for the landlord who have indicated that they have been informed by the Department of Energy and Mines that peat is regarded as a mineral, and in the circumstances, an Extract of Industry Licence [ sic ] will be required from the Department of Mines and Minerals. We have further been informed that the appropriate person to contact is John Mitas from the Department of Energy and Mines telephone (03) 412 7895 and mobile (03) 541 110. 196 This was garbled information. The Mineral Resources Development Act had replaced the provisions of the Mines Act in relation to mining leases, now called mining licences. A mining licence was required under that Act. It was also necessary to obtain a permit pursuant to s17A of the Soil Conservation and Land Utilisation Act, which applied irrespective of whether the mining legislation also applied. 197 On 15 February 1993, Mr Groves applied for a mining licence. In the application, Mr K Luscombe and Mr D Luscombe (presumably a relative) were named as technical advisors who would be assisting in the mining programme. 198 On 19 February 1993, Mr Roach wrote to O'Brien & Galante in the following terms. (The confusion about the correct name for the s17A application continued.) In reply to your letter of 12th February, 1993 and other subsequent developments, we reply as follows: 1. It is our intention to proceed further with the "Extract of Industries Application" [ sic ] I have enclosed a copy of the Department of Conservation and Environment (Colo Region) reply. From your letter it appears you already have a copy from Larkins McCarthy & Co. We have a buyer for the "lease" and request the landowner to lodge the application as the Department of Conservation letter indicates in (i). This will require an assessment of the flora and fauna values of the area, proposals detailing the development, utilisation and restitution of the area and justification for the area applied for (See Clause 16.1). 2. Registration at Titles Office of Lease (Clause 16.2). The landlord has failed to register the lease. We request the lease be registered. 3. Clause 16.6 states "If any provision in this Deed of its application to any party, person or circumstances is invalid or unenforceable then the remainder of this Deed shall not be affected thereby". It would appear that the lease is still valid even though the Consent by the Department of Conservation and Environment is still under consideration and a further application is necessary. As with all leases the transfer of the property should not affect the lease. We only need to notify the landlord by 30th June, 1993 to proceed with a further option of 5 years. The lease is current on 30th April, 1993, and should continue (on foot) regardless whether the property is sold or not. We have contacted the Department of Mines and Minerals and requested the information required to lodge an Extract of Industry Licence [ sic ]. The new owner will resolve this matter and has lodged a mining licence application. [Emphasis added by me for later reference] 199 The reference to requiring the landowner to register the lease is curious. Mr Roach knew it remained for him and the landowner to agree on the redescription to enable the lease to be registered. 200 There is nothing to suggest that Mr Roach was aware at the time of writing the letter of 19 February 1993 that Mr Groves had applied for a mining licence. The letter indicates an intention on Mr Roach's part to effectuate the sale of the lease. The s17A application would proceed. Registration of the lease was also now to be pursued. 201 This was the first step taken by Mr Roach to obtain registration of the lease since August 1990, when Mr Roach demanded that FS attend to registration of the lease to their account. 202 On the same date, 19 February 1993, Mr Groves wrote again to Mr Roach. The letter is dated 19 January 1993, but that is plainly an error, since it refers to a letter from Mr Roach "dated 19 February 1993" (a further error, Mr Roach's letter having been written on 9 February 1993). The letter was in the following terms: I am happy with the terms of this sale but as my solicitor is looking over the lease document and said he will have an answer for me by the end of next week or early the following week. Because of this I have to ask you for an extension of the fourteen days you have given me. When I ask for this extension I would like it to be until the 19th of March 1993. 203 On 21 February 1993, Mr Groves telephoned Mr Roach. In the course of that conversation, Mr Groves said he had applied for a mining licence "and was going ahead with the peat". In relation to that conversation, Mr Roach said in his statement, at [255]: I was aware that I had received legal advice from the Defendants that peat was a "stone" and was not a mineral and a Mining Licence was not required. The statement by Mr Groves that he was applying for a licence did not trigger any alarm bells in my mind at that time. It was my view Mr Groves did not know what was required and had made an error in applying for the licence. 204 On 22 February 1993, Mr Roach telephoned Mr Galante. There is a file note made by Mr Galante. Mr Roach says that he has no recollection of the telephone call. Mr Galante's note of the call is as follows: Re Roach 22.2.93 Telephone attendance on Roach – S.T.D. Melbourne to Sydney 18 mins now appears that Roach are in a salvage mode in relation to this investment and are not likely to proceed. he seems to assume that he is not in breach of the lease, but I indicated to him that it was my view that whilst he may have made contact with the Council on my recollection of the reading of the Lease – the failure to actually lodge the application may mean that he did not act as expeditiously as possible under the written terms and that therefore it may therefore be open to the Lessors to proceed with their notice. Roach states that when he initially made approaches to the Council and was told to proceed with his experimentations and after he had carried out his various tests then the application should be lodged. The other matter of concern is that peat has been determined to be a mineral pursuant to the department of mines and energy and that he could have secured the present rights that he has with a miner's licence. I am to look at the provisions of the lease overnight and get back to him tomorrow. 205 It appears that Mr Roach was told by Mr Galante on this occasion that Winnote was in serious difficulty in relation to default under the lease, having failed to obtain a s17A permit. The diary note records Mr Galante's understanding that peat was a mineral for mining purposes and that Mr Roach could have secured rights to the peat deposit by applying for a mining licence, but the note does not say that Mr Galante made that understanding known to Mr Roach. 206 On 23 February 1993, Mr Galante (having presumably looked at the lease overnight) wrote to Mr Roach, now advising that Winnote was truly in default under the lease by reason of not having obtained a s17A permit. He recommended that Winnote should exercise the option for renewal of the lease nonetheless and that Mr Roach should speak to the intending purchasers of the land with a view to reaching an accommodation with them (presumably with a view to the lease being treated as on foot following the sale, notwithstanding the default). 207 On 25 February 1993, Mr Galante wrote to Larkins McCarthy, putting Mr Roach's best foot forward. He said that Winnote intended to proceed with the application for a s17A permit; attention was directed to the Department's preference for the application to be made by the landowner; default under the lease for lack of the permit was denied; Winnote intended to exercise its option for a further term; any attempt to terminate the lease would be contested. 208 In fact, nothing further was apparently done by Mr Roach to obtain the s17A permit. 209 On 5 March 1993, Mr Luscombe resigned as a director of Winnote and sold his share in the company to Mr Roach for $1. 210 On 22 April 1993, heads of agreement were signed as between Mr Groves and the Haldanes, the purchasers from Mr Sadler. Mr Roach says he was unaware at the time that the agreement had been entered into. There is no reason to doubt that, but he knew it was imminent. 211 On 4 May 1993, Sewells, solicitors, wrote to Winnote stating that the Haldanes had purchased the property. 212 On 26 May 1993, a mining licence was granted to Mr Groves. It was registered on 27 May 1993. 213 Mr Roach says that, at this time, he had not heard from Mr Groves in relation to the proposed sale of Winnote and the stockpile to Mr Groves and remained of the view that Mr Groves had made an error in applying for a mining licence. 214 On 28 June 1993, Mr Roach made a diary note including the following: How long has a mining licence been required to extract peat? Owner entitled to royalty of minerals? Mr Roach says that the diary note shows his state of mind at the time to have been that he did not understand the significance of the mining licence obtained by Mr Groves. I have no reason to doubt that this was the case. 215 On 28 June 1993, Mr Roach telephoned the Department of Energy and Minerals and objected to the granting of the mining licence to Mr Groves. He was advised to put his objections in writing. 216 On the same date, 28 June 1993, Mr Roach wrote to the Haldanes care of their solicitors, Sewells, advising them that Winnote wished to renew the lease for a further five year period. Renewal of the lease was said to be subject to Winnote not being liable for the payment of the $10,000 minimum royalty payment provided for in the lease. Mr Roach also took issue with Mr Groves' entitlement to apply for a mining licence, in view of the real property lease in favour of Winnote. 217 Because of the qualification placed on renewal, the letter did not constitute a valid exercise of Winnote's option to renew. The renewal notice appears also to have been invalid because Winnote was in default for failure to obtain a s17A permit. 218 On 5 July 1993, Sewells wrote to Mr Roach advising that renewal on the terms proposed was rejected. The time for exercise of the option to renew the lease had now passed. The lease had terminated on 30 June 1993 by effluxion of time. 219 On 26 July 1993, Mr Roach wrote to the Haldanes, disputing that the lease had expired, the implication being that Winnote had validly exercised its option for renewal. In that letter, Mr Roach mentioned that Mr Groves had indicated that he would make an offer for the lease but that nothing had been heard from him since. Mr Roach said that Winnote was prepared to make an offer to exit the lease. 220 That was a last ditch stand to salvage something from the wreck. Mr Roach had endeavoured to keep the real property lease on foot, presumably in the hope of securing a payment from Mr Groves for Winnote's rights under the real property lease, such as they were, or, alternatively, of obtaining compensation for termination of the lease from the landowners. His efforts had come to naught. 221 On 15 September 1994, Mr Roach wrote to FS complaining about their initial advice, and stating that the lease now appeared to be worthless and that a third party had obtained a mining licence and was now in control of the deposit. The complaint was justified. 222 On 3 April 1995, FS wrote to Mr Roach as the "Managing Director" of Winnote. In that letter, FS said: On 27 April 1994, amendments to the Mineral Resources Development Act 1990 came into effect. From that date, it was necessary to obtain a licence to extract peat. As we advised you, (see our letter of 23 August 1988), that was not the position at the time the lease was executed. We deny that the advice given by us to you at the time was other than completely accurate, given the current state of the law. The changes referred to above occurred after we ceased to act for you. This was not correct. The 1990 legislation made no relevant change in view of the proclamation concerning peat under the earlier legislation. The reasons for the decision to sell Winnote in 1993 223 As at January 1993, Mr Roach and Mr Luscombe had the following reasons for selling Winnote to Mr Groves. (a) Winnote was trading at a loss. (b) There was an ongoing liability to pay a minimum royalty of $10,000 per year to the landowners. Complete cessation of business activity would not avoid that. (c) It was now known that a s17A application would have to be made, in order to retain the business, which was likely to be expensive. (d) The Roach group, which had funded Winnote's losses was engaged in a survival operation, realising assets to reduce debt. Retaining a loss-making business impeded that programme. 224 These reasons are sufficient to account, objectively, for the decision to sell. 225 The plaintiffs say, on the other hand, that concern about non-registration of the lease and consequent insecurity of title to the peat deposit was the reason for Winnote's business not being developed as Mr Roach had planned, and that the same concern contributed materially to the decision to sell out to Mr Groves. It is the plaintiffs' case that, if the correct advice had been given, Winnote would have had secure title to the peat deposit, the business would then have been developed as planned, and Mr Roach and Mr Luscombe would not have decided to sell out to Mr Groves as they did. 226 I am satisfied that Mr Roach was not genuinely concerned about security over the peat deposit by reason of non-registration of the real property lease. The case that such concern was the cause of Winnote being under-funded by the Roach group and, for that reason, being a loss-making business then falls away. So too, the case that such concern materially contributed to the decision to sell out to Mr Groves in January 1993. 227 There is no doubt that Mr Roach wanted the lease to be registered, but thinking that was necessary to secure Winnote's interest over the peat deposit is another matter. Mr Roach's conduct is inconsistent with such a concern. Where such a concern was stated, I believe that was done by Mr Roach for reasons other than expressing his true state of mind. I will elaborate. 228 Complaint to Mr Lewis about delay in registering the lease, in January 1989, was made in the context of having received an account for fees in December 1988 which remained unpaid until August 1989. 229 When, in April 1989, FS conveyed to Mr Roach a revision of the property description formulated by Larkins McCarthy and which was said to be necessary to register the lease, Mr Roach opted to make his own enquiries to asses the proposal rather than instruct FS to carry out further searches to clarify the situation. He then did nothing about making such enquiries for five months. That was when he attended at the Colac Shire Council offices in late August or early September 1989, at a time when he was in the district for other reasons. 230 Mr Roach says he wrote to FS on 4 September 1989, acknowledging that a search could be required after all, but querying whether that should be delayed in view of the new subdivision application which was pending. That letter might not have been sent. Assuming that it was, FS were remiss in not responding to it. But nothing further was done by Mr Roach to advance registration of the lease until he wrote to FS on 31 May 1990 complaining that registration needed to be resolved urgently. That was a further lapse of six months. 231 On FS's recommendation, FM were eventually instructed to carry out further searches, which they did. In consequence, they formulated a rewording of the property description in terms which seem to me to have been sufficient to meet the situation. 232 Mr Roach received FM's advice on 12 July 1990. Meanwhile, FS had sent a further account on 5 July 1990. That now became the focus of Mr Roach's attention until FS ceased to act in December 1990. During those five months, Mr Roach did nothing further to advance registration of the lease. He did not instruct FS to implement the proposed rewording of the lease to enable it to be registered. That is explicable in view of the dispute over fees. But he did not instruct other solicitors to attend to the matter either at that stage. 233 No further action was taken by Mr Roach to obtain registration of the lease until 19 February 1993, when Mr Roach wrote to Mr Galante. That was a further delay of two years since FS had ceased to act in December 1990. Mr Roach went to Mr Galante because the landlord was asserting default under the lease at a time when Mr Roach was endeavouring to conclude a sale of Winnote to Mr Groves. It was not the perception of a need for registration of the lease which took Mr Roach to Mr Galante. 