O'Kelly Holdings Pty Ltd; Clive Vincent O'Kelly and Sandra O'Kelly v Dalrymple Holdings Pty Ltd and Milglade Pty Ltd [1993] FCA 469 (21 September 1993)

FEDERAL COURT OF AUSTRALIA

0'KELLY HOLDINGS PTY LTD; CLIVE VINCENT O'KELLY and SANDRA O'KELLY v.
DALRYMPLE HOLDINGS PTY LTD and MILGLADE PTY LTD
No. QG52 of 1993
FED No. 658
Number of pages - 20
Trade Practices - Evidence - Costs

COURT

IN THE FEDERAL COURT OF AUSTRALIA
QUEENSLAND DISTRICT REGISTRY
GENERAL DIVISION
SWEENEY(1), LEE(2) AND O'CONNOR(1) JJ

CATCHWORDS

Trade Practices - misleading and deceptive conduct - sale of boarding-house - representations as to income and expenses of boarding-house - figures supplied to purchasers prior to entering contract not accurate - representations intended to and did induce purchase - assessment and quantum of damages - consideration of expert opinions by valuers and discretionary orders on costs.

Evidence - function of expert witnesses - conflicting expert evidence - duty of Court to form and act on original opinion - Court to take assistance from expert witnesses - whether error of law.

Costs - order that respondents pay applicants costs without reduction - whether error of law.

Trade Practices Act 1974: ss.52, 82

Federal Court of Australia Act 1976: ss.43, 51A

Federal Court Rules: Order 23, Order 62 r.36A(1)

Abalos v. Australian Postal Commission [1990] HCA 47; (1990) 171 CLR 167

Ramsay v. Watson [1961] HCA 65; (1961) 108 CLR 642

Ellis v. Wallsend District Hospital (1989) 17 NSWLR 553

Thurston v. Todd (1966) 1 NSWR 321

Hill v. Commissioner of Highways (1966) SASR 316

Holtman v. Sampson (1985) 2 QdR 472

Davie v. Edinburgh Magistrates (1953) SC 34

Fire and All Risks Insurance Co. Ltd v. Rousianos (1989) 19 NSWLR 57

Murphy v. Murphy (1963) VR 610

Hadzigeorgiou v. O'Sullivan (1983) 1 QdR 55

Anderson v. R. (1972) AC 100

HEARING

MELBOURNE, 9 August 1993
21:9:1993

Counsel for the Appellants: Mr D. Cooper

Solicitors for the Appellants: Feez Ruthning

Counsel for the Respondents: Mr J. Sheahan

Solicitors for the Respondents: Lees Marshall and Warnick

ORDER

THE COURT ORDERS THAT:
1. the appeal against the judgment for the respondents against the

appellants in the sum of $55,200 be dismissed;
2. the appeal against the trial judge's order that the appellants
should pay the respondent's costs, without reduction, and his
refusal to order that those costs should have been awarded on an
indemnity basis, be dismissed;
3. the appellants pay the respondents' costs of these appeals;
4. the respondent's cross appeal be dismissed; and
5. the respondents' pay the appellants costs of the cross appeal.

Note: Settlement and entry of orders is dealt with in O.36 of the Federal Court Rules.

DECISION

SWEENEY AND O'CONNOR JJ By a contract of sale dated 3 April 1987 Dalrymple Holdings Pty Ltd ("Dalrymple") agreed to purchase from Mr and Mrs Gohl a property in Highgate Hill, together with certain chattels, for $170,000. Mr and Mrs Gohl owned the freehold on which they conducted a boarding house known as "Linden Lodge". The vendors' agent was O'Kelly Holdings Pty Ltd, which acted through its directors, Mr and Mrs O'Kelly. Dalrymple, as trustee of a trust of the family of Mr and Mrs Murphy, went into possession and conducted the boarding house business until 31 March 1988, when it was replaced as trustee by Milglade Pty Ltd ("Milglade").

2. By an amended application dated 5 December 1988 Dalrymple and Milglade claimed that Dalrymple was induced to enter into the contract by misrepresentations by the vendors' agent concerning the income, expenses and profitability of the boarding house business.

3. As Spender J observed in his reasons for judgment dated 22 November 1990, the case for the applicants was that, prior to the execution of the contract, a document which became Exhibit 1 at the trial was delivered by the vendors' agent to the home of Mr and Mrs Murphy, each of whom was a director of Dalrymple. This document showed two tables with a breakdown of expenses, both per month and per annum, and, under the heading "Income", the following appeared:

"16 ROOMS x $70.00 p w. = $1106.00 p.w. - $4755.00 p.m. -
$57069.60 P.A.
BUDGET FOR 95% OCCUPANCY AND DISCOUNT 2 ROOMS FOR 4 WEEKS X'MAS
PERIOD THEY PAY $45.00 P.W. WHILE ON HOLIDAY.
ROOM/BOARD RATE WILL NOW INCREASE TO $75.00 P.W."

4. In the pleadings the applicants contended that they were induced to enter into the contract by the representations contained in Exhibit 1 made by the second respondent, the vendors' agent, acting through its directors Mr and Mrs O'Kelly, the third and fourth respondents. The case of those respondents was that any document given to Mr Murphy did not contain the information appearing under the heading "Income" as set out above. Their allegation was that that part of the document came into existence by the work of persons other than the respondents. The respondents asserted that no details of the income, costs or profitability of "Linden Lodge" were communicated to the applicants before the execution of the contract.

5. On 13 August 1990 Pincus J ordered a trial of preliminary issues to determine, in substance, whether the document which became Exhibit 1 contained the information under the word "Income" at the time Mr Murphy received it, or whether that information was added by persons other than the respondents, and whether that information was communicated to the applicants prior to the execution of the contract of sale.

6. When the preliminary issues came on before Spender J, counsel for the second, third and fourth respondents indicated that leave would be sought further to amend the Amended Defence and to file further affidavits the effect of which would be, where previously the respondents swore that the document handed to Mr and Mrs Murphy differed from Exhibit 1, they would say that, after considering the expert reports, they could no longer maintain that claim, and they would say that they were no longer sure.

7. In accordance with the directions of Pincus J in respect of expert evidence, a further affidavit of Gregory Keith Marheine had been filed by the applicants. No affidavit of any forensic expert had been filed by the second, third and fourth respondents.

