Court of Appeal Supreme Court New South Wales Medium Neutral Citation: ACN 116 746 859 (formerly Palermo Seafoods Pty Ltd) v Lunapas Pty Ltd [2018] NSWCA 203 Hearing dates: 14 September 2018 Date of orders: 14 September 2018 Decision date: 18 September 2018 Before: Basten JA at [1]; Meagher JA at [47]; Ward JA at [48] Decision: (1) Vary order (1) made by Slattery J on 30 April 2018 so that it provides: Order the defendants to pay two-thirds of the plaintiff's costs in the proceedings in the Equity Division. (2) Otherwise dismiss the appeal from the judgment of Slattery J and the orders made on 11 December 2017 and 30 April 2018. (3) Order the appellant to pay the respondents' costs of the appeal from the judgment and orders of Slattery J from 29 August 2018. Catchwords: TORTS – conversion – remedies – damages – whether trial judge erred in rejecting claims for certain heads of damage COSTS – remitter for rehearing on limited basis – whether trial judge on rehearing could award costs of earlier hearing – appeal costs – successful respondents derelict in compliance with interlocutory directions – whether reduction in allowed costs CIVIL PROCEDURE – Uniform Civil Procedure Rules (UCPR) r 51.53 – scope of directions in ordering a new trial – valuation evidence – whether judge on rehearing erred in rejecting evidence if expert not called Legislation Cited: Uniform Civil Procedure Rules 2005 (NSW), r 51.53 Cases Cited: ACN 116 746 859 (formerly known as Palermo Seafoods Pty Ltd) v Lunapas Pty Ltd & Anor (No 3) [2018] NSWSC 539 ACN 116 746 859 (formerly known as Palermo Seafoods Pty Ltd) v Lunapas Pty Ltd & Anor (No 2) [2017] NSWSC 1799 ACN 116 746 859 (formerly known as Palermo Seafoods Pty Ltd) v Lunapas Pty Ltd & Anor [2017] NSWSC 1583 Palermo Seafoods Pty Ltd v Lunapas Pty Ltd (No 2) [2014] NSWSC 1323 Palermo Seafoods Pty Ltd v Lunapas Pty Ltd [2014] NSWSC 792 Palermo Seafoods Pty Ltd v Lunapas Pty Ltd [2016] NSWCA 82 Category: Principal judgment Parties: ACN 116 746 859 (formerly known as Palermo Seafoods Pty Ltd) (Appellant) Lunapas Pty Ltd (First Respondent) Luciano Menniti (Second Respondent) Representation: Counsel: Mr J Palermo with leave of the Court (Appellant) Ms K A Gothard (Respondents) Solicitors: Appellant self-represented Jason Nott Solicitors (Respondents) File Number(s): 2018/11989 Decision under appeal Court or tribunal: Supreme Court Jurisdiction: Equity Division Citation: [2017] NSWSC 1583; [2018] NSWSC 539 Date of Decision: 11 December 2017; 30 April 2018 Before: Slattery J File Number(s): 2013/206954 [Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.] Judgment 1. BASTEN JA: The appeal in this matter involves what appears to be the last stage in a long running dispute between the parties with respect to the termination of a lease of a seafood shop and restaurant business on River Terrace, Tweed Heads. It concerns the valuation of stock, plant and equipment owned by Palermo Seafoods Pty Ltd ("Palermo") at the time its lease was terminated by the landlord, Lunapas Pty Ltd ("Lunapas"), which it was unable to recover from the premises. Orders were made at the conclusion of the hearing. [1] Procedural background 1. Damages were assessed by Slattery J in the Equity Division following hearings in September and December 2017. On 11 December 2017 the Court gave judgment in favour of Palermo in the sum of $250,000, together with interest which was calculated in the amount of $70,648. [2] The sum of $250,000 was described as "the market value of [Palermo's] plant, equipment and stock" converted by Lunapas on or about 8 May 2013. 2. Palermo had claimed a significantly greater sum itemised by reference to 12 heads of loss. 3. The notice of appeal identified a challenge to the rejection of three items of loss, together with the rejection of evidence of an expert accountant which had been relied upon by Palermo at an earlier stage of the proceedings and reliance upon valuation evidence tendered by Lunapas. The items in issue may be identified as follows: 1. rejection of a claim for loss of goodwill; 2. rejection of the claim for the value of plant and equipment assessed by reference to replacement value, and 3. rejection of a claim for "legal and corporate costs" as a head of damage. 