234 This course of conduct is utterly inconsistent with a concern on Mr Roach's part that Winnote lacked security over the deposit because the lease was not registered. 235 Mr Roach says his state of mind concerning the registration issue is confirmed by a letter he drafted in mid-1990 addressed to Mr Sadler. (The letter was not sent.) In that draft, Mr Roach wrote: Dear George, RE: LEASE BETWEEN GM SADLER & WINNOTE PTY LTD I refer to our telephone conversation today regarding the above lease. As you are aware we have not received a signed and registered lease for the peat deposit. This matter has been going on for 2 years on a continuous basis at considerable cost to ourselves It now appears that the reason why the lease was not registered was that shortly after its signing you lodged a new sub-division which negated the previous titles. The description of the property, as outlined on the lease, was not accepted to the Land Titles Office. This was not of our doing. Another complication has now arisen because a further sub-division and change in titles has occurred. Again this latest sub-division was not of our doing. The bottom line is that we have no registered lease, and probably never will have. The solicitors have been playing ducks and drakes at my company's cost and we are no longer prepared for this to occur. If I as an Engineer, designed a bridge and it fell down, or couldn't be built, and you suffered injury or financial loss as a result, your solicitor would sue me for massive damages. Without a registered lease, there is no commercial value in the deposit. In other words the money spent to date on the deposit is worthless. The fault for the lease not being registrable, as initially signed, is in our opinion the fault of either or both solicitors involved, and yourself (as you instructed your solicitor). It is our intention to recover the money spent to date and our loss of potential profit, unless we get a registered lease. It is not our intention to pay for the cost of achieving this result as we have, in good faith, already paid for that result. Furthermore this matter is being referred to the … 236 The draft letter is of no weight as evidence of Mr Roach's true state of mind about the need for registration. It is consistent that the letter was drafted with the thought of persuading Mr Sadler to assume responsibility for the costs of obtaining registration of the lease. It is also consistent that Mr Roach was insufficiently concerned about registration to send the letter. 237 As against the draft letter, there are other contemporaneous documents which evidence a very different state of mind. First, there is the application for a s17A permit in which Mr Roach contended that the deposit was not a commercial proposition. There was no suggestion there that this was due to the lease not being registered. It was the deposit itself which was said to be uncommercial. Mr Roach sought to explain what he said in that application as follows: When I filled out the application form, I deliberately underplayed the viability of the Deposit, on advice, as I did not wish to be put in a position by the Department that would require an expensive Environmental Impact Statement which may have cost in the order of $500,000 as I still did not have control of the Peat Deposit. My statements to that effect that the Peat Deposit was uncommercial were correct in the context where I lacked control of the Peat Deposit and had great uncertainty over the security of that control which I did have, circumscribed as it was by Sadler's control of the land outside what was defined as the "Peat Area" in the lease and his various subdivisions. 238 The suggestion that Mr Roach could and would have found $500,000 for an environmental impact statement in November 1992, but for a perception of insecurity of tenure, is fanciful in view of the financial state of the Roach companies at that time. On the other hand, I recognise that Mr Roach may have exaggerated the poor potential scope of the peat mining operation in the hope of persuading the department to withdraw the requirement for an environmental impact study. 239 No such explanation is available in relation to Mr Roach's letter to Mr Galante dated 19 February 1993. As appears from the passages emphasised earlier in this judgment, Mr Roach requested that Mr Galante attend to registration but also said: As with all leases the transfer of the property should not affect the lease. This observation disclosed a correct understanding of the Victorian law that a tenant in possession was protected when registered property was sold. Registration was only ever for more abundant caution. It was not a critical consideration in Mr Roach's mind and never had been. 240 Mr Roach cast the net somewhat wider. His state of mind when deciding to sell out to Mr Groves is said to be reflected in what he asserts he told Mr Luscombe at that time. That is said to have been as follows: I would be prepared to sell the Company and the peat stock pile provided that I received $40,000 paid to Roach Industries Pty Ltd as it has paid for the cost of extraction and the Royalties. We could apportion that amount of money for purchase of the existing stock piles of peat. It is my view that the lease that Winnote has in relation to the peat deposit is worthless in view of the fact that it has never been registered, we have no Extractive Industries Licence, and the property has now been sold. The clauses within the lease enable the farmer to allow anybody else to mine peat in the area outside the designated peat work area and if we didn't meet our conditions, then he would be able to authorise other persons to operate within our area. As you know I have just received a letter from the Department indicating that I would have to obtain an EIS report before I can get consent to extract peat. This could cost up to ½ million dollars. The lease has to be renewed before 30/6/93. If I renew the lease I will have to pay the royalty payment of ten thousand dollars each year. 241 I give no credence to Mr Roach's capacity to recall such a conversation in such detail so long after the event. It is the product of what Mr Roach now believes his state of mind to have been at the time. Genuine recall of his state of mind, in such detail, so long after the event, is equally implausible. 242 The critical consideration is that I am unpersuaded by Mr Roach's contention that he did not fund the business because of the problem about registering the lease or that this actuated the decision to dispose of the business to Mr Groves in 1993. Not funding the business had nothing to do with that. Nor did the decision to sell to Mr Groves. 243 A mining lease and / or exploration licence in 1988 would have made no difference. Winnote would still have operated at a loss. The Roach group would still have gone into survival mode, selling unproductive assets and other assets to reduce debt. Further funding of Winnote's losses would still have been inconsistent with that programme. Holding the business would still have involved continuing expenditure in order to comply with the terms of a mining holding under the legislation. A s17A permit would still have been required with whatever expenditure that involved. Forty thousand dollars payable to Roach Industries to recoup some of the Roach group's losses in funding the business over the period 1988 to 1993 was better than the Roach group continuing to fund further losses or walking away with nothing at all. 244 Mr Roach's true reasons for not funding Winnote to a greater extent than he did were that he did not believe the business was capable of profitable development and because he was not willing and able to provide or procure further funding. 245 Mr Roach's true reasons for deciding to sell out to Mr Groves – which, I would infer, were shared by Mr Luscombe – are best encapsulated by Mr Galante's note of his telephone attendance on Mr Roach which I have mentioned. Referring to renewal of the real property lease, Mr Galante recorded (as quoted earlier): … now appears that Roach are in salvage mode in relation to this investment and are not likely to proceed. In the context of Mr Roach's letter to O'Brien and Galante of 19 February 1993, the transactions with which Mr Galante understood Mr Roach was unlikely to proceed were the renewal of the lease and the related s17A application. 246 Mr Roach had given up on the project. As part of his strategy to reduce debt by disposing of unproductive assets, the peat mining business was to go for whatever he could get for it. A mining lease, with or without an exploration licence, would have made no difference. 247 Mr Luscombe had no choice other than to go along with what Mr Roach wanted to do. Since 1989, Winnote's business had been conducted by Roach Industries, and the Roach group of companies had funded its losses. Mr Luscombe had no leverage. Besides, Mr Luscombe was running his own race. He introduced Mr Groves. He agreed to the sale on Mr Groves' terms. He gave up his interest in Winnote to Mr Roach. He went in with Mr Groves, as Mr Groves' application for a mining lease demonstrates. 248 I find that the poor financial performance of Winnote during the years 1988 to 1993 was unrelated to the problems concerning the registration of the real property lease, as the plaintiffs assert, or to concerns about security of tenure in that regard or to anything else arising from the lack of a mining lease and / or exploration licence. It was unrelated to the breach of duty on the part of FM which I have identified. The fortunes of Winnote would have been no different if the correct advice had been given. 249 I also find that the decision to sell to Mr Groves on the proposed terms was unrelated to the problems concerning registration of the real property lease, to concerns about security of tenure, or to the breach of duty by FM. The decision to sell to Mr Groves would have been no different if the correct advice had been given. Mining authorisations obtained in and from 1993 250 A mining licence (ML 4667) was granted to Mr Groves on 26 May 1993 and registered on 27 May 1993. 251 The licence was subject to conditions including the following. The licensee was to employ four competent people. The licensee was to employ a mine manager holding a certificate of competency, or temporary permit. The licensee was to undertake progressive reclamation of land in the area subject to surface disturbance, in accordance with an approved rehabilitation plan. 252 In July 1993, an operations plan was prepared for Mr Groves by Tavebond Engineers. A plan to work the deposit was approved on 27 August 1993. 253 On 21 February 1994, Mr Groves entered into a compensation agreement with the owners of the land. It provided for a payment of $4 per tonne of peat extracted from the ground, to be reviewed after two years. (It is common ground that this was materially equivalent to the $4/m3 specified as a royalty payable to the landowner in the real property lease.) 254 An authority to commence work was issued on 25 February 1994. 255 It appears that the mining licence was held by Mr Groves personally until 23 June 1996, although the business was conducted by corporate entities, apparently throughout the period 26 May 1993 to 23 June 1996. 256 In the years ended 30 June 1994 and 30 June 1995, the business was conducted by Colac Peat (Aust) Pty Ltd, a company controlled by Mr Groves. 257 In the year ended 30 June 1996 (to 23 June 1996), the business was conducted by Peat and Allied Industries Pty Ltd (PAIL), a company controlled during that year by Mr Groves and two others. 258 On 23 June 1996, Pacific Agriculture Ltd (PAL), formerly Plantations Australia Ltd, acquired all the issued shares in PAIL and the mining licence. 259 Further detail concerning the acquisition of PAIL by PAL is recorded in the accounts of PAL for the year ended 30 June 1997. It is said that, on 23 June 1996, the company executed a contract to acquire all the issued shares in PAIL and the mining licence rights. It is further recorded that the consideration given by the company was an issue of shares to the value of $2,191,606 plus stamp duty of $6,566, the consideration having been allocated 50 per cent to the cost of the shares in PAIL (plus stamp duty) and 50 per cent to the cost of acquiring the mining licence. The allocation is said to have been based upon the directors' determination of the relative values of the mine and the subsidiary. The directors' report recorded that the mining licence had not been registered but that the company was operating pursuant to exclusive registered agreements which ran for the period of the licence. 260 An exploration licence (4115) was granted to PAL on 22 July 1997 for two years, in relation to an area of 32 km2 to the north of the mining licence. 261 The exploration licence included a condition that the licensee expend on exploration a minimum of $21,720 in the first year and a minimum of $23,400 per annum thereafter, unless the requirement be varied or suspended by the Minister. 262 Although, as between PAL and Mr Groves, PAL acquired the mining licence on 23 June 1996 (at the time of acquisition of the issued shares in PAIL), the transfer was not registered until 18 December 1998. That was because of a dispute concerning the licence. In late 1993, Mr Luscombe and his brother, David, commenced proceedings against Mr Groves in relation to the licence. On 2 February 1994, they obtained an interlocutory injunction restraining Mr Groves from transferring or otherwise dealing with the licence. The accounts of PAL for the year ended 30 June 1998 record the payment of $258,000 for settlement of the dispute. 263 On 12 August 1998, exploration licence 4310 was granted to PAL for two years. It covered an additional area of 40 km2, including the area of the mining licence. 264 The terms of that exploration licence are not in evidence. Presumably, they included a minimum expenditure condition similar to that in exploration licence 4115. 265 PAL and its subsidiary, PAIL, operated the peat mine until PAL went into administration on 21 December 1998. A new operating subsidiary of PAL was incorporated during the year ended 30 June 1999, Peat Operations Pty Ltd. 266 PAL was released from administration in November 1999. 267 PAL subsequently changed its name to Biogreen Ltd and Peat Operations changed its name to Biogreen Products Pty Ltd. 268 Two further exploration licences were granted to PAL on 12 May 2000, EL 4387 and 4451. Each was for a term of two years. They replaced the earlier exploration licences. Each contains a condition requiring a minimum expenditure in the order of $20,000 per annum. 269 Exploration licences H387 and 4451 expired in May 2002. There is evidence that they were extended or replaced by later exploration licences. Financial performance of entities exploiting the deposit as from 1993 270 For the years ended 30 June 1994 and 1995, Colac Peat suffered nett losses of $205,266 and $79,809 respectively. 271 For the year ended 30 June 1996, PAIL suffered a nett loss of $128,140. 272 For the years ended 30 June 1997, 1998 and 1999, PAIL suffered nett losses of $351,144, $412,207 and $595,667. 273 For the year ended 30 June 2000, PAL suffered a nett loss of $1,432,792. (There are no separate accounts for the subsidiary, PAIL, for that year.) 274 For the years ended 30 June 2001, 2002 and 2003, Peat Operations / Biogreen Products suffered nett losses of $865,374, $502,523 and $1,080,708. Winnote would have obtained an exploration licence and a mining lease in 1988 275 Mr Roach gave evidence of what he would have done if the correct advice had been given. He said, in his witness statement (Exhibit G), that he would have caused Winnote to apply, first, for an exploration licence and then, after assay of the deposit, a mining lease over the most favourable location. Later, in his oral evidence, he said he would have applied in his own name, allowing Winnote to exploit the resource on the same terms as had been negotiated for Winnote with Mr Sadler in relation to the real property lease. 