8. Mr Marheine gave oral evidence but was not cross-examined by counsel for the second, third and fourth respondents. His evidence concerning the disputed documents was described by Spender J as "dispassionate, thorough and convincing".

9. The effect of his evidence was that Exhibit 1 was an authentic document and that the document propounded by the second, third and fourth respondents as the document given to Mr Murphy, and which became Exhibit 2, was not bona fide and had been subjected to manipulation.

10. His Honour was satisfied on the evidence of Mr Marheine and the evidence of Mr Murphy that, when any document concerning costs, income or profitability was first received by anybody on behalf of the applicants, that document was in the form of the document which became Exhibit 1. He was satisfied that it was in that form when it was submitted by the second, third and fourth respondents to the applicants and that Exhibit 2 was an altered version of Exhibit 1.

11. Counsel for the second, third, and fourth respondents submitted to his Honour that, in any event, no document concerning costs, expenses and profitability was produced or delivered to Mr Murphy on behalf of the applicants until after the execution of the contract of sale.

12. Both Mr Murphy and Mrs Murphy gave oral evidence at the trial that Exhibit 1 was received at their home on 31 March 1987 and was discussed by them prior to the execution by them of the contract of sale later that day, at the premises of West End Real Estate, being the real estate agency conducted by the second, third, and fourth respondents.

13. Mr O'Kelly, on the other hand, said that on 30 March 1987, he conducted a tour of investment properties in the West End area of Brisbane with Mr Murphy and there were general discussions about returns of rooming houses, the discussion being based on a gross return of $40.00 per week for a room in a rooming house. He swore that prior to the execution of the contract on 31 March 1987 he had not discussed with or communicated to Mr Murphy or anybody else on behalf of the applicants any financial detail concerning any aspect of the operation of the boarding house. He said that on 31 March 1987 he had met Mr and Mrs Murphy at "Linden Lodge" where an inspection took place. They then returned to the West End real estate agency premises, which were locked (Mrs O'Kelly having departed), and there Mr and Mrs Murphy executed the contract of sale which had been previously typed by Mrs O'Kelly on that day, on instructions given to her by Mr O'Kelly after a conversation between Mr O'Kelly and Mr Murphy that occurred at about lunchtime on Tuesday, 31 March 1989.

14. Mrs O'Kelly said that she would have left the premises of West End Real Estate Agency at about 5 o'clock on that day and she did not see Mr and Mrs Murphy or her husband nor was she present when the contract of sale was executed on 31 March 1987.

15. Mr Murphy said that after the inspections of 30 March 1987, which included discussions concerning the yield to be expected from "Linden Lodge", he asked Mr O'Kelly to forward to him in writing the financial details of the performance of the boarding house, that he received that document, which was in the form of Exhibit 1, on the afternoon of 30 March 1987 at his home, either in the post which arrived at about 1 o'clock or by courier. He said that when his wife returned to their home from her employment, that afternoon they discussed the financial details contained in that document and then went to the West End Real Estate Agency, where they travelled in Mr O'Kelly's car to inspect the boarding house.

16. Mrs Murphy said that she recalled discussing other matters relating to the boarding house, but said that there was no discussion concerning the financial performance of the business. Both Mr and Mrs Murphy said that, on their return to the premises of West End Real Estate, Mrs O'Kelly typed up the contracts of sale, and that a deposit of $2,000.00 was paid. They executed the contract on behalf of Dalrymple Holdings Pty Ltd on that day. By the contract a further $3,000.00 was to be paid some fourteen days later. Both Mr and Mrs Murphy swore that the financial information contained in Exhibit 1 was communicated to them and relied on by them in the decision to execute the contract on 31 March 1987.

17. Mrs O'Kelly said that some 5 to 10 days after the execution of the contract Mr Murphy came to the premises of West End Real Estate and that she, in the presence of Mr Murphy, prepared a document relating to financial figures for "Linden Lodge". She could not say whether or not the information concerning income as appears on Exhibit 1 was in fact typed by her at that time. Both Mr O'Kelly and Mrs O'Kelly suggested that the information was sought by Mr Murphy in association with the financing of the project either directly from financiers or in connection with some partnership proposals.

18. As his Honour observed, there were "very serious questions of credit that call for resolution, but on analysis the factual situation advanced by either side of the record is in stark contrast".

19. His Honour said:

"If the contending accounts had been other than diametrically
opposed, questions such as the likelihood of a document posted on
Monday, 30 March 1989, presumably late in the day, being delivered
at Clayfield on 31 March 1989 at about 1 p.m. would loom as
important. If it was common ground that there had been oral
discussion covering income and expenses of the boarding house
prior to the execution of the contract, then the question of
whether the document Ex. 1 was delivered before execution, or
brought into existence afterwards for financing or other purposes,
would be more difficult.
It is not the case that Exhibit 2 is an earlier version of Exhibit
1, with the portion under the heading "Income" added later to
Exhibit 2 to produce Exhibit 1. The effect of Mr Marheine's
evidence is that Exhibit 2 is later than Exhibit 1, coming into
existence by the masking-out of the portion dealing with income
which appears on Exhibit 1. Against the background of that
unchallenged conclusion, the accounts of the O'Kellys and the
Murphys are so opposed as to leave no room for reconciliation on
the basis of mistaken recollection.
Shortly put, Mr O'Kelly says that the contract of sale was
executed on 31 March prior to any document containing figures
concerning 'Linden Lodge' or any information concerning the
financial performance of 'Linden Lodge' being communicated to Mr
Murphy or anybody else on behalf of the applicant. He says that
the communication which was made to Mr Murphy (and his present
position is that he is not sure whether it was in terms of Exhibit
1 or Exhibit 2), did not occur until after the contract of sale
for the purchase of the boarding house had been executed. The
contention by Mr and Mrs Murphy, on the other hand, is that the
details of the financial performance of the boarding house in the
form of Exhibit 1 was received by them and considered by them
prior to the execution of the contract of sale for the acquisition
of the boarding house and the representations contained in that
document were a material part of their reasons for entering into
the contract for purchase.
Having seen Mr and Mrs Murphy and Mr and Mrs O'Kelly give their
evidence, I simply say that I prefer the evidence of Mr Murphy,
and of his wife in so far as she corroborates his account, to that
of Mr O'Kelly and Mrs O'Kelly. I find the account given by Mr
O'Kelly, independently of any question of credit that arises as a
result of the contention concerning Exhibits 1 and 2, quite
implausible. It is inherently improbable that prior to the
execution of the contract no financial information concerning the
performance of the boarding house, 'Linden Lodge', would be
communicated by the vendor's agent to the purchaser. On Mr
O'Kelly's account, not even the most basic of information as to
rates, let alone income or costs of operating a boarding house
including components such as food, milk, bread and vegetables was
even discussed, let alone detailed. This scenario is so unlikely,
in my view, as really to reinforce acceptable evidence given by
persons who, it would seem to me, while they have a clear interest
in the outcome of the matter, did not overstate their position and
who frankly acknowledge that there were mistakes in some
significant respects in some earlier affidavits they had made.
In relation then to the two preliminary issues that I have to
decide, I find first that the document communicated by the second,
third and fourth respondents to the applicants was in the form of
JPM4 to the affidavit of Mr Murphy of 16 June 1988, and I further
find that the contents of that document were communicated to the
applicants prior to the execution of the contract of sale referred
to in the pleadings."