1. Brief reference to earlier stages in the litigation is necessary in order to explain the nature of the exercise being undertaken by Slattery J. 2. First, in June 2014 Young AJ delivered judgment in relation to the termination of the lease. [3] That judgment, and a second judgment delivered in September 2014, [4] were the subject of an appeal by Palermo to this Court. The appeal was upheld in part and a new trial ordered with respect to a matter not determined by Young AJ, namely whether there had been a conversion by Lunapas of Palermo's stock, plant and equipment and, if so, the loss suffered. [5] 3. The substantive issue in that appeal was whether the trial judge had erred in refusing to consider a claim in detinue or conversion with respect to the stock, plant and equipment, in circumstances where he said that no such claim had been pleaded. Rather, the pleaded claim had been for a "constructive trust", which the judge had noted was inappropriate because "the goods still belong[ed] to the plaintiff at common law and the proper cause of action is detinue or trover." [6] Neither detinue nor trover was pleaded by name. This Court rejected that reasoning, noting that the amended statement of claim had pleaded a claim for damages by reason of the wrongful use and denial of access to Palermo's plant and equipment; the court said that the mistaken characterisation of the claim as referable to a constructive trust was immaterial. [7] 4. The orders made by this Court on 19 April 2016 were as follows: (1) Appeal allowed. (2) Set aside the orders made [by Young AJ] on 26 September 2014 dismissing the proceedings with costs. (3) Direct that there be a new trial limited to the appellant's claim for damages by reason of the respondents' use of and failure to return the appellant's plant and equipment ("the appellant's claim"). (4) Further direct that the new trial be conducted on the basis that the parties do not challenge the findings of fact made in the judgment of [Young AJ] delivered on 16 June 2014, insofar as those findings are relevant to the appellant's claim. (5) The respondents pay the appellant's costs of the appeal. (6) The respondents, if otherwise qualified, have a certificate under the Suitors' Fund Act 1951 (NSW). 1. Relevantly to order (4), the Court identified the key findings of fact made by Young AJ in June 2014 in the following terms: "[13] On 16 June 2014 the primary judge delivered the First Judgment. The findings of fact are not easy to follow as they tend to be subsumed in the discussion of other issues. However, the findings made by the primary judge include the following: • the appellant had been entitled to an equitable lease of the premises for a period of three years from 2 July 2012, but by 8 May 2013 the lease had ceased to be specifically enforceable because the appellant was no longer willing, ready and able to fulfil the terms of the agreement for lease (at [47]); • accordingly, by 8 May 2013 the appellant no longer had a three year lease in equity, but merely a tenancy at will terminable on one month's notice, pursuant to s 127 of the Conveyancing Act 1919 (NSW) (at [37], [48], [138]); • on 22 April 2013, the first respondent gave the appellant a notice to remedy breaches of the agreement for lease relating to the payment of rent (at [66]); • it followed that the taking of possession of the premises on 8 May 2013 was 'premature' (at [69]); • the first respondent's action was wrongful because one month's notice had not been given, but as the appellant had accepted the termination of the lease as a repudiation no issue arose as to the right to possession (at [135])." 1. There were three potential problems arising from these orders. The first was that order (4) did not identify the relevant findings, and did not limit them to those set out in [13], which did not itself purport to be a complete list. Secondly, while order (2) set aside the order of the trial judge with respect to costs, the costs of the first trial were not expressly remitted to the Equity Division. As will be seen, this was an issue specifically identified by Slattery J, who found that the scope of the remittal did not allow him to determine those costs. 2. The third source of uncertainty (although a party with legal representation should not have been misled) arose from the reference by this Court to r 51.53 of the Uniform Civil Procedure Rules 2005 (NSW). That rule provides for the circumstances in which the court may order a new trial. It also permits the appellate court to restrict the issues to be the subject of a new trial. As already noted, the orders of the Court of Appeal did that, the Court noting that a direction in those terms was authorised by r 51.53(2), (3), (4), (5)(a). [8] Subrule (5)(c), not itemised by the Court, allowed the Court to "order that the testimony of any witness examined at the former trial may be read from the transcript, instead of the witness being again examined." Palermo appears to have taken the view that such an order was made or, perhaps, that whether or not such an order was made, that was the effect of an order for a new trial. Although, as will be noted, Palermo sought to rely on the fact that a witness had been