276 This shift demonstrates the inherent unreliability of direct evidence as to what a person would have done. Evidence of this kind is not evidence of the ordinary kind. It is not evidence of what the witness did or observed. It is really the witness' opinion as to what he or she would have done in a hypothetical situation. The admissibility of such evidence is entrenched. That, however, leaves the question of weight. As was said in Dominelli Ford (Hurstville) Pty Ltd v Karnot Auto Spares Pty Ltd (1992) 38 FCR 471, 483 (per Beaumont, Foster and Hill JJ) such evidence "might well be regarded as carrying little weight". Where the witness is a party with an interest in the proceedings, the court is generally in a better position to opine reliably on the question, by reference to context and probability, than is the witness. 277 In view of the inconsistency in Mr Roach's evidence as to what he would have done, I give no weight at all to his evidence on this topic. 278 The first question is whether any application for a mining lease or an exploration licence would have been made by Mr Roach on his own behalf or on behalf of Winnote. 279 For Mr Roach to have obtained such an instrument on his own behalf would have been morally wrong and in breach of Mr Roach's fiduciary duty to Winnote as a director of that company and to Mr Luscombe as a co-venturer. I do not believe Mr Luscombe would have stood for it. The law would then have been on his side. More particularly, I believe that Mr Roach would, on consideration, have done the right thing and would have applied on behalf of Winnote. 280 For the purpose of deciding whether Mr Roach would have applied for a mining lease and / or an exploration licence on behalf of Winnote, it is necessary to review the geographical relationship between the peat deposit, the Sadler land, the Revilli deed of licence and the mining and exploration licences later granted. 281 In January 2000, AP Bravo & Associates, consulting geologists, made a technical report following a drilling and sampling programme, to assay the Swan Marsh peat deposit. In that report, it was stated that the peat deposit is located in a shallow basin-like depression of about 6.5 km2 (equals 650 ha). In these proceedings, the depression has been referred to as "the hambone", the shape of the depression conforming to that of a leg of ham. 282 The land owned by Mr Sadler is described in Certificate of Title Volume 8847 Folio 239 as having an area of 2,546 acres, three roods and ten perches or thereabouts (approximately 1,030 ha), being Crown allotments 70A, 70B, 72B, 88AA, 89, 90, 91, 92A, 92B and 93, together with parts of Crown allotments 72, 72A, 73 and 74, parish of Irrewilipe, and parts of Crown allotments 1B, 1C and 1L, parish of Pirron Yaloak. 283 Some of the peat deposit, as delineated by the outline of the hambone, was outside the Sadler land. In particular, a notch into the Sadler land at its northern boundary and also the extremity of the leg of the hambone were outside the Sadler land. I would estimate that something in the order of 90 per cent of the deposit as delineated by the hambone was within the Sadler land. 284 There is some evidence of peat being visible on the surface of the land some six or seven kilometres from the Sadler property. But there is no evidence that there was any commercially significant quantity of peat beyond the boundaries of the hambone area. 285 Some of the Sadler land lay outside the hambone, in particular, lots 70A, 70B, 71 and 72. I would estimate that 75 per cent of the Sadler land was within the hambone area which defined the peat deposit. 286 The deed of licence between Mr Sadler and Revilli covered Crown allotments 89, 90, 91 and 92. That did not include the whole of so much of the peat deposit as lay within the Sadler land. Of the Crown allotments within the Sadler land which were also within the hambone area, the deed of licence did not cover lots 1B, 1C, 1L, 88A, 92A, 92B and 93. 287 It is not known why the deed of licence did not cover those lots. Mr Groves might not have wanted them for some reason. Mr Sadler might not have wanted to permit mining on them for some reason. 288 The evidence does not include a measurement of the area covered by the deed of licence. I estimate that the deed of licence covered something in the order of 80 per cent of so much of the deposit as was within the Sadler land and perhaps 75 per cent of the total deposit as delineated by the hambone configuration. 289 That is the geographical context in which it is to be decided what would have been done if the correct advice had been given. 290 A mining lease was available under the Victorian mining legislation. So was an exploration licence, over a much larger area. It is reasonable to suppose that these instruments could have been obtained by Winnote broadly in the same form as were obtained by others at a later date. 291 Mining licence 4667 (granted to Mr Groves on 26 May 1993) covered an area of 236 ha (the maximum for such a licence being 260 ha), located wholly within the area covered by the real property lease. It covered Crown allotments 90 and 91 and part of Crown allotment 89. 292 I estimate that the mining licence covered something in the order of 75 per cent of the peat deposit covered by the deed of licence and by the real property lease, something in the order of 50 per cent of the peat deposit within the Sadler land and perhaps 45 per cent of the total deposit as designated by the hambone configuration. 293 No exploration licence was obtained by Mr Groves, Colac Peat (Aust) or PAIL during the period 1993 to 23 June 1996 (when PAL acquired PAIL), nor by PAL until 22 July 1997. Exploration licence 4115 was granted to PAL on that date. It covered 32 km2 (equals 3,200 ha) to the north of the hambone area. 294 Exploration licence 4310 was granted to PAL on 12 August 1998. It covered 40 km2 (equals 4,000 ha) which included the hambone area. 295 Mr Roach consulted FS in 1988 with a view to securing rights in favour of Winnote over so much of the peat deposit as was covered by the Revilli deed of licence. It was not possible at that time to obtain a mining lease (later, a mining licence) over an area as large as that covered by the Revilli deed of licence. The mining lease obtained by Mr Groves in 1993 was for a little less than the maximum area for such a lease (236 ha, compared with 260 ha). As I have observed, the area covered by Mr Groves' 1993 mining lease covered something in the order of 75 per cent of the land covered by the deed of licence and by the real property lease. The proportions would not have been significantly different for a mining lease granted in 1988 for the maximum area under such a lease. 296 In other words, the maximum area under a mining lease would have been something like 25 per cent less than the area covered by the Revilli deed of licence which Mr Roach went to FS to secure. 297 In these circumstances, I do not doubt that, if Mr Roach had been given the correct legal advice, he would have been looking to secure mining rights over an area more extensive than the 260 ha allowed under a mining lease. That would have been achieved by obtaining an exploration licence. 298 Once that course of action came under consideration, there would have been no point in confining the application for an exploration licence to the area covered by the Revilli lease, nor even to the Sadler land. I do not doubt that an exploration licence covering at least the whole of the hambone, which extended somewhat beyond the boundaries of the Sadler land, would have been obtained. 299 I make that finding notwithstanding that no-one else operating the business as from 1988 obtained any such exploration licence until July 1997, contenting themselves with the mining licence covering only 236 ha which was obtained by Mr Groves in 1988. I distinguish the conduct of others for two reasons. First, others did not begin with the intent of obtaining mining rights over an area larger than could be covered by a mining lease or, later, by a mining licence. Secondly, I have had the opportunity of learning a good deal about Mr Roach's personality and business acumen. If there was an easy way of obtaining exclusive rights over a more extensive area than would have been covered by a mining lease, I believe his inclination would have been to pursue that course. 300 I should mention a problem in this connection, but only to dismiss it. Mr Roach retained FS to provide advice which would enable Winnote to secure mining rights over the area covered by the Revilli deed of licence. Can the defendants then be liable for the consequence of Winnote not obtaining such rights over any area beyond that covered by the Revilli licence? The question might be categorised as one relating to scope of duty or to causation of damage or to remoteness of damage. Theoretically, it might preclude recovery for any loss resulting from a failure to secure mining rights beyond the area covered by the Revilli deed of licence. 301 The question is academic. As I have said, the area covered by the Revilli deed of licence represented something in the order of 80 per cent of so much of the peat deposit as was within the Sadler land and perhaps 75 per cent of the total deposit as delineated by the hambone configuration. Nothing turns on a failure to secure 100 per cent of the deposit rather than 75 per cent or 80 per cent of it. 302 I find that, if the correct advice had been given, Winnote would have obtained an exploration licence extending over at least the whole of the peat deposit defined by the hambone configuration described in the 2000 Bravo report. It would have contained a condition relating to minimum annual expenditure similar to that contained in the exploration licences granted to PAL in 1997, 1998 and 2000. 303 Winnote would also have obtained a mining lease identical to that obtained by Mr Groves in 1993 or, if not identical to it, then substantially in the same form. Such a lease was necessary in order to extract peat. As for location, the area covered by the Groves mining licence included the area from which peat had been extracted by Revilli and from which peat was later extracted by those who operated the business subsequently. It is reasonable to assume that whatever motivated Mr Groves to designate the area for a mining licence in 1993 and others to continue that licence over the same area would have operated from Winnote's standpoint in 1988, with the same result. 304 Such a mining lease would have contained a condition relating to employment of labour similar to that contained in the mining licence granted to Mr Groves in 1993. 305 Whether Winnote would have continued to hold an exploration licence in 1993 is uncertain. There would have been the condition for annual expenditure. In view of the financial constraints on the Roach companies in the early 1990s, there would have been strong reasons for avoiding expenditure of that kind. The minister could vary or suspend that requirement. Whether he would have done so in response to the adverse economic conditions of the early 1990s I do not know. It is also possible that, five years on from 1988, no further exploration operations would have been warranted and Mr Roach and Mr Luscombe would, by then, have let the exploration licence go without further renewal, resting content with the mining lease they would have had, as others appear to have done subsequently. Would the Groves transaction have been completed but for the defendants' negligence? 306 If the correct advice had been given, Winnote would have had exclusive mining rights over the peat deposit in 1993. As I find the facts, that would have made no difference to the financial performance of Winnote in the years 1988 to 1993 or to the decision by Mr Roach and Mr Luscombe to sell to Mr Groves on the proposed terms. 307 Mr Groves was willing to acquire Winnote and the peat stockpile on the proposed terms subject only to his solicitor being satisfied with the real property lease. There is no reason to suppose that he would not have been willing to acquire Winnote and the stockpile on the same terms if Winnote had exclusive mining rights under the Victorian legislation plus or in lieu of a real property lease. That he had the financial capacity to fund the acquisition is apparent from his capacity to fund the expenditure which produced the losses subsequently incurred. 308 I find that, but for the breach of duty by FM, the Groves transaction would have been negotiated as it was and would have been completed in 1993 as was proposed. 309 The implications of this finding remain to be taken into account later in this judgment. I mention here, however, one possible implication which I will not take further. It is as follows. 310 The plaintiffs say that, if the defendants had given the correct advice, they (it can only be Winnote) would have had exclusive rights to the deposit in 1993, and that they lost the opportunity of exploiting the deposit for want of such exclusive rights when Mr Groves obtained a mining licence to their (Winnote's) exclusion. They claim damages accordingly for the loss of the opportunity to exploit the deposit as from 1993. 311 I have found that Winnote would have been sold to Mr Groves in 1993 if Winnote were to have had had such exclusive rights at that time. After I had reserved my decision it occurred to me that such a finding might work to limit Winnote's damages to whatever benefit it would have derived from ownership of such rights as from 1993 following such a sale. 312 I raised this approach with counsel after I had reserved my decision. For the reasons set out in my judgment No.36 in these proceedings (Roach & Ors v Page & Ors (No.36) [2004] NSWSC 776), given on 27 August 2004, I will not be entertaining that approach. 313 One implication arising from that finding which I will implement is that Winnote cannot claim to have suffered a loss by reason of the Groves transaction not being completed. That is because Winnote would have derived nothing from the sale. It was the shares that were to be sold (for nominal value) and the sale of the peat stockpile was to be to Roach Industries' account. 314 Another implication is that, if the sale had been completed, Mr Roach would have ceased to have any role in the management of Winnote. In my judgment No.36, I said this implication would be taken into account, so that evaluation of the plaintiffs' claim for damages would proceed on the basis that Winnote would have ceased to be under Mr Roach's management as from 1993. Expectation damages: a valuation case 315 The plaintiffs presented their case for expectation damages as one involving loss of a chance. It is not a loss of a chance case. It is a valuation case. 316 The over-arching general principle is that a plaintiff who has suffered harm as a result of breach of contractual duty or breach of a duty of care in tort is entitled to the amount of damages which would put the plaintiff in the same position as the plaintiff would have been in but for the breach: Robinson v Harman (1848) 1 Ex 850. 317 Compensable loss involves a comparison between a hypothetical state of affairs and an actual state of affairs. The hypothetical state of affairs is what would have happened but for the defendant's breach of duty. The actual state of affairs is what has in fact happened. The difference is the compensable loss. 318 Here, the hypothetical for Winnote is an exclusive right to exploit the deposit as from 1993. The actual is no entitlement to exploit the deposit at all. The difference is an exclusive right to exploit the deposit as from 1993. 319 Another way of expressing this is to say that Winnote lost the opportunity of exploiting the deposit as from 1993 to the exclusion of others. An opportunity to exploit a resource to the exclusion of others is the same as an exclusive right to exploit the resource. Stating the question in terms of loss of opportunity does not change the nature of the inquiry. 320 Either way – loss of an exclusive right to exploit or loss of the opportunity of exploiting to the exclusion of others – the loss is equivalent to loss of the resource itself. An exclusive right to exploit is equivalent to ownership. In plain terms, the loss suffered by Winnote in 1993 was loss of the deposit. The question is then: What was the value (if any) of the deposit? 321 The defendants say that the correct question is: What was the value of a mining lease over the deposit in 1993? That formulation relates to what the plaintiffs would have had if the correct advice had been given and, accordingly, what was lost to them when Mr Groves, in 1993, applied for and obtained the mining lease which they would have had. In that sense, their loss was the loss of a mining lease over the deposit as from 1993. 