20. His Honour went on to deal with questions of costs relating to the amendment of the defence made to withdraw the former denial of the allegation that the document handed to Mr and Mrs Murphy differed from Exhibit 1 as follows:

"I earlier reserved the question of the costs thrown away as a
consequence of any such amendment. Counsel for the applicants
sought those costs on a solicitor-client basis. I have given
close attention to the report of Mr Marheine and to the pleadings.
The document Exhibit 1 or a copy thereof was communicated by
letter of 4 February 1988 to the solicitors for the second, third
and fourth respondents. The first suggestion that that document
did not contain the information concerning the income of 'Linden
Lodge' was in the defence filed October 1988. It was only at the
hearing on 1 November 1990 that the second, third and fourth
respondents through their counsel sought to resile from their
position as reflected in the present state of the pleadings so as
by amendment to withdrew the denial that the document communicated
to the applicants was Exhibit 1.
It is understandable that a party, after reflection or on being
apprised of further evidence, might wish to withdraw a denial, and
such a change in position need not ordinarily be visited with
costs on a solicitor-client basis. However, where the denial
raises an implication of fraudulent conduct, the position is not
so clear cut, because an allegation of fraud or dishonest conduct
is not one that should be made except after the most careful
consideration. Here, the circumstances have a further dimension.
Quite simply, the effect of Mr Marheine's evidence is that Exhibit
2 is a fabrication and he was not challenged on this aspect of the
matter. I find it impossible to avoid the conclusion that it came
about as a result of the efforts of Mr O'Kelly and/or Mrs O'Kelly.
In all the circumstances, I order that the costs thrown away by
the need to replead ought be on a solicitor/client basis.
Otherwise as to costs, the second, third and fourth respondents
are to pay the costs of the applicants in respect of the hearing
and determination of the preliminary issues, including the costs
reserved by Pincus J on 13 August 1990."

21. The matter later came on for trial before Spender J. In his reasons for judgment dated 31 March 1993, his Honour noted:

"The application seeks an order pursuant to s.87 of the Trade
Practices Act varying the contract between the parties in such
manner as the Court thinks fit and declaring the said contract to
have had effect as so varied on and after the date of execution of
the said contract. Further, or in the alternative, the applicants
seek damages pursuant to s.82 of the Trade Practices Act for the
loss or damage suffered by the applicants, or either of them, by
reason of the first, second, third and fourth respondents'
involvement in contraventions of ss.52 and 53A of the Trade
Practices Act, together with any interest thereon at such rate as
the Court deems fit. Alternatively, the applicants seek the
damages suffered by the applicants, or either of them, flowing
from the fraudulent or negligent misrepresentations, or both, made
by the first, second, third and fourth respondents, together with
interest thereon at such rate as the Court may deem fit. Further,
or in the alternative, the applicants seek the damages suffered by
them for breach of warranty, together with any interest thereon.
Finally, and in the alternative, the applicants also seek
exemplary damages from the second, third and fourth respondents by
reason of the facts and matters referred to in the statement of
claim."

22. His Honour reviewed the evidence and held:

"In all the circumstances of this case, I am satisfied that the
representations contained in Exhibit 1 were both intended to and
did induce the entry of the first applicant into the contract to
purchase 'Linden Lodge'.
The first respondents made the representations, which were
misleading or deceptive, through the second respondent, and the
third and fourth respondents were knowingly concerned in that
conduct. That conduct was in trade or commerce and induced the
applicants to acquire the boarding house."

23. His Honour declined to award exemplary damages, and having cited authority, said:

"The applicants in this case are entitled to recover the
difference between the purchase price and the value of the
property at the date of acquisition, together with any
consequential losses. No such consequential losses have been
claimed."

24. His Honour then reviewed the evidence relating to the purchase of "Linden Lodge" by Mr and Mrs Gohl and its sale by Milglade on 1 April 1990 for $410,000. He did not accept the evidence of Mr Walsh, a valuer called on behalf of the respondents at the trial, which he found to be "unconvincing and unimpressive".

25. The evidence of Mr Brett a valuer called on behalf of the applicants was described by his Honour as "sound notwithstanding some difficulty with respect to a number of sales".

26. His Honour went on to say:

"However, my fundamental objection is to the multiplier he
adopted.
Mr Brett's report included two approaches to the assessment of
boarding house values. The first was a direct comparison with the
prices paid for other boarding houses: the second was by
capitalisation of the net income derived from the business. Mr
Brett adopted a capitalisation rate of 20%, on the basis that the
market during the period when 'Linden Lodge' was sold expected a
return on boarding houses of between 20-25%. The first applicant
paid $170,000 for the property in anticipation of a 21% return.
Mr Brett calculated that the anticipated income based on the
actual trading figures meant that the anticipated profit for the
year subsequent to the purchase would be $24,533. When
capitalised at 20%, this results in a figure of $122,665 which Mr
Brett concludes in practicable terms results in a value of 'Linden
Lodge' at 3 April 1987 of $123,000.
I am of the opinion that the capitalisation rate adopted by Mr
Brett was too generous. In preparing his report, Mr Brett relied
on a draft report by Mr Calabro, an accountant, which contained a
summary of the actual trading figures for the twelve months period
from 1 April 1986 to 31 March 1987, together with a summary of
later trading figures.
From the actual trading figures for the twelve months preceding
April 1987, Mr Brett also calculated a figure which was the profit
anticipated for the year following April 1987, which figure was
calculated at $24,533. I accept this figure as a relevant
starting point.
I consider that significant assistance as to a reliable
capitalisation rate on returns from boarding houses came from Mr
Brown, a property manager. His affidavit details substantial
experience and interest in comparable properties and in practical
terms I found his evidence to be both reliable and helpful. Mr
Brown gave evidence in his affidavit that he is rarely able to
make more than 14% on rental properties. Having regard to the
evidence of Mr Brown, I think it right to apply a capitalisation
rate of 17.5%."

