Custom Credit Corporation Ltd v Hall [1994] QSC 274

State Reporting Bureau TRANSCRIPT OF PROCEEDINGS (Copyright in this transcript is vested in the Crown. Copies thereof must not be made or sold without the written authority of the Director, State Reporting Bureau.) SUPREME COURT OF QUEENSLAND CIVIL JURISDICTION MACKENZIE J No 330 of 1994 CUSTOM CREDIT CORPORATION LIMITED and BRIAN A HALL BRISBANE .. DATE 31/10/94 JUDGMENT 1 REVISED COPIES ISSUED State Reporting Bureau Date 1 ) I I I I ~ <../ Plaintiff Defendant -- 1 of 13 -- 311094 mmb/lu (Mackenzie J) HIS HONOUR: The order in this matter is that the action is dismissed with costs, including reserved costs, if any, to be taxed. I publish my reasons. JGMENT 2 10 20 30 40 50 60 -- 2 of 13 -- IN THE SUPREME COURT OF QUEENSLAND No. 330 of 1994 Brisbane Before Mr justice Mackenzie [Custom Credit Co. Limited v. Brian A. Hall] BETWEEN 1udgment delivered CATCHWORDS: COUNSEL: SOLICITORS: HEARING DATE: CUSTOM CREDIT CORPORATION LIMITED Plaintiff and BRIAN A. HALL Defendant JUDGMENT - MACKENZIE I. 31/10/1994 NEGLIGENCE- Valuation- hotel valued for mortgage purposes- ordinary competent valuer test - valuation based on existing highly competent operator not objective standard of averagely competent operator - however, qualification in valuation that high management standards and favourable market conditions continue- prepared for large financial institution - whether valuation negligent. D.j .S. 1ackson Q.C. for plaintiff 1. Bell Q.C. for applicant Corrs Chambers Westgarth for plaintiff Quinlan Miller & Treston for defendant 18 - 21 July 1994 -- 3 of 13 -- IN· THE SUPREME COURT OF QUEENSLAND BETWEEN CUSTOM CREDIT CORPORATION LIMITED and BRIAN A. HALL JUDGMENT- MACKENZIE I. Judgment Delivered Monday, 31 October 1994 No. 330 of 1994 Plaintiff Defendant On 24 November 1986, the defendant prepared a valuation for the plaintiff of the Criterion Hotel at Dalby. He valued it at $2,150,000. Subsequently, the plaintiff advanced $1,810,000 to Kafola Pty Ltd to purchase the hotel and other real estate in Dalby. Under the management of Kafola Pty Ltd the hotel fell into financial difficulties causing loss to the plaintiff. The plaintiff alleges that the defendant prepared the valuation negligently in a number of respects. The defendant admits that the valuation was prepared for the plaintiff in the knowledge that it would be likely to rely on the valuation (subject to certain qualifications contained in the valuation) but denied that he had been negligent. It is common ground that at the time of the valuation the hotel was operated by the Davy family who were experienced hoteliers and considered to be well above average operators. The hotel was one of only two in Dalby with a drive-in bottle facility. It was also common ground that contrary to the usual practice there was no restraint of trade clause in the contract of sale of the hotel and that the Davy interests, having sold it, -- 4 of 13 -- 2 bought another hotel in Dalby, The Golden Fleece, at a dispersal sale of Carlton hotels and subsequently renovated it in such a way as to create a drive-in liquor facility which impacted on the trade of the Criterion Hotel. None of the last mentioned factors were known or should have been anticipated at the time of the valuation. The principal particulars relied on by the plaintiff were that the defendant failed to give any or any sufficient weight to the risk that the trading and profit figures achieved by the Davys might not be able to be maintained in the future by another proprietor and that the defendant failed to give any or any sufficient weight to the fact that the trading and profit and loss figures reflected the fact that the Davys were highly experienced in hotel operation. Other factors to which attention was paid in evidence were allegations that the defendant:- (a) had failed to give sufficient weight to the circumstance that gross profit figures supplied by the previous proprietor were unusually high; (b) had failed to give sufficient weight to the possibility of increasing competition in the future affecting the profitability and the value of the hotel; (c) had failed to make a reasonable or proper estimate as to the level of wages likely to be incurred in operating the hotel; (d) had adopted a capitalisation rate that in the circumstances was too low. It was alleged that the gross disparity between the valuation by the defendant and the true value of the hotel was evidence of negligence. There was no dispute that the capitalisation of earnings method was the appropriate means of valuation. It was accepted by all valuation witnesses that sales of about $35,000 per week were maintainable as a basis for assessing the earnings. The defendant gave evidence in support of his valuation. The plaintiff called two valuers, Mr Power and Mr Ludlow in support of its case. The former valued the hotel at $1,485,000 and the latter at $1,500,000. That figure was selected from a range of -- 5 of 13 -- 3 $1,473,333 to $1,718,889, the range being determined by using different capitalisation rates. Mr Power inspected the hotel on 29 March 1988 with a view to valuing it as at November 1986. Mr Ludlow inspected the property on 10 June 1994 and valued it as at 24 November 1986. As one of the major issues in the case was an alleged failure by the defendant to the value on a proper basis for mortgage purposes, it is necessary to highlight immediately one feature of the valuation. That is that during the course of explaining in his written valuation the basis upon which the gross profit was calculated he said the following:- "The