322 This is no different in substance from my formulation. A mining lease gave an exclusive right to exploit the deposit. It was equivalent to ownership of the deposit. The value of a mining lease over the deposit equates with the value of the deposit itself. 323 In rejecting the plaintiffs' test in favour of mine and the defendants', I am fortified in my approach by the decision of the Court of Appeal of the Victorian Supreme Court in Waribay Pty Ltd v Minter Ellison [1991] 2 VR 391. 324 In that case, the appellant Waribay had retained Minter Ellison in relation to a transaction whereby Waribay expected to gain control of a company David Linacre Pty Ltd. Minter Ellison gave certain advice and prepared documentation which was executed by those concerned. Waribay was to obtain an option to subscribe for convertible notes to be issued by Linacre and Waribay's nominees (intended to be Waribay's directors) were to become directors and secretary of Linacre. 325 When the time came for performance, it was found that the exercise of the option to subscribe for convertible notes and the exercise of the right of conversion did not give Waribay control of the board of Linacre and that Waribay's nominees were not qualified to be directors of Linacre under Linacre's articles of association. Minter Ellison acknowledged that the failure of Waribay's plan to acquire control of Linacre was due to fault on its part. 326 The trial judge found that no case for damages had been made out save for recovery of legal expenses. 327 Waribay had contended at the trial that it should be compensated for the lost opportunity of taking control of the company and of deriving a financial advantage even if the chance of achieving that outcome was less than 50 per cent. Minter Ellison contended that Waribay's loss was to be measured by valuing the shareholding in Linacre which Winnote had failed to obtain. 328 In their joint judgment on appeal, Young CJ and Kaye J (at 398) saw the critical question as being: what is it that the appellants lost? It was held (at 400) that the correct measure of damages was not the loss of a chance to obtain a controlling interest in Linacre. Taking an expression from McRae v Commonwealth Disposals Commission (1951) 84 CLR 377, their Honours said that "the element of chance lay in the nature of the thing contracted for itself". What was contracted for and lost was the expected controlling interest in Linacre, whatever that might be worth. 329 Their Honours said (at 401): The learned judge was satisfied, as we have already said, that the necessary causal connection had been established between the negligence and "what may loosely be described as the loss of the company ". In spite of the looseness of the expression, it does essentially describe what the appellants lost, viz. "an interest in the company". It was for the loss of that interest that the appellants were entitled to be compensated in damages. Those damages were to be assessed according to or based upon the value of the interest at the time when the appellants failed to obtain it as a result of the respondents' negligence. [Emphasis added] 330 The trial judge had adopted that test. In the result, as their Honours recorded (at 401), the trial judge was not satisfied that the shares in Linacre were of value. In particular, he was not satisfied that profitable trading would continue or that Linacre would have traded profitably if Waribay's directors had taken control of it. 331 Their Honours held (at 401) that the trial judge's approach to the question of assessing the loss was appropriate and that the attack by Waribay should fail. 332 Murphy J dissented, holding that it was sufficient if control of Linacre may have had some value, as the trial judge held was the case. It was then for the court to assess the worth of that possibility, which the trial judge had failed to do. That was the way Waribay put its case on appeal. 333 The appeal was accordingly dismissed. 334 I respectfully agree with the reasoning of the majority in Waribay. In the present case, what was lost by Winnote was the peat deposit, whatever it was worth. The correct measure of damages is the value (if any) of the deposit as at early 1993. 335 Peat was a marketable product in Australia in 1993 and thereafter. But it is not self-evident that a marketable substance which is in the ground has a value. There are many deposits of marketable substances which have no value because the substance cannot be extracted and sold at a profit. 336 The fact is that neither Winnote nor any of its successors in title have made money out of this deposit, except perhaps Winnote / Roach Industries in one year (see earlier). Otherwise, there has been a consistent history of loss, as recorded below. (The entities which have operated the business since 1993 are introduced earlier in this judgment, under "Exploitation of the deposit since 1993".) Years Ended Entity Net Loss 30 June 1994 Colac Peat $205,266 30 June 1995 Colac Peat $79,809 30 June 1996 PAIL $128,140 30 June 1997 PAIL $351,144 30 June 1998 PAIL $412,207 30 June 1999 PAIL $595,667 30 June 2000 PAL $1,432,792 30 June 2001 Peat Operations / Biogreen Products $865,374 30 June 2002 Peat Operations / Biogreen Products $502,523 30 June 2003 Peat Operations / Biogreen Products $1,080,708 (There are no separate accounts for the subsidiary, PAIL, for the 2000 year.) 337 The plaintiffs sought to make a case that the deposit had a value, and as to what that value was, by three categories of evidence: first, a discounted cash flow valuation exercise; secondly, evidence of an investment in Biogreen by Whinners Pty Ltd; and, thirdly, evidence which focused on two particular sale lines during the period 1993 to date. The plaintiffs' discounted cash flow exercise 338 The discounted cash flow (DCF) method is commonly seen in valuing businesses with an established pattern of performance. Nett earnings (income less expenditure) are projected over a period (usually 20 years). The projected nett earnings are then discounted for present value, for the risk associated with the kind of business involved and for any special risk associated with the particular entity. (Earnings after 20 years are usually insufficiently significant after discount to be taken into account. Sometimes a modest lump sum is included for earnings beyond 20 years.) 339 In the present case, beginning with Winnote's nett earnings prior to 1993 and / or with the nett earnings of those entities which have exploited the deposit since then would have yielded a nil value for the deposit, the history having been one of consistent loss. To support a DCF valuation which would attribute a positive value to the deposit, it was accordingly necessary for the plaintiffs to put forward a projection of revenue and expenditure based on a business operation which was different from any which had actually occurred. 340 The starting point in establishing such a projection was to adduce evidence concerning favourable features of the deposit itself and of the potential market for the product. As to the deposit, there was evidence in relation to the size of the deposit, its location and the quality of the peat. As to potential markets, the evidence included evidence of the demand for peat as a growing medium in horticulture (substantially for potting mixes) and in the mushroom trade (for casings). There was also evidence of the cost of imported peat and of other imported products which competed with peat, of the potential for market substitution and of a potential export market. There was also evidence asserting deficiencies in the way the business had been run by Winnote's successors, related to the markets targeted, a lack of quality control and, with that, damage to the reputation of peat from this deposit and to the reputation of Australian peat generally. 341 On such assumptions in relation to the deposit itself, potential markets and reasonable management practices, the plaintiffs sought to build up a projection of profitable operations for 20 years as from 1993. 342 As to management, the plaintiffs sought to distinguish their projection from the performance of the business under Winnote's successors by reference to how Mr Roach said he would have run the business. As I have mentioned, this approach is not available to the plaintiffs because, if the correct advice had been given, Winnote would have been sold to Mr Groves in 1993 and Mr Roach would have had no further role in Winnote's affairs. However, the plaintiffs are entitled to advance Mr Roach's evidence as to how he would have run the business as evidence of how the business could have been run under what the plaintiffs say would have been reasonably competent management. Mr Robertson's performance projection 343 The development of the plaintiffs' cash flow projection for the purpose of these proceedings commences with figures relating to the year ended 30 June 2000. PAL had come out of administration during the previous year. 344 Mr G Macdonald was chairman of PAL. Mr N Farnan was chief executive officer. PAL was now called Biogreen Ltd. 345 Mr Farnan was the chief executive officer of Biogreen from October 1999 until early 2003. Relevantly, he had been employed for six months in the year ended 30 June 1995 as a marketing executive by a manufacturer of foodstuffs in New Zealand. During that time he completed an MBA degree. He subsequently worked for the same company as a marketing executive for about 15 months including the year ended 30 June 1997. He was then employed as a strategic development manager with a stock and station firm in New Zealand during the years 1997 to 1999. 346 Mr B M Robertson, a mining industry consultant was retained by the plaintiffs' solicitors to produce a report for the purposes of these proceedings. He holds a Bachelor of Science degree from the University of Western Australia and an MBA from the Curtin University of Technology, Western Australia. He is a member of the Australasian Institute of Mining and Metallurgy. According to his curriculum vitae, Mr Robertson has commercial and technical experience in relation to exploration and mining operations, banking and project development management. His banking experience was as an associate director with Macquarie Bank Ltd during the years 1992 to 1997, involved in credit risk management and the commercial evaluation of business opportunities as well as marketing of financial products in the Bullion and Commodities Division of the bank. He had extensive experience in providing consultancy and management services to mining companies including coal mining companies. 347 In his report dated 25 May 2000 (which is an annexure to his affidavit of the same date), Mr Robertson expressed the opinion that "the fair value of the alleged loss incurred by the plaintiffs is between $14.85m and $19.33m, with a preferred loss value of $16.42m." That opinion was qualified by the observation that revision might be required on receipt of more definitive data, particularly in relation to operating costs. 348 In the course of his report of 25 May 2000, Mr Robertson endorsed the business plan outlined in an affidavit sworn in these proceedings by Mr Farnan. He described the plan as "a sensible and logical course of action which should be successful and practical to implement". 349 Mr Farnan's business plan, as described in his affidavit of 12 May 2000, involved five steps: assessing the resource, assessing the product, assessing the current and potential market for peat locally and off-shore, developing production and process methods and developing long-term commercial viability. The affidavit detailed progress in implementing that plan including the reviewing of existing data and the commissioning of various investigations and reports. A processing facility was to be built at the mine site. Three prospective market areas were identified: bulk and packaged peat, high-value peat sales (fertilizer and insecticide blends), and bio-remediation and a broad spectrum of environmental applications (the use of peat in effluent, heavy metal and other liquid-based industrial treatments). 350 Mr Farnan also said in that affidavit that a public listing or further private placement was envisaged within two years but that it would take at least another six months for a clear perception of the value of the company for share-holders to emerge. He added that he was budgeting to spend approximately $1.2m to achieve the necessary investigation and to implement the foregoing business plan. It was intended to fund the programme by sales of peat and share-holder contribution. 351 It was in this context, that, in May 2000, Mr Robertson was approached by Mr Macdonald to utilise the work he had done in producing his affidavit of 25 May 2000 towards the preparation of a strategic plan for Biogreen. It was Mr Robertson's understanding that the strategic plan was to be produced for the purposes of raising capital. Conformably, the need for an injection of capital was apparent from Mr Farnan's evidence (see above). 352 Mr Robertson commenced work on a strategic plan for Biogreen in August 2000. Between 1 and 17 August 2000, he constructed an equity and cash flow model which provided the frame work for the strategic plan. On 17 and 18 August 2000, he visited the site at Colac. He conferred with Mr Macdonald and Mr Farnan. 353 In the course of that work, Mr Robertson acquired more detailed information about Biogreen's business than he had when he prepared his report of 25 May 2000. With that benefit, Mr Robertson produced a supplementary report, dated 28 November 2000, which is annexed to his affidavit in these proceedings of the same date. 354 Mr Robertson's supplementary report provided no revised opinion as to the plaintiffs' loss but it provided a revision of some of the data and evaluations presented in his first report. 355 So far as is relevant, the revised data and evaluations are incorporated in four documents referred to in the second report. One of these documents is Appendix K, "Assumed production levels of fibrous and humic peat by market type". It provides projected sales by volume, in categories which include export sales, sales into the mushroom growing industry and sales into the nursery industry, for each year from 2001 to 2020. This document was said by Mr Robertson to have been produced by Mr Farnan in close consultation with Mr Robertson, drawing on Mr Farnan's knowledge of the export and domestic markets and a market analysis carried out by Mr Robertson himself. 356 In his affidavit of 7 February 2001, Mr Farnan confirmed that Appendix K was produced by him in consultation with Mr Robertson based on information and data obtained and analysed by Mr Farnan. 357 Appendix K did not take actual sales in a base year as its starting point. It took forecasted sales for the year ending 30 June 2001 as its starting point. 358 Mr Robertson said the production estimates in Appendix K were reasonable. He based that opinion on the relativity between the forecasted figures and the size of existing markets. This assumed a certain degree of market penetration. Why that degree of market penetration was likely rather than, say, half of it or double it was not explained in the report. Forecasted export sales (which constituted about 50 per cent of total projected sales) were pure speculation, there having been little in the way of export sales in the history of the business since 1988. Speculation was compounded in relation to the assumed increases in forecasted sales over the period 2001 to 2020. 359 Exhibit BRC4 to Mr Robertson's report of 28 November 2000 includes Table A, "Biogreen fibrous and humic peat pricing structure". This incorporates a set of prices for various products on the domestic market (year unspecified) and export prices for the same products for each of the years 2001 to 2005. 360 According to a note to the table, the prices are said to be from Biogreen's price lists. Mr Robertson said in his report of 28 November 2000 that these were Biogreen's current product prices as provided by Mr Farnan in September 2000. (That could not be correct in relation to the projected export prices in the table for the years 2002 to 2005.) 361 Exhibit BRC2 to Mr Robertson's report of 28 November 2000 is entitled "Product cost model". It is a table providing production costs for various product lines. This is said by Mr Robertson to have been provided to him by Mr Farnan in August 2000 as being Biogreen's budgeted unit operating costs. Mr Farnan said in his affidavit of 7 February 2001 that the data was drawn from daily production reports for the months of August, September and October 2000. 