27. His Honour's conclusions were:

"In this case the Court has been supplied with considerable
evidence as to comparable value and as to an acceptable
methodology of assessing value. Some of the processes of
reasoning in the various experts' contributions adopt a figure
which is not to be preferred in the light of other evidence. In
these circumstances the Court has to discharge its primary
obligation of finding the facts and it does so in grateful
reliance on the assistance provided by the opinions of experts but
without a slavish and uncritical adoption of any particular part
of any such opinion.
In these circumstances I would apply a capitalisation rate of
17.5% to an annual profit figure of $24,553, which gives
approximately $140,000 as the valuation of 'Linden Lodge' at 3
April 1987. This is some $30,000 less than the amount Dalrymple
paid on 3 April 1987.
The applicants are entitled to this sum, together with interest
pursuant to s. 51A of the Federal Court of Australia Act 1976.
Such interest is to compensate the applicants for being "out of
pocket" by the excessive price paid for 'Linden Lodge'.
It was submitted by the applicants that the representations here
were capable of amounting to warranties on the part of the second,
third and fourth respondents and that therefore the applicants
were entitled to be put in the same position as if the warranties
had not been breached. In my view the applicants are not entitled
to damages on that basis. The representations here were
pre-contractual representations. They did not constitute warranties
by the respondents.
As the evidence in this case illustrates, interest rates in the
market have fluctuated considerably since Dalrymple purchased
'Linden Lodge'. I adopt 14% as a fair averaged rate for that
period, making the (rounded) amount for interest $25,000.
The first respondents (Mr and Mrs Gohl) did not appear at the
hearing. On the first day of the trial of the proceedings,
consideration of their position was deferred.
I give judgment against each of the second, third and fourth
respondents in the sum of $55,000.
I will hear the parties on costs, and as to any further orders I
should make."

28. By Notice of Appeal dated 20 April 1993 O'Kelly Holdings Pty Ltd and Mr and Mrs O'Kelly appealed against the whole of this judgment, contending that "the finding that the respondents were induced by the contents of Exhibit 1 to purchase the subject property was wrong and against the evidence" and that there should have been the findings of fact detailed in the Notice. They sought orders that the amended application be dismissed, with costs of that application and the appeal to be paid by the respondents.

29. On 23 April 1993 the learned trial judge delivered his reasons on the question of costs and any further orders to be sought.

30. His Honour said:

"It is convenient to deal with the further findings sought by the
second to fourth respondents.
What is asserted on their behalf is that the boarding-house was
purchased with the intention of making a capital profit on resale
and was not bought, as Mr Murphy alleged, to live off the income.
The circumstances that some two years later it was sold for a very
large profit has the consequence that the applicants in fact
suffered no loss."

31. Having reviewed the evidence his Honour went on to say:

"I am satisfied that the applicants acquired 'Linden Lodge' as an
investment. The question of returns on that investment was an
important matter. That finding is corroborated by the
calculations performed by Mr Murphy on the rear of Exhibit 1,
disclosing a yield on the proposed investment of the order of
slightly more than 20 percent. I am sure that the question of
capital gain was not an irrelevant matter in the decision to
purchase, but the decision to purchase was in a large measure
based on the trading figures supplied to the applicants in Exhibit
1. The presentation of those figures misled the applicants as to
the value of what they were acquiring and they are entitled to be
compensated as to their primary loss on the difference between the
purchase price and the value of what they were induced to acquire.
The fact that some considerable time later there was a handsome
capital gain made on the property does not affect their
entitlement to damages in respect of the conduct in contravention
of the Trade Practices Act.
As to the suggestion that there were inconsistent remedies
pursued, in my opinion, as the amended application makes plain,
what was sought on behalf of the applicants was sought either in
the alternative or in addition to damages based on the
contravention of s.52 of the Trade Practices Act. There was not
in my opinion a failure to elect between inconsistent causes of
action nor on any view of the evidence has there been a failure to
mitigate their damages.
It is not disputed that the applicants should pay to the second,
third and fourth respondents the costs thrown away by the
abandonment of the issues raised in paragraphs 25-34 of the
further amended statement of claim and I so order."

32. His Honour then dealt with the claim for exemplary damages,
saying:

"In the applicants' claim for indemnity costs, they say that not
only did the O'Kellys commit a blatant fraud in the production of
the document which became Exhibit 2, but they set out deliberately
to fabricate a document which they intended to adduce in evidence
to support their defence in circumstances where they knew that
that defence carried with it the assertion that the applicants'
case was dishonest and itself based on deliberately concocted
evidence.
In my reasons for judgment on the preliminary issue, I said that
the document given to Mr Murphy and propounded by the second,
third and fourth respondents, 'was not bona fide and has been
subjected to manipulation'. I said:
'I find it impossible to avoid the conclusion that (the
fabricated document) came about as a result of the efforts
of Mr O'Kelly and/or Mrs O'Kelly.'
As earlier indicated, I ordered that the costs thrown away by the
need to replead ought be on a solicitor-client basis but otherwise
ordered costs be paid by the second, third and fourth respondents
(the implication being that they be on a party and party basis).
It has to be accepted that the second, third and fourth
respondents were the agents for the first respondent, and have
little personal pecuniary interest in the dealings with which
these proceedings are concerned.
There is force in the submissions on behalf of the applicants but
the essential features on which they rely remain much as they were
as at November 1990, although I am conscious that there has been,
in a sense, a maintenance of the position on which they relied at
the time of the preliminary hearing. I was conscious then, as I
am now, of the matters to which the applicants point, but in all
the circumstances, I am not persuaded that I should order costs
other than on the usual basis in respect of the principal proceedings."