hotel achieved 41% Gross Profit last financial year and I have adopted this gross profit although it should be pointed out that this gross profit is only achieved through very good buying practices and by not having to discount to meet the local market. The profitability of the hotel will suffer if current buying prices are not maintained and also if discounting is reintroduced in Dalby. My projected profit and loss statement reflects the current trading and profitability position of the hotel under the high standard of management currently being employed. Unless a similar high standard of management is continued the profitability of the hotel will not be maintained." It was submitted on behalf of the defendant that this clearly highlighted that the valuation took into account the high standard of management then employed in the hotel. By the end of the trial it was well established that the incoming operators of the hotel were inexperienced and that that inexperience as well as other circumstances was a factor in the failure of the business. However, it is apparent from the plaintiff's documentation concerning the advance (Ex. 3) that its Queensland office had conducted its own enquiries and had formed a rather more positive view. It refers to the applicant being experienced in licensed motels and as having sold its last motel at a large profit. One of the "strengths" of the application is stated as:- "client has experience and proved ability to build up business." -- 6 of 13 -- 4 The plaintiff attacked certain aspects of the defendant's valuation with particular reference to his assessment of maintainable gross profit, the level of wages and the capitalisation rate. The defendant's primary case was that the valuation was provided on a basis expressly stated in the "limiting conditions" section of the valuation namely "that the current standard of management shall be maintained". The standard of management, it was said, was set out expressly in the passage quoted above and in other passages in the following terms:- "I have adopted the netprofit figure arrived at in my Projected Profit and Loss Statement as being a realistic assessment of the trading position of the hotel under competent management. In summary the Criterion Hotel is a well laid out, staff efficient operation in an excellent location in Dalby." It was submitted that, as it was accepted on that basis by the plaintiff, it was irrelevant whether a valuation for mortgage purposes should ordinarily be made on the basis of good average management. As an alternative argument it was submitted that if the defendant was not able to rely on the "limiting condition" the purpose of the valuation was irrelevant to the way in which the valuer proceeded in determining it. If, contrary to that submission, the purpose was relevant, the evidence was not consistent from the plaintiff's valuers as to how the valuation should proceed. It was submitted that Mr Power's approach would require the incoming purchasers' competence to be assessed while Mr Ludlow would value on the basis of a good average operator. It was submitted that Mr Hall favoured the manner in which he had proceeded, namely to have regard to the actual operator (not an operator of average competence) and make it plain that it was a valuation on the basis of the actual operator. It was further submitted that the plaintiff's valuers had been influenced by the circumstances in which they made their valuations including the benefit of hindsight, and that therefore they could not be accepted without question. -- 7 of 13 -- 5 With regard to the specific matters of complaint set out above, the passages quoted from the valuation show the defendant clearly adverted to the possibility that the gross level of profit was high and was dependent on maintenance of the high standard of management, the continuation of good buying practices and the continuation of a market place in which there was no discounting. It is difficult to maintain that the defendant was not well aware that the high standard of management under the Davys was an important factor in profitability. Anyone reading the passage quoted, especially someone in a senior position in a finance company would infer that there was a risk that if someone less competent and experienced than the Davys operated the hotel, its profitability would in all probability suffer. The officer of the plaintiff who recommended the advance, Mr Rae, said that he had no specific recall of reading the qualifying parts of the report. He said:- "I don't remember reading it in this particular case, but ... it would have been a fairly typical comment that a valuer would make, and would obviously have to be taken into account and this would be why we would be relying on the fact that our State office believed that the proposed purchaser and now proposed borrower would have the expertise to be able to maintain that standard of operation." As Mr J ackson pointed out, contributory negligence by the plaintiff was not an issue in the case but it can be said that the misplaced reassurance contained in Ex. 3 was a significant factor in Mr Rae and, subsequently, Mr Porter who approved the loan treating the possibility', warned against in the valuation, of a decline in value if the operators were not managers of the same standard as the Davys as of little consequence. Both Mr Rae and Mr Porter said that they had relied on the amount of the valuation in deciding whether the amount of the loan fell within the plaintiff's lending guidelines. The other specific matters relate to the process of formulation of the valuation. The