362 These cost figures had then been modified by Mr Robertson in consultation with Mr Farnan for the purposes of Mr Robertson's report of 28 November 2000. The modified figures are in Appendix I, "Biogreen detailed operating costs by product line". Appendix I was endorsed by Mr Farnan in his affidavit of 7 February 2001. 363 In his affidavit of 15 February 2002, Mr Farnan mentioned that the processing plant had, as planned, now been built at Colac, at a cost of $900,000. 364 Also exhibited to Mr Farnan's affidavit of 15 February 2002 was a valuation dated 1 January 2002 prepared for Biogreen by Mr C Young, consulting geologist, in the sum of $7.5m (which was admitted into evidence but not as evidence of the facts and opinions stated therein). 365 Mr Robertson's projections as to sale volumes (Appendix K), product prices (BRC4) and costs (BRC2) as presented in his second report became the basis for a DCF valuations by other expert witnesses called in the plaintiffs' case. Sales revenue for each year could be calculated by multiplying projected sale volume by price for each product line. On this basis projected sales revenue for the year ending 30 June 2001 was $4,378,848. 366 I pause here to evaluate the reliability of Mr Robertson's projections. 367 First, Mr Robertson's projections cannot be regarded as unbiased. His independence as an expert witness is compromised by his work for Biogreen. In that regard, his brief was to produce a strategic plan for capital raising purposes. This was in line with Mr Farnan's business plan. That involved assisting Biogreen to look as attractive to prospective investors as could reasonably be done. Mr Robertson's role was to assist the company to put its best foot forward. It was in that context that data was obtained and evaluations were made by Mr Robertson which fed into the foundational documents produced by him in conjunction with his second report. 368 Secondly, there is the lack of any secure basis for the sales projections in Appendix K for the year ending 30 June 2001. I have mentioned the unsatisfactory rationale for domestic market penetration, the speculative nature of projected export sales and the speculative nature of projected increases in sales for ensuing years. 369 Thirdly, there was no check by Mr Robertson of his forecasts against performance by Biogreen during the years between his affidavit evidence in the year 2000 and the trial. That, one would have thought, was the most obvious thing an expert in his situation would want to do. Indeed, one would have expected that he would have wanted to substitute actual performance figures for those which had been forecasted and to revise future projections from an up-to-date base. That would be so unless the company had failed to follow the business plan which was in place when the projections were made or unless there were external events which had impeded implementation of the plan. Then it would have been a matter of revising the earlier exercise having regard to the effect of such factors on actual performance rather than ignoring the actual performance of the company in the intervening period altogether, as Mr Robertson did. 370 Mr Robertson does not seem to have given a thought to the fact that his projections were stale until he had to concede in cross-examination that actual performance during the intervening period was relevant. This reflects adversely on his standing as an expert witness upon whom the court can rely for the foundation of the plaintiffs' DCF exercise. 371 Actual performance had in fact fallen far below Mr Robertson's projections. In relation to the year ended 30 June, Mr Robertson's projected sales revenue (projected sales volumes times prices) was $4,378,848. By June 2001 (that is, within 6 months or so of Mr Robertson's report of 20 November 2000), Biogreen itself was budgeting only $1,868,905 in sales revenue for the year ended 30 June 2002. By January 2002, that had been revised down to $1,014,023. Accounts for the year recorded sales revenue of $568,496, about one quarter of Mr Robertson's forecast (and an operating loss of about $500,000). 372 In a number of respects, Mr Robertson, not surprisingly, had to concede in cross-examination that his projections were seriously flawed. He agreed that his projected sales volumes did not appear reasonable in view of Biogreen's own budgeted sales volumes. (His projection for export sales was virtually four times that for which Biogreen itself – over-optimistically, it turned out – had budgeted.) His average selling price computed to nearly double a computation of Biogreen's budgeted average selling price, requiring a concession that the projected sales volumes in Appendix K might not be reasonably justified. There were also significant differences between his assumed selling prices and those in Biogreen's budgeted selling prices. 373 Mr Robertson's projections were just as inconsistent with performance in relation to the year ended 30 June 2003: projected sales revenue $6,519,187, actual $739,945 (and an operating loss of about $1m). 374 It was submitted on behalf of the plaintiffs that Mr Robertson's opinion that the production estimates in Appendix K were reasonable was not challenged in cross-examination. Taking the cross-examination as a whole, I do not think that is correct. However, even if it be correct, there is nothing in the point. As was stated by Rolfe AJA (with whom Sheller JA and Davies AJA agreed) in M and EM Hull Pty Ltd v Thompson [2001] NSWCA 359 at [21], expert evidence not so challenged may be rejected where, for example, the report is ex facie illogical or inherently inconsistent, or where it is based on an incorrect or incomplete history, or where the assumptions on which it is founded are not established. See also Scalise v Bezzina [2003] NSWCA 362, per Mason P (with whom Santow JA and Brownie AJA agreed) at [94]-[98]. Stricter statements concerning the application of the rule in Browne v Dunn (1893) 6 R. 67, such as in Precision Plastics Pty Ltd v Demir (1975) 132 CLR 362 per Gibbs J at 370-371, should now be read as confined to the facts of the particular case. Here, the assumptions made by Mr Robertson did not rationally support a conclusion that the production estimates in Appendix K were reasonable. Furthermore, Mr Robertson's projections were challenged in some detail in the filed evidence of the defendants' expert witness, Mr Bryant. The plaintiffs were on notice that the reliability of the production estimates in Appendix K was in issue. 375 Mr Robertson's projections do not provide a reliable basis for a DCF valuation of the peat deposit. Valuations by Mr Humphreys and Mr Lonergan 376 Using Mr Robertson's projections as a base, DCF valuations were prepared by two witnesses called by the plaintiffs, Mr Humphreys and Mr Lonergan. 377 Mr Humphreys applied Mr Robertson's projections for the years ended 2001 and following to the years ended 30 June 1993 and following; Mr Lonergan applied Mr Robertson's projections to the years ended 30 June 1994 and following. 378 The rationale for the transposition was that Winnote had ceased production in 1993 so that the deposit stood to be valued absent an ongoing business element. There was a similar context in 2000, Biogreen having recently come out of administration following a history of loss-making operations in the period 1993 to 1999. 379 Mr Robertson, in effect, conceded, however, that transposition of his projections to an earlier start date was not so simple. To be valid, market conditions would have had to be the same or very similar. Mr Robertson conceded that he had made no study of the prices which were achievable at the earlier date. He agreed that if he had been asked to value the business assuming it had started up in 1988 or shortly thereafter, he would have wanted to know how the business had fared at that time and, if at a loss, why so. 380 The transposition to 1993 or 1994 of projections made as from 2001 is insecure as a step in the process of valuing the deposit as at 1993. 381 The following table summarises Mr Humphreys' and Mr Lonergan's respective valuations, grossed up for income tax and interest. (NPV = nett present value) Humphreys Lonergan NPV as at 30.6.93 (before deductions) $8,232,667 $2,982,443 Discount rate 16.5% 16.47% Less negative cashflows to 30.6.93 $706,995 Nil NPV as at 30.6.93 $7,525,672 $2,982,443 Gross up for income tax $3,200,000 $1,278,189 Interest on NPV to 30.6.03 $7,843,245 $3,108,297 Total $18,568,917 $7,368,929 382 The main differences between the two exercises are as follows. Mr Humphreys allowed a deduction for losses incurred in the period 1988 to 1993. The second main difference is that Mr Lonergan did not include Mr Robertson's component for export sales in his calculations, but he said his valuation should be regarded as conservative for that reason. Mr Humphreys' valuation 383 Mr R G Humphreys was engaged by the plaintiffs' solicitors to provide a report for the purpose of these proceedings. He is a chartered accountant in 1968 and also has an honours degree in law. He has been responsible for the audit of major public companies and subsidiaries of multinational corporations, and for special assignments which have included valuations. He was a partner of the firm Deloitte Touche Tohmatsu from 1976 until 1994. Since then he has specialised in providing forensic accounting services, including the valuation of businesses in legal proceedings. 384 As recorded above, Mr Humphreys' valuation came in at $7,525,672, yielding $18,568,917 when grossed up for tax and interest. 385 As a valuation of the deposit, as at 1993, it incorrectly incorporated a deduction for pre-1993 losses. Making that adjustment before grossing up for interest and tax, the end result, after grossing up, would have been in excess of $20m. 386 Mr Humphreys was instructed to use and assume the correctness of Mr Robertson's figures. He did not consider whether the sales, pricing and cost forecasts produced by Mr Robertson were realistic. He transposed those figures back in time because he was asked to do so and for no better reason than that Mr Roach believed he would have been able to produce the same results as from 1993 as were achievable according to Mr Robertson as from 2001. Mr Humphreys conceded that if he had been asked to assess the reasonableness or reliability of the Robertson projections, he would have examined Biogreen's actual results for the years ended 30 June 2001 and following. 387 Mr Humphreys multiplied the Robertson projected sales volumes by the Robertson projected prices to produce projected sales revenue. He multiplied the Robertson projected sales volumes by the Robertson projected operating costs to produce projected operating expenses. 388 Mr Humphreys then introduced a component for research and development, marketing and administration costs. No basis was disclosed for the quantification of this item in Mr Robertson's evidence. 389 The figure for marketing costs was taken from an early report co-authored by Mr Robertson and a colleague, in which no basis was provided for the figure. Furthermore, the figure was for the marketing cost of a bulk peat product whereas the product lines assumed in Mr Robertson's projected sales included packaged products which, it could be expected, would involve a higher marketing cost per unit of volume. 390 Mr Humphreys initially used a discount rate of 14.27 per cent but he later deferred to Mr Lonergan, adopting the latter's discount rate of 16.5 per cent. This produced the final figures mentioned above for value as at 1993 and as grossed up. 391 I will refer to the end result of Mr Humphreys' exercise as the Humphreys model. 392 The Humphreys model was used by Mr Lonergan as the basis for his valuation. 393 Insofar as Mr Humphreys' valuation is also relied upon by the plaintiffs as a valuation of the deposit, it suffers from deficiencies which render it of no use to me. It is based on Robertson figures which are not reliable (see earlier). These include sales revenue forecasts which are highly speculative and unreasonable, and export sales revenue forecasts in particular which are wildly speculative. Such speculative forecasts are then used without allowance in the discount rate or otherwise for the possibility that they might not be achieved. (I will deal more closely with this point when I come to Mr Lonergan's evidence.) Mr Lonergan's valuation 394 Mr W Lonergan, a chartered accountant, was initially retained by the plaintiffs to review the report of Mr M Bryant, an accountancy expert witness retained by the defendants. He is the Managing Director of Lonergan Edwards & Associates Ltd, a valuing practice, and is an adjunct professor in the School of Business in the University of Sydney's Faculty of Economics and Business. He has held a number of positions on various national and international bodies in his profession. He was a corporate finance partner at PricewaterhouseCoopers (then Coopers & Lybrand) for 23 years prior to 2001, following which he founded Lonergan Edwards & Associates Ltd. He has valued a large number and variety of mining operations. He has written on the valuation of mining interests in his textbook The Valuation of Businesses, Shares and Other Equity (4th ed.) (Allen & Unwin, 2003). He is the author of a number of other publications 395 As recorded above, Mr Lonergan's valuation came in at $2,982,443 as at 1993, yielding $7,368,929 when grossed up for tax and interest. 396 With some modification, Mr Lonergan adopted the Humphreys model which substantially incorporated the Robertson projections. 397 He added in a factor for the cost of operating capital. Otherwise, the costs figures incorporated in the Humphreys model were adopted without critical analysis. 398 He applied the projections in the Humphreys model for the year ended 30 June 2001 and following to the years ended 30 June 1994 and following with some further modifications. In respect of the year ended 30 June 1994, he substituted Biogreen's then reported revenue figure ($404,269) and for the year ended 30 June 1995 he substituted Biogreen's revised budget figure ($1,014,023). 399 The major modification was to exclude export sales altogether. As I have mentioned, that represented in the order of 50 per cent of the Robertson sales forecast, with very little to support the potential for export sales at all, let alone of that order. 400 Mr Lonergan's valuation was substantially less than that of Mr Humphreys, principally because he did not take into account the export sales in the Humphreys model. He said, however, as I have mentioned that his valuation should be taken to be conservative because of that omission. 401 In his report dated 19 May 2003 (which is annexed to his affidavit of 20 June 2003), Mr Lonergan gave as his reason for omitting export sales that, in the time available, he had not been able to calculate the full loss incurred, including the value of the export market potential. In cross-examination, Mr Lonergan said that there seemed to be a reasonable degree of evidence in relation to the Australian market for peat but he did not have the information in relation to the asserted export market. 402 Taxed with not having said anywhere in his report that there was evidence to support the figures for domestic sales, Mr Lonergan said that, if he made no specific comment on those figures in his report, he was happy with them, meaning (he said) that they were reasonable in the circumstances. He added that his acceptance of the figures for domestic sales was, in effect, dealt with in his report by exception. 403 No cogent reasons were offered by Mr Lonergan, in his report or in re-examination after the foregoing cross-examination, for accepting the Robertson domestic sales projection as being reasonably reliable. An opinion without clearly stated assumptions and without disclosure of a process of reasoning which leads from the assumptions to the opinion can be given little, if any, weight. 404 In his report, Mr Lonergan himself had noted that the forecasted domestic market sales in the Humphreys model were in the order of two to three times the total of peat imports into Australia for each of the years 1993 to 2003. He said that prima facie this appeared to be optimistic, but that he had assumed for the purpose of his valuation exercise that Colac peat would replace the whole of the peat imported into Australia and that the availability of Colac peat would enable the domestic market to expand. This was an extraordinary assumption to make as justification for what, on the face of it, was a seriously exaggerated forecast. 