33. His Honour then dealt with questions of costs and made the following orders:

"1. There be judgment for the applicants in the proceedings
against the first respondents in the amount of fifty-five
thousand two hundred dollars ($55,200.00).
2. The applicants pay the respondents' costs thrown away in
relation to the issues raised by paragraphs 25 to 34 of the
further amended statement of claim.
3. The respondents pay the applicants' costs of the
proceedings, without reduction."

34. His Honour's phrase "without reduction" was used in relation to the debate before him which he summarised as follows:

"The final matter is the level of costs, having regard to the
provisions of O. 62 r. 36A(1). This rule provides:
'Where a party is awarded judgment for less than $100,000 on
a claim (not including a cross-claim) for a money sum or
damages any costs ordered to be paid, including
disbursements, will be reduced by one-third of the amount
otherwise allowable under this Order unless the Court or a
Judge otherwise orders.'
I gave judgment on 31 March against the second, third and fourth
respondents in the sum of $55,200. This amount included a
component for interest, awarded under s. 51A of the Federal Court
of Australia Act 1976.
The increase to the sum of $100,000 from $50,000 only took effect
from 1 January 1993, which is after the trial of the principal
proceedings but before judgment. Section 51A(1) permits the court
or a judge on application, unless good cause is shown to the
contrary, to order that there be included in the sum for which
judgment is given interest at such rate as the court or judge, as
the case may be, thinks fit (my emphasis). Interest awarded
pursuant to s. 51A is part of the judgment sum.
This interpretation is consistent with the judgment of the N.S.W.
Court of Appeal in Fire and All Risks Insurance Co. Ltd v.
Rousianos (1989) 19 NSWLR 57; the judgment of the Full Court
of the Victorian Supreme Court in Murphy v. Murphy (1963) VR
610; and Hadzigeorgiou v.O'Sullivan (1983) 1 QdR 55.
It therefore is the case that at the time of the trial in the
principal proceedings the judgment would have exceeded the
threshold which called for the application of O. 62 r. 36A. In
the circumstances of this case the applicants are entitled to
their party and party costs without reduction. Out of an
abundance of caution, I order that there be no reduction in the
costs ordered to be paid in the amount of costs otherwise
allowable."

35. By their supplementary Notice of Appeal the appellants appealed against the order that the appellants pay the respondents costs without reduction.

36. By Notice of Cross Appeal dated 21 May 1993 the respondents contended that there should have been an order that the appellants pay the costs of the respondent on an indemnity basis.

37. The appellants submitted, amongst other things, that his Honour erred in finding that the respondents were induced by Exhibit 1 to enter into the contract. There was ample evidence to support this finding, including that which showed the document to be a fabrication. The finding turned upon the view his Honour formed of the credibility of the witnesses, whose accounts of the critical facts were diametrically opposed. It is a classic case for a court of appeal to leave undisturbed the finding of inducement, acknowledging the advantages of the trial judge and the persuasiveness of his reasons.

38. The appellants also contended that the fact that the respondents on 1 April 1990 sold the freehold to developers for $410,000 should have led his Honour to conclude that they suffered no damage when they entered into the contract on 3 April 1987.

39. In dealing with this submission his Honour noted Mr Murphy's evidence that he told Mr O'Kelly that "there was no way I was buying the property unless I was positive it was giving that income", and went on to hold:

"I am satisfied that the applicants acquired 'Linden Lodge' as an
investment. The question of returns on that investment was an
important matter. That finding is corroborated by the
calculations performed by Mr Murphy on the rear of Exhibit 1,
disclosing a yield on the proposed investment of the order of
slightly more than 20 percent. I am sure that the question of
capital gain was not an irrelevant matter in the decision to
purchase, but the decision to purchase was in a large measure
based on the trading figures supplied to the applicants in Exhibit
1. The presentation of those figures misled the applicants as to
the value of what they were acquiring and they are entitled to be
compensated as to their primary loss on the difference between the
purchase price and the value of what they were induced to acquire.
The fact that some considerable time later there was a handsome
capital gain made on the property does not affect their
entitlement to damages in respect of the conduct in contravention
of the Trade Practices Act."

40. None of the valuers called on either side used the 1990 sale as evidence of the 1987 value. Mr Brett, whose evidence generally impressed his Honour, specifically considered it, and said that it was of no assistance because the 1990 purchase was for the purpose of amalgamation with an adjoining site for redevelopment. His Honour made no error in treating the evidence of the 1990 sale as he did.

41. The appellants sought to rely on events subsequent to the contract of sale as probative of the value of the property at the time, such as expressions of opinion by Mr Murphy as to the value of the property and offers made for or expressions of interest in the property in February 1988 and December 1988. In my opinion, his Honour was not in error in failing to hold that these events were "probative" of the 1987 value.

42. The appellants also referred to a valuation of the land and buildings made by Mr Skelsey, a valuer, on 13 November 1987 of $206,000. In the first part of this valuation, the income figures, which were capitalised at 15%, were based on an unrealistically high occupancy rate. A second paragraph which the valuer described as "Summation value of land and Improvements" valued the land at, "say, $118,000" and the improvements at $81,000. This valuer was called on behalf of the appellants at the trial and was not cross-examined. At the trial no submission was made in relation to the valuation evidence of Mr Skelsey and it was not submitted that his valuation by summation was relevant in determining the value of the property.

43. The appellants submitted to us that his Honour erred in capitalizing the annual earnings of $24,553 at 17.5% and should have used the figure of 14% which would have produced a value of $175,000 and therefore no loss by the respondents.

44. His Honour referred to the authorities dealing with the function of expert witnesses and the use by the court of their evidence as follows:

"The primary function of an expert witness is to assist the Court
in the Court's function. Lord President Cooper said in Davie v.
Edinburgh Magistrates (1953) SC 34 at 40:
'Their duty is to furnish the judge or jury with the
necessary scientific criteria for testing the accuracy of
their conclusions, so as to enable the judge or jury to form
their own independent judgment by the application of these
criteria to the facts proved in evidence.'
An illustration of this is Thurston v. Todd (1966) 1 NSWR 321,
where the Court of Appeal was concerned with a case where at the
primary trial level there were differing medical opinions on the
life expectancy of a quadriplegic and the trial judge had formed
his own opinion on life expectancy. The Court of Appeal held that
estimates of life expectancy in cases of this nature are imprecise
and based on informed speculation, and it was therefore open to a
trial judge to reject those opinions of medical experts and select
his own estimate of life expectancy. At 331, Holmes JA said:
'It is clear that the medical experts are giving honest
opinions but that those opinions have in them an element of
speculation based upon the degree of optimism of the
particular expert. This is a factor which the tribunal of
fact can weigh and allow in full or discount. I do not
think that the opinions are so essentially scientific that
they must be wholly accepted or wholly rejected.'
Similarly, a trial judge is not obliged to accept the findings of
expert witnesses: Abalos v. Australian Postal Commission [1990] HCA 47; (1990)
171 CLR 167. The present is not a case where the evidence of
experts is uncontradicted, such as Anderson v. R. (1972) AC 100;
cf. Ellis v. Wallsend District Hospital (1989) 17 NSWLR 553.
In Hill v. Commissioner of Highways (1966) SASR 316, Mitchell
J said at 325:
'I am in the position in the instant case where I have been
supplied with a formula, and with considerable evidence as
to capitalization rates and if I find (as in fact I do) that
none of experts called has been placed in the position of
having the whole of the material facts put before him, then
I think I should consider the expert's evidence as to the
rate of capitalization in the light of the facts which I
find.'
In my opinion, the Court's duty is to form and act on its own
original opinion, taking such assistance as it can from the
opinion of experts, but it is not bound, nor should it defer, to
the opinion of experts in the sense of permitting experts to
hijack the fundamental fact finding obligation of the Court.
That view is consistent with the observations of the High Court in
Ramsay v. Watson [1961] HCA 65; (1961) 108 CLR 642, where the Court (Dixon
CJ, McTiernan, Kitto, Taylor and Windeyer JJ) said at 645:
'The jury were entitled...to give weight to the opinion of
an experienced physician skilled in the relevant branch of
medicine...'
And later:
'But it is for the jury to weigh and determine the
probabilities. In doing so they may be assisted by the
medical evidence but they are not simply to transfer their
task to the witnesses.'
In Holtman v. Sampson (1985) 2 QdR 472, the Full Court of the
Supreme Court (D.M. Campbell, Macrossan and Thomas JJ) said at
474:
'In cases where the experts differ, the lay tribunal will
apply logic and commonsense to the best of its ability in
deciding which view is to be preferred or which parts of the
evidence are to be accepted.'"

45. The witnesses used differing rates of capitalisation, Mr Calabro 20.5%, Mr Brett and Mr Brooks 20%, Mr Foster and Mr Skelsey 15% and Mr Brown 14%.

46. His Honour was impressed by Mr Brown's general evidence, noting that he was rarely able to achieve a return better than 14%. It is not surprising that an investor such as Mr Brown who bought "predominantly with a view to making an eventual capital gain" would have been content with a return lower than that appropriate in the case of the purchaser in the present case, which was largely, but not exclusively, concerned with income return.

47. His Honour thought it "right to apply a capitalisation rate of 17.5%". It was open to him on the evidence to form this judgment and I find no error in it.

48. In his reasons for judgment dated 23 April 1993, the learned trial
judge made findings of fact "to enable the resolution of what were said to be outstanding issues". One of the outstanding issues was whether the applicants had failed to mitigate their damages, and his Honour found that there was no such failure.

49. In paragraphs 11 to 13 of their submissions the appellants referred to mitigation of damages as follows:

"11. In the further alternative an applicant is only entitled to
recover non-avoidable damage. Once the Murphys realised by
July 1987 that they had been deceived (T184-9; T640-2), (or
by late 1987 T594) the Second Respondent was obliged to sell
the property to crystallise its damage because it was not
'locked-into' the property in any sense (T645-6).
cf. Burns v. MAN Automotive Aust. Pty Ltd 161 CLR 653.
12. This is a matter of proof, not pleading: O.11 r.13(4)
F.C.R. Heffernann v. Hayes 25 VLR 156.
13. At the time the Respondents in fact chose to sell, the
market price for just the land and building was
substantially greater than the contract price for the
entirety of the subject matter of the contract. On the
evidence the same is true of June/July 1987 (although a
smaller profit would have been made) and at all times
thereafter till 1990. In that context the Respondents could
have avoided any loss by selling the land after they
perceived they had been defrauded."

50. I reject these submissions and adopt the respondents' submissions here; namely, the duty to mitigate did not require the respondent who was not suffering continuing losses to sell the property; the evidence of later sale is irrelevant unless it is evidence of value at the date of purchase; and an allegation that the respondents should have sold the property earlier than they did is one which raises new issues of fact and must be pleaded. There was no error in the learned primary judge's reasons on this point.

51. I would dismiss the appeal against the judgment for the respondents against the appellants in the sum of $55,200, with costs.

52. His Honour's order that the appellants should pay the respondents' costs, without reduction, and his refusal to order that those costs should have been awarded on an indemnity basis were discretionary orders made in the light of his detailed knowledge of the course of the proceedings and without any error of principle or misconception of fact. I see no reason for disturbing them and would dismiss the appellants' appeal against the former order and the respondents' cross appeal against the latter, in each case with costs.

LEE J This is an appeal from several judgments of a Judge of this
Court (Spender J) in which the appellants were ordered to pay to the respondents the sum of $55,200 and, inter alia, the respondents' costs of the proceedings.

2. His Honour found that the first respondent ("Dalrymple") had suffered loss by reason of conduct in trade or commerce by the first appellant ("O'Kelly Holdings"), being conduct that was misleading or deceptive in contravention of s.52 of the Trade Practices Act 1974. His Honour held that Dalrymple was entitled to recover the amount of that loss pursuant to s.82 of the Trade Practices Act. His Honour also found that the second and third appellants ("Mr and Mrs O'Kelly") had been knowingly concerned in the conduct of O'Kelly Holdings.

3. The relevant facts were as follows. In April 1987 Dalrymple purchased from Mr and Mrs Gohl land and improvements situated at 91 Hampstead Road, Highgate Hill in Brisbane. Dalrymple was introduced to the property by O'Kelly Holdings, the agent for Mr and Mrs Gohl. The principal improvement on the property was a "colonial style" dwelling converted to operate as a licensed boarding house. Mr and Mrs Gohl conducted such a business on the property. The price paid for the property was $170,000.

4. The property was not subject to any leasehold interest. Dalrymple intended to take over and continue the boarding house business established on the property. His Honour found that prior to executing the contract for the purchase of the property, O'Kelly Holdings had made statements in respect of the turnover and profitability of the business that amounted to conduct that was misleading or deceptive in contravention of the Trade Practices Act. Those findings are not challenged in this appeal.