cross-examined and therefore did not need to be recalled, in fact no such order had been made by this Court, nor was any such direction implicit in the orders which were made, as Slattery J correctly noted. [9] Preliminary issues 1. Before turning to the heads of damage with respect to which Palermo alleged error, it is convenient to deal with challenges to the evidence on which the assessments were based. (i) the Gurciullo report 1. Palermo sought to challenge two rulings of the trial judge with respect to expert evidence. The first was the rejection of the evidence of Mr Gurciullo. Mr Gurciullo, who had been Palermo's accountant, had prepared a "report" which was tendered in proceedings before Young AJ and which had been the subject of cross-examination. Palermo assumed that Mr Gurciullo's report could be relied upon in the proceedings before Slattery J. It claimed that it was not aware until the final (supplementary) hearing on 7 December 2017, three months after the completion of the trial, that the Court would not consider the contents of the report unless he was made available for further cross-examination. Palermo agreed that, in the circumstances, it was then offered the opportunity to rely upon the report but had declined to do so on the basis that it would extend already prolonged proceedings into the new year. It complained, in effect, that it was unfair to put it in such a position at the heel of the hunt, when all the evidence had otherwise been adduced and addressed and judgment reserved. 2. The problem arose because of the confused state of the material presented to the judge. However, Palermo, being the plaintiff in the proceeding, bore responsibility for ensuring that the relevant material was before the trial judge and, had there been any doubt about the matter, it should have sought to have it resolved. Part of the problem lay in the fact that Palermo lacked legal representation at that stage. 3. There can be no criticism of the trial judge, who clearly went to significant lengths to seek to ensure that all the issues which could properly be agitated were properly agitated and relevant material presented to the Court. Nevertheless, if, on a subsequent appraisal, it appears that there had been an element of procedural unfairness, viewed objectively, there would be grounds for intervention on appeal. 4. It is sufficient to say for present purposes that the careful attention to fairness on the part of the trial judge did not inadvertently cause unfairness to the appellant. The approach adopted on behalf of Palermo had been erroneous for reasons which will be identified. If, in the result, Palermo was placed in a difficult forensic position when the situation was identified by the trial judge, that is not a matter of which Palermo can reasonably complain. (ii) the Knight Report 1. Although it did not appear to arise from the grounds of appeal, Palermo challenged the reliance by the judge on a "summary appraisal report" prepared by a certified valuer from Lloyd Assets Services, Mr Terry Knight ("the Knight Report"). [10] 2. Although Palermo claimed that there had been no "disclosure" of the Knight Report before the trial, it had been annexed to an affidavit of Lunapas' accountant, Mr Rossiter, dated 19 July 2016. Palermo objected to reliance upon the Knight Report at the trial. On the objection being noted, the trial judge asked Mr Palermo whether he had seen the report before and he agreed he had. [11] Counsel for Lunapas noted that Mr Knight was not available for cross-examination because, despite directions to that effect, Palermo had given no notice that he was required for cross-examination. The judge admitted the evidence without requiring Mr Knight to be called. [12] Finally, the concerns raised by Palermo in its submissions in this Court were raised below and addressed by the judge in his reasons. [13] 3. No error was demonstrated in the judge placing reliance on the Knight Report. (iii) conduct of counsel 1. The notice of appeal sought to raise an issue as to Lunapas' representation before Slattery J. The issue arose on the third day of the trial when directions were given for service of submissions. Mr Palermo noted that the solicitor who had been listed as the solicitor on the record for the defendants was no longer acting, that Mr Murphy (counsel) was acting on a direct access basis but that no change had been made to the court record with respect to appearances. The judge directed Mr Murphy to file a fresh notice of appearance. [14] 2. That irregularity can have no relevance to any error in the judgment of the trial judge, nor did the notice of appeal or the appellant's submissions suggest any connection. It cannot be relied upon as a ground of appeal. Substantive issues (i) loss of goodwill 1. Palermo asserted that there should have been an award for the loss of the goodwill of the business on the basis that the lease had been extended to allow it to operate until 1 July 2015. Palermo asserted that a finding to this effect had been made by Young AJ. 2. Indeed, it was true that Young AJ had accepted that there had been an extension of the lease, a fact which the trial judge noted at [10]. He also noted that Lunapas re-entered the premises some two years before the expiry of the lease. 