405 When it was pointed out to Mr Lonergan that Colac peat was not substitutable for all currently imported peat (because of differences in peat type), Mr Lonergan said he was prepared to assume that the shortfall in substitution would have been taken up by a further expansion of the local market. That was contrivance. 406 Mr Lonergan agreed that Biogreen's performance called the Robertson forecast into question. The average selling price assumed by Mr Lonergan was $95 to $99/m3 (including exports) or $81 to $82 (excluding exports). That compared with Biogreen's actual average selling price for the eighteen months to 30 June 2003 of $72/m3. 407 In cross-examination, there was debate as to whether Biogreen had followed the business plan which lay behind the Robertson forecast. That debate went to whether Biogreen's actual performance invalidated the Robertson forecast. It did not and could not validate the forecast. 408 It is apparent to me that Mr Lonergan had no good reason for accepting the Robertson domestic sales projection. I think Mr Lonergan was doing his best to advance the plaintiffs' case. He could not support the Robertson projection for export sales without looking foolish. He could only support the projection for domestic sales by a device. I have no confidence in Mr Lonergan's objectivity as an expert witness. 409 A substantial problem emerged in relation to Mr Lonergan's valuation exercise arising from the deletion of export sales from the Humphreys model. As mentioned above, Mr Lonergan's exercise assumed an average price per cubic metre of product sold of between $95 and $99. However, Mr Lonergan failed to note that, in the Humphreys model, the average selling price per cubic metre was substantially higher for export sales than for domestic sales. A recalculation after deleting export sales yielded, as mentioned above, an average selling price of between $81 and $82. According to calculations made by the defendant's accountant, Mr Bryant, that was less than the break even price of $84.29 calculated on the figures used by Mr Lonergan excluding export sales. It followed that, on the figures used by Mr Lonergan, if export sales were excluded, the result was loss rather than profit. 410 There were further problems concerning Mr Lonergan's valuation. For the purpose of calculating an appropriate discount rate to be applied to the assumed prospective cash flow, Mr Lonergan utilised the Capital Asset Pricing Model (CAPM). The formula for this model is to add two factors together. The first factor is the risk-free rate of return (the long-term bond rate at the relevant time). The second factor is arrived at by multiplying the market risk premium (the difference between the average return on a broad portfolio of shares and the risk-free rate of return) and a beta factor (a factor related to the business of the individual company, usually determined by reference to a published industry beta factor or combination of industry beta factors). It is unnecessary to present the rationale for this approach here. 411 In the present case, Mr Lonergan used a risk-free rate of 7.37 per cent, a beta factor of 0.8 low / 0.9 high and a market risk premium of 6.00 per cent, yielding a result under the CAPM formula of 12.17 per cent low and 12.77 per cent high. This was then increased by four percentage points for illiquidity and size, to produce a discount rate of 16.17 per cent low and 16.77 per cent high, averaged to 16.5 per cent. Again, the rationale for the additional liquidity-size factor need not be presented here. 412 Two industry betas were selected by Mr Lonergan: the beta for the coal subgroups of the solid fuels industry, and the beta for the fertilisers and agricultural chemicals industry. The reasons given for the choice of the former were that peat was a type of coal and that the exploitation of the deposit required very simple mining procedures. The reasons given for the selection of the latter were that peat, once extracted, was often marketed as a form of fertiliser and, accordingly, the same factors would apply as in the agricultural chemicals industry. 413 The two selected industry betas, at the relevant time, were respectively 0.88 and 0.94. A somewhat lower beta factor was appropriate for this project, Mr Lonergan said, because the project had a very low risk nature relative to the relevant industries. Mr Lonergan made reference to what he described as the very simple nature of the underlying business. 414 The reasons for adopting a beta factor for the project less than that for the selected industries were elaborated as follows in Mr Lonergan's report. (a) There was no exploration or technical risk such as that inherent in a typical mining project. (b) Unlike typical fertilisers, the extracted peat had only to be dried and was ready for sale. (c) There was minimal commercialisation risk. This was not an expensive or complex market to enter. (d) There was a low level of operating leverage, in view of a low proportion of fixed costs in the overall cost structure. It was these considerations which resulted in adopting a beta factor of 0.8 low / 0.9 high, in lieu of the industry beta factors of 0.88 and 0.94. 415 In the broad view, discounting the beta factors of 0.88 and 0.94 to a low of 0.8 and a high of 0.9 made little difference in the working through of the CAPM formula. However, these considerations are also to be seen as amplification of the reasons for selecting the two industry beta factors chosen by Mr Lonergan. In particular, there was Mr Lonergan's assumption that the business of mining and marketing peat from this deposit was a simple, uncomplicated procedure. 416 The evidence does not bear out that assumption. The peat varied substantially in composition depending on depth and location within the deposit. Different peat users required peat with different characteristics. The peat required treatment other than mere drying. Quality control dogged attempts to market Colac peat successfully. What was necessary for adequate quality control in relation to peat from this deposit (if achievable), in terms of plant, procedures and man-power, was not established by the evidence in these proceedings. My impression, on the whole of the evidence, was that the prospect of mining and marketing peat from this deposit was far from being a simple, uncomplicated operation. 417 I do not have the expertise to say what industry betas should have been chosen by Mr Lonergan or what adjustment to chosen betas was required. What is significant from my perspective is that Mr Longergan's criteria for the choice of industry betas and / or for adopting those which were chosen without upward rather than downward adjustment were flawed. This goes to the core of Mr Lonergan's valuation exercise. 418 There is a further, and perhaps an even more fundamental point. A DCF valuation using the CAPM formula is only as good as the reliability of the cash flow projection which provides the basis for the exercise. Nothing could be more obvious. In his report of 19 May 2003, Mr Lonergan included under the heading "Disclaimers" the following: LEA [ Mr Lonergan's company ] has assumed that these budgets and forecasts were prepared fairly and honestly based on the information available to management at the time within the practical constraints and limitations of such budgets, forecasts and assessments. It is assumed that the budgets, forecasts and assessments do not reflect any material bias, either positive or negative. LEA has no reason to believe otherwise. 419 I have mentioned that I do not regard the Robertson forecast as being unbiased. Appendix K in particular was Mr Farnan's work, albeit done in consultation with Mr Robertson. But Mr Robertson had been engaged by Biogreen as a consultant to assist in the preparation of material for capital raising. Appendix K was a product of collaboration between Mr Farnan and Mr Robertson in that context. Material generated for the purpose of making a company an attractive object for capital investment cannot be regarded as unbiased. 420 The wildly speculative component for export sales (amounting to about half of all projected sales) and projected domestic sales exceeding total imported peat by two or three times were, without more, sufficient to discredit the forecast. But, even more fundamentally, there is the inherently speculative nature of the sales forecast altogether. It was not based on a proven sales record. It was dependent on a level of market penetration without a rational basis for the extent of market penetration. It is no wonder that performance failed to fulfil the forecast. This was apparent within months, and by a very large margin. 421 Mr Lonergan was taken in cross-examination to the question of reliability of the assumed cash flow forecast. He said it was necessary as a first step to correct a cash flow projection to the highest order of reasonable accuracy that one can. He mentioned a technique of probability weighting, involving various scenarios or ways in which the business could be conducted. But, in reports, he said, one usually adopts a best estimate of projected cash flow. He also said that one can adjust the discount rate if the cash flow projection cannot be corrected to make it reliable. 422 I quote the following passages from the cross-examination of Mr Lonergan which then followed. First, at Tr 1422: Q. The assumption that you have made is that the budget forecasts and assessments do not reflect any material bias? A. Except the ones I have corrected and the ones I have disclaimed, yes. Q. We will come to that. When you say you have assumed that they don't reflect any material bias, is that the same thing as saying they are, on your assumption, unbiased cashflows? A. Reasonable. Q. When you say "unbiased", what do you mean? A. I think I said reasonable, Mr Meagher. Q. You have assumed that they don't reflect any material bias? A. Yes. Q. What does that mean? A. That they are, to all practical purposes, realistic. Then, at Tr 1437: MEAGHER: Q. If I ask you to assume that the projections as to sales and sales revenue in your model are optimistic? A. Local or export or both? Q. The whole lot. A. Yes. Q. Do you agree that someone who answers the description of a willing but not anxious, fully informed but objective investor, would use a higher discount rate to address the over optimism in the forecasts when seeking to arrive at a valuation based on the projections? OBJECTION. QUESTION ALLOWED. A. They should have, Mr Meagher, for the reasons I said before. What they should do is down-grade the estimates. Q. If they can't down-grade the estimates, what do they do? A. Probability adjust. Q. If they can't probability adjust, what do they do? A. Lift the discount rate. Q. An example of a case where one is likely to be dealing with optimistic forecasts is a case involving a start up enterprise? A. Venture capital generally is prone to that sort of thing. Q. In such a case, if you use a discount cashflow methodology to conduct a valuation, your practice is to use a discount rate of between 30 and 50 per cent, isn't it? A. For venture capital? Q. Yes. A. Yes, for venture capital it is very dangerous. It is very, very high risk, Mr Meagher. Then, at Tr 1438-40: MEAGHER: Q. I want to read a statement to you and I want you to tell me whether you agree with it: "In assessing projects where cashflow forecasts are optimistic and/or highly uncertain, a reasonable assessment of the expected cashflow projections can be materially different from the most likely estimate, especially if this is provided by the promoters or otherwise with a financial interest in the project or the value being derived." A. Yes. Q. You agree with that? A. Yes. Q. An example of a project where the cashflow forecasts are likely to be optimistic and/or highly uncertain is a cashflow forecast for investment in technology or research and development? A. Yes. Q. Do you agree that when one has a project where I ask you to assume the cashflow forecast is optimistic and/or highly uncertain, those risks must be incorporated into the valuation? A. Yes, that's correct. Q. And they have to be, to allow for the difference between the cashflow forecast and the best estimate of expected cashflows that would be prepared by a willing, but not anxious, fully informed and objective investor? A. Yes. Q. That is to eliminate the overoptimism in the forecasts? A. That is what you should do. Q. Do you agree that in practice many investors and analysts adopt an alternative approach of calculating the discount rate in such circumstances; that is, alternative to using, for example, the capital asset pricing model? A. No, no. Not the last bit, Mr Meagher. Q. From using risk free rate, plus the market premium rate? A. I think your question is this: In a situation where there is excessive optimism in the cashflows, do some people load up their discount rate to deal with it? Q. Yes? A. The practical answer to that is they shouldn't, but they do. Q. And the people that you include within the "they" are investors, analysts and others in the market? A. Some, yes. They shouldn't. I mean, it's not how it ought to be done. Q. If the reality is that you have forecasts which are optimistic, and you don't have any ability to refine them down, to correct them, then this is the only approach you can use, isn't it? A. Sorry, Mr Meagher, you should probability adjust it. Q. If you can't probability adjust, this is the only approach left if you are going to do a discount cashflow valuation, isn't it? A. There are three ways of doing it. Theoretically, you should fix the cashflow forecasts. Theoretically, even if you fix them, you should probability weight them. If you can't fix them, you should nevertheless go for a probability rating with imperfect numbers. Failing all else, yes, you can up the discount rate to deal with it, but it is the least preferred, and most likely to be prone to error, way of dealing with it. Q. In relation to this last approach that you have identified, you accept that it is appropriate to use a much higher discount rate than if the probability adjusted net present value technique is applied? A. Yes, that would be right. Q. And the probability adjusted net present value technique is, in effect, the technique which you described in your first three theoretical ways to approach the problem I posed? A. Yes. I say that just a bit reluctantly. It is very complex. You should probability weight the cashflow outcomes. That's what you should do and then discount them all back. That's the theoretically correct way of doing it. Q. You have not done that here? A. No, no. As I think I said before, many valuations are done on a "best estimate" basis. And, at Tr 1441: Q. You agreed with me earlier that if you weren't able to adjust optimistic forecasts, then one approach available, perhaps the last approach, but one approach available is to use a much higher discount rate? A. Well, if you can't adjust, yes, that's right. 423 What I take from this is as follows. Something has to be done about insecure forecasts. In the best of worlds, one ensures, by adjustment if necessary, that the cash flow forecast is one which is realistic, that is, likely to eventuate. Sometimes that can be done by adjusting for various probabilities. Sometimes, one has simply to adjust downward for speculation. Where one does not then have a cash flow forecast, whether the initial forecast or as adjusted, in which one has that level of confidence, there is no alternative but to increase the discount rate to reflect the risk that the forecast is likely to be wrong or might be wrong. 424 One hardly needs Mr Lonergan for that. It is common sense. If the cash flow forecast is insecure, the valuation must include a factor which reflects the risk that the forecast may be wrong. 