5. In July 1988 Dalrymple commenced proceedings to recover the amount of loss it claimed to have suffered by reason of conduct of O'Kelly Holdings. It did not seek any order from the Court to set aside the transaction it had entered. By March 1988, and probably earlier than that, Dalrymple was aware of the nature of the misleading conduct and had decided to affirm its bargain and recover from the appellants whatever loss it had suffered.

6. In their appeal the appellants attempted to argue that there was an absence of causal connection between the conduct of O'Kelly Holdings and the loss Dalrymple claimed it had suffered. It was submitted that his Honour had erred in his finding of fact that the relevant conduct of O'Kelly Holdings had occurred before Dalrymple had entered a binding contract to purchase the property.

7. That submission may be dealt with quite shortly. In effect, it amounted to a submission that his Honour failed to give adequate weight to contrary evidence adduced by the appellants. The relevant findings of fact by his Honour were made in his reasons for judgment delivered on 22 November 1990 in determination of a preliminary question. That judgment was not the subject of an appeal. In his Honour's reasons for judgment in the principal hearing, delivered on 31 March 1993, his Honour confirmed his earlier findings of fact.

8. In his Honour's reasons for judgment on 22 November 1990, his Honour said as follows:

"There are, of course, very serious questions of
credit that call for resolution, but on analysis
the factual situation advanced by either side of
the record is in stark contrast.
...
Having seen Mr. and Mrs. Murphy and Mr. and Mrs.
O'Kelly give their evidence, I simply say that I
prefer the evidence of Mr. Murphy, and of his wife
in so far as she corroborates his account, to that
of Mr. O'Kelly and Mrs. O'Kelly. I find the
account given by Mr. O'Kelly, independently of any
question of credit that arises as a result of the
contention concerning Exhibits 1 and 2, quite implausible."

Other findings made by his Honour in respect of the Exhibits 1 and 2 referred to in his reasons bore most adversely upon the credit of Mr O'Kelly.

9. It is obvious from the above that the findings of fact made by his Honour were based upon an assessment of the credit of witnesses and nomination of the evidence to be preferred, and a submission that it was open to this Court to interfere with those findings was bound to fail unless a manifest and material error could be demonstrated. No such error was exposed. (See Devries v. Australian National Railways Commission [1992] HCA 41; (1993) 112 ALR 641.)

10. The appellants further submitted that his Honour erred in finding that the conduct of O'Kelly Holdings contributed to the decision by Dalrymple to purchase the property. His Honour accepted the evidence of Mr Murphy, a director of Dalrymple, that Dalrymple would not have offered $170,000 for the property had it known the extent to which the conduct of O'Kelly Holdings was misleading. The appellants pointed to passages in the evidence capable of sustaining a different conclusion but that evidence fell well short of demonstrating that his Honour's finding was glaringly improbable. The finding of a causal link between the conduct of O'Kelly Holdings and the incurring of the claimed loss was clearly open to his Honour.

11. The real nub of this appeal is whether his Honour erred in finding that Dalrymple had suffered any loss in purchasing the property for the price it paid for it.

12. His Honour acknowledged that the principal difficulty in the case was the assessment of the loss occasioned by the conduct of O'Kelly Holdings. His Honour noted that according to the principles established by Gould v. Vaggelas (1984) 157 CLR 215 and Toteff v. Antonas [1952] HCA 16; (1952) 87 CLR 647, in an action for deceit the usual measure of damage would be the difference between the real value of the property at the time of purchase and the price the purchaser paid for it and that in assessing the amount of loss recoverable under s.82 of the Trade Practices Act usually a similar measure will be applied. (See Munchies Management Pty. Ltd. v. Belperio (1988) 84 ALR 700 and Henjo Investments Pty. Limited v. Collins Marrickville Pty. Limited [1988] FCA 40; (1988) 79 ALR 83.)

13. The property was sold in April 1990 for a price of $410,000. His Honour correctly stated that the price obtained for the property in April 1990 did not mean that Dalrymple had not suffered loss in April 1987 when it paid a purchase price of $170,000 but the price paid in April 1990 would be part of the evidence relevant to establishing the value of the property in April 1987.

14. His Honour was presented with evidence from expert valuers, some of whom provided assistance to his Honour and others of whom did not.

15. Much of that evidence relied upon a method of valuation which capitalized the net income of the boarding house business as at April 1987. His Honour adopted this method in determining that the value of the property at April 1987 was $140,000.

16. As his Honour said, the basis of valuation should be the price that a willing purchaser would have had to pay a vendor not unwilling but not anxious to sell. (See Spencer v. Commonwealth of Australia (1907) 5 CLR 418.) It was put another way in Pastoral Finance Association Limited v. The Minister (1914) AC 1083 at p 1088:

"Probably the most practical form in which the matter
can be put is that they (the dispossessed owners)
were entitled to that which a prudent man in their
position would have been willing to give for the
land sooner than fail to obtain it."

17. That passage was referred to and amplified in Dangerfield v. Town of St. Peters [1972] HCA 15; (1972) 129 CLR 586 per Barwick CJ at p 590:

"That is to say, one supposes that the owner of the
land, with his knowledge of it and its suitability
for the special purposes to which he has been
putting it, was considering buying that land for
that purpose from a willing seller. The sum he
would pay to secure that land for those purposes
rather than lose it will be the value of the land
to him. The knowledge and experience he had of the
particular use to which he could successfully and
lawfully be put must be reflected in that sum."

18. In the instant case the property to be valued was improved urban land. In so far as the land had been put to profitable use, that use could be taken into consideration if it might be fairly said to increase the value of the land. (See Pastoral Finance Association at p 1088.)

19. Where the land is used for the conduct of a business, capitalization of the profits of the business at an appropriate rate may show that the whole undertaking regarded as a going concern, including land and improvements, may cause the land to be of greater value to the owner than would be the case if the land were valued without consideration of the effect of the business. (See Eastaway v. The Commonwealth [1951] HCA 80; (1951) 84 CLR 328 at p 340.)

20. Each of the above cases was concerned with the valuation of land compulsorily acquired from an owner and not land purchased by a willing purchaser from a not unwilling vendor. However, the principles established by those cases are no less applicable to the valuation of a property retained by a purchaser who claims, by reason of the misleading conduct of the vendor, to have paid more for the property than it was worth to the vendor.