general principles applicable in determining whether a valuer has been negligent are set out in the following passages. Firstly in Singer & Friedlander Ltd v. John D Wood & Co (1977) 243 EG 212, the following passage appears:- -- 8 of 13 -- 6 "The valuation of land by trained and competent and careful professional men is a task which rarely, if ever, admits of precise conclusion. Often beyond certain well-founded facts so may imponderables confront the valuer that tie is obliged to proceed on the basis of assumptions. Therefore, he cannot be faulted for achieving a result which does not admit of some degree of error. Thus, two able and experienced men, each confronted with the same task, might come to different conclusions without anyone being justified in saying that either of them has lacked competence and reasonable care, still less integrity, in doing his work" In Corisand Investments Ltd v. Druce & Co (1978) 248 EG 769, the following is said:- "The nature of the process of valuation is such that in every case the valuer must be free to apply the clear principles of his discipline, according to the best of his honest judgment, on the facts as he judges them to be. If a valuer has applied those principles, and judged the facts in a manner in which a sensible and competent valuer could judge them, it matters not that other sensible and competent valuers could and do take different views of the facts. In considering, however, whether a valuation is shown to have been one which no ordinarily competent valuer could on the facts have put forward or accepted, much weight must be attached to the fact that the valuer has failed properly to apply any of those clear principles of his discipline, if that fact be demonstrated." The basis upon which a valuation for mortgage purposes should be made was at least initially in dispute. The evidence on behalf of the plaintiff was to the effect that if the defendant's approach was to value for mortgage purposes on the basis of an existing well above average operator, there was an error in principle. Mr Hall was disposed to defend the way in which he had carried out his valuation, by valuing on the basis of the existing operator but with the warning that it was dependent upon maintenance of the same standard of management and market conditions. However, in the context of forecasting income for the purpose of capitalisation of earnings he was prepared to accept that it was important to consider productivity under the operation of a typical management, rather than a management dependant on the personal characteristics of the management. The following passage in Corisand Investments v. Druce & Co states the principle in this way:- "I come then to my conclusion on this matter of principle as to the duty of a valuer in making a valuation for mortgage purposes. There can, in my judgment, be no answer of general principle upon this point as to the need or obligation of a valuer to make any specific deduction from his open market -- 9 of 13 -- 7 valuation, in any particular amount or proportion, in order properly to determine a valuation for mortgage purposes. The answer must depend upon what circumstances, on the facts of any particular case, are shown to be relevant. The valuer must, in valuing for mortgage purposes, exclude from his valuation any apparent asset or valuable content of the hotel as a saleable property, which will not be, or may well not be, available for sale by the mortgagee when he attempts to realise the security. That sale price which the valuer must try to estimate for the guidance of the intending lender is that sale price which the property is likely to fetch- as the valuer can judge it- at the time relevant to the possible realisation of the security and in the circumstances then relevant." I am satisfied that (leaving aside the question of the express reference to the high level of competence of the Davys) it is generally incorrect to value for mortgage purposes on the basis of maintainable profits achievable by an existing highly competent operator. The proper approach would be to relate it what was achievable by an average competent operator. However, this issue became interwoven with specific grounds of attack upon the defendant's valuation. Mr Hall used 41% as the gross profit margin for the purposes of the valuation. The actual gross profit margin for the year 1985/86 was 40.8%. In the previous two years, it had been about 30%. Turnover in 1985/86 was higher than in the two previous years. Mr Hall applied 41% gross profit margin in his calculation, with the qualification immediately stated that it was based on continuing good management and market conditions. He used the 1985/86 figures because he believed that the previous two year's figures were affected by periods of discounting. His valuation was made at the time from direct knowledge of conditions and free from any influence of hindsight. Mr Power and Ludlow respectively choose 37% and 38%. Mr Power believed that the 1985/86 gross profit margin indicated a maximum profit percentage in the various segments of the business. Mr Ludlow, whose experience of Queensland conditions was limited and subsequent to the relevant period thought the increase in gross profit margin was too -- 10 of 13 -- 8 substantial a figure to be confidently accepted. It was generally agreed that 41% (or 40.8%, to be more precise) was at the top of but not outside industry parameters. Mr Hall used a figure for wages which was demonstrated by the actual figures but admittedly lower than the industry average. Mr Power and Mr Ludlow thought that about 