425 Where, as here, the cash flow forecast is not unbiased, is demonstrably exaggerated in some respects and is based generally on speculation rather than historical information, one has such a case. 426 Mr Lonergan, erroneously, did not treat the cash flow forecast in that way in the present case. A necessary increase in the discount rate was not made. 427 Put another way, the DCF exercise presented by the plaintiffs would be appropriate for valuing a business with an established history of profitable trading. In such a case, history provides the projected cash flow and the CAPM formula accommodates the risk that businesses generally and businesses of that kind may not continue to trade profitably. As at 1993, there was nothing like that to value because no-one had made money out of the attempts made to exploit this deposit. To value this deposit as one would value a business with an established history of profitable trading was fallacious. Mr Bryant's evidence 428 Mr M B Bryant is a chartered accountant and registered company auditor. He was retained by the defendants in relation to these proceedings. In addition to his accountancy qualifications, Mr Bryant also has a Master of Arts (Law) degree from Cambridge University. He was the partner in charge of Arthur Andersen's dispute analysis practice for the Asia-Pacific region and is now a partner of Ernst & Young. In that capacity, he has produced expert reports on a number of topics, including valuation of businesses and economic loss claims. 429 According to Mr Bryant, the appropriate discount rate was between 30 and 40 per cent. On that basis, he calculated that, excluding export sales, but using the incorrect average selling price assumed by Mr Lonergan, the valuation figure would be between $200,000 and $700,000. This calculation demonstrates the huge difference between adopting Mr Lonergan's discount rate of 16. 5 per cent and Mr Bryant's discount rate of 30 to 40 per cent. Of course, as mentioned above, if one takes Mr Lonergan's assumed average selling price, adjusted for deletion of exports, the forecasted revenue stream is negative and the DCF exercise yields a nil return in value. 430 Mr Bryant gave cogent reasons for adopting a 30 to 40 per cent discount rate. I reject Mr Lonergan's 16.5 per cent rate for the reasons I have mentioned. Shortly put, it does not meet Mr Lonergan's own criteria. That leaves Mr Bryant's opinion on the matter as the only opinion with credibility. I have no reason to reject it. I accept it. 431 It does not follow, however, that the deposit is shown to have had a value of $200,000 to $700,000. That calculation was made on an assumption favourable to the plaintiffs as to average selling price which has not been made out. The failure of the plaintiffs' DCF valuation case 432 For the reasons I have given, the plaintiffs have failed to establish by means of their DCF exercise (the Farnan-Robertson-Humphries-Lonergan evidence) that the deposit had a value as at 1993. The Whinners transaction 433 Mr G B White AO is chairman, chief executive officer and founder of White Industries Ltd and White Industries Australia Ltd. He has over 40 years experience in civil and mining engineering and construction. Since 1967, the White group of companies has been one of the leading civil engineering and mining companies in Australia. It has extensive interests in the development and operation of coal mines in Australia and India. There was no evidence that Mr White had any particular expertise in the mining and / or marketing of peat. 434 Mr White's evidence was given by affidavit. He was not required for cross-examination. 435 It appears that, in 2002, Mr F Kempson of Laton Capital, was retained by Biogreen to obtain equity finance. Mr Kempson approached Mr White. Mr White visited the site with Mr Kempson and Mr Farnan in July 2002. He was provided with a copy of the valuation report by Mr C Young to which I have referred and was told that the report had been utilised to support the valuation of Biogreen's interest in the deposit at $7.5m for balance sheet purposes. Mr White was informed by Mr Farnan that there were about 15m tonnes of peat in the deposit. 436 Drawing on his experience in the mining industry, Mr White thought the resource would have a value of about $2/tonne or approximately $30m. He thought the extraction costs were extremely cheap and that the extraction process was simple and inexpensive. He noted that there were previous valuations mentioned in Mr Young's report, which Mr White said supported his belief as to the inherent value of the resource. 437 Mr White engaged in negotiations with Mr Kempson and Mr MacDonald on behalf of his family company Whinners Pty Ltd. The negotiations were at arm's length. 438 On 29 July 2002, Mr White wrote to Mr Kempson on behalf of Whinners offering to subscribe $1m for ordinary shares in Biogreen. In the letter, Mr White stated that Whinners valued the company at $6m, so that a subscription of $1m would entitle Whinners to 16.66 per cent of the company. Mr White also offered, on behalf of Whinners, to subscribe $1m for convertible notes in Biogreen. 439 By letter dated 30 July 2002, Mr Farnan wrote to Mr White accepting his offer. He advised that the total capital of the company outstanding was currently 32,031,804 shares. A 16.66 per cent interest in the company for $1m would therefore be covered by the issue of 5,336,465 shares to Whinners. On 5 August 2002, Whinners subscribed for those shares. The contemplated further subscription of $1m for convertible notes was implemented by a loan of $1m by Whinners to Biogreen secured by a charge over the assets of the company. 440 On 30 May 2003, Mr MacDonald, chairman of Biogreen, wrote to Whinners advising that the company was raising a further $2m by way of equity subscription. On 10 June 2003, Whinners subscribed a further $151,554.60 for its pro rata entitlement of a further 757,773 shares. This maintained Whinners' percentage interest in the company. 441 Mr White acknowledged that Biogreen and the Colac peat deposit were not synonymous and that Biogreen had a number of interests and related projects other than simply mining and selling the peat. However, he said the essential reason for considering the investment to be a good one was his perception at the time of the value of the resource and its potential for exploitation for import substitution and for the export market. 442 Mr White's evidence was not admitted as expert opinion evidence concerning the value of the deposit. It was admitted as evidence of the Whinners investment which the plaintiffs relied on as evidence of value. The evidence of Mr White's reasons for entering into the transaction was allowed as evidence of his state of mind at the time but not as evidence of the facts as he believed or understood them to be. 443 Mr Lonergan said of the transaction that it implied a value of "the peat business" of $6.5m. This he calculated in the following way. $m Value subscribed for one sixth interest 1.0 Sum of value of minority interests (6 x $1m) 6.0 Add premium for control (33% of $6m) 2.0 8.0 Less cash subscribed (1.0) Implied value of the business 7.0 Less other net tangible assets Value of factory (0.5) Implied value of peat operations 6.5 444 Mr Lonergan went on to observe that, in 1992, Biogreen was in a distressed state due to cash flow problems. Accordingly, he concluded, it was likely that the value of $6.5m implied by the transaction was too low because the sale price might have been discounted due to that factor. In these circumstances, Mr Lonergan said, the Whinners transaction appeared to be relevant to establishing a low end parameter on the value of the deposit as a cross-check on the reasonableness of the assessed loss. 445 Mr Lonergan did not say that the Whinners transaction provided the basis for an opinion by him as to the value of the deposit independently of the major DCF valuation exercise which he presented to the court. Nor was there any other expert valuation evidence to that effect. Accordingly, the question which now arises for me is whether I should use the Whinners transaction as an independent basis for attributing a value to the deposit without expert evidence to that effect. 446 I am not satisfied that the Whinners transaction establishes that the deposit had a value in 1993. My reasons are as follows. 447 The Whinners transaction establishes that in 1992, Biogreen had the capacity to raise $1m in equity finance for a 16.66 per cent share in the company and to raise a further $1m by secured loan. It does not establish that Biogreen as a whole had any particular sale value at that time. 448 The transaction was for an interest in Biogreen as distinct from an interest in the deposit. As at 1992, Biogreen had expended a substantial amount of money in capital works (significantly more than the $0.5m assumed by Mr Lonergan), in establishing a market for Colac peat, and in research and development. There was, accordingly, a significant difference in timing (1993 rather than 2002) and in what is to be valued (the deposit rather than Biogreen). 449 Mr White understood that the extraction process was simple and inexpensive. It appears that he failed to take into account – presumably because he did not know – that the product had been dogged by inadequate quality control and that the prospect and cost of securing satisfactory quality control were unknown. 450 Mr White relied on the Young valuation. It was based on inflated assumptions as to revenue relative to Biogreen's own adjusted budget forecasts at that time. (The report has no standing as valuation evidence in these proceedings. It was not admitted as expert opinion evidence.) 451 Mr White's understanding that Colac peat was or would be readily saleable as an import substitute in the domestic market and for export sale is not borne out in a practical sense by the evidence. Profitable trade in these areas has not eventuated. 452 Albeit under the pressure of a salvage programme, Mr Roach was prepared, in 1993, to let Winnote and the deposit go for a mere $2. Whilst that offer was not accepted and is, accordingly, not strictly evidence of value, it is not unreasonable to have regard to the epsiode in evaluating the significance to be accorded to the Whinners transaction, which is not direct evidence of the value of the deposit either. 453 No-one has made money in their attempts to exploit the deposit in the 15 years or so prior to 2002 and Biogreen's performance after the Whinners transaction did not fulfil Mr White's expectations. 454 It appears that Mr White was not fully informed concerning Biogreen's history and true financial position. The evidence certainly fails to establish that he was. 455 The Whinners transaction does not persuade me that the deposit had a value in 1993, let alone enable me to put a value on it as at that time. 456 Mr Bryant's DCF valuation exercise, which I have accepted in preference to those of the plaintiffs', attributes no value to the deposit. The plaintiffs' alternative valuation exercise 457 This exercise was presented by counsel for the plaintiffs at my suggestion. What I had in mind is best conveyed by what I said in the course of oral submissions at the end of the trial (Tr 3150-3): HIS HONOUR: … If I were to come to the view that the White transaction is of little weight and that the DCF exercises include forecasts that are not sustainable, is there a third way in which I could, on the evidence that has been adduced, rationally quantify a case for the plaintiff along the following lines: That one had regard to actual pre1993 sales and near misses, dealings that you would say had [ shown a ] serious potential for sales of an order that one could get some feel for; that one could have regard to the total potential markets for peat in various areas; one could look at the price of imported peat and look at what the domestic peat could be sold for; if one then formed a view about the kind of business that was really practicable in 1993 and thought perhaps of a modest growth rate from then on; in other words, if I had no confidence in the reliability of the Robertson projections as an exercise that he undertook, can I rationally do something along the same lines but starting with elements that are secure? RARES: We would submit yes, and that is really what one gets to in the cases which say the judge has to do the best that he can, on the basis that your Honour does have this very solid base of actual credible material in the different markets. HIS HONOUR: Look, assuming that I can - and I think you are probably right in saying that it must be open to me to attempt to do it in principle - don't I need to be shown such a path in a much more considered and delineated way by you? … Well, for example, how much of the mushroom peat market, the accessible mushroom peat market, had he got with Melbourne Mushrooms between 1988 and 1993? … Then, as far as the growing media situation is concerned, there is the Yates stuff; there is the Debco stuff. It only went a certain distance, but, for reasons that the evidence indicates, perhaps one could put that together to be able to say, well, if Mr Roach had been given a clear run between '88 and '93, well, by 1993 he would have built up a trade in relation to the growing media industry, in the order of such and such. In relation to the export trade, I mean, there were some transactions. … See, what brings me to this possible approach is that in the discounted cashflow exercises there is lots of evidence about the quality of the peat, its substitutability for the imported peat, and the available markets, and Mr Roach's management capacities, which, collectively, have been called the assumptions on which the Robertson forecasts are based. But, to a large extent, the movement from those assumed facts to the Robertson forecasts is a great leap. It is a great leap. It is not a step that is taken in a derivative way. It is a step that is taken that is more intuitive than derivative. Now, as the case has proceeded, a lot of evidence has been given, much of which is capable of being used by the plaintiffs, which supplements a good deal of what was assumed by Mr Robertson about those matters, but which he did not take into account. I have no expert opinion about value which does take them all into account, but I apprehend that it would, nonetheless, be open to the Court, on the principle that the Court must do its best, if I cannot accept the leap that Mr Robertson makes - equal Mr Lonergan, equal Mr Humphreys. RARES: Yes, I understand. HIS HONOUR: And if I am not impressed with the weight of the White transaction, I have got to do my best, and it is a best to be done on the whole of the evidence, not just with Mr Robertson. It is that which thus far it does not seem to me has been addressed in an organised kind of way. 458 In a nutshell, what I had in mind was that the plaintiffs might be in a position to lead evidence of actual lines of business conducted in the years 1988 to 1993 which were profitable or were likely to become profitable. I thought this might provide the basis for a valuation of the deposit as at 1993 based on actual sales data rather than forecasts made several years later which bore no relationship to actual sales at the later time, let alone as at 1993. 459 In my suggestion, as recorded in the transcript, I included the assumption of the business being conducted as Mr Roach says he would have done. Mr Roach's continuing involvement in the business cannot now be accommodated for the reasons I have given, but that was not a fundamental element in my suggested approach. 460 I had no expectation, one way or the other, as to whether the exercise I proposed would prove to be practicable or would be productive for the plaintiffs. But I did expect, perhaps naively, that anything produced along these lines would be fairly straightforward. The response was anything but. 461 In response to my suggestion, the plaintiffs produced a file of material (MFI 40) consisting of an 18 page submission document, Plaintiffs' further submissions as to damages, supported by a bundle of tables about one inch thick. This file was then the subject of extensive oral and written submissions by both sides. 462 Because of the stage in the proceedings at which the exercise was generated, there was no expert evidence to support the exercise or to assist the court to understand and evaluate it. 463 The exercise covers two kinds of sales, one being sales of peat for use in the mushroom growing industry and the other being sales of peat for use in the horticulture-nursery trade. 464 Projections of income and expenditure have been produced for the years 1994 to 2019 limited to the two lines of business. Asserted past loss is calculated to the year 2003. Interest on past loss is added. Asserted future loss is calculated for the period 2004 to 2019 on a discounted cash flow basis, using a discount rate of 16.47 per cent. The plaintiffs say that allowance is then to be made for unquantified lines of business: import substitution, export sales and other sales. 