3. That finding did not assist Palermo in circumstances where, as noted above, Young AJ had also found that "by 8 May 2013 the lease had ceased to be specifically enforceable because [Palermo] was no longer willing, ready and able to fulfil the terms of the agreement for lease". This finding, expressly identified by the Court of Appeal, was not contestable. It followed that Palermo no longer had an enforceable lease extending to July 2015, but a tenancy at will terminable on one month's notice. Lunapas had given notice to remedy breaches on 22 April 2013, but was "premature" in retaking possession on 8 May 2013. 4. As the trial judge stated: "[177] … Goodwill would only be available if Palermo had a saleable business with an entitlement to continue to trade at the premises beyond May 2013, which it did not. … [178] Palermo only had an entitlement to trade from the premises for another two weeks after the re-entry on 8 May 2013. Palermo realistically had almost no business to sell." 1. Palermo's challenge to this finding is based on a misapprehension as to the factual basis of its entitlement to the premises as at 8 May 2013. There was no error in the approach adopted by the trial judge in rejecting the claim for loss of goodwill. (ii) value of plant and equipment 1. The $250,000 damages assessed by the trial judge included $50,000 for the value of stock as at 8 May 2013 and $200,000 as the market value of the plant and equipment. There was no challenge to the value of the stock. 2. In terms of principle, the judge rejected the proposition that Palermo was entitled to the replacement value of the goods, without regard to their condition at the time of the conversion. 3. The basis of Palermo's challenge was not that there was legal error in adopting as a basis of valuation the market value of the plant and equipment at the time of the conversion, but rather the proposition that Young AJ had made a finding of fact, which was not to be controverted, to the effect that the plant and equipment was to be valued according to the replacement value. This was apparently based on two statements in earlier judgments. First, in this Court, Emmett AJA had stated: "[40] In his further reasons of 26 September 2014, the primary judge dealt with the question of whether Palermo was entitled to damages for confiscation of its chattels. … His Honour referred to Palermo's claim that the total value on a replacement basis of the plant and equipment was $521,025.90 and that it claimed $60,000 worth of stock." 1. The statement by Emmett AJA was factually correct: first, Palermo had made such a claim and, secondly, Young AJ had identified such a claim at [37] in his second judgment. However, to state that the claim was made is to say nothing about whether it was accepted; it patently was not accepted. That is, neither the figure nor the basis of the assessment was an accepted fact. It followed that Palermo had to establish a value in accordance with the evidence before Slattery J. 2. As already noted, Slattery J rejected Mr Gurciullo's report. Nevertheless, he referred in his reasons at [180] to the figure of $285,000 which Mr Gurciullo had identified as the "written down value on the 8th May 2013" of plant and equipment. [15] 3. Mr Frank Palermo had sworn an affidavit prior to trial in which he had identified as the "value already approved by the court" for plant and equipment an amount of $521,025.90. The figure was identified as "Replacement Value of Assets schedule (as provided to courts at trial in May 2014)". This statement was followed by a further assertion: "It is not to be disputed in the Court that the dollar amount and also the list of plant and equipment be contested due to the acceptance from both parties in previous court proceedings. The parties accept that this list and value is to be taken as fair consideration regarding the amount claimed." 