10% of projected sales was about the right figure for wages having regard to industry averages. I accept that in the absence of particular factors in a particular case. So far as capitalisation is concerned, Mr Hall applied 20%. Mr Power applied 21% and Mr Ludlow a range from 18- 21%. These capitalisation factors led to a valuation, in the case of Mr Hall of $2,150,000, in the case of Mr Power to a valuation of $1,485,00 and in the case of Mr Ludlow a range from $1,473,333 to $1,718,889. There was an attack on Mr Hall's evidence that he had in fact allowed for quality of management in the capitalisation rate. That was accepted to be a relevant factor but the attack was really that the professed reliance on a significant component relating to the good management was an afterthought. The fact that it was not explicitly set out in the valuation was stressed. The case is one where it is abundantly plain there was a high standard of management. The passage in ·the valuation which is criticised makes reference to the past and future trading potential. While the factors at the end of the valuation do not explicitly refer to the standard of management, the valuation itself does and in criticising the list of factors at the end, one must also keep in mind that it was produced in 1986 as a valuation not as a statement of evidence, and that analysis aided by hindsight often presents a worse picture than is in reality justified. While dealing with the valuation evidence it should be noted that Mr Byrne, an experienced valuer, gave a belated "critique" of Mr Hall's valuation, supporting it. Given the circumstances of the "critique's" preparation and its limited purpose, Mr Byrne's ev._idence is entitled to less weight than it would ordinarily be. -- 11 of 13 -- 9 The difficulty about the case is that the defendant has valued the property on a basis which ordinarily should not have been used for mortgage purposes. He took into account the existing operator who was a high quality operator rather than using an objective standard of a competent average operator. Had the valuation been done on that basis without any qualification, it would have been done negligently. However, throughout the valuation, the fact that the valuation proceeded on the basis that the present operator was a high quality operator is stressed in the strongest of terms. The fact that the valuation would be affected in the event of the same standard of management and the same favourable market conditions not continuing was also stressed throughout the valuation. The figures used by him were those which had been historically achieved but were, once again, those which could only be expected to be achieved by an operator of the high standard of the existing operator and stable market conditions. It was accepted that the various components were not beyond achievement, although they were at the most favourable end of the scale. The capitalisation rate, like the operating figures, was not demonstrated to be outside the applicable range. Further, the valuation was not done for a lay person. It was done for a large financial institution (as to which see P.K. Finans International (U.K.) Ltd v. Andrew Downs & Co Ltd (1992) I EGLR 172). Additionally, the company's own investigation of the applicant produced a conclusion that had an element of commercial judgment. It equated the incoming operator to the existing operator, describing the incoming operator as being experienced in licensed motels and having a proved ability to build up a business because of the successful sale of the last motel owned by it. As events proved, it was erroneous to extrapolate this experience into the hotel industry, but nonetheless, that judgment was made. Mr Rae, the officer who recommended the loan was disposed in evidence to characterise the explicit statements in the valuation as to the basis upon which it proceeded as routine statements of a kind found in valuation -- 12 of 13 -- 10 11 • 4 • reports while relying on the fact that the plaintiff's Queensland office believed that the proposed purchaser would have the expertise to be able to maintain that standard of operation. I conclude that while the assumptions in the valuation are at the high end of the range, the valuation is one which, on the assumptions made, is not shown to be one which an ordinarily competent valuer could not have reached. The more difficult question is the interaction between the finding as to the proper basis of a valuation for mortgage purposes, the explicitness with which the actual basis of the valuation was stated, the stressing of the risk if a less competent operator and less favourable trading conditions took over and the influence of the plaintiff's own inquiries concerning the purchaser's capability in making the decision to lend the amount borrowed. Taking all of these matters together, I am not satisfied that the plaintiff has discharged the onus of proof. The case does not represent any more than an application of existing general principles to the particular facts of the case. Therefore it should not be taken to be authority for any wider proposition than that. In the event that the plaintiff succeeded, the basis for assessing damages was not in dispute. The plaintiff asked only for damages in accordance with the Statement of Account calculated on the basis of 12% interest (Ex 5A), and the defendant made a similar submission. Had the need to assess damages arisen, the assessment would have been made on that basis. The order is that the action is dismissed with costs including reserved costs (if any) to be taxed. r • -- 13 of 13 --