21. His Honour calculated a value for the property by capitalizing an annual profit of the boarding house business of $24,533 at a rate of 17.5 per cent which produced a valuation of $140,000. The appellants submitted that the rate of capitalization applied by his Honour was too high and that the appropriate rate was 14 per cent which would have provided a valuation of $175,000. There was evidence before his Honour that an appropriate rate could be as high as 20 per cent. One valuer, Skelsey, to whose evidence I will return shortly, applied a capitalization rate of 15 per cent but agreed that a rate of 20 per cent could be appropriate. It cannot be said that his Honour's selection of a capitalization rate of 17.5 per cent demonstrated any error by his Honour, although it may be expected that, depending upon the safety of the investment, market forces would tend to depress the rate of return on capital invested in an asset of high yield by requiring more capital to be expended to acquire such an asset.

22. The question raised by the appeal is whether the valuation applied by his Honour was adopted without considering whether the business conducted on the property added any special value to the land or whether the valuation obtained by that method failed to reflect the actual value of the property as improved land.

23. The property was purchased by Mr and Mrs Gohl in July 1985 for $155,000. When it was sold by Dalrymple's successor in title in April 1990 for $410,000, the price obtained represented the value of the property to the owner of the adjacent land who acquired it to redevelop both properties as an amalgamated lot. In the absence of any evidence to the contrary, it was also evidence that the property had maintained its basic worth between 1985 and 1990. There was no evidence of any downturn in the value of improved land in the area between July 1985 and April 1987 or that Mr and Mrs Gohl had paid other than market value for the property in July 1985, however calculated. Such evidence as there was, established that the value of the property in July 1985 was only $15,000 less than the price Dalrymple paid for the property in April 1987.

24. There was evidence that in February 1988, after Dalrymple became aware of the nature of the misleading conduct, it had received an offer from a purchaser prepared to purchase the property for $190,000 and it had refused that offer. Additional evidence of particular significance was a valuation of the property prepared by Skelsey in November 1987. Skelsey had been instructed to value the property by a mortgage insurer whose services had been sought by Dalrymple. In that valuation Skelsey reported as follows:

"Generally, this area has undergone a continuing
transformation over the last 5 years, and the
increasing pressure applied by the Expo Site and
immediate fringe re-development will ensure future
value and viability of properties similar to the subject."

It was Skelsey's opinion that the property had a higher value if sold as a property on which the business of a boarding house was carried on but that opinion had been formed upon information provided to Skelsey by Dalrymple which suggested that the annual profit of such a business was substantially higher than the true profit as found by his Honour. However, Skelsey also provided an alternative valuation without regard to the conduct of such a business and was of the opinion that the value of the property would be $220,000 if the property were used for a private residence and the existing dwelling restored and renovated by the purchaser. It was assumed that the required renovations would cost $40,000-$50,000. It followed that Skelsey valued the property as it stood at $170,000-$180,000. Skelsey reported that similar "older style timber colonials" were part of the development surrounding the subject property and that a number of those buildings had been renovated and restored. Skelsey was not cross-examined on this part of his valuation.

25. His Honour did not refer to the value of the property as established by the price paid for it in July 1985 and the evidence of valuation of the property as improved land as provided by Skelsey was neither accepted nor rejected. His Honour did refer to evidence of "comparable value" but that was evidence which compared prices paid for properties in the inner Brisbane area on which boarding house businesses were conducted. His Honour did not find that the valuation of the property as improved land would provide a value less than the value obtained by capitalization of the net profit of the boarding house business conducted on the property.

26. The adoption of capitalization of the net profit of the business as the method of valuation to the exclusion of consideration of the value of the property as improved land involved an error. (See Eastaway at pp 339-340.)

27. Given that Skelsey's evidence of valuation of the property as improved land was not rejected by his Honour and was unchallenged in cross-examination, this is a proper case for this Court to determine the value, particularly when regard is given to the history of the litigation in this matter and the costs already incurred. If this Court is able to resolve the issues, it should do so.

28. On the evidence, the capitalization of the annual profit of the boarding house business in April 1987 showed that the conduct of such a business contributed no special value to the property and failed to reflect its normal value as improved land.

29. There was evidence that the value of residential properties in Brisbane increased in the latter part of 1987 and in 1988 but if allowance is made for increase in the value of the property between April 1987 and November 1987, Skelsey's evidence of its value in November 1987, coupled with evidence of the value of the property in July 1985, make it apparent that the value in April 1987 was unlikely to have been such that the differential between that value and $170,000 was either significant or measurable. The property was an elevated site within two kilometres of central Brisbane with some city views and in close proximity to transport routes. The evidence before his Honour suggested that, at the time of purchase, there was a market for residential properties of that type in that location. There was reason to give particular weight to Skelsey's valuation as an independent valuer instructed by a third party mortgage insurer. It was Murphy's evidence that when O'Kelly introduced him to the property, O'Kelly had said that Mr and Mrs Gohl were prepared to reduce their asking price from $200,000 to $170,000 but were not prepared to negotiate any lesser price. Whether that was Mr and Mrs Gohl's instruction was not the subject of further evidence but, on the material before his Honour, there was no reason to conclude that in April 1987 a prudent and not anxious vendor would have been willing to sell the property for less than $170,000 or would have been other than an unwilling vendor at a price of $140,000 if the vendor had paid $155,000 to acquire the property in 1985.

30. The weight of evidence pointed to a conclusion that the value of the property as improved land in April 1987 would have been in such proximity to $170,000 that it would have been unreasonable to conclude that Dalrymple had proved that it had suffered loss by acquiring the property for that price at that time.

31. It follows that the appeal should be allowed with costs and the judgments entered on 31 March 1993 and 23 April 1993 set aside and replaced by an order that the application be dismissed and the applicants pay the costs of the application other than the costs of the trial of the preliminary issue. The judgment entered on 22 November 1990 will remain undisturbed by those orders.

32. Although the judgment of 23 April 1993 was entered against Mr and Mrs Gohl, who were not appellants in this appeal, it appears that they have not been represented at any of the motions for judgment and have been prepared to abide by any orders made against their agents. Similarly, they stand to benefit from any success the agents, as appellants, have in this appeal and the only proper order to make is that the whole of the judgment of 23 April 1993 be set aside.