1. For the reasons noted above, those statements were based on a false premise: there had been no finding of fact, nor indeed acceptance by the other party of the claim. Nevertheless, there was other evidence before the trial judge as to the value of the plant and equipment. As the judge stated: "[182] … The management accounts contain a balance sheet as at 8 May 2013. Although that balance sheet values plant and equipment at $384,263.64 as one of the assets, it does not separately identify stock. The Court infers that because stock is a significant item greater than all the other amounts in the balance sheet, that it is unlikely to have been forgotten and has probably been included in the figure of $384,263.64." The Court was not able to identify the sum included for stock in that valuation but thought it should be reduced to "about $325,000" on that account. [16] 1. Mr Knight inspected the plant and equipment on 5 October 2013 and assessed two values, namely the fair market value in continued use and a forced liquidation value. On the first basis, he provided a figure of $184,732 and on the second basis, $44,558. 2. The judge accepted that Mr Knight had valued the plant and equipment which had been on the premises on 8 May 2013, but also accepted that some allowance should be made for the period of five months. [17] That allowance led to the Court assessing the plant and equipment as at 8 May 2013 at the figure of $200,000. [18] No error has been shown in that valuation. (iii) legal and corporate costs 1. Slattery J noted that Palermo had claimed an amount of $564,000 for costs, which, to the extent that they were recoverable, were recoverable as legal costs. The judge rejected this item as a head of damage on that basis. [19] No error has been identified in taking that course. 2. In his third judgment (of 30 April 2018), the judge made orders with respect to the costs of the proceedings. [20] Relevantly for present purposes, order (1) was in the following terms: "(1) Order the defendants to pay two-thirds of the plaintiff's costs of the re-hearing of the issues of quantum of loss due to conversion of the plaintiff's goods." This Court noted that this was arguably too narrow, even with respect to the remitted issues, because it could have been construed as not covering all of the costs of the rehearing. Thus an important issue, disposed of by the trial judge favourably to Palermo, was whether there had been a conversion of its stock, plant and equipment. It was entitled to costs of that exercise, but on one reading the order may not have covered them. 1. More importantly, this order left the costs of the hearing before Young AJ undetermined. The judge addressed this issue in his reasons in the following passage: "[19] The Court sees no basis to disturb previous costs orders. This Court undertook a re-hearing on a discrete part of these proceedings, as directed by the Court of Appeal. The re-hearing did not involve re-examining the prior decisions of other judges in the proceedings. But except to the extent that the Court of Appeal disturbed the prior decisions, this Court applied aspects of the findings in those decisions or the re-hearing. The Court will not make or change costs orders beyond the present hearing." 1. There is no doubt that the notice of appeal was apt to raise the issue of costs orders. Not only did it claim that damages should have been awarded with respect to costs, but it also sought an order that the respondents pay its costs "for the entirety of this case including the hearing of [Young AJ] judgment 2014, Court of Appeal judgment 2016 and Slattery judgment 2017." 2. With respect to the costs of the proceedings before him, Slattery J accepted that costs should follow the event, but made a reduction because the amount recovered was far below the amount sought and a number of significant heads of damage had not been recovered. That was an entirely reasonable exercise of the discretionary judgment required and Palermo has not sought to identify error in it. However, to reject the proposition that the Court could address the costs of the first trial was to adopt an unduly narrow view of the scope of the remitter. This Court's orders made no reference to the costs of the first trial, except by setting aside the order which included an order as to costs. Correctly, Slattery J was in no doubt that the remitter permitted him to award costs of the rehearing, although there was no reference to that subject matter in the order of this Court. However, it is commonplace for this Court, in upholding an appeal and remitting the matter for a further trial, to leave the costs of the first trial and the rehearing in the discretion of the judge conducting the rehearing. Because costs follow the event, it may be expected that, in most cases, the costs of the first trial will have to abide the outcome of the rehearing. Absent some express restriction, Slattery J should have addressed the costs of the first trial when awarding costs of the rehearing. 