465 By way of background, the plaintiffs commenced mining operations at Colac in 1988 and lost the deposit to Mr Groves in the first half of 1993. As recorded above, I envisaged an exercise which took as its starting point actual sales of Colac peat by the plaintiffs in the period 1988 to 1993. The plaintiffs were apparently unable to make an arguable case along those lines. The starting assumptions for mushroom sales are based on actual sales of Colac peat in the year ended 30 June 1995 (the second year after the plaintiffs lost the deposit) and the starting assumptions for the horticulture-nursery business are based on actual sales made still later and not of Colac peat. 466 There are three separate calculations of loss in relation to the mushroom industry line of business, called Scenarios A, B and C. 467 Scenario A begins with the sale of 2,100 m3 of peat in 1994. In that scenario, the annual volume of sales is then assumed to increase after 1994, reaching 15,000 m3 in 1998. That volume is then maintained through to 2019. The price of $140/m3 in 1994 increases to $144 in 1999 and to $160 in 2001. That is then maintained to 2019. 468 The evidence for the starting data in Scenario A is the actual sale of 2,050 m3 of Colac peat to Campbells Mushrooms in the year ended 30 June 1995 at $141/m3. The evidence for the increase in price thereafter is the sale of Colac peat to others at $144/m3 in 2000 and at $159/m3 in 2003. 469 The evidence relied on for the huge increase in the volume of sales in Scenario A after 1994 is of a more general nature, namely, evidence of an increase in the proportion of peat used in mushroom casings in the mushroom growing industry and of increase in the size of the mushroom growing industry itself. 470 Scenarios B and C assume larger increases still in the annual volume of sales: in Scenario B to 20,000 m3 in 2002 through to 2019; and , in Scenario C, to 20,000 m3 in 2002 and then to 30,000 m3 from 2003 through to 2019. 471 The same general kind of evidence is relied on to support the more substantial increases in volume of sales in Scenarios B and C as is relied on to support the increases in volume of sales in Scenario A. 472 There are then 12 further scenarios, A1 to 4, B1 to 4 and C1 to 4. In these scenarios, the line of business in relation to the horticulture-nursery industry is added in as from 1997. 473 In 1997, the company Debco held a substantial share of the wholesale potting mix market for NSW and Victoria. In that year, Debco was selling 10 litre bags of potting mix at pallet prices from $2.95 per bag ($295/m3) to $4.21 per bag ($421/m3), and 30 litre bags at prices from $7.24 ($241/m3) to $8.61 ($287/m3). In 1997, Debco was not using Colac peat in its products. 474 Scenarios A1, B1 and C1 include a potting mix sales revenue of $457,000 for each of the years 1997 to 2019, based on the assumed sale of 5,000 m3 of peat in 10 litre bags. Scenarios A2, B2 and C2 assume additional sales, generating a sales revenue of $812,500 for each of those years. Scenarios A3, B3 and C3 assume still higher potting mix sales, generating a sales revenue of $915,000 for potting mix in each of those years. In scenarios A4, B4 and C4, higher sales again are assumed with an annual revenue of $1,625,000. 475 The revenue figures are the product of an analysis of Debco's pricing and cost structure as at 1997 and the plaintiffs' estimate of the capacity of an operator of the Colac deposit to penetrate the wholesale potting mix market in that year and subsequent years. 476 For the year 1994, the outcome under Scenarios A, B and C is negative for nett cashflow before financing and tax and for nett cashflow after tax. The outcome in scenarios A, B & C does not become positive until 1998 for nett cashflow before financing and tax and until 2003 (Scenario A) and 2002 (Scenarios B and C) for nett cashflow after tax. Accordingly, so far as the mushroom growing trade in isolation is concerned, a positive result is dependent upon the huge assumed increase in the volume of sales subsequent to 1994. 477 The addition, as from 1997, of the assumed line of business in relation to the horticulture-nurseries trade, as presented in Scenarios A1 to 4, B1 to 4 and C1 to 4, results in a positive figure as from 1997 for nett cashflow before financing and tax, although not for nett cashflow after tax until 1998, 1999 or 2000 (depending on the scenario). 478 Accordingly, either the huge increase in the volume of sales for mushroom growing subsequent to 1994 or the addition of the assumed sales to the horticulture-nursery trade commencing in 1997 is necessary in order to produce a positive result for the exercise as a whole. 479 There are serious problems for the plaintiffs in relation to this exercise. 480 The increases in sale volumes in relation to the mushroom growing industry assumed in Scenario A are indeed huge: a 230 per cent increase in the period 1994 to 1997 and a further 115 per cent increase on that in 1998. That is an increase of over 600 per cent in four years. In Scenarios B and C the sales volumes increase even further in subsequent years by large margins. 481 These increases in volume of sales to the mushroom growing industry are based, as I have mentioned, on evidence of an increase in the proportion of peat used by the industry in casings and on evidence of the growth of the industry. There is merit in the defendants' submission that the assumption of an expanding market for peat in the mushroom growing industry, to the extent assumed by the plaintiffs, is insecure in view of the evidence that the increase in mushroom production has, in large measure, been due to increased productivity and efficiency. 482 But, even allowing for a large increase in the available market, the plaintiffs' figures depend on an operator of the Colac deposit capturing a substantial part of that market. The extent to which that could be expected is pure conjecture, and imponderable without the benefit of expert evidence. The court has no expertise in marketing. I have no way of evaluating these sales volume figures. For all I know, they are a massive underestimate or a massive overestimate. 483 The costs introduced by the plaintiffs are also insecure. In many respects, the deficiencies relate as readily to the costs assumptions behind the major DCF valuations presented by Mr Humphreys and Mr Lonergan. I found it unnecessary to go into detail about those costs in that context because the DCF approach, as presented by Mr Humphreys and Mr Lonergan, was so obviously flawed and valueless on other grounds. Closer consideration in some respects is now warranted in the present context. 484 The plaintiffs have taken administrative costs of $400,000 from Mr Humphreys, but the figure in his ultimate model was actually $650,000. More importantly, in proposing a figure for administrative costs, Mr Humphreys assumed that the extracting and marketing of peat from this deposit was a relatively simple operation and that administrative expenses incurred by later operators were avoidable. For the reasons I have given earlier in this judgment, the assumption as to the simplicity of the operation was unwarranted. In particular, the assumption avoided consideration of the need for investigation, facilities and manpower in order to maintain adequate quality control over the product, all of which were uncosted, if indeed satisfactory quality control of peat from this deposit was ever practicable. 485 Research and development costs and rehabilitation costs in the plaintiffs' third approach have also been taken directly from the Humphreys model. Those costs were simply a figure assumed by Mr Humphreys without regard to the actual costs incurred in that regard by later operators. 486 A fixed cost is included in the exercise for plant at $650,000. That is based on the cost to PAL of $654,976 in establishing its plant at Geelong. There is no reason to suppose that that plant was adequate. Judging from the company's performance, there is reason to think it was not. Even after the expenditure of about $1m by 30 June 2002 on Biogreen's plant at Colac, peat from the deposit was not being processed suitably. In these circumstances, it is not established that the provision of $650,000 for plant in the plaintiffs' third approach is adequate provision. 487 In relation to variable costs, these are taken from Appendix I (earlier referred to). I have made my comment in relation to that document. Furthermore, applying Biogreen's variable costs in the year 2000 to assumed operations in 1994 is not secure. 488 Marketing costs are included at $3.70/m3. That is the figure assumed by Mr Humphreys. It was not supported by him in any analytical way and the assumed context was, again, a simple business operation. 489 The assumed sales to the horticulture-nurseries trade are proffered on an assumption that an operator of the Colac deposit would have gone into this market. Mr Roach did not do so when he was in control of the business. The assumption is insecure in the extreme. 490 The defendants join issue with the way in which the plaintiffs have derived the revenue figures in scenarios A1-4, B1-4 and C1-4 from Debco's pricing and cost structure in 1997. There is no expert accountancy evidence to mediate that debate. I do not believe I am competent to resolve it without such assistance. I am not satisfied that the plaintiffs' methodology is sound. 491 The suitability of Colac peat for the horticulture-nurseries trade was strongly in issue in the proceedings, as was its capacity to compete against imported peat and peat substitutes. I find it unnecessary to resolve these issues. It is sufficient for present purposes that the assumptions of market penetration which underlie this aspect of the plaintiffs' exercise are simply not made out. How can the court decide, without the benefit of expert evidence, the likely extent to which an operator of the Colac deposit could expect to penetrate this market either as a seller to horticulturalists and retailers or as a supplier to other wholesale marketers such as Debco? To support the assumed volume of sales, the plaintiffs refer to the size of the market and the asserted suitability of Colac peat to satisfy the requirements of that market. There is, however, no logical nexus between these considerations and the sales volumes which they are said to support. 492 In this respect, the exercise suffers from one of the fundamental flaws in the plaintiffs' major DCF exercise. Assumed sales are speculations. There is no way of evaluating their reliability or of making any kind of rational adjustment. It was to avoid this difficulty that I suggested the possibility of starting with actual sales of Colac peat made in the period 1988 to 1993 but (as I have said) that was apparently not an available way forward for the plaintiffs. 493 There are then two points to be made in relation to the exercise as a whole. First, the use of the 16.47 per cent discount rate for future loss suffers from the same difficulties in relation to this exercise as it does in relation to the plaintiffs' major DCF exercise. It defies the criteria laid down by Mr Lonergan to use that rate in relation to cashflows which are not grounded in experience or adjusted for probability. The court is in no position, unassisted, to adjust the discount rate in that way. Lastly, a glance at the tables used in support of this exercise is sufficient to show that an evaluation of the exercise without the benefit of expert accountancy evidence is more than can reasonably be expected. 494 Once the plaintiffs found they were unable – as I thought might be possible – to make a case based on revenue and costs in relation to actual sales prior to 1993, with perhaps some modest allowance for growth, an approach based on hypothetical rather than actual sales appears to have been doomed from the start because of the insecurity of the assumptions required and the unavoidable intricacy of the methodology. 495 The plaintiffs have not established by this alternative valuation exercise that, as at 1993, the Colac deposit had any commercial value. The plaintiffs' claim for reliance damages 496 The plaintiffs have a claim for reliance damages, in the event that their claim for expectation damages is unsuccessful. The claim is for the totality of expenditure in the business of exploiting the Colac peat deposit during the period 1988 to 1993. 497 The claim includes payments by Winnote and by other companies in the Roach group. The latter are said to have been made on behalf of Winnote. That is in contention. 498 The plaintiffs' initial claim was for $1,417,981. In the course of the proceedings, the claim was reduced to $612,867, being $469,328 for the payments as listed by Mr Bryant in Appendix 7 to his report of 27 November 2000 (Exhibit 29) plus $143,539 for rent for premises at Railway Street, Lidcombe. 499 The listed expenses are claimed to be the expenses incurred in relation to the business of extracting and selling peat from the deposit. The plaintiffs do not contend that, but for the defendants' failure to give the correct advice, the expenditure, or any of it, would not have been incurred. They say that the expenditure became wasted when they lost the deposit to Mr Groves for want of a mining lease. They rely on the decision in Wardley Australia Ltd v The State of Western Australia (1992) 175 CLR 5 for the principle that a loss can be contingent on the happening of a later event. 500 In view of the findings which I have made, there is no question but that the business would have been carried on in the same way if the correct advice had been given. In these circumstances, the plaintiffs' case has to be that the expenditure was wasted because, if the correct advice had been given, Winnote would have recouped the expenditure out of profits to be made from exploiting the resource after the deposit was lost to Mr Groves in early 1993. 501 The plaintiffs have failed to make a positive case that the business would have been profitable as from 1993, but they invoke McRae v Commonwealth Disposals Commission and Commonwealth of Australia v Amann Aviation Pty Ltd (1991) 174 CLR 64 as authority for a shift in the burden of proof, requiring the defendants to show that the plaintiffs would not have made a profit from exploiting the deposit after early 1993 out of which to recoup that expenditure. The plaintiffs say that the defendants have not discharged that burden of proof. 502 The authorities relied upon establish the following principle. Where, in consequence of breach by the defendant of a contract between the parties, the plaintiff is deprived of the prospect of benefit arising from performance of the contract, the onus is on the defendant to show that expenditure by the plaintiff for the purposes of the contract would not have been recouped out of such prospective benefits. 503 The principle has no application to the present case. The expenditure in the present case was not incurred for the purposes of a contract with the defendants. In making that distinction, I adopt, with respect, the reasoning of Giles J in NRMA Ltd v Morgan [1999] NSWSC 407 at [1351]-[1361]. (The decision was reversed on appeal, sub nom Heydon v NRMA (2000) 51 NSWLR 1, but not on this point.) 504 The plaintiffs' claim for recovery of expenditure as reliance damages accordingly fails. Conclusion 505 The plaintiffs have failed to establish that the Colac peat deposit, which Winnote in effect lost to Mr Groves in 1993 as a result FM's breach of duty, had a value. Limitation defence 506 I have mentioned that the defendants raise a limitations defence asserting that, if the plaintiffs suffered loss as a result of the defendants' conduct, they did so earlier than six years before commencement of the proceedings. 507 The defence does not arise for consideration in view of my conclusion that the plaintiffs have failed to make out a claim for loss resulting from breach of duty on the part of the defendants. Orders 508 I make the following orders: (1) Verdict and judgment for the defendants against the plaintiffs; (2) Plaintiffs to pay the defendants' costs on a party and party basis; (3) Liberty to apply for reconsideration of the order for costs if exercised within seven days from the date of this judgment by notice to the other side and to my associate. 509 The parties have not been heard in relation to costs. If there is an application, the question of costs will be decided by me de novo, for which purpose draft directions should be submitted, incorporating a timetable for evidence, outlines of argument and a date to be heard. -o0o- Last Modified: 11/17/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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