3. It is clear that Palermo was partly successful with respect to the issues determined by Young AJ, and partly unsuccessful. It was appropriate that it obtain an order for its costs, but on a reduced basis. The appropriate course is to accept the level of recovery identified by Slattery J with respect to the costs of the rehearing and expand the order to cover the costs of the first trial as well as the rehearing. Costs of appeal 1. Subject to the variation of the costs order, the appeal has been entirely unsuccessful. In the ordinary course, the appellant would be required to pay the whole of the respondents' costs of the appeal, though possibly subject to a marginal reduction on account of the variation of the costs order with respect to the first trial. That variation would be marginal, or non-existent, because the issue was not raised in those terms by the appellant and the time spent on it was insignificant. 2. There is a further issue, which arises from the fact that the respondents, though represented by solicitor and counsel today, have been derelict in their compliance with orders of the Registrar. 3. At a directions hearing on 2 May 2018 the appellant was directed to file submissions by 6 June; they were in fact filed on 30 May. Under the rules the respondents' submissions were due four weeks later. At a directions hearing on 20 June, a hearing date was fixed for 27 August and the respondents were directed to file and serve submissions by 18 July. That did not happen. On 25 July the hearing date was vacated and the respondents were directed to file their submissions by 22 August. That did not happen and a further directions hearing was listed for 29 August. On the last date, the respondents were represented, for the first time, by their current solicitor who was directed to file and serve submissions by 7 September. The trial date, which was 14 September, was maintained. Clearly the timetable was extremely tight, if the Court and the appellant were to obtain an understanding of the respondents' case prior to the hearing. 4. The respondents' submissions were not filed on 7 September, but on 10 September. However, because 7 September was a Friday and the submissions were in fact filed on the next working day, criticism of the failure to comply with that order may be more muted than had they been three working days late. In any event, the proper course is to disallow recovery by the respondents of any costs incurred prior to 29 August 2018. (It may be that this is a limited penalty for the failure to comply with the Registrar's orders, because it appears that the respondents were unrepresented until that date, the costs recoverable by a litigant in person being strictly limited.) Orders 1. For these reasons, the Court made orders in the following terms at the conclusion of the hearing. For convenience they are set out below: 1. Vary order (1) made by Slattery J on 30 April 2018 so that it provides: Order the defendants to pay two-thirds of the plaintiff's costs in the proceedings in the Equity Division. 1. Otherwise dismiss the appeal from the judgment of Slattery J and the orders made on 11 December 2017 and 30 April 2018. 2. Order the appellant to pay the respondents' costs of the appeal from the judgment and orders of Slattery J from 29 August 2018. 1. MEAGHER JA: I agree with Basten JA. 2. WARD JA: I agree with Basten JA. ********** Endnotes 1. ACN 116 746 859 (formerly known as Palermo Seafoods Pty Ltd) v Lunapas Pty Ltd & Anor [2017] NSWSC 1583. 2. ACN 116 746 859 (formerly known as Palermo Seafoods Pty Ltd) v Lunapas Pty Ltd & Anor (No. 2) [2017] NSWSC 1799. 3. Palermo Seafoods Pty Ltd v Lunapas Pty Ltd [2014] NSWSC 792. 4. Palermo Seafoods Pty Ltd v Lunapas Pty Ltd (No 2) [2014] NSWSC 1323. 5. Palermo Seafoods Pty Ltd v Lunapas Pty Ltd [2016] NSWCA 82 (Simpson JA, Sackville AJA and Emmett AJA). 6. [2014] NSWSC 1323 at [43]. 7. [2016] NSWCA 82 at [30]. 8. [2016] NSWCA 82 at [34]. 9. [2017] NSWSC 1583 at [63]-[64]. 10. [2017] NSWSC 1583 at [209]. 11. Tcpt, 04/09/17, p 20(35)-(45). 12. Tcpt, p 22(20). 13. [2017] NSWSC 1583 at [212]. 14. Tcpt, pp 280-281. 15. The figure was given in a letter to Mr Palermo dated 6 November 2013, to be found in Ex JG1 to Mr Gurciullo's affidavit of 9 December 2013. 16. [2017] NSWSC 1583 at [208]. 17. [2017] NSWSC 1583 at [214]. 18. [2017] NSWSC 1583 at [218]. 19. [2017] NSWSC 1583 at [173]. 20. ACN 116 746 859 (formerly known as Palermo Seafoods Pty Ltd) v Lunapas Pty Ltd & Anor (No 3) [2018] NSWSC 539. Amendments 18 September 2018 - [1] inserting "by" after "owned". [6] Amending "Young AJA" to "Young AJ". [43], [45] Amending "respondent" to "respondents". DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 18 September 2018